Four Success-or-Fail Factors for Retailers in China

SMITH BRAIN TRUST -- Some foreign retailers in China are stumbling. Others are thriving. Count Home Depot and Best Buy among recent failures. On the other hand, the likes of Gap and Decathlon have done well. The degree of success or failure “is driven by some combination of industry concentration, product and brand differentiation, first-mover advantage and local adaptation,” write Anil K. Gupta and Haiyan Wang in the American Chamber of Commerce in Shanghai magazine, Insight. 

Gupta, the Michael D. Dingman Chair in Strategy and Globalization at the University of Maryland’s Robert H. Smith School of Business, and Wang, a 1995 Smith School MBA and managing partner of the China India Institute, elaborate:

1. Industry concentration. Fragmented retail segments are easier to enter than concentrated ones. Within China, as in most other markets, electronics retailing is very concentrated and has historically been dominated by two players. In contrast, in China, food retailing or apparel retailing have been relatively more fragmented segments. For a foreign player such as Best Buy, entering the highly concentrated electronics retailing segment posed almost insurmountable challenges. The established players had massive scale advantages that a foreign player simply could not counter. 

2. Differentiation. In the case of Best Buy or Home Depot, there was little difference between the product mix sold by them and their Chinese competitors. These companies had to compete with local players on non-product factors such as price, location, and other value-added services. In contrast, consider Decathlon, Gap, H&M, or Ikea. Their products and brands are viewed as unique and superior to those of direct competitors and are not available outside of their stores. In many of these cases, the product brand and the retail brand are one and the same – a very different situation from that faced by Home Depot or Best Buy.

3. Early advantage. Foreign retailers who do not bring product differentiation or branding advantage to China can expect to have a rough time – unless they entered in the 1990s. This is especially true in retail segments that were not very concentrated at the time of the foreign retailer’s entry into China. Early entry can allow the company to build local scale before its competitors do so. This is precisely the strategy that Walmart has pursued in China. In contrast, Home Depot and Best Buy were simply too late when they started eyeing the market.

4. Local adaptation. Selling products for personal consumption requires far more sensitivity by retailers to local imperatives than is necessary in most other industries. The foods that Chinese consumers like to eat, the types of clothes they like to wear, their body sizes and structures, the prices they can afford, how they shop and where they like to shop can all be very different from those in Western markets. Home Depot’s do-it-yourself concept ran up against very low labor costs in the Chinese market that requires thinking in terms of do-it-for-me rather than do-it-yourself. British apparel retailer Marks & Spencer’s struggles in China began with its first stores’ oversupply of large-fitting clothing (sizes 6-18) and an undersupply of small-fitting clothing (sizes 2-4) that would be more appropriate for Shanghainese frames.

SMITH BRAIN TRUST HOME | ABOUT | ARTICLES | HOT TOPICS | VIDEOS | SUBSCRIBE