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Foreign stores can’t swim against Chinese currents

By Chen Yuefeng (Global Times)

08:30, March 08, 2013

Germany consumer electronics seller Media Markt will be closing all seven of its stores in Shanghai Monday, according to recent statements from the company, effectively marking the retailer's exit from China.

Although Media Markt has long been a leading figure in Europe, where it rose to become the world's second largest gadget and appliance retailer behind US-based rival Best Buy, its globally renowned name failed to bring it success in China. But in this regard, Media Markt is not alone. Best Buy, Home Depot and Mattel Inc - whose ill-fated Shanghai Barbie outlet once occupied a stop directly in front of Media Markt's flagship store on Huaihai Road - have all seen their operations in China go bust due to their inability to adapt to local conditions.

Since retailers in China are generally weak when it comes to negotiating prices with suppliers and manufacturers, especially in the cut-throat consumer electronics market, homegrown retail titans like Gome and Suning have managed to thrive because they make most of their money charging suppliers fees to display their goods.

This model is largely unknown to most Western retailers, who usually acquire a supplier's wares first and then turn around and resell them to consumers. This approach invariably bumps up the operating expenses of foreign retailers and leaves them at a disadvantage in China, where most local consumers are highly sensitive to prices and willing to do the leg work to hunt down a bargain.

At the same time, Media Markt (and several others) floundered in China because they were entering the local market at a time when the country's retail industry as a whole was on the cusp of a transformative period due to the rise of e-commerce, which really started picking up traction with Chinese shoppers in 2009.

According to figures from the China Chain Store and Franchise Association, offline sales at retail chains grew by just 8.4 percent year-on-year in the first nine months of 2012, slower than the overall rate of retail growth over the same period for the first time in China's history as online sales platforms accounted for a greater share of consumer sales receipts.

The growing preference of Chinese consumers to shop online has taken a bite out of traditional retailers nationwide. But well-established retailers who jumped early to grab a seat aboard the e-commerce train fared better in the end - once again, Gome and Suning offer good examples. Yet, as is apparent now, Media Markt and others who concentrated on the brick-and-mortar segment were mostly doomed to a short-lived existence as their more nimble peers outdid them in online sales.

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