Home Depot Lessons from China

 Home Depot Lessons from China

Home Depot (HD) was founded in 1978 by Bernie Marcus and Arthur Blank among others. The company vision was to be a “one-stop shopping for the do-it-yourself.” (Our History, n.d.) The first HD stores were big box in size each 60,000 square feet and opened on June 22, 1979, in Atlanta, Georgia. Investopedia (n.d.) defines a big box retailer as one “that occupies an enormous amount of physical space, offers a variety of products and is usually plainly designed.”  HD is the fourth largest retailer in the USA and is ranked fifth in the world. (Did You Know n.d.) They sell everything from appliances to tools and hardware.

China was the world’s largest and fastest growing home improvement market. There was a booming economy and Government incentives for home ownership. Home ownership has risen from nearly zero fifteen years ago to 70%. (Wang, 2011) The annual home improvement market was worth 15-50 billion dollars and growing at a rate of 20%. (Wang, 2011) B&Q and Ikea had successfully entered the market. HD was finding that the US market was slowing down; it was against this background that HD decided to enter the lucrative Chinese market.

They had become somewhat familiar with the Chinese market since 1996 when one of its senior managers Jim Ingles gave Home Ways (HW) founder Du Sha technical assistance, exchanged ideas and trained its employees when HW first opened in China. It is fair to say that the HW was modelled closely on its US counterpart HD. However at that time HD was reluctant to join together as a joint venture.

HD imported many products from China and in 2002 set up two sourcing offices in Shanghai and Shenzen. As well as sourcing products for its shops it also had some of its own brands manufactured here. They become more familiar with China and opened a business development office there. This was done to gain insight into the Chinese customers and evaluate potential market entry strategies prior to opening a store. Up to now HD had mixed successes with overseas expansion. They successfully entered the Canadian and Mexican markets through a strategy of acquisition and expansion. However the same strategy did not work in Chile and Argentina – they ended up selling their stores in 2001. They had not ventured into foreign markets since that debacle. Therefore it was very important to HD that it had the right strategy developed prior to entering the Chinese market.

With this in mind Chuck Elias Home Depot’s China head was tasked with studying the Chinese market. He “visited 25 cities over 14 months, researching competitors’ outlets and traditional markets” (John, 2013. p.4) It appears that a thorough analysis of the marketplace, its operators and competitors was done. It is unclear if customer attitudes and behaviour to home improvements were studied and analysed. The bricks and motor were studied but the intangible consumer? 

Evaluating Entry Strategy

HD decided that an acquisition policy was the best route to enter the market. In late 2006 they gained immediate exposure to the Chinese retail market after the purchase of HW, the store it helped set up ten years previously. This resulted in them owning 12 stores in six different Chinese cities. These stores had over 90,000 square feet of retail space or approximately 90% of HD stores in the US. They immediate started to remodel, revamp, and remerchandising the stores while training the associates to the HD model. The rebranded stores opened eight months later.

They appointed a local Chinese business leader Yves Chen President of HD China and Asia, who had experience working with the Beijing Haulian Group. He was given the task to “integrate Home Way stores into Home Depot” (John, 2013. p.5) and developing a growth strategy. He was basically in charge of turning HW stores into HD stores i.e. import the US model and implement it on the Chinese store. No major adaptations for local conditions or consumer preferences.

HD introduced a paint centre, water treatment centres & 300 Eco Options or environmentally friendly products, which were aimed directly at the Chinese consumer. (John, 2013. p.5) Up till then the Chinese market had a vendor or wholesaler, a middleman and a retailer. The retailer received the smallest margin. HD planned to use its Chinese wholesalers to supply its Chinese shops and thus cut out the middleman, but found they were not licensed to do so. So Chinese goods were sent to HD USA and then back to HD China.

In early 2012 HD changed their strategy. They downsized from big box to small speciality stores in malls. They opened a stand-alone 1,300 square foot store selling Behr paint in Tianjin, a second tier city. After a period of time flooring section was added to the store. (John, 2013. p.11) The smaller outlet allowed them to try and target specific customers, resulting in increased productivity and to become more profitable. HD was delighted with the results and opened a Home Decorators Collection store June 2012. There are plans to open similar stores in Beijing and other cities.

