Why major American corporations have struggled in China: Home Depot
Why major American corporations have struggled in China: Home Depot
This article is part of a series about the importance of cross-cultural design, other installments of which have been published over the last month.
Home Depot is another retailer that has struggled in China. However, unlike Walmart, it did not figure things out. Home Depot’s story in China began in December 2006 with its purchase of a Home Depot imitator which already had twelve locations throughout China. The deal was rumored to have cost Home Depot around $ 100 million USD.
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The story of Home Depot contains perhaps some of the most important lessons for any foreign business entering China as, no matter what it did within its business model, it had little potential for success because the model itself was doomed to cause failure. This assertion might be hard to make sense of since, according to a Gallup poll from March 2005 taken in China, 93% of those who responded said that they owned their place of residence. Homeowners are the bulk of Home Depot customers of course. With a market that massive, it was no wonder Home Depot thought it would hit a homerun by expanding into China.
Similar to Walmart’s mistake discussed in the fourth installment of this series, Home Depot’s mistake was to have a fundamental misunderstanding of the Chinese consumer and his/her desires. Very few Chinese homeowners want to do their own repairs, upgrades, and renovations. This overlooked fact blew a massive hole in the Home Depot business model, since its model is based on selling to people who want to do their own home improvement projects to save money.
However, even with such a flaw within Home Depot’s business model, its true mistake was not altering its strategy to provide the types of products and services Chinese customers do value. If Home Depot had done decent market research, it would have realized that the Chinese consumer generally does not like do-it-yourself (DIY) projects. If it had still wanted to take a shot in China, it could have changed its model to offer the service of carrying out home improvement projects with its own products. As a result of not adequately understanding Chinese consumers, Home Depot closed its final seven stores in China in September 2012.
To see the success Home Depot could have had, one needs to look no further than IKEA. IKEA is absolutely making a killing in China, which might seem strange given what I previously said about the Chinese not wanting to build their own things and that this concept is synonymous with the IKEA brand in the West.
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But in China, IKEA learned about Chinese market differences and developed a two-pronged strategy in order not to repeat the fate of Home Depot. First, it was able to keep and leverage its classic showrooms within its retail stores. The showrooms alleviate one of the largest reasons many Chinese don’t want to do their own home upgrades: they lack confidence in what they are doing. Many Chinese who are ready to purchase their first home have not ever lived in a modern style home. This causes uncertainty about what is typical or stylish and, therefore, frustration about making design choices. The Chinese typically would much rather see how something works or looks, then purchase it exactly how it is, rather than come up with their own design.
In addition, the typical Chinese life experience means that most of them do not have the skill or know-how for DIY projects. So, unlike its marketing approach in the West, and in other international markets, in China IKEA offers and promotes a service of designing and building home improvement items.
This solves the related problems of the Chinese people not knowing how and not wanting to do DIY projects. Home Depot may well have been able to win over China by employing a similar approach from the outset. And even after its initial lack of success, instead of re-strategizing to figure out and solve its customer’s needs/desires in China, Home Depot kept a fixed frame of reference, which ultimately led to its inability to gain market share there.
The author is Clayton “CJ” Jacobs, who is currently an Entrepreneur-in-Residence with, and the Head of Cross-Cultural Design at, ReadWrite. An area of focus for him is helping American companies understand and enter the Chinese market through taking a modern user-centric product design approach. You can contact him directly at clayton.michael.jacobs(at)gmail.com or find him on Twitter & LinkedIn.
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