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Best Buy Shuts China Stores to Expand Five Star Retail Brand

Best Buy Shuts China Stores to Expand Five Star Retail Brand
A customer reads a closure notice outside a Best Buy Co. store in Shanghai. Photographer: Kevin Lee/Bloomberg

Best Buy Co., the world’s largest consumer electronics retailer, will close all of its nine Best Buy branded stores in China to focus on expanding the more profitable domestic chain it acquired five years ago.

“Store openings will be focused primarily on the profitable growth platforms of its Best Buy Mobile business in the United States and its Five Star business in China,” it said today in a statement.

Best Buy will open 40 to 50 of its Five Star branded stores as it competes against Gome Electrical Appliances Holding Ltd. and Suning Appliance Co. in the world’s most populous nation, where retail sales grew by a monthly average of 18.4 percent last year. The Richfield, Minnesota-based retailer also plans to almost double its Best Buy Mobile stores in the U.S.

“They have struggled with some of their branded stores,” Ben Cavender, a Shanghai-based analyst at China Market Research Group, said in a phone interview today. “The Five Star brand has been in the market considerably longer and is a brand people recognize. Not many people in China know what Best Buy is.”

Best Buy has declined 9.7 percent in the past year. The stock rose 0.6 percent to $33.04 in New York trading on Feb. 18.

The expansion will increase the number of Five Star stores to 210 during Best Buy’s fiscal year that ends in February next year, according to the statement.

Global Vice President

“The Five Star locations are much more spread out than the Best Buy locations,” he said. “That’s the best way for them to have a major national presence right now.” Best Buy lagged behind competitors in the Chinese market also because of its distribution network and store locations, according to Cavender.

Wang Jian, co-founder of Five Star, has been appointed global vice president for Best Buy Co., according to an e-mailed statement from the Chinese unit.

Five Star, based in Nanjing, eastern Jiangsu province, has about 170 stores in seven provinces, employs more than 8,000 people and had sales of 24.7 billion yuan ($3.8 billion) in 2009, according to its website.

That compares with Gome’s 704 stores in more than 200 Chinese cities as of June 30, with another 370 stores run by billionaire founder Huang Guangyu’s Gome Group. Suning had 1,206 outlets in 223 cities in the country as of Sept. 30.

Best Buy entered China in 2006 by paying $180 million to take control of Jiangsu Five Star Appliance Co., the nation’s fourth-largest electronics retailer. Five Star at the time had 136 stores.

Competitor Metro

Metro AG, the world’s third-largest retailer, opened the first outlet of its Media-Saturn consumer electronics division in China in November. The Dusseldorf, Germany-based company plans to add about 10 stores by 2012 in Shanghai, where it is has identified an annual revenue potential of 5 billion euros ($6.8 billion).

“The fact that Best Buy is retracting from this market means that we will have even better chances there,” said Horst Norberg, chief executive officer of the unit.

‘Growth Opportunities’

Best Buy will continue “investments in the Best Buy Mobile and Five Star business models, which are profitable and have significant growth opportunities,” Chief Executive Officer Brian Dunn said in the statement. “The actions we are taking 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.”

Best Buy also said today it will exit Turkey, shutting its two stores there. The global restructuring, which includes improving U.S. supply-chain operations, will save the company $60 million to $70 million annually starting in the 2013 fiscal year, it said. There will be charges of as much as $245 million in the 2011 and 2012 fiscal years, according to the statement.

Metro’s Media-Saturn operates 17 stores in Turkey.

Best Buy plans to open about 150 Best Buy Mobile stores in the fiscal year that ends in February 2012, bringing the total to about 325.

Four Best Buy Stores will reopen from Feb. 24 to March 24 and the company will deliver goods customers purchased or refund the price during the period, according to a statement posted on Best Buy’s website in China today. There will be no change in extended warranties, the statement said.

Quality Products

Mao Xinlie, 78, said he will miss Best Buy’s reliability. “The good thing about Best Buy is the quality of stuff they sell, but their prices for products and services are higher,” said Mao outside the retailer’s store in Xujiahui in Shanghai. He said he earlier bought a Samsung Electronics Co. Anycall mobile phone and a Toshiba Corp. laptop from the store.

Best Buy said it expects fiscal 2011 earnings per share of $3.20 to $3.40, excluding restructuring charges tied to closing stores in China and Turkey.

Best Buy shut two stores in Shanghai, one in Suzhou and one in Hangzhou, according to a statement posted on a bulletin board outside its Xujiahui store in Shanghai.

At least five calls to the company’s China offices today were unanswered.

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