Best Buy Hasn't Completely Turned Off Its Lights in China

Best Buy opened its first store in China at the end of 2006 not long after it had acquired a majority interest in the Chinese electronics chain Jiangsu Five Star. The store was hard for me to miss as I was living just a block or two (depends on how you count them) away in Shanghai's Xujiahui district.

I visited the store during one of its earliest days and had the opportunity to speak to a manager who had come from the U.S. He said their plan was to use the Xujiahui store as a testing ground and not open others in China until they had it right — even if it meant waiting one to two years. He also explained that the absence of movies for sale, a noticeable difference from their U.S. stores, was due to difficulties in obtaining a license to properly sell DVDs. Given the many nearby small stores selling pirated DVDs without much problem, this seemed a bit ironic. The most striking part of the conversation to me, though, was when he expressed surprise over the numerous visitors that day and portrayed it as a sign of success. I knew, especially in China, crowds didn't necessarily lead to what really mattered for a retail business — sales. If the manager had pondered the area with many cash registers but few customers buying anything, he may have been less enthusiastic.

Not long after my first visit, I decided to buy a mobile phone at the store. I personally found the shopping experience far more positive than what I had found elsewhere. At the time, it was the only store I had seen in Shanghai where I could easily try working models of a variety of phones. After making my decision, I was told they didn't have the color I desired in stock and weren't sure when they would. Sadly, I left the store to try to find the phone elsewhere. Happily, I quickly found it at a nearby store at a lower price.

Although there were promising signs and another seven stores later opened, in 2011 all of the stores were closed, and Best Buy decided to focus on its Five Star chain in China. Adam Minter suggested some potential problems which may have led to the closings such as a desire to focus on service yet failing to maintain its quality. He also wrote about another repeated failing of some Western companies in China:

Best Buy’s management told me, over and over, that “our market studies show Chinese consumers like to try out products,” and that Best Buy’s interactive displays would take advantage of that predilection, put the company over the top in Shanghai. Lo and behold, it was kind of true: Shanghai’s shoppers would go to Best Buy to try out products – and then promptly march across the street to one of the other Chinese retailers and buy them for less [BG: basically, my experience minus the step of actually trying to buy the product at Best Buy] (in stores with much deeper production selection, no less).

In this case, Best Buy listened to research about what customers in China wanted — good — but apparently didn't accurately evaluate the entire purchasing experience & environment — not good.

I also wondered if there might be less transparent reasons for the closings. Sometimes due to not fully appreciating China's legal requirements and conditions, companies set up their business structures in a way that is not conducive to success nor easy to fix. The best, though painful, solution can be to start from scratch again. In this case, Best Buy may have been able to take advantage of its Five Star chain to do something similar.

Whatever the cause, Best Buy's stores had met a fate in China that Europe's largest electronics chain, Media Markt, later met as well. It wasn't the end of the story for Best Buy in China though. It still had Five Star.

But last year there were calls from Wall Street for Best Buy to further pull out of China and sell its Five Star stores. Recently, Best Buy announced it would do just that:

Best Buy is selling Jiangsu Five Star Appliance Co. to Chinese real estate company Zhejiang Jiayuan Real Estate Group Co. for an undisclosed amount, a spokeswoman for Best Buy said Thursday. She said that Best Buy is exiting the China market except for its sourcing operations, and that the sourcing of its private-label products—everything from tablets and cords to televisions—is projected to grow.

Oh, all the memories . . .

There is one thing that oddly enough isn't only a memory now. It has to do with Best Buy's Xujiahui store which appears in the photo at the top of this post. The photo wasn't taken when the store had its soft opening in 2006. It wasn't even taken before the store's closing in 2011. Instead, I took the photo less than one month ago — over 3 years after the store closed. Yes, not only is this large retail space in a prime shopping area still boarded up, it still has a large Best Buy sign. And any night I have passed by since the store's closing the sign has been lit up during "opening hours". Just to be clear, this is not normal behavior for a closed store in China.

The answer . . . I only have guesses. For example, perhaps Best Buy could not get out of the lease for the space. Best Buy may have figured it might as well keep the sign going. Or maybe unseen sections of the store are being used as office space by Best Buy. If true, I would question whether they couldn't do something better with the front entrance (there was another entrance from a parking lot below) than surrounding it with a wall of blue boards.

If you have an answer, I would love to hear it. There may be yet another interesting and valuable lesson to be gained from Best Buy's experience. At least for now, their light still shines in China.