While HD appeared to have studied the tangible competitor market in detail it appears that its study of the intangible consumer attitudes and behaviour was not as detailed. They failed to grasp the difference in how consumers in US & China behave. More importantly they failed to grasp how this different behaviour might impact on their retail model. Importing American style store into China without adapting it to the local market conditions and ways of doing business was not successful. Chinese culture both at an individual and business level is vastly different from that of the USA and the Western World. This difference appears not to have been recognised, understood or fully appreciated. When you “fail to plan” for such an enormous cultural difference then you “plan to fail”. While they got the support of local & national Government officials it failed to identify and resolve the red tape whereby goods purchased in China could only be sold in China if they were first exported and then re-imported. They seem to have made little use of the executive knowledge and experience of HW management. "Hasten slowly" was not its motto. It moved quickly after the acquisition to put the HD stamp on the stores.

Just because the company is working well in the home market doesn’t provide guarantee that it will do the same in International Market. How Company as successful as Home Depot not be able to make success in china? China’s largest population and rise in middle class enthrals many retailers Home Depot wished to make most out of this emerging market but this is tuff water to ride, as the land caries variety of culture in every Conner and this invokes diverse in consumer shopping behaviour. Some retailer taste success and some just doesn’t, this doesn’t give us or anyone a right to conclude that Chinese market is tuff and Chinese consumer are tricky to do business with. Every consumer in every Conner of world is different with his needs and likes its retailer’s sole job to understand consumer and Market before entering the market failing which they will taste failure, with that being said lets analysis various Reasons for Home Depot failure in china.

Reasons for Home Depot Failure in China

Fishbone Analysis/ Root Cause Analysis of Home Depot Failure in China

Home Depot Failure in china

Lack of Cultural and Consumer Understanding

It’s very easy to say that the main reason for HD’s failure was the lack of cultural and consumer understanding. The Chinese labor market is cheap so consumers will prefer to hire labor rather than doing it themselves. Apart from the difference in Home Depot product model DIY and actual Chinese consumer DIFM, if you take a closer look there are various reasons for HD failure in china.

Often deep customer understanding can only come from experience within the given marketplace. Fishbone analysis/ Root Cause Analysis gives a detailed understanding on HD failure in china, rather than generalizing on the fact that HD failed to understand the market. Hence drilling down further we get a various reasons such as HD did not have any Plan B and were changing CEO’s quite often if their plan did not work this resulted in unstable management.

Poor Timing

Home depot entered the Chinese market later[i] than its international competitors and with the domestic companies also having a strong foothold[ii] it made the entry process even more difficult by the time by the time it arrived China's growth was slowing down.

Emerged Competitors

Home depot entered China in 2006 by accruing the Home way stores, by the time HD made their mind to enter china competitors had set their strong foothold in China. According to china national interiors and decoration association has estimated there are more than 40000 registered home improvement retailers offering their service to the Chinese market ^{(Case Study PG 7)}  .

Top Home Improvement Competitors Analysis Matrix

This matrix clearly describes when the competitors entered into Chinese market and how many stores it had in 2006, this gives a clear understanding how emerged HD’s competitor were in china. In addition to this HD took 1 year to remerchandise, renovate and finally it opened its rebranded store on August 2007. HD never considered this in there planning strategy, they were too confident about themselves in the china market. 

