The decision by Media Markt to dive head first into the mainland consumer electronics market made perfect sense – on paper, at least. Propelled by higher income growth and rising purchasing power in both urban and rural areas, this market segment is expected to be worth up to US$265 billion by 2015. Chinese consumers want more – and better quality – TVs, DVD players, desktops and laptop computers, mobile phones and a vast array of other electronic gadgetry.
However, the domestic market remains controlled largely by domestic home appliance and consumer electronics retail giants Gome and Suning Appliance. The jury is still out as to whether foreign entrants can make a successful dent in the market, particularly after US retail behemoth Best Buy decided in February to scuttle its China operations, closing all of its nine branded stores here after five years of losses. The company is now pinning its hopes to the smaller-scale Jiangsu Five Star retail chain it acquired five years ago.
Only weeks before Best Buy’s decision was made public, Media Markt announced plans to intensify its presence. It had already opened a 13,500-square-meter flagship store on Shanghai’s snazzy Huaihai Road last November and followed up with a second store in the city’s eastern Pudong district. Now the company says it will roll out another 10 stores in Shanghai by the end of next year. While Media Markt said it will focus on the Shanghai market at first, managers have set the ambitious target of putting 100 China stores into operation by 2015 in pursuit of an estimated 8% annual growth rate in the domestic consumer electronics sector.
At first glance, Media Markt and Best Buy exhibit worrying similarities in their business models – both pitch to the upper-middle range of the market, both offer large-format stores, and both depend on big revenue returns from a comparatively small number of locations.
Know thy market
But according to Hong Shibin, deputy director of the China National Household Electric Appliances Commercial Association, this is where the similarities end. Media Markt’s future success in China will depend on one major factor: understanding the local market.
“Best Buy has a good operational model back in the US, but it may not be the best for China,” said Hong. “Companies come to China because they see the market growth and the big opportunities available. However, they often forget that this market is also immature and they focus on what they are good at, and not what the market actually wants.”
Zhou Li, senior analyst at consultancy Sinoci, agrees. She noted that even though Best Buy may be a world leader, it has little brand recognition in China, particularly compared to Suning and Gome, which have built themselves into household names. In a country glutted with hardware tinkerers, local shoppers were not interested in Best Buy’s offer of “Geek Squad” after-sales service. They only wanted the best price possible.
So while Best Buy generated a fair share of foot traffic, many who passed through its sliding doors were there to compare prices, not buy anything. More often than not they would check Best Buy’s tag, then go to the Suning store next door to get a better price.
Media Markt hopefully learned this lesson before market entry. “Compared to Best Buy, Media Markt did more research on Chinese consumers’ purchasing habits,” said Li. “They can offer strong after-sales service to consumers, but have also promised to compete on prices, and store managers have been given greater control over securing supplies and have stronger financial incentives to perform.”
Parents and partners
Media Markt is fortunate in one respect: Despite being a newcomer, it can still call on in-house China expertise through its parent Metro Group, the world’s third-largest retailer, which has been operating on the mainland since 1996. Metro opened its first Cash & Carry through a venture with Jinjiang Group, and now has 48 outlets in 35 cities, a figure the company expects will continue to grow in coming years.
Although Metro’s historical focus has been on the food and beverage sector, it is nevertheless already experienced analyzing trends and shifts in Chinese consumer demand, a key skill that can be employed on behalf of Media Markt’s operations.
Also in Media Markt’s favor is its partnership with tech giant Foxconn, owned by Taiwan’s Hon Hai Industries, which controls 25% of the Media Markt China. Media Markt hopes that Foxconn, a manufacturer of several big name products including Apple’s iPad, can support the retailer’s expansion in several ways.
“Working with Foxconn could prove advantageous through its government relationships, real estate, and human resources,” said Gong Wending, from consultancy Shangpu-China. “Media Markt is also planning to bring in store-labeled products, which would provide Foxconn with a direct sales network.”
Furthermore, Media Markt may be able to leverage Foxconn’s strong relationship with big brand names in securing supply contracts at competitive prices, something Best Buy failed to do and which could make a difference when it comes to successfully competing with bargain-basement local electronics retailers.
“If we assume that the relationship between Media Markt and Foxconn is sustainable, Media Markt may enjoy a price advantage over domestic firms,” said Chen Yuefang of trade journal China Chain Store.
“This competitiveness cannot be copied by Suning, Gome or any other domestic firm.”
In addition to this partnership, balancing product quality and competitive pricing will be a key issue in determining Media Markt’s success in China.
By observing Best Buy’s demise on the mainland, the German firm now knows what not to do, which is a good start. But will it ever be able to successfully compete with Suning or Gome, which have a combined market footprint of over 2,000 stores nationwide?
By understanding that most Chinese consumers are first-time buyers of its products and keeping prices low, Media Markt might just pull it off, said Hong of the China National Household Electric Appliances Commercial Association.
“Media Markt needs to position itself in the middle between what Suning is doing and what Best Buy tried to do,” said Hong. “Most importantly, they need to maintain a strong bargaining position with suppliers to keep prices down, because that is what will keep customers coming in.”