Analysis: Wall Street to Best Buy - Now, get out of China

By Dhanya Skariachan

NEW YORK (Reuters) - Best Buy's move to exit Europe has many on Wall Street hoping the big box retailer does the same in China.

The company sold its stake in a European joint venture to Carphone Warehouse Group this week for less than half of what it paid five years ago. Despite the loss, investors welcomed the news and sent shares up to their highest level in a year.

Many are betting that the next move for the world's largest consumer electronics chain will be out of China, where it has struggled to fend off local rivals and failed to carve a niche in a cluttered market. That unit has also been without a leader for more than a month.

"They are really struggling in China, much more so than they were in Europe," said BB&T Capital Markets analyst Anthony Chukumba, who predicted the company could divest its assets there later this year. "There are no strategic benefits to them being in China."

Chief Executive Officer Hubert Joly said in a statement on Tuesday that the European deal "should not suggest any similar action" in other overseas markets, but he has emphasized since starting last fall that he wants to focus on the United States.

Best Buy declined to comment on whether it eventually would sell its Chinese operations, which accounted for only 3.5 percent of its sales in the most recent financial year. China contributed to 4.1 percent of annual sales in the prior year. Best Buy would not break out China's contributions to the bottom line.

The company told Reuters on Wednesday that it has hired a Chinese national to replace Nicolas Wang, who had been CEO of Best Buy's Five Star business but left in March. It plans to make the formal announcement soon. But the appointment may not be enough to win over support of the overseas business.

"I think that they would still be better off getting out of China," said Janney Capital Markets analyst David Strasser. "The less distraction they have in turning around the U.S. business, the better off they are."

Pulling out of China would leave Best Buy without access to one of the world's premiere growth opportunities.

But it would enable Best Buy to focus on the United States, something for which investors have lobbied. The move also could give the retailer more cash to invest in businesses with better growth prospects such as mobile and e-commerce.

"China has never been particularly profitable for them, and if they feel they can't make that happen, then of course it would be better to try to monetize that holding rather than for them to continue to lose money," said Jerry Bruni, portfolio manager of JV Bruni & Co, which owns Best Buy shares.

In 2012, Best Buy had 1.8 percent of the Chinese market, while local rivals Suning and Gome had 10.6 percent and 10.3 percent respectively, according to Euromonitor International.

STUGGLING IN CHINA

Best Buy went into China in 2006 by taking a majority stake in Nanjing-based retailer Jiangsu Five Star Appliance Co for $180 million. A few years later, it bought out the local company, and opened its own brand stores too.

The operation struggled from the beginning. During the U.S. recession, Best Buy's former management did not invest enough time integrating Five Star into Best Buy "primarily because the U.S. started to fall off a log" said Robert Willett, a former CEO of Best Buy International.

Best Buy and Five Star initially had higher costs because they had separate IT, finance and sourcing, said Willett, who retired from Best Buy in 2009.

Another problem was that the retailer's own-brand stores never adapted to the local market or succeeded in wooing the Chinese customer, who often shops on e-commerce sites like 360buy.com.

Chinese customers "are either going to get the best price online" or use that price to negotiate the best price in stores, said Franklin Yao, managing partner of Shanghai-based consulting firm SmithStreetSolutions.

The company also failed to customize its stores to the local market. For example, Best Buy had an equal number of washers and dryers on display, but many Chinese consumers consider dryers harmful to clothing and don't use them, making that a waste of floor space, said James Roy, a senior analyst with consulting firm China Market Research Group.

Two years ago, Best Buy shuttered its own-brand megastores to focus on Five Star, which is an established name and has smaller stores in cities where the Chinese middle class is emerging.

But its market share continued to fall, dropping 14.3 percent during the last five years, according to data from Euromonitor International, while local rival Suning boosted its share by 29.3 percent.

Best Buy would not be the first to leave China. Europe's largest electronics chain, Media Markt, closed its Chinese stores in March because of pricing pressures.

Last year, U.S. retailer Home Depot abandoned its big boxes in China and decided to focus on selling goods online in the world's most populous country.

Foreign retailers who have managed to stay have not had it easy in China, with some such as Britain's Tesco and Germany's Metro AG applying brakes to their Chinese expansion.

Some believe pulling out of China would enable Best Buy to focus on competing more effectively with Wal-Mart Stores Inc and Amazon.com Inc in the United States.

"If you don't control your core market, you don't control anything," said former Best Buy executive Willett.

(Reporting By Dhanya Skariachan in New York; Editing by Jilian Mincer and Leslie Gevirtz)

Source: http://news.yahoo.com/analysis-wall-street-best-buy-now-china-050555507.html

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