By Ed Dean

Mattel, Best Buy and Home Depot struggled in China for different reasons, but they highlight the market's retail rewards and risks

International business media have recently been salivating over the big story of three major US brands struggling (or doing even worse) in China. Mattel's House of Barbie closed its doors on March 7 following two years of operations on Shanghai's Huaihai Road. The official media statement speaks of the store having "attracted tens of thousands of loyal customers and accomplished its mission to promote the overall Barbie brand" and that it will bring those great experiences to consumers more broadly across China.

Just two weeks before, Best Buy also suddenly shuttered nine of its China stores. The US consumer electronics retailer's customers were left asking what value their warranties now held and likely regretted spurning cheaper local competitors Suning and Gome. In turn, Best Buy's retreat gifted new entrant Media Markt a fantastic opportunity that it cleverly took up: an offer to take on the now invalid Best Buy warranties. With this deft move, the German company has certainly lived up to its "I'm not stupid" slogan.

These two stories sit alongside the closure of Home Depot's last Beijing store in March. Home Depot, the world's largest home improvement retailer, entered China in 2006 by acquiring 10 stores – half of which have now closed.

Observed together, Mattel, Best Buy and Home Depot's woes in China pose a number of questions: What should we make of these apparently similar stories? What can we learn that will help us and our clients succeed where some others have failed? Should this be seen as a sign that Western companies cannot make it in China?

A closer look

Peeling back the layers, there are different reasons for the firms' struggle. It is too simplistic and lazy to see these stories as connected in any substantial way. At an operational level, the main commonality between these stories is the timing.

From the moment it opened, the six-storey House of Barbie  struggled at its prime location on Huaihai Road. The store would have been better served by picking one of the more popular "ends" of Huaihai Road – near Xintiandi to the east or Shaanxi Road South junction to the west – than the less exciting middle section.

While the House of Barbie's interior was impressively designed – in many ways a museum to Barbie's long heritage – strangely, it never fully occupied the first floor. It's lack of street-front presence surely did little to entice passing customers to enter – though some say this was because of a tough contract in which its landlord was charging an unreasonably high rent for the first level.

Other theories regarding its disappointing sales relate to high prices and the wrong product. I fear Mattel, which saw Shanghai as a testing ground for this new concept, may have learned less than it hoped about the real potential of its experiment in Asia.

Best Buy faced pricing issues as well. It offered the very same products as competitors Gome and Suning, but at higher prices. The company tried to see if better service and warranties would make a difference. The answer is that they do – otherwise, there would have been zero sales. However, it seems this was insufficient to counterbalance higher operating costs. While Gome and Suning effectively lease shelf space and sales staff to product manufacturers, Best Buy employed staff directly, much as it does in the US. The company has said it plans to continue operating its more successful Five Star branded stores which reflect a more local business model.

Home Depot has struggled because the market is very different from its expectations. China's exciting middle class may be growing, but in a land with cheap products and even cheaper contractors, who really wants to "do-it-yourself"? UK competitor B&Q faces similar challenges in what has proved a tough market for foreign entrants.

Success isn't guaranteed

These cases highlight how the four biggest reasons for setting up shop in China are also the challenges that can trip up some companies. Let's take these in turn:

"China is HUGE! How can we go wrong?" China's size is without a doubt its biggest draw. There is a very real danger that if you are not in China, long term growth will be limited. With so many potential consumers it seems unconscionable to foreign firms that anyone could fail. Unfortunately, the country's massive size is also a massive challenge. Even when you start to think of the country as more akin to the EU – which has different regions, languages and cultures – it's still difficult to grasp China's true size, diversity and the inherent problems this presents.

"China is growing and changing so fast!" While this trend seems like a good thing, the phrase also shows how the market can be seen as a moving target. China's dynamic business environment may offer opportunities, but it also presents a challenge like no other: satisfying the needs and wants of millions of consumers whose habits are often described as anything but static.

"Chinese consumers love to try new things!" Yes, they do – but it seems they like to try new things all the time. Although loyalty is the holy grail of most Western brands, in China it can be hard to achieve. This can be seen both in terms of both consumer and employee loyalty.

"The local competition is unsophisticated." Pride comes before a fall; and those who underestimate domestic competition do so at the risk of their own success. The aforementioned trends mean that local businesses are learning very fast. And, it goes without saying – but I'll say it anyway – they are on their home turf.