March 8, 2011 / 4:44 AM / 8 years ago

Best Buy bets on inland China for growth

(Updates with quotes, background) * Hopes Asian business revenue to grow 20-30 pct a year

* Plans to open 40-50 stores in China in FY 2012

* Eyes inland China expansion via joint ventures, acquisitions

By Donny Kwok     HONG KONG, March 8 (Reuters) - Top U.S. consumer electronics retailer Best Buy Co Inc (BBY.N) said its China strategy will focus on expanding into cities in the country’s hinterland, where manufacturing groups are migrating.     The move into more rural parts of China comes amid a change in strategy for the seller of 3D televisions and other high-end gadgets.

Last month, Best Buy said it would close its branded stores in China and Turkey and focus on the profitable growth of its Best Buy mobile business in the United States and its Five Star business in China.    “Relative to other parts of the world, the China market is explosive,” Best Buy’s Asia President, Kal Patel, said late on Monday in an interview. “We are looking at the centre of China.”     While global companies are eager to tap China’s massive consumer market, getting people in the world’s most populous nation to open their wallets is not as easy as it seems.     The Financial Times reported on Tuesday that U.S. toymaker Mattel (MAT.O) has shut its six-story Barbie doll store in Shanghai, with analysts saying the company failed to adjust to the local market.

“China retail sales are growing at around 18 percent so foreign retail brands are trying to get into the market, but the reality is that there are probably going to be more losers than winners because these Western brands are not catering to Chinese preferences enough,” said Shaun Rein, managing director of China Market Research Group in Shanghai.   <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^     Best Buy to close some int’l branded stores [ID:nN2178940]    Foreign firms in S.China move inland       [ID:nTOE71R04P]     ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^> 

Still, global retailers looking for stronger growth outside their home markets have flocked to China — where consumer wealth has risen alongside a booming economy.

Chinese consumption has grown by more than 9 percent a year, after adjusting for inflation, over the past decade. Retail sales grew 19.1 percent in December from a year earlier, up from 18.7 percent in November.     “We hope that we will continue to grow our Asian business 20-30 percent a year in top-line and bottom-line,” Patel said on the sidelines of the World Retail Congress Asia-Pacific in Hong Kong. Patel added that growth would be led by its China expansion.     MOVING INLAND      Best Buy plans to open 40-50 Five Star branded stores in China in fiscal 2012 with a majority of the stores to be opened in so-called lower-tier cities.

Big retailers have traditionally catered to upmarket first-tier cities such as Shanghai and Beijing where residents have higher incomes.

But China’s rapid economic growth is making smaller cities such as Wuhan and Chengdu attractive.

Best Buy would close inefficient bigger-size stores and open more stores in China’s interior, where manufacturing activity is moving, Patel said.     “One indication that is important to us is how they (the government) want to drive manufacturing to the centre ... we will grow quite a lot in that area (in lower tiers cities in inland China),” Patel said.      Many manufacturers are relocating inland from more wealthy coastal regions in a bid to save costs, an effort helped by increased investment by the government to boost economic development in more remote areas.     “We are looking at a whole bunch of experiments around e-commerce, store inside a store, we may even look at some hypermarket partners (in China),” Patel said, adding the company would expand into lower-tier Chinese cities through joint ventures with local partners and acquisitions.     “It is still early days for us to decide if it is one brand we have across China. All options, 2 or 3 years from now, are open depending on what works for the consumer,” Patel said.      Best Buy competes with local players such as GOME Electrical Appliances (0493.HK) and Suning Appliance 002024.SZ.     The contribution from China to overall Best Buy revenue is small — the Five Star business generated $1.7 billion in revenue for fiscal 2011, compared with overall revenue of $50 billion.     “But it’s growing fast,” Patel said, referring to the China market. “I would love it (China’s contribution) to be 15 percent of our operating profit in five years. And in 10 years, I would love it to be 50 percent. This is our ambition.”   

(US$1=HK$7.78)

(Additional reporting by Melanie Lee in Shanghai; Editing by Dhara Ranasinghe) ((donny.kwok@thomsonreuters.com; +852 2843 6470; Reuters Messaging: donny.kwok.reuters.com@reuters.net))

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