U.S. consumer electronics retailer Best Buy Co. Inc. said its retail strategy in China will focus on expanding its network into inland cities, where consumption is booming.
"Relative to other parts of the world, the China market is explosive," Asia President Kal Patel said late on Monday in an interview. "We are looking at the centre of China."
This moves reflects a change in strategy for the seller of 3-D televisions and other electronic devices. Last month, it said it would close self-branded stores in China and focus its business on wholly owned subsidiary Five Star, which has nearly 170 smaller stores in seven Chinese provinces.
In the United States, it said it will focus on profitable growth at its Best Buy mobile business as part of a wider rethink of its international focus.
Global retailers are eager to tap China's massive consumer market, but getting people in the world's most populous nation to open their wallets is not as easy as it seems.
U.S. toymaker Mattel confirmed reports on Tuesday that it had shut its six-storey flagship Barbie store in Shanghai, saying it wanted to focus on the broader Chinese market rather than just China's commercial hub.
"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.
Still, global retailers looking for stronger growth outside their home markets have flocked to China, where consumer wealth has risen alongside a surging economy.
Chinese consumption has grown more than 9 percent per 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 expansion in China would lead the growth.
Best Buy plans to open 40-50 Five Star stores in China in fiscal 2012, with the majority in less affluent cities.
Big retailers have traditionally catered to upmarket first-tier cities such as Shanghai and Beijing, where residents have higher incomes. But as more manufacturing groups shift production inland, consumer incomes in the interior are also growing.
Rapid economic growth is making smaller cities such as Wuhan and Chengdu attractive, and the market is vast — according to the national statistics agency, more than 120 cities have populations in excess of 1 million.
"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-tier inland cities)," Patel said.
Many manufacturers are relocating inland from more wealthy coastal regions in a bid to cut costs, an effort helped by government investment to boost 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 that the company would expand into lower-tier cities through joint ventures with local partners and via acquisitions.
"It is still early days for us to decide if it is one brand we have across China. All options, two or three 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 Holding Ltd. and Suning Appliances Co. Ltd.
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. "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."
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