U.S. Retailers Take a Licking in China

Last year, retail sales in China grew by a staggering monthly average of 18.4%. That sounds like easy pickings for your savvy Yankee retailer, doesn't it?

Not so fast, gringo. There's a whole lot that American business needs to learn about selling to Chinese consumers before it can slice off a sizeable piece of that pie. Here are a few lessons from the "What Not To Do" textbook.

It's a cultural thing
Mattel
(Nasdaq: MAT  ) came on way too strong in Shanghai in March 2009, when it opened its 36,000-square-foot pink shrine to Barbie, the iconic American doll. The company hoped to capitalize on the hoopla surrounding Barbie's 50th birthday and anticipated that the glitz would shore up the middle-aged doll's glamour quotient and slipping sales appeal. Two years later, the company closed the store.

Mattel went wrong assuming that Chinese girls and their mothers would go gaga over the curvy blond doll. Barbie was just too over the top for Chinese sensibilities. Cute dolls are good; sexy dolls are creepy. Doing some homework here could have helped.

Best Buy (NYSE: BBY  ) announced last February that it will close all of its Best Buy-brand stores in China. Instead, it will shift all of its retail efforts to its more recognizable Five Star-branded Chinese stores. The Best Buy brand is instantly recognizable here, but in China the reaction is more like "never heard of it."

Best Buy also had a few other cultural barriers to contend with. Its U.S. stores depend on warranty contracts for a chunk of their revenue. But Chinese consumers don't buy warranties. Also, the typical Chinese chain store pays its suppliers only when their products have been sold. Best Buy paid its suppliers whether the items moved off the shelves or not. Chinese suppliers pay salespeople to push their products, while Best Buy had a more neutral stance.

Home Depot (NYSE: HD  ) closed its last store in Beijing this past winter. It found that China just doesn't think do-it-yourself. Unskilled-labor costs are still relatively low, so people pay others to do their redecorating and home repairs. Do-it-for-me works better in China. But Home Depot isn't giving up totally. It still has stores in rapidly growing cities such as Xi'an and Tianjin.

As fellow Fool Seth Jayson points out, Home Depot in China was the brainchild of its former chairman and CEO, Bob Nardelli who, back in 2004, said, "I am confident of the portability of our model to China." Perhaps "overconfident" is more accurate.

Even the king of retailing is vulnerable
Wal-Mart
(NYSE: WMT  ) , which entered China in 1996 and now has more than 300 stores in 124 cities there, has succeeded up to now by doing its homework and giving customers what they want. The aisles are full of live-frog tanks, tables of various frozen reptiles, and pig faces. There's also antibacterial underwear, Golden Horde brand powdered horse milk ("The Khan's Choice"), dried snake, and even crocodiles on ice.

But lately it's not all been a bed of congee for Wal-Mart in the People's Republic of Shopping. Its market share has dropped from 8% to 5.5% over the last three years. According to theChina Herald, the big-box model that works in the States is not all that suited to China. Traffic has been increasing, and there is a lack of free parking -- and this pushes consumers to shop in their own neighborhoods.

Also, Wal-Mart's image as a low-price destination cuts both ways for the company. On one hand, it can't compete on price with tiny mom-and-pop stores that survive on the thinnest of margins. On the other hand, the upwardly mobile consumers find the Wal-Mart stores just a bit too downmarket for their tastes.

Would you like sea slugs with that?
Yum! Brands
(NYSE: YUM  ) , whose restaurants have been in China since 1987, is one American company that has learned how to succeed in China. It uses local ingredients, has a menu that caters to the Chinese palate, and doesn't rely on its signature fried chicken. According to James McGregor, author of One Billion Customers: Lessons From the Front Lines of Doing Business in China: "[KFC] got in early. They adapted the product. They expanded aggressively, and they gave their Chinese managers real decision-making power."

Yum! takes China very seriously. It made 40% of its operating profits in the past four quarters from its Chinese business. The company has shown that American retailing can work there. But what other American companies have to learn from its success is that business in China is not business as usual. What works in middle America doesn't necessarily work in the Middle Kingdom.

Have another story of an American company getting it right or wrong? Let me know in the comments section below.

Fool contributor Dan Radovsky owns shares of Wal-Mart. The Motley Fool owns shares of Yum! Brands, Best Buy, and Wal-Mart. Motley Fool newsletter services have recommended buying shares of Wal-Mart Stores, Yum! Brands, Home Depot, and Best Buy and creating a diagonal call position in Wal-Mart. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 25, 2011, at 12:02 PM, kestrellee wrote:

    McCormick is another very successful story in China.

    In early 1990, McCormick started a small operation in Shanghai. Unlike other companies, McCormick let its Chinese manager's to decide what to produce and what to sell. Its Chinese Operation did not focus on fast food coatings for American fast food restaurants. Instead, it sells fried chicken breadings in small pouch to Chinese retailers. It proved to be very successful strategy.

    Later on, it focus on producing garlic powders, chili peppers and other ingredients in China and export to USA. Through McCormick USA's sales network, McCormick China made huge amount of money.

    Before KFC, MCD and other fast food chains started their fast growth in China in, McCormick built its ketchup plant in Guangzhou. When I visited that plant and heard that the plant was only running at 30-40% capacity, I was worried about its future because so many food plants failed in China. But after 2 years, the plant ran in full capacity. and Now they have expanded production several times.

    Comparing to its competitors, McCormick China is very successful due to its trust to local managers, and their provision in business management.

    Wally Li

    Williamsburg, VA

  • Report this Comment On July 25, 2011, at 12:20 PM, XMFDRadovsky wrote:

    Thank you, that's very interesting about McCormick.

    Dan

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