Trying to Make Sense of Best Buy China Closures

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After a couple days of reading background on Best Buy’s closure of nine China stores, I’m calling it quits. I can’t figure it out.

I mean, the basics are obvious. The electronics retailer wasn’t cutting it in China and had to pull the plug. Competitors Suning and Gome were kicking its ass, and the writing was on the wall. I get that.

Thanks to folks like Adam Minter at Shanghai Scrap, I also now have a better understanding of why they failed (I’ve never actually been in a China Best Buy store). Apparently, like many other foreign investors, they jumped into the market because China is big and growing without stopping to figure out what their competitive edge would be. Not an uncommon mistake, I should point out.

[T]he decision to move in was much more seat-of-the-pants, and had little to do with any pent-up demand in the market.

What little strategy there was doesn’t seem to have been thought through all that well. Adam relates a meeting he had with Best Buy several years ago, where an exec told him that they would compete on service, not price, and that Chinese consumers would be willing to pay a premium for it. Yikes.

Anyway, fast forward to now and the Best Buy shutdowns. This is the part that confuses me. Here’s the labor end of things, where the laying off of 1,000+ people, and a resulting protest, was reported in Shanghai Daily:

They said they only found out about the closures when they turned up for work.

Best Buy will give jobs to some of the staff that had been laid off because of the closures, Liu Ting, a PR manager with the company, said.

Each employee is expected to get “N+5” months’ payment as compensation where N is the number of contract years, according to the company.

Liu said yesterday that about 70 percent of the employees had agreed to terminate their contracts while negotiations were continuing with the others. “We will also give out questionnaires to former employees to find people who still want to work for us,” Liu said.

I don’t know about you, but I can’t figure out if that is evidence of “seat-of-the-pants” kind of decision making or if Best Buy is just the victim of some tough ex-employees who are looking to take advantage of the situation.

Look, layoffs are a big deal here in China, and when you are closing down a company or firing a lot of people, you have to follow the rules and play it very carefully.

If you’re taking notes at home, Article 41 of China’s Labor Contract Law says this about layoffs:

If any of the following circumstances make it necessary to reduce the workforce by 20 persons or more, or less than 20 persons but accounting for 10% or more of the total number of employees of the Employer, the Employer may only do so after it has explained the situation to the labor union or to all of its employees 30 days in advance, has considered the opinions of the labor union or the employees, and has submitted its workforce layoff plan to the labor administrative department[.]

Following that language is a list of reasons/excuses for mass layoffs, including insolvency, serious operational difficulties, etc. I think Best Buy certainly qualifies under at least one of those grounds.

In other words, if you need to fire a lot of people (and 1,000+ people qualifies in spades), you need a layoff plan, which you need to run by your workers and the local labor bureau. Did Best Buy follow these rules? Hard to say.

It’s not clear whether any of this was done 30 days in advance, but it sounds like Best Buy has talked to some of their workers already, and has apparently settled on an “n + 5″ severance scheme, which is actually pretty good (better than I’ve ever been given!). If their numbers are accurate, 70% of the work force has agreed to this, while 30% are holding out.

So who showed up protesting at the store(s), claiming that they hadn’t been notified of termination? Are these disgruntled members of that remaining 30%, jockeying for negotiating position? Did Best Buy drop the ball on its layoff plan?

And what is all of that verbiage about hiring back workers to deal with ongoing/windup matters? Why send out questionnaires to former staff who “still want to work” for Best Buy? I’m sure there is some reasonable explanation for all of that, but it sounds very ad hoc and inefficient at best.

We certainly cannot expect any clarifications from corporate HQ. Here is what their verbally challenged CEO had to say:

Brian Dunn, chief executive, said that the moves are “consistent with our strategy of driving businesses that have earned the right to additional capital while curtailing activities that we believe will not meet our return on investment thresholds”.

If Sarah Palin was a Harvard Business School grad and was doing a stint as a Corporate Communications director, she might come up with that statement. I think Cicero just rolled over in his grave, crapped his toga, and then dictated a letter to his secretary Tiro about how awful Dunn’s rhetoric is, before heading back to the underworld.

To be fair, Dunn couldn’t have exactly come right out and said “US sales suck, and we totally fucked up China, so we’re jumping ship ASAP.”

If anyone wants to speculate further, be my guest.

4 responses on “Trying to Make Sense of Best Buy China Closures

  1. colin

    WTF. It was a complete surprise to me that BB was opening up in China, seemed like just yesterday. And now they’re already closing before I’ve yet to even visit one store? Sheesh… Things really do move fast in China.

  2. colin

    BB might have also been drunk with self confidence after the tailspin and eventually collapse of their arch rival Circuit City. Maybe they thought anything they touched would turn to gold after that.

  3. Old Eyes

    Maybe some of the above notes and reasons why Best Buy pulled out, but remember this: they invested in one of China’s largest electronics/appliances retail shops called Five Star. Five Star is still around and seems to be growing. Therefore, this may just be a revision of their strategy, and instead they are focusing on their China-based brand (which does fight on price, not service).

    That said, a few years ago they closed their Beijing procurement office and there were rumors ever since that they were struggling. Their shops in Shanghai always were clean and had good layouts, but their prices were DEFINITELY NOT the cheapest. For example, their shop in Shanghai’s Xujiahui was next to lots of electronics stores that had the same products for much cheaper prices. Investors in BBY should be scratching their heads and asking “Huh? Why would they charge more money for the same products next door??!”

    1. deldallas

      Concurred – I believe I saw an article stating that, while the company was shutting down the Best Buy branded stores, numerous new Five Star stores would be opening.

      I’ll miss the Best Buy stores. Sometimes, I’d go there because it was much more relaxing than the cluttered electronic mega-malls elsewhere in Xujiahui. When I had to buy a laptop on the spot (due to my old one “disappearing” from my apartment), I went to Best Buy because there was the sanctity of mind that I could do a no-questions-asked-return-for-100%-of-my-cash, in case I decided Chinese language Windows was “too much” for me or I just didn’t like the computer. The #2 reason I went to Best Buy was because it was a way more relaxing shopping experience: the stores weren’t cluttered or noisy, the Suzhou store was conveniently in the SIP, salespeople weren’t in your face, you didn’t have to go into “haggling mode”, and while I knew I wasn’t going to get a good price, I also felt safe that the product would adhere to a reasonable quality standard.

      I always thought the Shanghai & Suzhou stores had decent traffic, but I wouldn’t be surprised if a lot of people were just gauging “market prices” and physically trying-out products before seeking a discounted price elsewhere. Ultimately, my guess is the Five Star business had better profit margins and they wanted to focus their energy on a single platform in PRC.