University of Tennessee

Best Buy Failed in China, but Times Are Different Now

June 20, 2019

Three Ways American Companies Can Enter the Chinese Retail Space

The Chinese retail space was once dominated by regional players, but now giant companies like Gome and Suning have consolidated and are creating new markets that give rise to both opportunities and challenges for American companies.

“These really big players are changing the game – almost like an Uber – because not only are they selling the product, but they are also making the market,” says Sean Willems, Haslam Chair in Supply Chain Analytics at the University of Tennessee, Knoxville’s Haslam College of Business.

Willems says American companies should pay attention to three aspects of this scenario:

Gain a Toehold in New Markets

The Chinese retail market is innovative – sometimes more so than in the United States. These consolidated giants are setting their own rules now, and that gives American companies the opportunity to start establishing a footprint.

“The clearest analog is Amazon,” Willems says. “There is an incredible draw to sell on Amazon, because it opens up a new market that is otherwise not available to you.”

For American companies expanding into China, this presents a path forward.

“Work through these giant-platform retailers to establish a presence and then a viable economic model to expand and capture incremental market share among traditional resellers,” Willems says. “This is a phased-expansion approach that starts with platform retailers and then moves forward.”

Plan to Pay Slotting Fees

The Chinese retail market has changed enormously in recent years.

“In the old days, regional players just bought things at a certain price and re-sold them,” Willems says. “Now the big players are not taking ownership of product. Instead, they’re having the manufacturer keep inventory and demanding a slotting fee for a portion of the retail floor.”

Manufacturers have the power to participate in either of these markets, or both, but for American companies a two-tiered market entry may be advisable.

“The consumer base is wide, and there is ample room for growth and innovation,” Willems says.

Understand Consolidation Will Continue

For manufacturers, the platform retail model can be a “deal with the devil” because platform effects “drive a ruthless market efficiency that will pressure any firm that doesn’t adapt,” Willems points outsays.

“What it comes down to is how greedy is the platform retailer, and how much demand substitution is there in these markets,” Willems says. “As the platform retailers get more powerful, they can start to take more share from traditional retailers. Suddenly, if you’re not in their market, you can’t survive. And there is every reason to believe that they will further consolidate.”

Willems recently published “Channel Selection and Contracting in the Presence of a Retail Platform,” in the journal Production and Operations Management along with Yuelin Shen of the Zhejiang University of Finance and Economics and Yue Dai of the Fudan University School of Management.