Name of the Competitor	Origin of the retailer	Type of Retailer	First Store Opened in	No of Stores by 2006
Ikea	Swedish/ International Retailer	Stores / Big Box	1998[iii]	4 Stores[iv]
Araujo Furniture Group "DIDA"[v]	Italian based / International Retailer	Stores and Manufacturing Unit	1998[vi]	1 Store
FLEXA	Danish/ International Retailer	Agents and Speciality Stores	1999	15 agents and 10 Stores[vii]
B&Q	Britain/ International Retailer	Stores / Big Box	1999	100 Shopping centres[viii]
Midea [ix]	Domestic Retailer	Stores and Manufacturing Unit	1968	N/A

Growth Slowdown

To add fuel to their sorrow Chinese economy started reacting to global recession. US consumers drive China's growth[x] strongly reacting to global crisis and in order to survive the crisis Chinese government started taking precautions. The Chinese government made restriction measures to residential property purchase in 43 Cities across china[xi] and included the caps and raised the deposit level in home purchases. This tightened measure directly impacted home improvement sector and left no choice for HD rather than wait carrying hopes in the eye for things to change.

Chinese Housing boom was a Bust

One of the main reason caught HD eye was growing housing market more than 80% of homes are privately owned evidence of successful privatization policies during the 1980s and 1990s[xii]. This Chinese building boom looked like a terrific opportunity to HD.

There were three types Chinese households

1.       Commodity houses,

2.       Economically affordable houses, and

3.       Rental properties[xiii].

HD never understood this bifurcation in house buying and this lead to miscalculation that more home buying hence more home improvement products will sell. This was the biggest blunder made by HD management failing to understand the reality of real estate that the market was driven by speculators and buyers those who buy the property did not planned to live there it was just an Investment to them. Hence they did not want to decorate or buy cabinets to such house this resulted to sales slowdown and eventually became a step to failure in china.

Unstable Management Team

Changing Heads Often

CEO BLAKE

Country Head Chuck Elias

President

Division Head

Yves Chen (2007-2008) Simon Chuen (2008-2009) Raymond Chou 2010-2012

Frequent change in management will Impact Company as well because every person has his/her own way of thinking, this was one of the main reasons for HD failure in China. HD’s frequent change of heads seemed like a rash response and one that was not going to fix their problem. These inefficiencies created concrete steps of failure for HD in china. With no plan B HD did not know how to react when their initial plans failed.

Lack of Educating the Customers

This is one of the main steps a retailer has to do when bringing in a new concept to the market. China has never dealt with the DIY model before, but they are fascinated by western products hence the HD should have showcased the model house and model rooms, rather than teaching them how to fix a ceiling fan or window. This is not what educating customers is all about as this indirectly forces them to learn the DIY model which the Chinese customer had no interest in. The Chinese turned to decorators to help them purchase their products and then got fitters to come in and fit out their home and could to afford to do so as labor was so cheap.

An HD customer expressed on their HD shopping experience[xiv] (Rephrased) their staffs are very helpful teachers us how to fix the deck and ceiling fan but their products are in itself not packed with western culture.

IKEA, on the other hand, teaches the consumer how to decorate their home, and thereby experience Western culture. The project — and the payoff, for that reason – lets consumers experience that culture[xv]. Source (http://www.irealtytimes.com/articles/2677/20120809/chinese-ikea-shoppers-making-themselves-home-little.htm#page5)

Ikea Store in china

 Lack of Flexibility & Poor Merchandise

In the major cities in china, homebuyers typically purchase an apartment that needs a range of finishing work. Chinese consumers must[xvi]:

 1. Select a contractor for design, decoration and finishing service

2. Develop a home design plan in conjunction with the contractor

3. Select and purchase construction materials through the contractor or in consultation with the contractor or by the homeowner himself

4. Agree to the finishing schedule and pricing

5. Allow time (on average 2-3 months) for the work to be completed

6. Conduct the final check of the whole project when finished

Those consumers who buy a home where the finishing work has already been completed still need access to innovative home-related merchandise and services at attractive prices. There is a clear need to beautify, need to personalize and the need to protect. But HD never understood this nor did its products satisfied any needs. A Chinese interior speaks of his experience with HD “[xvii]Qiu Hongtao: I've been to Home Depot, but I wasn't impressed. It's an American brand, and I went there expecting new and unique American products.” Chinese like foreign products because they are unique and often are seen as a luxury item.

This proves that HD Lacked Flexibility towards the consumer it was just imposing its home model to china consumer hence ended up having a poor merchandise range inside store this showed a definite way to failure to HD in china.

