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For American Retailers, China Isn’t “Business as Usual”

For American retailers doing business in the Far East, certain quirks can make or break a retail store


Since 2008, American consumer-oriented companies have been China-crazy. And for the most part, the euphoria was merited. The country was just entering an era of consumerism, and China’s love for “classic Western” goods translated into a huge opportunity for companies that could deliver those goods on Chinese turf.

For example, Yum! Brands (YUM) chicken-restaurant chain KFC and Crest toothpaste, from Procter & Gamble (PG), are well-known and well-loved brands in China … not despite being typical Americana, but because they’re typical Americana.

As more than one American retailer has learned the hard way, though, China may love Western brand names, but the Chinese don’t necessarily love American-style stores.

What exactly are American retailers doing wrong in China, and, more importantly, what will it take for U.S. consumer-oriented companies to succeed there?

Chinese Consumers Prove Tricky for American Retailers

The list of failed retailing efforts by U.S. companies in China is stunningly long. In 2006, Home Depot (HD) began opening what would eventually be seven storefronts in China, perfectly positioned to capitalize on the country’s budding consumer class. Last year, it closed all seven stores, finally recognizing that the Chinese aren’t a DIY kind of customer base.

Best Buy (BBY) also entered China in 2006, certain its over-the-top style of electronics stores would be a smash hit with the gadget-hungry culture. It wasn’t. Last year, Best Buy finally closed its namesake-stores (which had that typical U.S. feel to them) in China, opting to focus on the existing Five Star chain it acquired as a stepping stone when it first eyed the market.

Even the venerable Walmart (WMT) announced in October it was going to be closing approximately 25 stores in China in the foreseeable future … stores that were underperforming. That’s not a typo. An underperforming Walmart is almost unheard of in the United States, but the chain just didn’t take off in China.

All the closures raise one question: How could formulas that work so well in North America work so poorly in the Far East?

There’s a simple answer — most American retailers didn’t properly understand Chinese consumers, who have a remarkably different approach to rationalizing shopping purchases. Chinese consumers prefer a less structured, more intimate shopping environment.

Chinese Retailing Done Right

Take Best Buy’s failure for example. Its American stores are big, well-stocked, with its goods all neatly lined up and categorized from front to back, top to bottom. The Chinese hate it. Instead, they’d rather pilfer through bins of semi-random goods, seeing if there’s something in it they’d like. It’s messy and disorganized, and it’s exactly what its Five Star stores provide.

Americans’ favorite coffee house, Starbucks (SBUX), has also realized there’s such a thing as being “too Western.” Many of the next few hundred Starbucks stores to be opened in China will be larger stores (some as big as 3800 square feet) with lots of couches. These new stores also feature locally grown teas, as well as lots of palpable — perhaps even gratuitous — local ambiance.

And KFC? The finger-lickin’-good chicken joint? It’s not necessarily fried chicken that’s making the restaurant one China’s favorites. Its menu choices like sesame seed cake, fried shrimp, and spicy chicken rice, which can’t be found on any KFC menus here in the United States.

Bottom Line

For investors, if the compelling part of a company’s growth story is China-dependent, then those companies absolutely must embrace the following facts:

Localization is crucial: Whether it’s a company’s choice of local personnel or locally-grown ingredients, Chinese consumers can spot a misfit/transplant a mile away… and they don’t like them. Starbucks’ new-store strategy makes a point of decorating with local art and artifacts, and featuring local musicians on its version of “open mic” night.

Old habits die hard: While the concept of a megastore like Walmart is no longer new to the Chinese, many of China’s consumers are still in the habit of going to the market every day to buy fresh food to prepare for meals.

Chinese consumers can be walking contradictions: While they love the intimate feel of small, locally-owned shops, they also love shopping online, where the deals are remarkably better than the prices found at most big-box stores. Most U.S. retailers provide something in the middle, appealing to neither extreme. Successful companies doing business in China tend to operate only at either end of the spectrum.

As is the case with any business venture, some companies will understand and adapt, while others will do neither.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media,

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