Home Depot's Retreat from China

            
 
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Case Details:

Case Code : BSTR429
Case Length : 15 Pages
Period : 2006-2012
Pub Date : 2013
Teaching Note :Not Available
Organization : The Home Depot.
Industry : Retail
Countries : USA, China

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"We bought our way in. Getting established wasn't so difficult. Exiting has been nightmarish"

-Carol Tomé, Chief Financial Officer of The Home Depot Inc. in 2012.

"The company's big box stores in China were never as productive as what the company initially expected, given the significant differences that exist in shopping behavior between U.S. and Chinese consumers. Further, if the company couldn't get the stores to work during one of the biggest real estate build outs seen in the last 50 years, it is unlikely they would work in what appears to be a cooling property market in China."

-Scot Ciccarelli, Analyst, RBC Capital in 2012.

Home Depot Exits Big-Box Retail in China

On September 07, 2012, US-based building materials and home improvement products retailer, The Home Depot (Home Depot), announced the closure of all its seven big-box retail stores in China, six years after it had entered the country. Home Depot, however, announced that it would continue to operate specialty stores and would venture into online sales. During the late 1990s, the home ownership policy in China had undergone a change and people were allowed to purchases houses. This led to a boom in the housing and home improvement market.

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The home improvement market had huge potential, as in China, the houses were handed over to the buyers in a semi-finished state. The buyers had to carry out a lot of work including laying the floor, fixing the water pipes, carrying out the electrical work, etc. Sensing a huge opportunity, Home Depot entered China in 2006 by acquiring the big-box stores of China-based home improvement retailer Home Way.

In the six years that Home Depot was in China, it failed to find a niche in the market and the Chinese operations sustained continuous losses as the company struggled with its do-it-yourself (DIY) model. With labor rates high in the US, it was common for people to carry out several home improvement activities themselves. On the contrary, in China, labor was easily available and at a relatively low price, so the Chinese engaged labor to get most of the home improvement related work done. There was also a proliferation of small time contractors who took up work related to finishing and refurbishing. Several home buyers engaged these contractors to carry out tasks like laying flooring, tiles, installing pipes, painting, etc. Home Depot struggled in the market and was unable to compete with the local players and small time contractors who undertook home improvement work. To cut down the losses, the company shut down five stores between 2009 and 2011. The footage of the remaining stores was also reduced to maintain profits. But the stores were unable to meet the targets for long-time financial returns so the company decided to exit the market.

Analysts blamed Home Depot's business model for its failure in China. According to them, Home Depot was unable to find the right format for the Chinese home improvement market, which was very different from the US market. They said that instead of customizing its DIY model to suit the needs of the Chinese, Home Depot just imposed its business model and big-box stores on China. According to an analyst at China Market Research group in Shanghai, James Roy (Roy), “Home Depot failed because it didn't make any adjustments to its format to fit the way Chinese consumers shop. Home Depot essentially exported its big-box model to China and didn't adapt.” ...

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