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Home Depot In China. It’s Complicated.

Posted in China Business

Home Depot recently closed down its last Beijing store and the media has for the most part ascribed that to a lack of a Do It Yourself (DIY) culture in China. Though I do not for a moment doubt that China for the most part lacks such a culture, I am not at all convinced that is the sole (or even the main) reason for the closures in Beijing. 

I have read a number of books and articles on China’s consumer and retail culture and I have engaged with many true experts in the field and all that allows me to make one point and one point only: China’s retail is incredibly complicated. My law firm has clients unbelievably successfully selling products in China that I would have thought had absolutely zero chance of success and other clients who have failed to succeed with products that everyone thought were sure winners. Like consumers just about everywhere else in the world, China’s are fickle, mercurial and unpredictable. 

Back to Home Depot. 

There could be a million reasons for its failure in Beijing and the analysis ought not to ignore that it still has six stores in Tianjin?  Are those six stores making money? Is Tianjin really that different from Beijing? Did the Tianjin stores “make it” because they are more clustered, making for better distribution or better name recognition?  Who knows? I sure don’t.

Yet at the same time, I persist in thinking there is some lesson to be learned from Home Depot’s Beijing failure (is it premature to call it a China failure?).  Was it too soon? Was it in the wrong place?  For an excellent article that helps raise more questions (but in my mind necessarily fails to really answer them), check out “Home Depot fails to convince China to DIY,” on MSNBC.com. 

What do you think?

  • http://www.china-speakers-bureau.com Fons Tuinstra

    In China’s, most interior construction is outsourced to construction companies (if one-person operations can be called a company). Those construction companies do the purchasing and have possible more leverage to get higher discounts than official whole sale stores.
    It might be different outside the cities, but I do not see many urbanites making their hands dirty when somebody else can do it cheaper.

  • Aaron

    I think Home Depot briefly managed to tap into a little bit of that DIY home improvement market in China, but perhaps its business declined because of stiff local competitions and a decline in the DIY market in China.
    While there are still a lot of speculative real estate buying in China, the speculative realtors in China are not flipping condos by DIY home improvement. So there is that decline.
    However, I think Home Depot is missing out (or couldn’t get in) on the rural home constructions.
    The Chinese government is shifting more of its subsidies for housing constructions into the rural areas, away from the cities. It’s hard to tell how much of that will be speculative real estate, but Home Depot might do well setting up small sales offices in some rural cities, and offer to ship in home building DIY supplies to the rural areas. (Big stores are unjustified, but may be catalog sales).

  • http://daninbusiness.com Dan Welygan

    B&Q (a UK-based? chain which is a lot like Home Depot or Lowes) is still around in China, and seems to be surviving; their retail formula does not seem to be that much different than Home Depot.
    B&Q did get into the game of providing branded renovation services for people that bought flats/condos; according to a friend of mine in Shenzhen who used their service, he felt that they were going to ensure a higher level of construction service and not cut corners on materials. (as opposed to the shortcuts that some smaller general contractors in China often take)
    I never have been to a Home Depot in China; does anyone know if they got into offering that sort of service?

  • Shanghai Guy

    B&Q is also doing quite well here in Shanghai. I know of 4 locations (scattered, not clustered) across Shanghai. Perhaps it’s due to differences in regional culture?

  • Janet

    I agree that the B&Q example calls into question the main point of this story. I am not sure how successful they are, but B&Q has stores all over China, including second tier cities like Chengdu (where they opened in 2003 or 2003, if I recall correctly). I’m not sure how good their sales are — never seemed to be many people when we visited stores in Chengdu and Beijing. Many people may use stores like this as we do — as a reference point for pricing of materials and supplies, since they do post prices in a more transparent way than the wholesalers. But once you have that basic information, you can use it to know an upper end price for whatever material you are looking for, and then take that information to a wholesaler and bargain. We used this approach to ballpark prices for various materials when we were preparing to finish the apartment we bought for my inlaws. The bargaining and gotta-get-a-deal-every-time mentality is very strong in China, and that may be one factor that led to Home Depot’s demise — they may have had decent prices and a one-stop advantage, but I think people here are much more willing to run around looking/bargaining for better prices and do not necessarily have a “time is money” orientation.

  • Mike

    My observations of eight years in Suzhou are that Chinese people do not DIY, not even a little bit, but they do go to stores like B&Q to select their home decorations, either for installation by B&Q (they have a service for that) or by somebody else.
    Not sure about Home Depot. I think there was one in Suzhou, not sure if it is still there, but it did/does not compare well to B&Q (who are everywhere, by the way). I tried to get to the Home Depot store once, but it was hard to get there, looked old and dumpy, had no parking but was surrounded by street peddlers, so I turned around and went to B&Q, which is well located, big, clean and ‘modern’, ample parking, no chaos.

