Best Buy and Toys 'R Us Enter China - What to Expect?

| About: Best Buy (BBY)

Due to liberalized regulations stemming from China’s ascension to the WTO, retailers have been flocking to China in the last year to try to grab a share of the increasing money that China’s emerging middle class is spending on consumer goods like Sony (NYSE:SNE) cameras or Nike (NYSE:NKE) athletic garb.

Best Buy (NYSE:BBY) has entered the fray and set up a flagship store in China last month. Although retailers like Wal-Mart (NYSE:WMT) have been here for years, few have wide product selections and service remains sub-par. Aside from Ikea which has done a fabulous job in China, the ambiance of these retailers pale in comparison to their American and other international operations.

But this might change with the China entries of Best Buy and Toys ‘R Us which also opened a store in Shanghai recently. Although many critics believe that the market is too crowded or controlled by local retailers like Guomei and Suning, the time is right for foreign retailers to enter China if they can deliver the right product mix and services.

Chinese consumers are demanding better service and product lines than the current retailers are offering. My firm has run exit interviews with shoppers after spending time at electronic purveyors like Guomei. Overwhelmingly, consumers remarked that they were “disappointed with product selection” and “nasty” salespeople that “represent a specific brand within the store and thus give biased recommendations.” They are dying for unbiased salespeople and better product selection in warm atmospheres.

This gives retailers with dedication to the China market the opportunity to seize market share. Investors should closely look at the stock of Best Buy because it is making the strides necessary to expand well in China.

Growth through Acquisition
Aside from opening its largest store worldwide in Shanghai at 80,000 square feet, Best Buy also just spent $180 million USD to acquire a majority stake in domestic electronics retailer Jiangsu Five Star Electronics Co. The acquisition gives Best Buy a presence of 136 stores across eight provinces to go toe to toe with local retailers Guomei and Suning. Best Buy estimates that China’s electronics market can reach a staggering $100 billion USD a year by 2010, and they want a big share of that market.

Although Best Buy is late to China, I believe in the first mover disadvantage in China. Second movers can come in by copying what competitors did right and avoiding their mistakes. So far, Best Buy has done a good job of learning from others.

Excellent Service and Unbiased Salespeople
Last weekend, several analysts from my firm and I went to Best Buy to do mystery shopping and interview other consumers shopping there. The service, quite frankly, was excellent. The staff patiently answered our numerous questions about telephones from Siemens (SI) to mobile phones from Motorola (MOT) to computers from Apple (NASDAQ:AAPL).

They made recommendations based on client needs rather than on which gave them the best commissions. As one staff member told me, “There is no reason to waste your money on this camera if you are not making movies. This cheaper one makes more sense for your skill level.”

Chinese consumers were happy too. When asked about the shopping experience, consumers commented to us that “The staff is really knowledgeable. They can tell me a lot about the products, and they can tell me about different brands.”

Store Layout

Consumers also really liked the store layout which was considerably larger than other retailers. “It is so big like American ones,” one customer gushed who had spent time in the US previously.

They also were impressed because they could touch products and compare different brands with ease. One commented “It is great that I can hold all the things here without having to ask. Seeing Apple, Sony, and Lenovo side by side is a big help.”

Indeed, the mobile phone selection was laid out and easy for consumers to pick up and see what the phones liked. In most stores, one has to ask impatient mobile phone sellers to look at a phone.

Typical Service in Chinese Retailers

Such happiness in the sentiments of consumers is the exact opposite from how they feel about Guomei or Suning, where shoppers get biased information about products from salespeople. On blogs and BBS, Chinese consumers have been slamming the sales techniques of these stores.

One shopper wrote, “Look at the sales staff in Suning and Guomei, they all crow about their products while saying as many bad things about their neighbors’ products as possible.” Another wrote, “Do not believe the words of Guomei sales staff, they are ‘trained’ well to take the money from your pocket.”

Consumers also have been upset with the weak product offerings. One blogger blogged “If you want to buy an MP3 player I suggest you don’t go to Guomei, their selection is out of fashion, and there are not many types.”

Although many of the checkouts were empty on both of my firm’s visits to Best Buy, the positive word of mouth that Best Buy is gaining from their flagship store throughout China will be huge as they continue to rollout stores. Moreover, we believe consumers will start buying from Best Buy as prices are competitive. One product that I ended up buying was about 3% cheaper than the equivalent at Carrefour.

Investors should watch carefully to see if Best Buy’s numbers in China can impact their overall stock price in the positive manner that we predict it will. Conversely, look for Guomei’s stock to be hit.

CMR analyst Ben Cavender contributed to this article.

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