Best Buy's Chinese Expansion

The headlines characterized Best Buy's closing of its Chinese stores as a pullback from globalization. But, as much as shareholders pine for their portfolio's big retailers to go global, especially in emerging markets, does it make sense? I would say, "No."

When Best Buy arrives in China or India, what is the comparative advantage that it brings to these kinds of large, fragmented markets? Domestically, it has a strong brand identity (that great yellow sale tag, big stores, low prices, the latest technology), buying power, efficient distribution, and a low margin--high turn business model. In India, for example, the domestic market constraints, such as inefficient customs, transportation and low labor productivity hamstring a retailer like Best Buy and make it as mediocre as any local competitor.

In a country that doesn't have a high regard for "intellectual property," an Indian competitor can open a store called "Best Bye" with the same format, layout and yellow tag, and there goes the brand identity. Price breaks from manufacturers now occur at much smaller break points than in the past, so a local big store probably gets similar pricing, except perhaps on a private label product. Store construction times and construction materiel procurement are nowhere what a Best Buy is accustomed to in the U.S. Labor productivity in markets like India is low, turnover high, and training times are long.

Grey markets are prevalent in emerging markets, which have largely been purged in developed markets. All in all, the guts of the low margin, high turn model are eviscerated in India and China.

Local entrepreneurs find it much easier to deal with the bureaucracy and corruption than do Western, public retailers, with corporate codes of ethics. So, at the end of the day, the lack of the social, political and physical infrastructure--things which U.S. companies take for granted--all conspire to level the playing field for local, well financed entrepreneurs. Although Best Buy might have to look elsewhere for its growth potential, shareholder interests are better served by pulling the plug on China.