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March 1, 2011

Haunted by the ghosts of retailers past

by mikediliberto
Photo of an abandoned retail mall

They say that those who do not learn from history are doomed to repeat it.

In the light of Best Buy’s recent decision to pull out of China and Turkey, one is led to conclude that there is still a lot of opportunity for the retailers of today to learn from the lessons of the past. It is doubly frustrating when you believe, as I do, that the very behaviors that led to the success of Best Buy in the United States would have been helpful to duplicate in their entry to china.

The wall of history features prominently in the main foyer of the Best Buy corporate campus in Richfield Minnesota. Walking it’s length you can read about the history of the company that was once called “Sound of Music”, and of particular note is an event that happened on June 14th 1981. On that date, a tornado ripped through their Roseville store location, damaging and destroying a significant amount of inventory. In the days following the storm, the team at Sound of Music set about liquidating this inventory in preparation of rebuilding the store, through a tent sale format that claimed all sales would be “best buys”. Response to the “best buy” sale was fantastic and within 2 years of the tornado, the first Best Buy branded store was open for business in a new superstore, deep discount format.  In product development circles we call this pivoting, changing direction in response to customer demands. Quite by accident, a regional hi-fi shop in Minneapolis had discovered the pent up demand for the superstore format that had been brewing in the American consumer.

When I look at Best Buy’s decision to refocus their international aspirations, I believe that they failed to capitalize on an Best Buy annoucement of closed stores opportunity to find their unique differentiation in the Chinese market, and have repeated mistakes of retailers before them.

I remember being on site at Best Buy Shanghai during the grand opening. The Shanghai Best Buy was nothing short of spectacular. From its prominent location on the Shanghai skyway to the immensity of it’s interior (4 floors), it was, all in all, fairly awe inspiring. Once we got past the immensity, the second thing that struck my colleagues and I was how “American” it felt. From the store fixtures to the floor finishes to the signage and employee uniforms, you would swear that they had simply packed a standard Best Buy into a few shipping containers and reassembled it in China. I still remember how all of the HDTV content in the video department was playing their standard American content.  It was absolutely surreal.  What was also striking was how different it felt from all of the other major retailers in China. Most other electronics chains, like Suning and Gome, as well as the electronics departments of general merchandise retailers like Metro and RT-Mart, all offer a similar shopping experience.

Best Buy argued, indeed correctly, that they offered a differentiated shopping experience in the otherwise homogenous selection of electronics retail outlets.

The problem is, it is not whether you are differentiated, what matters is whether you are advantageously differentiated within the market.

Best Buy succeeded in the United States market because it turned out that most consumers viewed buying electronics as only marginally less frustrating than purchasing an automobile.  Best Buy’s superstore format made it easy, stress free, and mostly self-service.  By addressing the needs of the market, they quickly rose to the number one spot.

When entering new markets, it is dangerous to assume that the market demand of your current customers exists in your foreign customers, and in fact it is far better to take the opposite approach, and take your time to perform market research due diligence.  Wal-Mart learned a similar lesson during their entry into the German market, where their Americanized stores failed to capture the hearts of the German consumer, and led them to pull out just a few years later.  Learning from the strategic mis-steps that prevented their entry into the German market, Wal-Mart has done quite a good job making their Chinese stores feel much more localized.  I can’t say that they offer an advantageously differentiated experience compared to similar retail outlets, however given their plans for growth in the market, things seem to be going well.

As Andreas Knorr and Andreas Arndt remarked in their study of Wal-Mart’s retreat from the German market:

“Wal-Mart’s attempt to apply the company’s proven US success formula in an unmodified manner to the German market turned out to be nothing short of a fiasco.”

In a post-withdrawl interview with Wal-Mart German Division CEO David Wild, he remarked,

“If you want to be successful in a foreign market, you have to know what your customers want. That’s the most important lesson…..It does no good to force a business model onto another country’s market just because it works well somewhere else.”

As more and more retailers begin eying up an entry into Chinese, and other global markets, they would be well advised to study those that have come before them.  Learn your history, for failure to do so can cost you dearly.

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