Why China Doesn't Like Barbie, Best Buy or DIY

Barbie ChinaIn March 2009, iconic American toy manufacturer Mattel (MAT) opened its flagship Barbie store to great fanfare in Shanghai. It spanned six floors, with a majestic staircase that showcased 875 of the company's signature dolls.

Excited shoppers deluged it on its opening day. Two years later it closed, with Mattel citing poor sales.

According to The Wall Street Journal, Chinese consumers thought Barbie wasn't serious enough and wanted a better role model for their daughters. Other reports said the doll was "sexy" rather than "cute," and was therefore inappropriate for Chinese children.

Whatever the exact reason, it's clear Mattel didn't do its consumer research.

Mattel is not the only company that took a face-plant when it tried to conquer the country of nearly limitless potential.

"We Were Stupid and Arrogant"

For some American companies, China has become the graveyard of ambition.

Big-box electronics retailer Best Buy (BBY) took the plunge into China in December 2006. Like Mattel, its first store there was also in Shanghai.

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But in February of last year, Best Buy announced it would be closing its five Best Buy-branded China stores due to poor performance, and would instead focus on its Five Star-branded stores there, which are doing well. Why the difference?
"We were stupid and arrogant," David Deno recently told The Wall Street Journal.

Until early last month, Deno was Best Buy's Asia chief and had overseen the company's rapid expansion in China. What Deno was getting at was the company's initial assumption that to be successful in China, all the company had to do was import the Best Buy model as is, with no tweaking for the Chinese market.

But Chinese consumers weren't ready for Best Buy as is. For one thing, China's middle class isn't as well-off as America's, so the store's high-end product selection -- and high-end pricing -- wasn't quite right. Also, the Chinese are used to haggling over prices, something the U.S.-styled Best Buy wasn't quite ready for.

Can't Program the Remote? Just Call Me at Home

In 2006, Best Buy bought a 75% stake in Five Star, an established Chinese electronics and appliance brand that had the pulse of the Chinese consumer from the start. Five Star salespeople, or "solution experts," are trained to spot shoppers who may buy more expensive items and offer them courtesy food and drink.

Five Star solution experts even go as far as to give customers their home phone numbers for any service problems or product questions that may crop up after the sale. This type of selling mimics Chinese culture, which is very network- and referral-based.

Five Star has also so far avoided China's big cities, focusing instead on smaller ones. Compared to those in a wealthy, cosmopolitan city like Shanghai, middle-class shopping habits in China's small cities aren't yet ingrained, so shoppers are more open-minded.

I Don't Do Windows or DIY

Chinese consumers also put the screws to Home Depot (HD). Last year, the company closed half its stores there. In that case, the big American brand's fundamental incorrect assumption was that Chinese consumers would be as excited by the thought of "do it yourself" as American ones.

But in China, doing it yourself can mean you're too poor to have someone else do it.

5 Companies Americans Can Be Proud Of
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Why China Doesn't Like Barbie, Best Buy or DIY

Nucor (NUE)  A company in a cyclical industry like the steel-making business could certainly be excused for paring down its workforce during tough times. During the Great Recession, Nucor's revenues were cut in half -- and yet the company didn't lay off a single worker.

Following a plan instituted by his predecessor, F. Kenneth Iverson, CEO Dan DiMicco has the company carry out a "pain-sharing" program when business is slow. Executives are the first to take pay cuts -- and they can be steep. After that, hours are reduced. That can hurt, but in the end, everyone keeps their jobs.

Whole Foods (WFM)  Sure, it's great that this grocer is encouraging Americans to eat smarter, but that alone isn't enough reason to celebrate it. The presence of Whole Foods has encouraged the proliferation of organic foods, which are unquestionably better for the environment. The company's color-coded seafood sustainability index encourages customers to consume responsibly, and it has taken huge steps to encourage sustainable farming in Costa Rica.

But it doesn't end there: Whole Foods also has an admirable approach to salaries. Co-CEO and founder John Mackey gets a $1 salary and took home just $78,000 in 2011 in accrued vacation time; no executive is allowed to earn more than 19 times the average worker's total pay.

Berkshire Hathaway (BRK-B)  Warren Buffett's baby makes it on to the list for how it's run: with an uber-long-term horizon and the utmost respect for shareholders. Arguably the greatest investor the world has ever seen, Buffett has also set the standard for transparency when it comes to communicating with the financial community.

Case in point: the David Sokol fiasco of early 2011. Sokol, one of Buffett's top charges, convinced Berkshire that Lubrizol -- a chemicals company -- was worthy of acquisition. The problem: Sokol held a substantial amount of Lubrizol shares that stood to appreciate upon the acquisition, and he didn't disclose the holding.

Sokol left the company around the time this information became known. Buffett was quick to give a full account of the situation, baring all for outsiders to see -- including his later bewilderment with Sokol's behavior.

Starbucks (SBUX)  Sure, it's easy to see this coffee king as a symbol of all that's wrong with corporate America. Satirical newspaper The Onion once joked that the stores were so ubiquitous, a new Starbucks was being opened in the restroom of an existing Starbucks.

All jokes aside, the company has been a model employer and partner with suppliers. Any employee who works just 20 hours per week is given health-care coverage. During the economic downturn, the company spent more money on this benefit annually than it did on all the coffee it bought. Starbucks has spearheaded the move for fair-trade coffee as well. It is the world's largest purchaser of fair-trade coffee, and it often pays above market value to its producers in developing countries.

And this past year, CEO Howard Schultz launched a drive to kick-start American job growth. In the program dubbed "Create Jobs for USA," the company collects donations from customers. All of the donations are poured into a fund that facilitates micro-loans to spur small-business job growth.

Costco (COST)  Competitor Walmart (WMT) has been in the headlines a lot lately. Whether it's for bribing officials in Mexico or not allowing employees to form unions, there seems to be a dark cloud hanging over the company. So why doesn't Costco get any bad press when the majority of its employees don't have union representation either?

It's actually quite simple: The company believes in its employees, and it backs that up with its actions. Employees are paid an average of $17 per hour and have generous health-care and retirement benefits -- two things Walmart employees certainly can't claim.

And customers are huge beneficiaries as well. Costco has razor-thin margins -- which means nearly every penny of savings Costco can squeeze out using its size and efficiency is passed on to customers. The company's profits, in fact, are almost entirely accounted for in membership dues -- not sales. The approach has worked out well for shareholders, too; including dividends, Costco shares have returned 131% over the past decade, doubling what the larger market has offered up and quintupling Walmart returns.

"Products are too cheap and simple at Home Depot," Tong Long, a longtime Chinese tile saleswoman, told Marketplace last year. "It's mainly for poor people."

Like Best Buy, the company will now be focusing on China's smaller cities, where there's less wealth and less revulsion at the idea of painting your own bathroom.

U.S. companies are not going to give up on the Chinese market. (Mattel says it remains committed to making the brand work in China.) But it's going to take persistence and some cultural humility to win favor with customers a half a world away. These are tough lessons, but if they're taken to heart, the payoff could be wildly profitable.

John Grgurich is a regular contributor to The Motley Fool. The Motley Fool owns shares of Best Buy. Motley Fool newsletter services have recommended buying shares of Home Depot and Mattel, as well as creating a bear put spread position in Mattel.

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