International Marketing Week 4

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9GLOBAL MARKET ENTRY STRATEGIES

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CASE 9-1 THE HOME DEPOT THROWS IN THE TOWEL IN CHINA

In September 2012, Home Depot, the U.S.-based home- improvement retailer, announced that it would shutter all seven of its remaining big-box stores in China after years of losses. The retailer had been scaling down its operations since 2009, when it closed five big-box stores in Qingdao, Shenyang, Tianjin, and Beijing. The exit from Beijing was of particular concern as it was one of the few markets where car ownership among households is more than 20 percent.

Home Depot first ventured into China in 2006 when the retailer invested $100 million to acquire Home Way, a local home-improvement chain. Home Way was the first “big-box” home improvement retail chain in China and operated 12 stores in six cities in China (Beijing, Tianjin, Xi’an, Qingdao, Shenyang, and Zhengzhou).

Home Depot’s do-it-yourself (DIY) concept, which is well accepted in the United States and other countries, never found enthusiasm among Chinese consumers. It was very rare that Chinese people would do refurbishing jobs themselves. They came to the store to select what they wanted and then hired tradesmen to complete the job. The reasons for this were partly economic, partly cultural. In terms of economics, low wages and an abundance of migrant workers was one factor. Even the more price-sensitive people would often hire laborers to undertake home improvements. Moreover, the cultural mind- set differed. Many Chinese who had the money to shop at Home Depot or rival B&Q regarded it below their dignity to do the installation themselves. According to Torsten Stocker, a retail analyst at Monitor Group in Shanghai:

People don’t grow up with DIY, so they don’t have the skills, and they also don’t have the storage space [for tools] … in Europe or the US you have a garage or a basement where you can keep that lad- der or drill but many Chinese have very small flats with no storage space. Maybe it [DIY] is a business model whose time has not yet come in China1

1“Home Depot Leaves Beijing,” Financial Times, January 27, 2011.

Chinese consumers also would not tend to do small projects like a paint job. Instead, they might refurbish their homes every 10 years. New homes were usually bought as a concrete shell; customers would buy everything else they needed to make the home livable such as the kitchen, electrical wiring, plumbing, bathrooms, and furnishings.

China’s home improvement market is huge and grow- ing rapidly: In 2011, the market increased by 15 percent to RMB278.5 billion ($44.6 billion). However, the market was very fragmented with the top five players accounting for just 4 percent. The top four branded outlets (B&Q, IKEA, Ori- ental Home, and Home Mart) had only 2.5 percent of the market. Although B&Q was the market leader, describing itself as “China’s No. 1 home improvement retailer”, it had a mere 1 percent market share. The remaining 97.5 percent consisted of small-scale Chinese manufacturers and retail- ers. Many of these used to ship their products to the West to the likes of Home Depot. However, more recently, they had opened up small shops (both retail and wholesale) within China to grab a higher margin. Many of these suppliers under- cut Home Depot’s prices. DIY retailers like Home Depot also faced tough competition from China’s vast “home dec- oration malls,” which combine under one roof many differ- ent brands, offering sales and service. Moreover, Home Depot lost customers due to a poor relationship with home decora- tion companies who blamed the company’s business model for squeezing their profits.

Making things worse was the Chinese government’s 2010 decision to rein in the property market via price controls. This new policy lowered housing sales and greatly dampened the home-improvement business. Indeed, Britain’s Kingfisher, which operates B&Q, also reduced its number of stores in China from 63 to 40.

Given its lackluster performance, Home Depot ultimately decided to overhaul its China strategy. Instead of operat- ing big-box stores as it does elsewhere in the world, the chain would focus on specialty stores. It already had opened a paint-and-flooring store and a home-decorations outlet in

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2 • Case 9 • Global Market Entry Strategies

the port city of Tianjin. The group was also looking into the e-commerce arena. Carol Tome, Home Depot’s CFO, said that the firm had reached a partnership with 360Buy, China’s second-biggest business-to-consumer website, and was seek- ing a partnership with e-marketplace Taobao, a division of the Alibaba group.

