Best Buy's exit typifies tough electronics market

Updated: 2013-02-26 11:47

By Liu Baijia (China Daily)

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Best Buy's exit typifies tough electronics market

Two years after Best Buy Co closed all of its stores in China, one wouldn't expect that market to have much enthusiasm for the US electronics retailer.

Gome Electrical Appliances Holding Ltd, the country's second-biggest electronics chain, said on Sunday that its founder and principal shareholder, Huang Guangyu, has no plan to sell his stake to Best Buy.

It was the second time in two days that Gome responded to a report that Huang, who in 2010 was sentenced to 14 years in prison for insider trading, illegal business operations and bribery, had lost interest in the loss-making business and was looking to sell his shares.

On Friday, Li Chengdong, who describes himself as an "independent" e-commerce analyst, wrote in a blog post that Suning, a larger competitor of Gome's, has been doing well with online sales as Gome struggles. He also reported, without attribution, that Huang could sell Gome to Best Buy.

The blog soon generated buzz among big names in the US and Chinese electronics industries. But its viral impact reflects the challenges faced by electronics retailers in China.

Through the first three quarters of 2012, Gome, which dominated the sector before Huang's legal troubles, reported an 18 percent decline in revenue from the previous year to 36 billion yuan ($5.8 billion). Its net loss was 687 million yuan.

Suning didn't fare much better. During the same nine-month period last year, the company's revenue increased 7 percent to 7.2 billion yuan while net profit fell 31 percent to 2.35 billion yuan.

Starting in 2000, big players such as Gome and Suning benefited from China's urbanization wave and the increasing affluence of families. They expanded rapidly with financing from stock investors and by squeezing profits out of electronics manufacturers.

At the end of 2003, Gome had only 100 stores in China. By 2008, the number was almost 1,000. At the end of September 2012, it was only 1,070.

The two rivals launched price wars to drum competitors out of the market, imposed charges on electronics makers and tapped capital markets to finance their expansion.

Aggressive domestic competition and ever-changing consumer demands taught global electronics retailers hard lessons in China, despite their initial eagerness about 1.3 billion potential consumers and the country's growing economy.

When Best Buy entered China in January 2007, it was cautious. The Minnesota-based company operated just one store, in Shanghai, for the first 20 months. It was seen as a high-end retailer that was focused on user experience.

Within two years, Best Buy decided to expand, quickly opening five more stores in Shanghai and three in neighboring cities for a total of nine. It also acquired domestic chain Five Star Electric Appliances in 2009.

By the time Huang, the Gome boss and once the richest man in China, became the subject of investigation in 2008, Best Buy had been mentioned frequently as a possible savior in acquisition rumors about his company.

However, the small scale of its Chinese operations, failure to strike a balance between low prices and high-quality service and, crucially, an unsuccessful strategic adjustment back in the US forced Best Buy to close its own branded stores in 2010. It retained ownership and operation of Five Stars outlets.

In its most recent quarterly earnings report, Best Buy said net losses from international operations, excluding charges, totaled $2 million in the period ended on Nov 3, due to lower revenue in Canada and China and lower gross profit in Europe. In January, the company announced it was closing 15 stores in Canada.

On Jan 16, Media Markt, the electronics retail chain owned by German retail giant Metro AG, said it would stop investing in China after more than two years operating there. Media Markt opened its first Chinese store in 2010, in Shanghai. It has since built a network of seven stores around the city.

Financial performance was disappointing, however. During the first three quarters of 2012, the stores' total sales amounted to 100 million euros ($130 million) and losses for the year were estimated to be 40 million euros.

Prospects for physical retailers of electronics are dealt a further blow by online sales.

New York-based research firm eMarketer said global e-commerce transactions exceeded $1 trillion last year, with the Asia-Pacific region accounting for about 30 percent. The firm predicts that China will surpass Japan as the No 2 market in the world with online transactions of $181.6 billion in 2013.

Even bolder is Chinese firm iResearch's estimate that online transactions in China totaled 1.3 trillion yuan last year, about 6 percent of the world's total.

Taobao and Tmall, operated by Chinese Internet giant Alibaba Group, in which Yahoo Inc is an investor, together accounted for 1 trillion yuan in sales. Alibaba claims there are more than 800 million items for sale between the two websites, which attract 60 million visitors a day.

In a Feb 15 research note, Morgan Stanley analyst Jordan Monahan valued Alibaba at between $66 billion and $128 billion - in line with the market capitalization of, respectively, Facebook Inc and Inc.

The Chinese website 360buy, an Amazon-style marketplace that began as a stand at an electronics mall in Beijing in 2004, saw online transactions hit 60 billion yuan last year from 300 million yuan five years earlier.

On Jan 16, the company raised $700 million from Kingdom Holding Co, owned by Saudi Arabia's Prince Alwaleed bin Talal, the Ontario Teachers' Pension Plan and others. They had valued the company at $7.25 billion.

Last week, Suning introduced a strategic restructuring that focuses on increased online business. The company recorded online sales of 18.4 billion yuan in 2012, three times the total from the previous year.

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