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Best Buy Looks for China Model
Summary:Array

On December 28th 2006, North America's first big household appliance retailer opened shop in Shanghai. But despite the orange, spacious, corridors and curvey counters, the consistent store environment did not hide the stylistic differences between Guomei, Suning, and other appliances on sale.

Three days later, Chinese appliance retailer Five-Star's response, a high-end appliance retail location, opened in Nanjing. For a firm that just six months ago was bought by Best Buy, it is meticulously moving forward in the interestsof it's stakeholders.

Since first coming to China, Best Buy took three years to open its first store. As early as 2003, Best Buy had established an office in Shanghai. Buying up Chinese appliances was its most important task at the time.

Best Buy was thus able to advance its understanding of local suppliers. In 2005, Best Buy's China purchases stood at 72 percent of global purchases. Haixin, Haier, Changhong, Shahua, etc. are all important suppliers for Best Buy.

China's household appliance industry rakes in 500 billion yuan in sales a year, a figure that has made Best Buy determined to do business here.

One source at Five-Star says that in May of 2006, Best Buy bought the firm for $180 million. According to the an agreement by both parties, Five-Star would maintain its brand name. This signaled Best Buy's strategy of pursuing two brand-names in China.

The source also says that in the Five-Star headquarters of Zhejiang and Jiangsu provinces, Five-Star will maintain and increase its brand-name lead. In a string of other cities, Best Buy will seek to elevate it's brand-name prestige to the level of Guomei and Suning.


On the day of the grand opening in Shanghai, local suppliers themselves blended among the crowds. Best Buy staff were all dressed in uniform, but there were no sales promotion present. This was less than reassuring for the the suppliers.

But what the suppliers were all paying attention to was the 'pay first' policy that Best Buy uses with its suppliers. This subverts the 'quasi-financing' model relied upon by local household appliance retailers.

'Quasi-financing' is when appliance retailers pay back suppliers after a period of time. In the meantime, they use the windfalls to make other investments.

Appliance retail chain expert Luo Qingqi believes that Best Buy operates this way in order to bear management risk and create a win-win situation for suppliers, consumers, and ultimately itself. Since domestic retail chains are rapidly expanding, management risk has been transferred to the manufacturing sector, straining its financial resources.

In line with the 'pay first' policy, after supplier's products enter the store they are entirely placed, marketed, and sold by Best Buy. In order to continue to attract suppliers, this requires that Best Buy give them a higher profit margin.

Best Buy is still looking for its 'China model'. Lu Weimin, cheif of Best Buy's China operations, has suggested that the company is still in the process of understanding this market, and that once they find a good model they will rapidly reproduce it. Perhaps this is what other retail chains are most afraid of.

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