Best Buy’s China Store Closures Cap Gradual Market Pullback

Best Buy’s move to close its namesake stores in China caps a gradual pullback from the market that began not long after expansion plans were aired. The chain will take $225 million to $245 million in restructuring charges in fiscal 2011 and 2012 to close nine stores, including six in Shanghai and two in Turkey, the first of which opened in Izmir in late 2009, Best Buy said. The move will yield $60 million to $70 million in annual savings, the company said.

The growth of Best Buy stores in China began with the opening of an 86,000-square-foot location in Shanghai in 2007. Then, former International CEO Bob Willet forecast that the chain would open “several hundred” stores across the country “over time” (CED Oct 30/08 p6). But by July 2010, the chain had halted the expansion, CEO Brian Dunn said (CED July 1 p1). About 1,500 Best Buy employees in China and Turkey will be affected by the closings, a company spokeswoman said.

Despite the pullback, Best Buy plans to reopen two China locations “later,” the company said. Product sourcing offices in Shenzhen and Shanghai for Best Buy’s private label products, including Dynex and Insignia brands, will remain, a spokeswoman said. The Shanghai office, which opened in 2003, will move to a new location because its lease is expiring, she said.

Although Best Buy is shutting its branded locations in China, Jiangsu Five Star Appliance, which it acquired for $180 million in 2006, will expand with 40-50 locations coming on line in fiscal 2012, the company said. The 158-store chain is profitable and has posted double-digit gains in operating profits, but Best Buy’s noncommissioned sales strategy is ahead of Chinese consumers, Dunn has said.

Best Buy also is limiting expansion of its full-size U.S. outlets to six to eight in fiscal 2012. That continues a trend that began two years ago when it slowed annual store growth to 3 percent, adding 46 outlets, from the previous 8-10 percent. Best Buy has focused on smaller, 20,000-30,000-square-foot stores with its openings. There will be 18 full-size stores added in the Canada, U.K. and Mexico in fiscal 2012. Canada is the largest of three markets, with 64 Best Buy stores and 144 Future Shop locations as of February 2010. The U.K. and Mexico have six and five stores.

Best Buy accelerated growth for its Best Buy Mobile joint venture with Carphone Warehouse, with a goal of opening 150 standalone stores in fiscal 2012 to increase the chain’s size to 325 outlets by February 2012 from 74 in February 2010. Carphone Warehouse has aired plans for 500 Best Buy Mobile stores, though it hasn’t announced a date for hitting that target (CED Jan 19 p3).

The retailer said it also will restructure “certain end-to-end supply chain processes” in the U.S., resulting in charges for asset impairments involving real estate, inventory and equipment. And it will take a charge tied to “intangible” trade-name assets. Details of the restructurings weren’t available at our deadline. A Best Buy spokeswoman declined to comment.