Best Buy Plans Retreat From China. Good News or Bad?

There was a time when China was the final frontier for American retailers. Companies across the spectrum bet big on the 1.3 billion residents in China, hoping to open up vast new revenue streams by moving into the country as quickly as possible. Best Buy (NYSE: BBY  ) was happy to hop on the train, spending $180 million in 2006 to buy Five Star, a China-based appliance and electronics retailer.

Fast-forward through the financial collapse, the increase in American unemployment, and the success of online-only retailers, and now Best Buy seems to have lost its taste for the Chinese market. The Wall Street Journal reported this week that Best Buy is considering options for Five Star, including selling the business, in a retreat from China. Five Star operates roughly 190 locations in the nation, up from 136 when the business was first purchased. While this might seem like a step backward, it's actually excellent news for Best Buy investors.

The money pit
As it turns out, the Chinese market is much more difficult to understand than many Western analysts expected due to cultural and economic differences. In short, the American dream is not the Chinese dream. That has led to retailers attempting to re-create the success they've had in America and Europe without actually knowing how to get to that success. China helped push Best Buy's international revenue down 10.5% in its last quarter on the back of a 5.8% drop in international comparable sales.

Best Buy's international failures aren't unique to China, however. The electronics retailer dropped its 50% interest in Europe's Carphone Warehouse business in April 2013. The company jumped into the market in 2008, but decided to get out after sales started to fall apart.

China has the added difficulty of being a market in which online sales are increasing at an incredible pace, putting even more pressure on brick-and-mortar locations. Best Buy has seemingly failed to make its business model work and feels like now is the time to cut it loose.

What's in it for Best Buy
Analysts estimate Best Buy could sell its China business for $300 million. That would give the company a nice injection of cash that it could use to either expand in Mexico -- where results have been better -- or to refocus its American business into a leaner, meaner machine.

Best Buy has been working to lower the operating costs of its American locations. It also aims to get its head around the developing omnichannel model, which is designed to eliminate the barriers that exist between online and physical shopping, allowing customers to buy things in any manner they want. On the operating side, Best Buy is trying to "optimize [its] store footprint," according to CEO Hubert Joly, which means that it needs to close certain stores, shrink some locations, and, eventually, open new locations in better markets.

For investors, this seems like a win-win. Best Buy loses the unnecessary focus on China and gets some cash in the process. The company needs to keep as many of its resources as possible driving toward one goal: making its American brick-and-mortar business a success again. The Five Star news has helped push the company stock up, and it could do much more if this early report is followed by action.

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Comments from our Foolish Readers

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  • Report this Comment On July 01, 2014, at 1:32 PM, mistacy wrote:

    More cost cutting, more business regression.

    I dont understand how this was received as good news, since the stock has been going up since.

    In my world, a healthy business expands.

    Business contraction means the business is having a hard time generating money.

    How can shareholders think differently?

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Andrew Marder

Andrew Marder worked in retail for years, holding jobs ranging from bookseller to bank strategy analyst. He has worked for the Motley Fool since 2012, and loves coffee.

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