Seeking to gain a foothold in China’s booming consumer electronics market,
Best Buy Co., the largest U.S. electronics retailer, said Friday it will acquire
a majority stake in Jiangsu Five Star Appliance Co. for US$180 million.
With the transaction, which has already received regulatory approval from
Chinese authorities and is expected to close next month, the U.S. retailer will
gain a retail presence in eight of China’s 34 provinces. Five Star, the
fourth-largest appliance and consumer electronics retailer in China, has 136
stores and saw its revenue rise more than 50 percent last year to US$700
million, Best Buy said in a press release.
“This relationship (with Five Star) complements our other efforts to learn
about the Chinese retail environment,” Robert Willett, chief executive of Best
Buy International said in the press release.
Best Buy, the largest consumer electronics seller in the United States, joins
a growing list of retailers that are ramping up operations in the world’s
fastest-growing economy, a trend that has accelerated over the past year since
barriers to entry by foreign retailers were eased. Though Best Buy is entering
the market later than some other retailers, such as Wal-Mart Stores Inc., the
consumer electronics segment in China remains fragmented and is expanding
rapidly.
Growing market
According to Best Buy, overall consumer electronics sales in China are
expected to reach US$100 billion by 2010 and are projected to grow more than 10
percent annually over the next decade.
The news of the acquisition came as little surprise. A report in the China
Business News on Wednesday said that Best Buy had agreed to purchase Five
Star.
Best Buy said Friday that the acquisition, which includes an injection of
US$122 million in capital, is expected to be neutral to Best Buy earnings in the
current fiscal year. Best Buy’s fiscal 2007 ends next March.
R. Scot Ciccarelli, retail analyst at RBC Capital Markets in New York, said
that financial information on Best Buy’s acquisition is limited, but that it
doesn’t appear as though the company is paying too much on the ownership
stake.
“They have been talking about entering China for a long time and this is a
low-risk strategy for them to do it,” Ciccarelli said, noting that the learning
curve for Best Buy could be too steep if it pursued a purely organic growth
strategy in the country.
By partnering with Five Star, Best Buy will be able to learn which strategies
work best in China, enabling it to eventually build its own network of Best
Buy-branded stores with a deeper knowledge of Chinese consumer preferences,
Ciccarelli said.
Willett, the CEO, said in the press release that the company is moving
forward on plans to open its first Best Buy retail store in China this year. The
company last month announced its plans to open a Best Buy store in Shangai.
Best Buy already has offices in Shenzen, Shanghai and Beijing. The so-called
sourcing offices, the first of which opened in 2003, have helped Best Buy
establish relationships with manufacturers hoping to gain broader distribution
in China and North America.
Canadian expansion
Best Buy began its international expansion in 2001 with the acquisition of
Canadian consumer electronics chain Future Shop Ltd. Best Buy operates 119
Future Shop stores and 44 Best Buy stores in Canada.
The move into China represents the company’s first step outside of North
America and the company expects to continue expanding abroad.
“We are encouraged by the significant opportunity to leverage our recent
investments for both top-line and bottom-line growth,” Willett said. “
International growth is an important part of our long-term plans.”
Spokeswoman Susan Busch said that Best Buy’s current international plans are
focused on Canada and China. She declined to comment on further opportunities
for expansion in China, though she noted that Five Star has been growing its
network of stores and that Best Buy isn’t making changes to the Chinese
retailer’s strategy.
The current management team at Five Star, which is based in the city of
Nanjing in Jiangsu Province, will remain in place and the stores will continue
to operate under the current brand. Five Star’s management team and its
employees will hold the 49 percent stake not being acquired by Best
Buy.
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