BEIJING - The consumer electronics retailer Best Buy said on Tuesday that it will close its retail headquarters in Shanghai, along with nine of its stores in China.

Industry insiders said Best Buy's business strategy hampered the expansion of its branded stores in the Chinese market.

The US-based retailer said that it would now focus its strategy on expanding its wholly-owned stores - which operate under the name of Five Star Appliance - to consolidate its business operations in the country. Best Buy expects to open 40 to 50 profitable stores before 2013, raising the number of Five Star outlets to 200 or more.

Meanwhile, the company said two Best Buy outlets might re-open later this year, but did not provide additional details.

"While the decision to close the stores was difficult for management, moving forward, we are confident about our business strategy and remain committed to China, as demonstrated by the accelerated development of Five Star," said Kal Patel, president of Best Buy Asia.

The company said it would offer qualified employees positions in the Five Star retail business and in its exclusive franchising business, as well as retaining some team members to support ongoing operations.

Industry experts said Best Buy's operational strategies were not able to generate profit as quickly as its local rivals and constrained its development in China.

Local competitors have stronger bargaining power in price negotiations, which caused Best Buy to lose its competitive edge in pricing, according to industry experts.

"Best Buy makes profit by taking the differences between the products purchased and products sold. They get some discounts from the manufacturers through large purchasing volumes," said an industry insider from a multinational grocery and general merchandising retailer. "Dominant retailers may get even better discounts as their purchasing volume is much larger than Best Buy."

"In some cases, the discounts are so large that the suppliers of Chinese electronic products feel cheated," said Chen Can, an analyst from Analysys International.

"In China, all Best Buy stores are located in affluent areas, which brings high operating costs. Product promoters in other electronics stores, such as Suning or Gome, are paid by manufacturers, but Best Buy must pay for such costs," both of which result in a negative effect on Best Buy's performance, according to the insider.

High operating costs and lower bargaining power in price negotiations finally led Best Buy to lose the price advantage when competing with local rivals, and it failed to attract enough customers.

"Price remains one of the key factors considered by consumers," said Chen from Analysys International.

Analysts also mentioned that the booming e-commerce market in China has also had a negative effect on the profitability of electronics retailers that operate through the traditional distribution channels.

"Consumers can get discounts of more than 10 percent through e-commerce platforms. Additionally, they are guaranteed the same after-sale services. There is no reason for them to shop in traditional retail stores," said Ding Wenjin, an analyst from Dongguan Securities Co Ltd.

Analysts from Analysys International also said that the failure of Best Buy's business model in China is not good for the industry as a whole.

"Actually, Best Buy's business model is more advanced and appropriate for the electronics retail sector. Undercutting prices should not be the main business model in China," said Chen.

Wang Ying also contributed to this story.

China Daily

(China Daily 02/23/2011 page15)