Whether Home Depot’s fortunes in China can be reversed remains to be seen. In a company statement, Frank Blake, Home Depot’s CEO, said: “We’ve learned a great deal over the last six years in China, and our new approach leverages

Sources: “China’s slump brings Kingfisher to earth,” http://www. theguardian.co.uk, accessed October 13, 2012; “Home Depot leaves Beijing,” http://www.ft.com, accessed October 13, 2012; “How B&Q does it all in China,” http://www.ft.com, accessed October 13, 2012; “B&Q, Home Depot find the going tough,” China Daily, April 6, 2009; “Home Depot Learns Chinese Prefer ‘Do-It-for-Me,’” http:// www.wsj.com, accessed October 13, 2012; “Home Improvement in China,” Euromonitor International, July 2012; http://multivu. prnewswire.com/mnr/homedepot/26373/docs/China_HI_Overview. pdf; “Closer Look: Home Depot Closes Up Shop in China,” http:// english.caixin.com, accessed October 19, 2012; “China Winds Shift for U.S., European Retailers,” http://english.caixin.com, accessed October 19, 2012.

that experience and reflects our continuing interest in provid- ing value to Chinese customers.”

DISCUSSION QUESTIONS

1. Many multinational companies entering China base their investment decisions on the long-term hope that China’s mar- ket will eventually catch up to the goods and services they offer. Did Home Depot misread the China market? Why or why not? 2. Home Depot blamed its poor performance in China on local consumers’ negative attitude toward do-it-yourself. While this undoubtedly was a factor, could there be other rea- sons? IKEA has been doing pretty well in China. What could Home Depot have done differently to increase its chances for a more successful performance? 3. Home Depot decided to overhaul its China strategy and focus on specialty stores and e-commerce. Is the company on the right track? Why or why not? 4. Should Home Depot simply give up on the China market? Are there other strategic initiatives it could pursue to improve its performance?

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CASE 9-2 ALFA ROMEO—“IL RITORNO”

Fiat had been planning to relaunch Alfa Romeo in the United States for so long that the wait had become part of the Alfa Romeo myth, on a par with its racing prowess, style, and dis- tinctive engine sound. Sergio Marchionne, Fiat’s CEO, repeat- edly said that he did not want to relaunch Alfa Romeo until the product was perfect. Alfa pulled out of the United States in 1995 because of poor sales, quality issues, and the wrong model range. Finally, after almost 20 years of absence, Fiat intended to reintroduce the sports car marque in the United States. The relaunch was seen as one of the biggest challenges of the Fiat–Chrysler partnership. If Fiat was able to get it right, Alfa Romeo could play a similar role as Audi for the Volkswagen group.

Fiat planned to bring several models to the U.S. market. The first model in the lineup would be the Giulia sedan, which Fiat planned to introduce early 2014. Fiat planned to manufacture it in the United States. The model would share many compo- nents with the upcoming Chrysler 200 model. It was aimed to compete with mass-market models like Audi A4. Another Alfa model in the pipeline was a “compact crossover” sports utility vehicle (SUV) that would be built on the same platform as a new Jeep model. In the sports car segment, Fiat planned to launch the 4C Coupe and the iconic Spider, formally branded

Sources: “Alfa Romeo Will Relaunch On The US Market With Four New Models,” http://www.topspeed.com/cars/car-news/alfa-romeo- will-relaunch-on-the-us-market-with-four-new-models-ar136132.html; “Alfa Plots “Il Ritorno” as U.S. Re-Entry Takes Shape,” http://www. reuters.com, accessed June 28, 2012.

as the Duetto sports car. The 4C would be priced in the same range as mid-tier Mercedes and BMW models ($42,000 to $67,000). The new Spider would be built in Japan and share its chassis with the next-generation Mazda Miata. Fiat hoped to lure younger buyers with the Spider; the Spider would be priced in the $23,500 to $31,225 range.

Fiat intended to rely on its 160-strong Chrysler/Fiat dealer network in the United States. It hoped to avoid the mistakes it made for the 500 mini Fiat model. When Fiat introduced the 500 mini in 2011, it set an unrealistically high target of 50,000 unit sales for the first year. It ultimately sold fewer than 20,000 units.

DISCUSSION QUESTIONS

1. Alfa Romeo was rumored to return in 2004 to the U.S. market. One Alfa Romeo owners club had planned to call the club’s annual celebration “Il Ritorno” or “The Return” in the summer of 2004. In the end, they had to change the name for the 2004 party. Marchionne delayed the reentry and when Fiat took control of Chrysler in 2009, it was postponed even fur- ther. Chrysler dealers were itching to get going. Was Fiat right to push back the reentry for Alfa Romeo? Why or why not? 2. Could Alfa Romeo successfully compete in the United States? What are the key challenges that Fiat would encounter for the reentry of the Alfa Romeo in the U.S. market? 3. Whom would you target, and how would you position Alfa Romeo?

