Why Home Depot Struggles and IKEA Thrives in China?

At a time when China’s home furnishings market surged 17 percent, the largest U.S. home improvement company Home Depot has been struggling and closed five stores since it entered the China market in 2006.

Analysts pointed to the fact that a “do it yourself” culture does not exist in China. True.  Because labor costs are relatively low, many homeowners would rather hire someone to do the work than do it themselves. Apparently, Home Depot made the same mistake as some other companies that entered China without understanding the local market, which is often dramatically different from their home market.

Unlike consumers in the West, Chinese consumers have no role model from older generations. Home ownership was non-existent about fifteen years ago. It was then very common for a family, sometimes three generations, to share a 300-square-feet room that they used for sleeping, eating and daily activities. A kitchen was not even a necessity as many people simply cooked in a common area outside their room.

In the last fifteen years, home ownership has gone from practically zero to about 70 percent. However, many people have little sense of how to furnish or decorate a home.  They are very eager to learn from the West. This is one of the reasons that IKEA is very popular in China. Their Western-style showrooms provide model bedrooms, dining rooms, and family rooms showing how to furnish them. Their stylish and functional modern furniture is particularly appealing to young couples.

I visited IKEA in Shanghai. The 360,000-square-foot store was packed with people shopping for furniture and household appliances for their new homes. The store offers more than seven thousand products and features a five-hundred-seat restaurant and a spacious and colorful children’s playground. Some people come to IKEA to experience the Western style of living, or simply for recreation, as if it were a theme park.
While Home Depot reduced its stores in China from twelve to seven, IKEA plans to double the number of its stores from its current eight to fifteen by 2015. In a country where millions of new home owners are added each year, companies cannot afford to lose this potentially huge market. Here are some important lessons that we can draw from the Home Depot case:
    * Chinese consumers need to be educated as they have no role models. They are eager to learn but they need guidance. Companies that invest in educating the market can expect to reap handsome rewards.

    * Pay attention to local customers’ preferences. For example, the kitchen is usually small and considered secondary in a Chinese home. Chinese cooking usually blackens the kitchen with soot and grease and is the domain of an ayi, or household helper, who cooks for the family.

    * Most Chinese homeowners live in condominiums rather single family homes. They do not have a garage that can store tools and ladders. A more appealing package would be pre-designed interiors with installation included.

Since the Chinese consumer market is new and still emerging, companies have an opportunity to rebrand their products and services. For example, GM China has done a better job of truly listening to customers than GM North America has. Many middle class Chinese like to drive their parents around on weekends and some can afford to hire chauffeurs. GM’s Cadillac SLS model addresses the needs of the Chinese market for a roomy, luxurious back seat for chauffeur-driven riders.

In order for companies to succeed in a new market, it’s critical that they study the market and adapt to local conditions. It is still not too late for Home Depot to turn itself around in China.

/written by Helen H. Wang, Forbes/