Poor Shopping Experience

 As said by Edmund DIT professor “Retailing is a theatrics experience” and this is what differentiates retailing from trading. HD was selling mundane products in typical HD store style. Even if the products are not up to the mark, retail visual merchandise, store atmosphere in general lure the customer to buy the product. This is where Ikea cracked it completely, Ikea proved to be the complete family store where people visit the store to spend quality time. Source: (http://szdaily.sznews.com/html/2012-09/17/content_2206764.htm)

Home depot store in china

Ikea Store in China

Ikea Store Images[xviii]

 

Ikea Store in China

Ikea Store in China 

Critically assess the strategies proposed by HD for its future in China

HD is running out of ideas on how to formulate a successful strategy In China. Their biggest issue is to try and repair the six years' damage that has already been done to the brand name in the marketplace and attempt to change the consumer’s perception of their brand. It would also seem that another failed strategy would make it very difficult for HD to redeem itself in China.

The new way forward: E-commerce

The new strategy seems to place less emphasis on the stores and more on e-commerce. This seems like the most logical move for HD to make as China is expected to be the largest online market in the world by 2015. HD is sticking with the specialty stores they have in Tianjin for the moment but it does not look like they are going to expand on those until they start showing signs of promise in the marketplace. The specialty stores are the polar opposite of the Big Box technique that was originally used and even the renewed strategy is not guaranteed to be successful. CEO Blake stated that “We will either figure out how to make money in China or we won’t be there”. The only question really is how long they are willing to wait before they become profitable in China. With HD comes in a bit late into the Chinese market compared to its main competitors it should be able to learn a few lessons from their failure and successes, in from particular Ikea. They showed great flexibility in terms of how they adapted to the Chinese market, showed them the western way of doing things, and communicated very well with the home improvement market.

Specialty Stores

The specialty stores are a way of HD keeping some sort of foothold in the retail market and choosing to sell products like paint and flooring as there is a higher margin on those products than in America. Although the products are made in China the manufacturing company is not allowed to sell within China so HD has to ship it back to America and then back over again. 

HD will have to look at the following criteria if their new strategy is going to work:

·         Whether they are going to be a DIY or DIFM retailer

·         If they are going to change their Brand Name

·         Who their target market is going to be

·         How they are going to gain a competitive advantage over their competitors

DIY vs DIFM

The DIY culture that helped HD become such a success in America, with over 2100 stores across the country, was a complete fail in China. Torsten Stocker of the Monitor Group stated “People don't grow up with DIY, so they don’t have the skills, and they also don’t have the storage space for the tools”.  In order to try and combat this HD opened a Home Decorators Collection store in June last year, which is a sign that they are reacting to the market’s needs. They have two options. Firstly to develop a strategy whereby they educate their consumers on the DIY strategy and try and make them aware of the benefits of it. Or else scrap that concept and develop a relationship with the decorators will be working on the house and try to build on that. The second option seems to be the more sensible as if China has not seen the use of the DIY model after six years, how will it do so after seven or eight.

Brand Image

HD also may need to look at the possibility of changing their brand name as they received a large amount of negative press due to the hostage situation that occurred. The fact that they have spent six years in China and have not been able to deliver what the consumers are looking for it seems that they have done too much damage to their brand name and that it is only associated with something that doesn’t work. They wouldn’t be the first to do so as the Pizza hut's Chinese name is 'Bushing Ke' which translates into 'Meet Succeed Customer' and went down a huge success.

Their Target Market

With there being a major rise in the population of the middle class in China, a lot of which looking to buy a home, this is something that HD could really tap into. Also, after the one child per family policy came into play in 2007, woman become so scarce that brides were given full control of how they wanted their home to look. HD's original concept of big box did not appeal to the female customer so this is something they will have to take into consideration going forward with their specialty stores.

What will HD have to do in order to succeed?  