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Short Cases • 3

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CASE 9-3 STARBUCKS’ FORAY IN TEA-LOVING INDIA

On September 28, 2012, Starbucks announced its long-awaited plans to expand its coffee retailing empire in tea-loving India. A few weeks later, on October 19, 2012, the global coffee chain opened its first store in Mumbai’s Horniman Circle, the heart of the city’s commercial district. The area is home to luxury shops, including a Hermès store, and numerous offices and bank headquarters. The 4,500-sq. ft. store (418 m2) is far larger than most Starbucks stores elsewhere around the world.

To enter India, Starbucks set up an $80 million 50–50 joint venture with Tata Global Beverages, a division of the very diversified Tata Group conglomerate. The joint venture was already set up before the Indian government decided to allow the so-called single-brand retailers to set up shop in the mar- ket on their own. The Indian partner describes itself as “Asia’s largest coffee plantation company.” In fact, the Mumbai-first shop is located in a restored heritage building that is owned by Tata Sons, another division of the Tata Group. The coffee chain had initially planned to open its first stores in India in mid-2011, but needed to postpone its debut when it had diffi- culty finding suitable real estate.

In a first for the firm, all the coffee sold in Starbucks stores across India would be locally sourced and roasted in India. Tata Coffee, a unit of Starbucks joint venture partner, had built the roasting facility in the southern Indian state of Karnataka. The new facility would have a capacity of 375 metric tons of coffee beans annually.

Even though India is a nation of tea lovers, the country has seen a rise in the coffee shop culture over the past few years. According to one consultancy, the total coffee shop market was expected to grow from $230 million in 2012 to $410 mil- lion by 2017. At the time of Starbucks’ entry, Bangalore-based Café Coffee Day dominated the market with more than 1,300 stores across the country. Other notable coffee chains included The Coffee Bean and Tea Leaf, a privately held U.S. firm, and U.K.-based Costa Coffee. Costa Coffee set up business in India in 2005. By mid-2012, the chain had stores in six cities across

Sources: “Starbucks to Enter India in $80m Tata Joint Venture,” Financial Times, January 31, 2012, p. 15; “Costa Coffee Opens 100th Outlet in Mumbai,” http://articles.economictimes.indiatimes.com/ 2012-07-14/news/32674990_1_costa-coffee-india-cafe-brand-100th- outlet; “Starbucks Makes Long-Awaited India Entry in South Mumbai,” http://india.blogs.nytimes.com/2012/09/28/starbucks-makes- long-awaited-india-entry-in-south-mumbai/; “Tata Setting up Star- bucks Coffee Roasting Facility,” http://online.wsj.com, accessed October 13, 2012; “Starbucks Out to Woo Tea-Loving Indians,” http://www.ft.com, accessed October 20, 2012.

India; it opened its 100th outlet in Mumbai in August 2012. Costa Coffee planned to open another 100 stores over the coming 2 years. Costa Coffee also recognized the need to go beyond serving coffee alone.

Starbucks’ expansion into India is part of its strategy to reduce the dominance of the United States in its operations. Of its more than 17,000 outlets, about 6,000 were in more than 50 countries outside the United States. In Europe, Starbucks had struggled in some countries, particularly France. China, on the other hand, has been a crown jewel of the company’s inter- national empire. The China business, however, did meet a few obstacles. A Starbucks outlet set up in 2000 in Beijing’s For- bidden City was closed 7 years later after protesters claimed that the store tarnished the historical site. By 2012, Starbucks had over 500 outlets in China. It expected that China would become its second-largest market by 2014 and planned to have 1,500 stores across the country by 2015. Starbucks also had high aspirations for India. In an interview with the New York Times, John Culver, president of Starbucks China and Asia Pacific, said: “We’re going to be very thoughtful on how we grow, but at the same time we’re going to look at accelerating growth and capturing the opportunity that exists for us here in India.”

DISCUSSION QUESTIONS

1. Starbucks decided to enter India through a 50–50 joint venture with Tata Global Beverages. As the case points out, the first store was based in Mumbai. Assess Starbucks’ entry strategy—entry-mode choice, partner choice, and scope. 2. Starbucks entered India relatively late. Costa Coffee, a major global chain based in the United Kingdom, set up business 7 years earlier. By the time of Starbucks’ entry in the country, Costa already operated 100 outlets. In fact, Starbucks planned to enter India much earlier but it had to postpone its move. Evaluate the timing decision. Does Costa Coffee have a significant first mover advantage vis-à-vis Starbucks? If so, would Starbucks be able to overcome it? 3. What criteria would you use for selecting future cities in India to set up shop? 4. What marketing mix recommendations in terms of menu and promotion would you recommend to Starbucks? Should it make concessions to the Indian palate as other Western global restaurant chains operating in India have done? Should Starbucks charge a premium price as it does in most other countries or lower the price for its coffees?