International Marketing Week 1

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1GLOBALIZATION IMPERATIVE

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CASE 1-1 UNDERSTANDING THE LOCAL CUSTOMS AND PREFERENCES: A LESSON LEARNED FROM BEST BUY PULLOUT OF THE CHINESE MARKET

On February 22, 2011, Best Buy, the largest U.S.-based con- sumer electronic retailer, announced its withdrawal from the Chinese market, closing its nine stores in China. The com- pany had been operating in China for 5 years, with an addi- tional 3 years of preparing the market entry. During its 5 years’ expansion in China, Best Buy succeeded in opening nine stores in big cities such as Shanghai, Beijing, Suzhou, and Hangzhou. Despite its major store expansion in China, Best Buy just captured only 1 percent of the Chinese market. Best Buy was struggling to compete with two major local competi- tors, Gome and Suning—each owned 1,000 branded stores in China.

In running its business in China, Best Buy stuck to its American business model: big box stores with fixed prices. In China, consumer electronics retailers lease parts of their store to manufacturers of distinct brands and make money from the “entrance fee” paid by the manufacturers and some percentage of their sales profit. On the contrary, Best Buy makes money only from the business profit by purchasing all of its products directly from manufacturers and then pricing them independently. A majority of salespeople in traditional Chinese retailers usually comes from the supplier side (i.e., manufacturers’ own employees); thus, enabling them to offer specialist knowledge and negotiate discounts. Best Buy’s sales team, on the other hand, is established by hiring staffs indepen- dently, and the company does not utilize commission policy for its sales staff to avoid biased promotions.

Best Buy emphasizes superior service to the customers in positioning itself to Chinese consumers. The blue-shirted store employees are trained to provide the best service for cus- tomers. Consequently, Best Buy’s prices are perceived to be too expensive by Chinese consumers. Despite all of its efforts to attract consumers, Best Buy did not succeed in boosting sales and winning market share.

China is considered an immature market with most con- sumers coming from the low-end segments. This characteristic has often been blamed by industry critics as the reason why Western companies fail in China. Consumers in China prefer to bargain over set prices. Consumers are exposed to a great variety of options that are priced much lower than the fair market prices, and they can get access to these products eas- ily. With so much piracy going on in the market, consumers’ demand for electronic products at the fair market prices would be reduced. Best Buy’s store format presented as a huge flag- ship store posed a problem in China. Most Chinese consumers prefer smaller, conveniently located retail outlets due to the high adoption of cars in China that has created traffic con- gestion. This store format issue is claimed to have been the reason for Best Buy’s closing in the United Kingdom as well as in Turkey.

As a matter of fact, Best Buy’s business in China is not limited to the operation of its flagship stores. In 2006, the com- pany acquired a Chinese electronic retailer, Five Star—the nation’s fourth-largest retailer. Five Star, based in Nanjing, eastern Jiangsu province, had about 170 stores in 7 provinces, employs more than 8,000 people and had sales of 24.7 bil- lion yuan (US$3.8 billion) in 2009. As of June 30, 2010, its competitor, Gome, had about 704 stores in more than 200 Chi- nese cities with additional 370 stores run by Huang Guangyu’s Gome Group. Another local competitor, Suning, had 1,206 outlets in 223 cities in the country as of September 30, 2010.

In an interview with the Financial Times in late 2011, Brian Dunn, Best Buy’s chief executive told that, learning from the past mistakes, the company was exploring ways to reintroduce its brand in China. The brand that the company was testing within its Five Star stores would be named Best Buy Mobile or Star Mobile. Best Buy Mobile has been used in the United States for standalone mobile shops as well as specialized stores

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2 • Case 1 • Globalization Imperative

within a store. Thus, overcoming the problem of geographi- cally concentrated, big box store format in China, Best Buy was thinking of “breaking the bulk” by opening up smaller store format that concentrates on a certain product category.

DISCUSSION QUESTIONS

1. What do you think is the main problem behind Best Buy’s failure in China? 2. What global strategy did Best Buy implement in reaching consumers in China? Do you think the strategy is appropriate? Why or why not?

3. If you were hired as Best Buy’s global consultant, what would you recommend to Best Buy in its plan to return to China market? What strategy should Best Buy take?

