Bottom line: Best Buy's (NYSE:BBY) sale of its Five Star chain represents a long-overdue withdrawal from traditional retailing in China, and it would be wise to consider an e-commerce option if it tries to return later.
Some might see retailing giant Best Buy's newly announced sale of its Five Star electronics chain as a retreat from China, but I would personally congratulate the company for a shrewd move that was long overdue. That's because traditional retailing is rapidly dying in China, as shoppers opt for the convenience, better selection and lower prices of e-commerce. What's more, the traditional electronics retailing sector is already overcrowded and highly competitive, dominated by big national chains led by Suning and Gome.
If I were advising Best Buy, I would tell it to seriously consider returning to the market in the not-too-distant future with a newer retailing model that many foreign companies have recently embraced to take advantage of their international connections. That model has companies setting up big warehouses that enjoy preferential import taxes in Shanghai's year-old free trade zone (FTZ), and then operating online shops with a special focus on selling imported goods from those warehouses.
That model has been adopted by global online retailing giant Amazon (NASDAQ:AMZN), which hopes to use its global connection to sell goods from its US and other international sites to Chinese consumers at competitive prices and with quick delivery times. Microsoft (NASDAQ:MSFT) and Sony (NYSE:SNE) also have used a similar strategy to offer their Xbox and PlayStation gaming consoles after China lifted a decade-old ban on the sale of such consoles this year. Discount supermarket giant Costco (NASDAQ:COST) recently announced similar plans, and leading retailer Wal-Mart (NYSE:WMT) may also be weighing a similar operation for its main China e-commerce platform, Yihaodian.
All that said, let's return to Best Buy's latest strategic move in China, which will see it sell its Five Star chain to local real estate company Jiayuan Group (company announcement). Best Buy didn't provide any financial terms for the deal, but said it was approached by Jiayuan, implying that it wasn't actively looking for a buyer for Five Star. The electronics chain is a mid-sized player in China, with 184 stores nationwide.
Best Buy said it expects the sale to close next year, and that the deal won't affect its private label business in China. Best Buy originally purchased Five Star in 2006, and entered China with about a dozen of its own-brand stores in Shanghai a short time later. But its model that emphasizes customer service never really caught on in price-sensitive China, and it ended up shuttering all but one of its own-brand stores in 2011.
Rumors first began circulating in June that Best Buy might be looking for a buyer for Five Star as it focused on improving performance at its core operations in North America (previous post). The company certainly isn't the first major western brand to bow from China, and follows other high-profile names including home improvement giant Home Depot (NYSE:HD), leading British supermarket operator Tesco, and a joint venture operated by German electronics chain Metro.
As I've said above, I do think this move was probably long overdue and would even suggest that established domestic powerhouses like Suning and Gome consider taking similar steps. In fact, Suning is already pushing aggressively into e-commerce, and Gome has begun making similar moves more recently. At the end of the day, traditional brick-and-mortar retailing just isn't a good business model for electronics and home appliances, and Best Buy should seriously consider an FTZ foray similar to Amazon's and Costco's if it decides to make a new play at China's tough market.