American Retail's Final Frontier: China

The story is all too familiar; a prominent and successful American company seeks to expand its global empire in the world’s fastest growing consumer market, China, but within a few short years the giant pulls out of the country wondering what went wrong. The most recent company to fall prey to this unfortunate cycle is Mattel, who recently closed its $30 million Barbie superstore in Shanghai.

Barbie superstore in Shanghai

The six story pink Barbie wonderland opened in March of 2009 in honor of Barbie’s 50^th birthday with lofty goals of targeting China’s upwardly mobile, trend-setting elite, and turning the fashion doll into a full-blown lifestyle brand with a heavy branded-merchandise focus. The store had much broader offerings than any other Barbie store, with a cosmetics counter, adult clothing, spa, nail emporium, and even a wet bar. For the first time not just in China, but anywhere, Barbie was being targeted to women as old as their early 30s - decades after most girls in America probably “grew out” of the blonde bombshell doll. Regrettably for Mattel, the strategy flopped. Within eight months of opening, the store had to cut sales goals by 30%, and now it’s closing the store completely, citing a strategy change.

While the recession couldn’t have helped, it is important to point out that amidst Barbie’s failure, retail spending in China rose 18% in 2010 - clearly some shortcomings in strategy are to blame. Analysts have cited problems like poor store location, not localizing the brand, and overpricing for reasons why the store didn’t work.  As Shaun Rein noted on Forbes.com, “Chinese women tend to like cutesy, girlish pink clothes (think ‘Hello Kitty’), not the sexy and skimpy kind Fields (Patricia Fields: Sex and the City) designed,” which are more akin to the clothes that Barbie wears. This lack of localization isn’t the root of all Barbie’s troubles; however, since the dolls are still well-liked in the country, and Mattel did make efforts to localize the brand, like introducing Ling, a Chinese Barbie.

Other American companies have struggled to effectively take advantage of China as the biggest and fastest-growing consumer market as well - Best Buy and Home Depot recently pulled out of China. These failures also cannot be attributed only to lack of localization. Businesses often dismiss their struggles in China claiming that they’re caused because the Chinese prefer to haggle, but that excuse is faulty. A popular Chinese electronics store, Gome, has fixed prices and when it transitioned to that pricing strategy its sales actually rose because wealthy Chinese actually fear over paying and don’t want to bother with negotiating prices, so Best Buy was perceived as overpriced because its products could easily be found at local shops for much lower prices, not because Chinese people just wanted to haggle for lower prices. Apple has maintained a successful high price strategy in China – its Shanghai store sells more iPhones per square foot than any other Apple store in the world even with prices that are 30% higher-because its products are not easily substitutable.

The deeper issue that chains like Best Buy and Home Depot faced was that big box chain stores cannot maintain their price advantage in China. Local retailers are more competitively priced for things like standard electronics because the country has a prolific piracy problem that makes such goods extremely accessible, and the companies pay lower salaries, benefits, overhead, etc.

As Barbie, Best Buy, and Home Depot have shown, the flagship store model is difficult to pull off in China. The extreme traffic and lack of parking make such stores a logistical problem for consumers who consequently prefer to shop closer to home where they can walk to the store. Also, since the Chinese government banned free shopping bags, consumers tend to shop more often, buying less at each outing, which only perpetuates the preference for local stores. Even the world’s largest and most powerful retailer, Wal-Mart, must scale down its stores to succeed in China. As a Forbes.com blog pointed out, “smaller formats that appeal to consumers in emerging markets might be more appropriate to connect with consumers and establish brand presence.”

But Barbie’s problems may not be as simple as localization issues.  Mattel’s greatest downfall was lack of confidence in its strategy, not knowing how to balance localization with staying true to the American heritage that makes Barbie the most iconic fashion-doll in the world. Barbie’s expansion into Shanghai was more than a new location; it was also a foray into being a lifestyle brand. The Shanghai store was selling dolls, of course, but its vast other offerings seemed to take center stage, which was new territory for Barbie. The lifestyle concept may have been more successful if tested in the US first where only one variable of the brand was being altered instead of two.

Barbie branded makeup at the Shanghai store

Even though millions of dollars were lost due to the faulty strategy of these companies, they all moved quickly to end the bad strategy and cut their losses. Hopefully other companies can learn from their mistakes and effectively localize but also choose a clear strategy when expanding to China, or any other new market.