Just earlier this month, CSOFT was proud to host a localization workshop for Oxford Bright Scholars right in our own Shanghai office. Hosted by CSOFT’s Samuel Austin, scholars from all over the world gathered to learn best practices, the ins and outs of localization, and what factors to look out for when going global. The students were assigned the task of writing about a business who failed in their localization efforts when entering China, what could have been avoided, and include analysis based on what they learned from the workshop. The winning entry comes from Oxford Bright Scholar, Yuxin Wu and has been included below.
Best Buy: Not the Best Buying Choice for China
By Oxford Bright Scholar Yuxin Wu
Best Buy Co., Inc., is the largest specialty retailer in the U.S. consumer electronics retail industry. In 2006, Best Buy formally entered the Chinese market, and in that same year, Best Buy not only opened its first store in China, but also purchased 75% 5STAR.CN’s shares, a local retail company in the same industry.
Fast-forward to 2011, when Best Buy closed 9 Best Buy stores across Mainland China. Finally, in December 2014, Best Buy sold 5STAR.CN, representing its exit from the Chinese market.
When analyzing the Best Buy’s case study and its failed localization, we can incorporate our group discussions from the Oxford Bright Scholars and CSOFT’s Globalization and Localization Workshop to analyze its key mistakes.
1) Market Segmentation
Best Buy ignored market segmentation, which is one of the most important factors for localizing in China. Best Buy positioned itself as high-end electronics retail and differentiated itself in the market by providing customers with better quality of services. These services, however, also came with higher prices. The high price market positioning strategy works well in North America, but unfortunately it contributed to Best Buy’s exit from the China market. Partially, this is because Best Buy failed to see that China is still a developing country in terms of purchasing power. A large gap remains between Chinese consumers and North American consumers. In other words, even with a rising middle class in major Chinese cities like Shanghai and Guangzhou, Chinese consumers remain reluctant to pay an extra 20% on top of the price for better quality services.
2) Cultural Customization
Cultural customization refers to when products are tailored to meet customers’ unique needs at a low cost. In China, expectations of quality services remain a relatively new concept. For example, tipping for services is not common in Chinese culture. Therefore, when Chinese customers can buy the same products from competitors in the market, such as Suning or Gome, at a cheaper price, they will lack brand loyalty to Best Buy. Therefore, the unique characteristics of Chinese consumers’ behavior undermine the effectiveness of Best Buy’s strategy to offer a high quality shopping experience and services in China. To better localize, Best Buy should have considered different methods of attracting Chinese customers, such as with promotional campaigns appealing to the Chinese customers’ experiences in finding a bargain.
3) Local Specifics
Best Buy failed to identify local specifics of the Chinese environment when implementing its sales strategy. Best Buy used the outright purchasing method of building relationships with suppliers and producers. This means they had to first purchase products from the producers and then use in-house sales representatives to interact with customers.
There are clear advantages of Best Buy’s method. For example, more quality assurance when it comes to services and specifically its relationship with customers. However, this method can also decrease working capital and contribute towards liquidity problems and cash constraints in the short term. While these methods and strategies work well for Best Buy in North America, they contributed towards its failure in China, especially when compared with local Chinese firms like Suning and Gome, who use the trade and agency method when it comes to their supply chain managements. This method refers to when the producers sell their products using the commercial spaces provided by Suning and Gome.
Although Best Buy failed in the end, there are key takeaways for us as we analyze the uniqueness of the China market. For example, Best Buy localized its brand name to “百思买”. It is not only understandable to Chinese customers, but also readable. Also, Best Buy kept its well-known yellow color, which is a quite a popular color in China. Best Buy also translated most of its product descriptions into Chinese, making it more accessible to Chinese consumers.
In 2017, Best Buy ranks 72 in the Forbes Global 500, which indicates that it is still doing very well all around the world. The Chinese market is developing and expanding extremely fast and comes with unique characteristics, making Best Buy a good case study for companies entering the Chinese market.