Just weeks after US electronics retailing giant Best Buy (BBY.US) made a final retreat from China, British rival Kingfisher (KGF.L) is making a similar move with word that it’s selling control of its China B&Q store operations to a local buyer.
These two deals mark an interesting twist to a trend that has seen other global retailers like Home Depot (HD.US) and Germany’s Metro (MEO.DE) also abandon the tough China market. Whereas the earlier cases saw companies simply close down their China operations and leave, this new wave of deals has firms selling their operations to eager Chinese buyers.
China’s retail sector has been a tough one for both domestic and international players these last few years. In addition to stiff competition, traditional retailers are facing a strong challenge from an aggressive and fast-growing group of e-commerce firms like Alibaba (BABA.US) and JD.com (JD.US), which often offer better prices along with the convenience of online shopping and quick home deliveries.
Those challenges have led to reports that French titan Carrefour (CA.PA) may be considering a similar pullout, and even US giant Wal-mart (WMT.US) is facing similar pressures.
According to the latest headlines, Kingfisher has agreed to sell 70 percent of its China operations to local retailing giant Wumart Stores (01025.HK) for 140 million pounds (US$220 million). The money-losing operations include 39 of Kingfisher’s flagship B&Q home improvement stores throughout China, employing around 3,000. Kingfisher said the sale will allow it to focus on its core business of home improvement stores in Europe.
The sale price values B&Q China at a relatively modest US$315 million, which looks like quite a good deal for Wumart, which is better known in China for its supermarkets. The move will help Wumart, which operates 650 supermarkets, in its bid to expand into the home improvement business.
I’ve been to Wumart supermarkets in the past, and can say that the chain may be big but its stores are definitely a bit more tired and run-down than slicker stores run by Carrefour and Walmart.
Accordingly, I expect that we’ll see B&Q’s China stores lose some of their shine following this particular deal, which could ultimately prompt Kingfisher to shut down the brand in China completely. Kingfisher is clearly looking to salvage some of the big investment it has pumped into China over the last decade, even as it decides the market isn’t one that it wants to compete in directly.
Such salvage operations are becoming the preferred exit option for foreign retailers who are growing tired of years of difficult operations in China, with the situation only worsening due to the e-commerce challenge.
British grocery giant Tesco (TSCO.L) kicked off the trend last year, when it rolled its chain of 131 Chinese grocery stores into a joint venture with local partner China Resources Enterprise (00291.HK). Before that Carrefour was reportedly considering a similar China exit strategy, though no deal was ever announced.
More recently, Best Buy announced earlier this month that it would sell its remaining business, a local electronics chain called Five Star, to local buyer Jiayuan Group for an undisclosed price. The move marked the end of Best Buy’s gradual withdrawal from the market, after it shuttered its own-brand stores three years ago. Two years ago, Home Depot also shuttered its own-brand China operations, ending a six-year foray in the market.
All of this underscores two realities for major western retailers in China. The first is the toughness of the market due to competition from local players and also e-commerce companies. The second is the fact that most of these companies have pumped millions or even billions of dollars into building up their China business over the last decade. That means they are now reluctant to completely write off those huge investments, and are trying to salvage at least some of the money by selling to local buyers.
In cases like Best Buy, that strategy looks reasonable, since it probably doesn’t care what happens to the Five Star brand under Jiayuan’s management.
But I do suspect that companies like Tesco and now Kingfisher may not like what happens to their brands under management by their new Chinese partners. Accordingly, I expect we’ll see these newer partnerships quickly come under pressure, and retailers like Kingfisher and Tesco will ultimately withdraw their brands completely from China.
Bottom line: Kingfisher’s sale of control of its China home improvement chain to a local partner will produce an uneasy alliance that will ultimately see the UK retailer withdraw its B&Q name from the market.
– Contact us at [email protected]