According to a BCG report China will have 280 million affluent consumers, by 2020, which will account for more than 30% of its urban population. China will have annual household disposable incomes of at least $20,000. It also indicated that 60% of these affluent consumers shop online. These are all indicators that although it is important for HD to have some kind of store presence in the marketplace, their real opportunity is online and that is why this needs to be a the heart of their new strategy in China. HD will also need to address the DIY model as it simply does not appeal to the Chinese consumer. Also they will have to make the shopping experience in their stores appealing to woman as they will be making most of the purchasing decisions for the household for the foreseeable future.

Conclusion

HD has to make it work in China, whether it be via e-commerce or through the stores themselves, the market is too big and has too much potential to opt out of. HD decided to to pull out of the Argentinian and Chilean market as it was no financially viable to revise their strategy and start over as the opportunities are not as great as those in China.

Ikea have their own factories in China which makes their inventory management process far more efficient then those of their competitors. HD should do the same as their current model is restricting  the range of products they are selling in the speciality stores to just paint and flooring. On top of this HD will have to revise its branding strategy, make their store shopping experience more appealing to the target market and adapt more of a westernized essance to their products.

---

[i] http://saportareport.com/blog/2012/10/cfo-carol-tome-tells-the-inside-story-of-home-depots-retreat-from-china/

[ii] http://chinhdangvu.blogspot.ie/2013/09/why-big-american-businesses-fail-in.html

[iii] http://businesstoday.intoday.in/story/how-ikea-adapted-its-strategies-to-expand-in-china/1/196322.html

[iv] http://www.chinadaily.com.cn/business/2010-08/26/content_11205758.htm

[v] http://www.topfurnitureguide.com/en/news/?id=7

[vi] http://www.topfurnitureguide.com/en/news/?id=7

[vii] http://www.topfurnitureguide.com/en/news/?id=7

[viii] http://www.wantchinatimes.com/news-subclass-cnt.aspx?id=20130219000055&cid=1206

[ix] http://www.midea.com/cn/

[x] http://www.atimes.com/atimes/Global_Economy/HI27Dj01.html

[xi] http://www.forbes.com/sites/jackperkowski/2012/06/05/chinas-economy-is-slowing-but/

[xii] http://www.ibtimes.com/worlds-largest-real-estate-bubble-has-china-worried-703454

[xiii] http://www.milkeninstitute.org/pdf/China-HousingMarket.pdf

[xiv] http://www.businessinsider.com/ikea-home-depot-china-failed-2012-9

[xv] http://www.businessinsider.com/ikea-home-depot-china-failed-2012-9

[xvi] http://bear.warrington.ufl.edu/oh/IRET/Cases/Home_Depot_China_Revised.pdf

[xvii] http://www.marketplace.org/topics/world/home-depot-not-hit-china

[xviii] http://www.dailymail.co.uk/news/article-2413685/Everyday-goings-IKEA-Children-urinating-furniture-people-sleeping-want.html

http://saportareport.com/blog/2012/10/cfo-carol-tome-tells-the-inside-story-of-home-depots-retreat-from-china/

http://www.bizjournals.com/atlanta/blog/femme-fortune/2013/04/home-depots-failure-in-china.html?page=all

Big box (n.d.). Investopedia. Retrieved from http://www.investopedia.com/terms/b/big_box_retailer.asp

Did You Know. (n.d.). Home Depot Website. Retrieved from:

https://corporate.homedepot.com/OurCompany/DidYouKnow/Pages/default.aspx

John, D.R. (2013) Home Depot’s Lessons from China. Amity Research Centers Headquarter, Bangalore

Our Company. (n.d.). Home Depot Website. Retrieved from:

https://corporate.homedepot.com/OurCompany/History/Pages/default.aspx

Wang, H.H. (2011, Feb 10) Why Home Depot Struggles and IKEA Thrive in China? Forbes. Retrieved from: http://www.forbes.com/sites/helenwang/2011/02/10/why-home-depot-struggles-and-ikea-thrives-in-china/ http://thediplomat.com/2013/05/half-a-billion-chinas-middle-class-consumers/

http://chinhdangvu.blogspot.ie/2013/09/why-big-american-businesses-fail-in.html