Sources: “Best Buy Brand Closes Shop in China and Turkey,” Finan- cial Times, February 22, 2011; “Best Buy’s Withdrawal: American Morals Fail to Transcend Chinese Consumer Market,” ChinaBrief- ing.com, March 2, 2011; “Why Best Buy Failed in China,” cnbc.com, March 7, 2011; “Why Best Buy’s Overseas Strategy Is Falling,” Busi- nessInsider.com, November 4, 2011; “Best Buy Shuts China Stores to Focus on More Profitable Brand,” Bloomberg News, February 22, 2011; and “Best Buy Seeks Ways to Return Brand to China,” Financial Times, September 29, 2011.

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CASE 1-2 KEEPING WITH THE TIMES—MCDONALD’S, I’M LOVIN’ IT!

McDonald’s, the world’s largest restaurant chain with over 30,000 outlets in more than 115 countries, brings to mind many terms: golden arches, Big Macs, McNuggets, affordable meals, brand value, and American capitalism to name just a few. How did McDonald’s become one of the world’s best known brands? Needless to say, being in the food industry entails dif- ferent menus for different parts of the world, based on varying tastes and preferences. At the time when McDonald’s made its foray into foreign markets, it was almost impossible to have a mass marketing or global strategy in terms of McDonald’s menu items. Therefore, the company adopted a strategy to appeal to those different preferences. According to the com- pany, the secret to its successful brand is a type of multido- mestic strategy, which the company used successfully and was able to offer different menus in different countries.

Previously, McDonald’s even extended this strategy to marketing for its restaurants in foreign markets. Remem- ber the yellow and red garbed clown that attracted kids to McDonald’s? McDonald’s had maintained the same image for years, and by the start of the 21st century, it was not work- ing anymore. Add to that the growing health consciousness among consumers the world over that caused the restaurant chain to suffer from decreasing profitability. But by 2005, the year that marked its 50th anniversary McDonald’s was on its way to regaining its stardom.

With time, it is necessary for companies to keep abreast of the changes that are taking place in the environment. Today, many firms are shifting from a multidomestic or multinational strategy to a more global one. It is believed that one rea- son for this is the growing convergence in consumer behav- ior, especially for food and apparel. For example, consumers all over the world are moving toward a healthy lifestyle that includes a healthy diet and exercise. For firms, a global strat- egy allows them to minimize overall costs and also market- ing costs by repeating commercials with few alterations, and it also justifies high advertising expenditure to release a perfect ad. McDonald’s is one of these companies that have adopted a global marketing strategy. McDonald’s has had to revive

its global business over the past 5 years, one of the ways to do it being to replace its previous shoddy image with a hip new one.

In the year 2003, the company launched its first truly global marketing campaign called “I’m lovin’ it.” The new promotion effort aimed at changing the company’s image in markets all over the world sends the same message to its global consumers with small changes for local tastes and preferences. Thus, even though there is still a significant divergence in McDonald’s menus, the new global marketing campaign enabled it to instill distinct global brand value in the minds of consumers. McDonald’s invested heavily in the campaign, employing celebrities such as singer Justin Timberlake and popular music group Destiny’s Child who draw a global audience, to appear in its advertisements. In addition, McDonald’s introduced more healthy foods in its menus such as salads. The “I’m lovin it” marketing campaign was targeted at consumers in all age groups from kids and young adults to seniors. The conceptu- alization of the ad was also global. It was the brainchild of a Germany-based firm Heye and Partner, and the company settled on this agency after consulting with several marketing agencies in many different countries. The strategy worked, and in just 1 year, the company’s revenues were up by more than 10 percent. As for the novel marketing drive, the company won Advertising Age magazine’s Marketer of the Year Award for 2004. As for its recent comeback, McDonald’s is truly lovin’ it. Recently, McDonald’s has started serving breakfast menus all day in the United States and has seen profits rise.

DISCUSSION QUESTIONS

1. Why do firms such as McDonald’s need to have a global marketing strategy even though its national menus are localized? 2. What alternative strategy could McDonald’s have used to regain its market? 3. For the future, how should McDonald’s tap into the con- vergence among global consumers?