You can't ignore 1.3 billion potential customers. Best Buy (NYSE: BBY ) is paying $180 million to acquire a majority stake in China's fourth-largest consumer-electronics chain. Hooking up with Jiangsu Five Star Appliance isn't the first time that Best Buy will be stamping its passport in the world's most populous country. The company already has three offices there. Given the region's prominent role in the manufacturing of appliances and other consumer electronics, it's just good business. And with a significant chunk in Five Star, the company achieves an immediate retail presence in the country, too.
It may not seem like a big deal. Five Star generated $700 million in sales last year, a pittance compared with the $30.8 billion that Best Buy rang up in fiscal 2006. Then again, sales grew by just 12% at Best Buy over the past fiscal year, while the top line surged 50% higher at Five Star.
Best Buy's move isn't just about acquiring a smaller, faster-growing retailer, though. A stake in Five Star lets the company dive headfirst into a market that will increasingly matter in the years to come. China's economy has grown at a torrid pace, improving by an annualized 10% clip over the past three years. At the heart of the boom is a younger generation coming into growing amounts of disposable income and just begging to tap into the consumer-electronics market. Just check out the heady growth at online-gaming specialists in China. At the sites run by NetEase (Nasdaq: NTES ) , Shanda Interactive (Nasdaq: SNDA ) , and The9 (Nasdaq: NCTY ) , you'll find hundreds of thousands of Chinese citizens playing the same role-playing game at the same time.
The 136-unit Five Star chain and the much larger Best Buy aren't exactly twins that were separated at birth. Appliances are a major component of Five Star's business, yet they make up only 6% of the revenue mix at Best Buy. One of the top sellers at Five Star is wall-unit air conditioners, and I can't recall them selling too briskly at the iPod-happy Best Buy in my neighborhood.
That will change, though. Checking out snapshots of Five Star feels like a throwback to the stateside appliance stores of the 1960s. It's no Best Buy. It's no CircuitCity (NYSE: CC ) , either. But cultural differences and architectural preferences dictate that this is more than just peeking into our own time capsule. China's retailing economy will blossom into its own personality. It's fairly obvious that as the economy continues to improve, the region's citizenry will be able to afford nicer things, which will be good news for China's established retailers.
Best Buy's shares fell today in sympathy with a weaker market, but the Five Star deal is a great move for the Motley Fool Stock Advisor recommendation. When your name is Best Buy, I guess that comes with the territory.
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Longtime Fool contributor Rick Munarriz has been to China just once, but he is in awe of the region's growth potential. He does not own shares in any of the companies mentioned in this story. He is also part of theRule Breakersnewsletter research team, which has recommended NetEase and Shanda. The Fool has adisclosure policy.