Home Depot Failed in China

Home Depot Failed in China

Name: Chuanshi Liu

ID: h701789460

Course: IB 207

Background

      Home Depot is the largest home improvement retailer in the world. It has about 2200 stores across the United States, Canada, and Mexican. It targets three main customer groups, which are D-I-Y customers, D-I-F-M customers and professional customers. Home depot is famous for its D-I-Y products and services.

     In 2006, after housing market turn down in the United States, Home Depot entered into the China home improvement market through a full M&A activity. It has twelve stores in Beijing, Shanghai, and other large cities in China. Home Depot served the similar services and products to Chinese customers, which also include the D-I-Y products. However, Home Depot did not succeed this time in China. From 2006 to 2012, the top managers in China area have been changed three times. Home Depot wanted to find out the solutions to this bad situation in local market. However, the situation was worsened when the building material market turned down in 2012, 12 main stores have been closed in local market. Top managers believe that the main reason for their failure is the cultural difference. The D-I-Y services and products do not fit the local culture.

Changes and effects

Business Environment

      There are changes in business environment for Home Depot. In United States, the biggest competitor for the Home Depot is Lowe's. They have very similar products and services. Both of them create the competitive advantage based on the cost advantage because of the bargaining power with the suppliers. Managers might think Home Depot could get the same competitive advantage in local market. However, the business models for the housing improvement retailers are very different in the United States and China. The differences have negatively affected this operation in China.

      First, inventory might be a burden for Home Depot when compete with local retailers. As a retailer, Home Depot's business could be seen as a reselling process. It means that Home Depot choose the products based on their estimate of the market, and then sell the products within their own value networks. It usually purchases large amounts of products. Then Home Depot could control a strong bargain power with suppliers so that purchasing price from the suppliers could be low; finally make a lower end price for customers. However, the large amounts of products mean a high inventory cost for the company (Feng, 2014). In China, the business process for home improvement retailers is very different. Retailers, such as Red Star, will rent their space to a lot of small-scale home improvement products suppliers. Suppliers only need to pay for the rental fee to Red Star. They have their own value networks and brands (Chen, 2012). What they want does is to Red Star's brand awareness and space for these products suppliers. So Red Star does not have too much costs and expenses on the inventory.

      Second, taking market share from local retailers might not be easy. As explained above, a lot of suppliers have their own value networks. They could supply products, transportation, installations, and after sale service all by themselves. So we could think that Home Depot does not have the bargain power with these small scale suppliers in China. Home Depot is only seen as a huge display window to show their products. Similar to Red Star, suppliers try to make use of brand awareness of Home Depot. Because Home Depot does not have the bargain power with suppliers, so the cost of the products is high. After involving the high inventory cost, a high end price will be transferred to customers. Finally, Home Depot does not have any price advantage with local retailers to take market shares.

      Third, local retailers use sales commission to motivate employees (Feng, 2014). When we enter into the western superstores, employees might give your good suggestions. Sometimes they even suggest you to go the store of competitors. I believe that is a good customer service. However, in China, there might be sales commission relates with the products. So the employees are really motivated to communicate with customers. Also, the training and salary might be a burden to the Home depot when compare with that of local retailers. As explained above, Red Star only rent their brand and space, so they do not need to train all the employees of suppliers. But Home Depot, as an independent retailer, needs to manage and train all employees in the company. Although we could think that the customer service of Home Depot is better than that of local retailers, this difference negatively affect the competition with local retailers.