Friday, January 11, 2013

Why Media Markt failed in China, and HEMA will

Media Markt Shanghai
Are they crazy? That was the first question I asked myself when I visited the giant Media Markt store in Shanghai in December 2010. A giant store in electronics, like I knew them from Europe, with a mostly similar range of products, apart from their rice cookers and dehumidifiers.
No competition for their domestic competitors both in price and selection, I concluded after a bit of research. Since my visit they expanded to seven stores in Shanghai, so the low number of visitors did not really deter the management.  Although, they initially had planned to open up to 100 stores up to now, but that also proved to be a challenge. This week, as German media announced Media Markt was closing their operation in China, although the holding company Metro still has to make the formal announcement.
Only three months ago, Media Markt did start in China a new marketing campaign, with a strong focus on pricing, but it was obvious too little, too late.

Why did they even try such a hopeless concept, now even their German management might ask. A nice clue I got earlier this week, when I watched a nice documentary "The Secret of the HEMA". The retailer HEMA is a kind of household name in the Netherlands and now also Belgium. An iron century-old business model of selling cheap commodities of decent quality to low-earners (and cheap high earners).
They have a long-standing tradition of sourcing their products in China, but during the documentary we watched not only their expansion into France. Also China was on the agenda.
"Don't do it," I jelled at the TV screen, a habit I do not often display, since it is pretty useless. But why was this sympathetic CEO Ronald van Zetten transferring a modestly profitable retail model in a small part of Europe into China, following the failed tracks of Media Markt?
The explanation came later, as Van Zetten had to visit the company who bought the HEMA in 2007, the investment firm Lion Capital. He did not say much after the visit, but booked a flight to Shanghai to explore the market.
He asked the right questions, in the Shanghai stores he visited. He did some math and discovered that the stores needed 50 percent of their turnover to cover for the rent. A short moment of desperation, since that is pretty high if your business model is based on low margins. Foreign companies will have a hard time when they try to beat local competitors on price. But then he soldiered on, following the instructions of his investment bank owners, for the HEMA there is no other way than expanding, even into markets where there is no future.

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