The Retailer Failed in China—But Does it Matter?
Greg is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
When The Home Depot (NYSE: HD) entered the Chinese marketplace back in 2006, officials thought customers would get excited about doing projects around the house. Six years, later, they are admitting that they were wrong—apparently most Chinese would rather pay a professional than pick up lumber themselves at a big warehouse-style store. The Home Depot is closing its main stores in China, leaving only two small “specialty” stores that focus on small-scale decorating products and continuing its online service in the country. But should this “failure” be interpreted as a red flag to investors or simply a speed bump on the road to growth?
Translation Problems
The failure to completely understand an international customer base is one that has tripped up a long list of American businesses in the past. Just because China offers a gigantic potential audience does not mean that you can throw products at it and hope that enough of them stick to make a profit. One of the most recent failures in this area is Best Buy (NYSE: BBY), which hoped that China’s love affair with technology would help it offset plunging numbers at its U.S. stores. Apparently, the company’s mistake was more a matter of style than substance—while the Chinese can’t get enough electronic gadgets, they don’t enjoy shopping for them in a big store.
In a country where the streets are crowded and the living spaces are very small, a “big-box” store doesn’t do well. Best Buy has gotten more traction in China by adjusting the style of its stores, but The Home Depot has decided to instead pull out almost completely. While it has suffered from some of the same style problems as Best Buy, in addition it looks like there just isn’t a market, period, for most of the products that The Home Depot sells.
What Could Have Been
In contrast, what companies have done well in China? The ones that carefully research the unique Chinese market and build their Chinese stores to match it. Take Apple (NASDAQ: AAPL), for instance. Its minimalistic, high-tech stores are the virtual opposite of a Home Depot warehouse! Selling less and doing it in a smaller store has spelled success for Apple and other companies in China, and The Home Depot is actually following that lead with the two small stores that it is keeping open in Tianjin. Will the company build more stores like them if they succeed? Perhaps, if it moves slowly and pays more attention to what its audience in China actually wants. But that’s not what the company should base its future on.
Why It Doesn’t Matter
If, for the sake of argument, The Home Depot had done an incredible job analyzing the Chinese market, pinpointing needs, and offering products that met those needs in a way that Chinese customers liked, we would almost certainly be looking at skyrocketing growth in its stock. But, does failure in China mean an upcoming downturn in stocks? Not necessarily.
The Home Depot has not been sitting idly by at home, trusting its Chinese endeavor to drive its business forward. It has gone to great lengths to make the local store a place that contractors, DIY-ers, and families looking to spend a Saturday morning together all like to visit. Rather than opening more and more stores in too-close proximity to one another (here’s looking at you, Wal-Mart!), The Home Depot has concentrated its efforts on drawing more kinds of customers to the stores it already has open. Excellent customer service, staffing that covers every inch of the store, children’s activities, and advanced, efficient restocking technology are just some of those efforts.
The conclusion? The Home Depot is a very smart, very competitive business in the U.S., even if its first major overseas endeavor was not. The company should probably not concentrate its attention on copying Apple’s focused approach in China, tailoring stores to the population’s tastes. Instead, it should keep doing more of what it is already doing really well: Improving its attractiveness to U.S. customers and getting more of their business. As long as it does that, its numbers will continue to rise, as they have for the past year.
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