Home Depot's Retreat from China
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Case Code: BSTR429 Case Length: 15 Pages Period: 2006-2012 Pub Date: 2013 Teaching Note: Not Available |
Price: Rs.400 Organization: The Home Depot. Industry: Retail Countries: USA, China Themes: Business Strategy, Business Environment |
Abstract Case Intro 1 Case Intro 2 Excerpts
Excerpts
Entry into China
Home Depot entered China in 2002 by opening sourcing offices at Shanghai and Shenzhen. Each of these sourcing offices had experts in quality control and sourcing. From these locations, Home Depot sourced lighting fixtures, fans, flooring products, bath accessories, faucets, tools, etc. In 2004, Home Depot opened a business development office in China with a view to gaining insights into the home improvement market in China, and evaluating strategies. Chuck Elias was the head of Home Depot's Chinese venture, and he researched the market, visiting several cities, markets, and studying the competitors for more than a year...
But China is Different
It was not long before Home Depot found out that the Chinese home improvement market was vastly different from the North American market. While in the USA and other North American countries, Home Improvement largely consisted of DIY, in China the work was done by labors and contractors. The way the retailers managed the suppliers in China was vastly different from the way they were managed in the USA. The Chinese also preferred to shop for the goods at specialized stores after comparing prices in different stores, and bargaining on the prices....
So is China's Home Improvement...
The company was able to differentiate itself in the USA by providing home improvement materials at low prices through its global sourcing practices. This did not prove to be an advantage in China as the local brands were much cheaper. In China, the people's preference for these products differed from province to province, whereas all the stores of Home Depot sold similar types of products....
And the Vendors
In the USA and other western countries, big-box stores offered different brands and were centrally managed. The suppliers agreed to the terms set by the retailers to display and sell their products through them. They followed the retailers' conditions and requirements to sell the products at a price decided by the retailers. The suppliers were also required to pay a commission to the retailer. In China, apart from the employees of the company, it was common for the representatives of the vendors to be present in the store to sell their products. They competed with each other to sell their products. This was very different from the way Home Depot operated...
Problem Arise
Just after a year of being operational in China, Chen resigned and Simon Cheun, Vice President, Merchandizing, was appointed as his successor. Though reasons were not cited for Chen's exit, observers said that the slide in Home Depot's profits and revenues during the quarter ending November 2008 could be the reason. Shortly after the company's entry into the market, China experienced an economic slowdown. In the first quarter of 2012, the country recorded its lowest economic growth in three years. Retail sales were adversely impacted and grew by 13% in August 2012 as against 17% in August 2011. The impact was also felt on home improvement products...
Closure of Big-Box Stores
In 2009, Frank Blake, CEO of Home Depot, said that they wanted to have a profitable business in China, but were facing problems due to the way stores were operated in China, the absence of the DIY market, vendor management, etc. He added, “While we're pleased with the business performance, we're still not confident we've got the right business model. We want to figure out how to make money there. We'll either figure it out or we won't be there,” ...
What Went Wrong?
Market observers did not think much of the company's new business model of having a presence in the market through e-commerce. They said that the main problem, i.e; the reluctance of the Chinese to go in for the DIY model remained unaddressed. Some observers said that Home Depot had entered China too early, when the Chinese were still unwilling to spend much on home improvement and decoration. They said that the DIY concept was not relevant to China as labor was affordable and widely available. ...
Exhibits
Exhibit I: Home Depot's Statement of Earnings
Exhibit II: Home Improvement Market in China
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