Companies

Best Buy sets eye on inland China for growth

By Donny Kwok (China Daily)
Updated: 2011-03-09 11:16

Best Buy Co Inc plans to focus on its Jiangsu Five Star Appliance Co Ltd outlets in China. [Photo / China Daily]

HONG KONG - The US consumer electronics retailer Best Buy Co Inc said its China strategy will focus on expanding into inland cities, where consumption is booming and manufacturing groups are shifting production.

"Relative to other parts of the world, the Chinese market is explosive," Kal Patel, Best Buy's Asia president, said in an interview on Monday. "We are looking at the center of China."

The move follows a change in strategy for the seller of 3D televisions and other high-end gadgets.

Last month, Best Buy said it would close its branded stores in China and Turkey and focus on the profitable growth of its Best Buy mobile business in the United States and its Jiangsu Five Star Appliance Co Ltd brand outlets in China, a wholly-owned subsidiary which has nearly 170 stores in seven Chinese provinces.

Global retailers are eager to tap China's massive consumer market, but getting people in the world's most populous nation to open their wallets is not as easy as it seems.

US toymaker Mattel confirmed reports on Tuesday it had shut its six-story flagship Barbie store in Shanghai, saying it wanted to focus on the broader Chinese market rather than just China's commercial hub.

"China's retail sales are growing at around 18 percent so foreign retail brands are trying to get into the market. But the reality is that there are probably going to be more losers than winners because these Western brands are not catering to Chinese preferences enough," said Shaun Rein, managing director of China Market Research Group in Shanghai.

Still, global retailers looking for stronger growth outside their home markets have flocked to China, where consumer wealth has risen alongside a surging economy.

Chinese consumption has grown by more than 9 percent a year after adjusting for inflation over the past decade. Retail sales grew 19.1 percent in December from a year earlier, up from 18.7 percent in November.

"We hope that we will continue to grow our Asian business 20 to 30 percent a year at the top and bottom lines," Patel said on the sidelines of the World Retail Congress Asia-Pacific in Hong Kong. He added that expansion in China would lead the growth.

Best Buy plans to open 40 to 50 Five Star branded stores in China in the 2012 fiscal year, with the majority located in smaller cities.

Big retailers have traditionally catered to upscale first-tier cities such as Shanghai and Beijing, where residents have higher incomes.

But China's rapid economic growth is making smaller cities, such as Wuhan, Hubei province, and Chengdu, Sichuan province, more attractive. And the market is vast. According to the country's statistics agency, there are more than 120 cities in the country with a population of more than 1 million.

Best Buy would close inefficient bigger stores and open more stores in China's interior, where manufacturing activity is moving, Patel added.

"One indication that is important to us is how they (the government) want to drive manufacturing to the center. We will grow quite a lot in that area (in smaller inland cities)," Patel said.

Many manufacturers are relocating inland from the more wealthy coastal regions in a bid to cut costs, an effort helped by government investment to boost development in more remote areas.

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"We are looking at a whole bunch of experiments around e-commerce, store inside a store. We may even look at some hypermarket partners (in China)," Patel said, adding the company would expand into smaller cities through joint ventures with local partners and acquisitions.

"It is still early for us to decide if it is one brand we have across China. All options, two or three years from now, are open depending on what works for the consumer," Patel said.

Best Buy competes with local players such as Gome Electrical Appliances Holding Ltd and Suning Appliance Co Ltd.

The contribution from China to overall Best Buy revenue is small - the Five Star business generated $1.7 billion in revenue for the fiscal year ended in January, compared with overall revenue of $50 billion.

"But it's growing fast," Patel said, referring to the China market. "I would love it (China's contribution) to be 15 percent of our operating profit in five years. And in 10 years, I would love it to be 50 percent. This is our ambition."

Reuters