  • All Roads

    Home Depot’s push in to China was one that was doomed from the start. It was a strategy that left several management teams behind, and after stalling for some time on their own investment they ended up purchasing the Beijing/ Tianjin group… for a huge premium.
    The market for DIY in China is different as it is not really DIY in the western sense. It is BIY here. BUY it yourself, and then have a team (B&Q or otherwise) install it. B&Q recognized this early and set up teams of contractors who could do the work, and set up sections of their stores to support this model (entire rooms were prearranged for purchase)… and this is all before pricing begin, or the fact that B&Q’s staff is over the top helpful when you are searching for advice.
    Getting back to HD though, the sign that the strategy was going to end up here was that they never expanded on the investment, or into China’s 2nd tier. they bought into an existing group of 6-8 stores, and then flat lined. And when the market flat lined in 2008, the investment reached a stage where it could not be supported long term.
    R

  • Don Johnson

    I second Mike’s comments, that the B&Q/Home Depot buyer in China is not a DIY so much as a buy-the-materials-Y-so-you-know-the-contractor-isn’t-swapping-in-cheap-stuff buyer. We did this ourselves when we wanted to use high-end low-VOC paints, glues, etc: we went and bought them ourselves, gave them to the contractor and watched the workers apply it. Also, as someone else said, B&Q offers contracting themselves making it a one-stop place.

  • Armand

    When I first read this post, I thought that someone should have asked Home Depot why it closed down. Then I realized that the reason for that is simple: they were not making money and they did not see themselves making money in the future. Since these are the guys who “messed up” in the first place, they might well be the last people we should be talking to as to why the money did not come in. I like your having the readers try to analyze the situation, but in the end, we will never really know.

  • Fredrik

    I agree with “All roads”, it’s really a gross misunderstanding of their customers and then inability to change to adapt. B&Q in China seems to me to be much more of a service company than anything else, and from what I heard about HD they never made this transition. I think the cheap labour costs have really undermined any start of a DIY culture, in most cases it’ll cost you more to get extra supplies if you mess up than it does to have a professional just do it for you.
    Quicker, more convenient, and cheaper is hard to argue with.

  • Ben S.

    It might be worth looking @ what is happening for HD in their North American markets as well in trying to answer this question. Specifically, they have been working through some of the investments made by previous management that don’t line up w/ new corporate priorities or today’s US market. They had an early advantage in Canada that is going away as Lowes expands in the Canadian market. Overall, HD just might not have either the resources or the patience to continue refining their China retail model.

  • HD Fan

    Thanks for this analysis and thanks, in particular, for not doing what so many of the so-called consultants have done: act like they know better than anyone else exactly what happened to Home Depot.

  • All Roads

    @HD Fan -
    when you say “act like they know better than anyone else exactly what happened to Home Depot. ” are you implying that you are in the know then? If so, Why not school us so-called consultants on what really happened.
    .

  • Gerald

    The Home Depot that I visited in Beijing was pretty close to the other home improvement stores that I’ve been to here (local brands as well as B&Q, which is quite successful from what I can tell). Ok, perhaps they offered more in the way of raw materials than their competitors, but I didn’t notice anything that was lacking for someone who wanted to renovate their apartment. So I would argue that it probably wasn’t a problem with their business model that caused them to fail, but rather other issues such as location (the location of the store I visited was a bit odd), brand awareness, suppliers, etc. Also, for those asking, this HD store also offered a home renovation service like B&Q (and all the other stores).
    The posters who mentioned that it’s more BIY rather than DIY over here are entirely correct – when folks want to furnish their apartment, they will usually buy the hardwood flooring, tiles, doors/door fixtures, sinks, toilet, shower, kitchen cabinets, plaster, electrical fixtures, etc. themselves, and then hire other people to do the actual work. There are huge home renovation markets that have independent vendors specializing in all of these, in addition to the one-stop megastores such as B&Q.
    I get the impression that some overseas readers might not realize this, but when a foreign brand comes to China they must undergo localization of their business model/products offered in order to be successful here. Though the change could be more radical for some (ie- Pizza Hut) than for others (KFC, McDonald’s).
    Another example – a Walmart store in China is quite different from a Walmart in the US and I’m pretty sure the same is true for the Carrefour stores here vs. those in France. But you will find that the Walmart and Carrefour stores in China are quite alike, and are both very successful here.

  • Gerald

    I just did a quick scan of the MSNBC article and some of the comments that accompanied it, and my are they way off the mark. Firstly, the article incorrectly assumes that the HD stores here are clones of the ones in the US. Secondly, DIY (beyond simple projects such as replacing fixtures) will not take off here for a long time for reasons that should be obvious to most of you.

  • TonyHuang

    Though the Home Depot news appeared mostly in Jan/Feb, I didn’t learn about it until 4/8/11 when I was listening NPR on my way to the airport. It has some interesting opinions from Chinese consumers http://marketplace.publicradio.org//display/web/2011/04/08/pm-home-depot-not-a-hit-in-china/?refid=0&utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+APM_Marketplace+%28APM%3A+Marketplace%29 . Based on the interviews, it seems HD has yet to define who their target customers should be.