Strategic Management

Lessons from Media Markt’s Exit from the

Chinese market

Contents

1. Market Overview

2. Introduction to Media Markt

3. Why Media Markt decided to enter the Chinese market

4. Why Media Markt failed- the wrong strategies

5. Lessons learnt

6. Conclusion- Dialectical Thinking with Systems Thinking

7. References

1. Market Overview

China, as one of the fastest emerging countries in the world

since the eighties, has always been a big market that

multinational companies are eager to enter. Since initiating

market reforms in 1978, China has shifted from a centrally

planned to a market based economy while experiencing rapid

economic and social development.

With a population of 1.3 billion, China has become the second

largest economy in the world and the fastest growing consumer

market. The electronic consumer market, specifically, has

expanded tremendously in the last couple of years. The Chinese

consumer electronics market generated total revenues of $28.4

billion in 2009, representing a compound annual growth

rate(CAGR) of 10.4% for the period spanning 2005-2009. The

performance of the market started to decelerate from 2010,

with an CAGR of 4.8% for the five year period 2009-2014, which

is expected to drive the market to a value of $35.7 billion by

the end of 2014.

On the other hand, the reality is not as optimistic as the

market data shows. Rampant price wars caused by overcapacity

have squeezed profit margins to some of the lowest levels in

the world. Some major local retail chains such as Gome, Suning

and Dazhong dominate the consumer electronics market. These

players control as much as 40 percent of sales in first-tier

cities like Shanghai and Beijing. They dominate even more in

some product categories such as the electronic giant Gome,

which controls 60 to 70 percent of TV sales in Shanghai.

Another main highlight of the consumer electronic market trend

is the e-commerce revolution in China. The impact of e-

commerce on traditional business areas is inevitable.

Seemingly overnight, China has become one of the world’s most

wired retail markets. Millions of consumers can now log on and

purchase a vast range of products which also shows a robust

growing trend in electronic consume products.

Source: McKinsey Global Insistitue analysis. March 2013

From the figure shown above, China’s e-tailing market has

posted the world’s highest growth rate. From a report recently

released by China’s E-Commerce Research Center, it was

estimated that by the end of 2013, the transaction volume of

China’s online retail market will reach 1.32 trillion RMB, a

year-on-year increase of 64.7%.

Competing for this online pie are not only major original

retailers such as Suning and Gome, but also many online

retailers such as Jingdong, Dangdang. Together with the

advantages of lower prices and great convenience, e-commerce

has brought huge challenges to traditional business models and

more and more physical retail stores are facing customers'

"fitting rooms" dilemma.

2. Introduction to Media Markt

Media Markt is a German chain of stores selling consumer

electronics with numerous branches throughout Europe and Asia.

It is Europe's largest retailer of consumer electronics, and

the second largest in the world after American retailer Best

Buy.

In 1979, Walter Gunz, Erich and Helga Kellerhals and

LeopoldStiefel opened the first Media Markt in Munich. In

1989, Media Markt ventured to go abroad and expanded to

France. After 20 years of expansion, Media Markt operated over

580 superstores throughout Europe in 2010.

In 2011, with the strong ambition towards to China, Media

Markt decided to start its business in Shanghai. Between 2013

and 2015, they planned to boost the number of stores to at

least 100 and capture 10% share of the Chinese market. From

the failed experience of Best Buy, Media Markt decided to

enter Chinese market in cooperation with a Chinese giant–

Foxconn.

Foxccon, as the world’s leading ODM Company, was also aiming

to transform their business model from just an assembly plant

to retailing. Media Markt believed a joint venture with

Foxccon would bring them many resources and networks that

would allow for a quicker and smoother growth in China.

After two years of a testing phase in Shanghai, Media Markt

had decided to give up on the Chinese dream. The company had

tried to replicate its European success in China but it failed

unfortunately.

Media Markt closed all 7 stores on March 11, 2013 and

operations would shut down entirely on 30 April 2013. They

delivered 100 million Euros sales in 2012 with an estimated 40

million losses in total. Metro Group finally decided to

discontinue further expansion of its subsidiary in China.

3. Why Media Markt decided to enter the Chinese market

Whilst Media Markt’s foray into China ended up as a big

fiasco, it was vital that the reasons for Media Markt to

branch out of Europe were clearly understood. This would

determine the objectives and aims of Media Markt’s decision.

Market-future

By the end of 2010, it was a really gloomy time for the

European economy as the European debt crisis was unfolding in

its worst time. Greece was on the edge of bankruptcy with

Ireland, Portugal, and Spain going to join the crisis soon.

There were even speculations that the European union would be

disintegrated.

Almost all the economies in Europe were shrinking in various

degrees. In such a gloomy environment, the prediction of the

shrinkage of consumer-electronics market in Europe was almost

certain. On the other hand, in China the market future

prospect seemed much brighter. Continuous economic growth

fostered a booming consumer-electronic market. While Chinese

people were getting richer quickly, their consumer behavior

was also changing.

The spending on consumer-electronics was growing faster than

most other commodity spending. According to Media Markt’s own

research, China’s electronics retail market would be worth 150

billion Euros (US $207 billion) by 2013, and the Shanghai

market alone would exceed 5.5 billion Euros.

Seen in this light, it would be appear that moving some of the

company’s resources and focus from Europe to China was a

rational and sound decision from a market strategy

perspective.

Company Financial Status

Media Markt’s parent holding company is Metro AG. Despite the

European debt crisis which started in 2008, Metro AG had been

a profit company since more than a decade ago and throughout

the debt crisis. Below is the chart of company’s yearly net

income.

2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 20000

200,000

400,000

600,000

800,000

1,000,000

1,200,000

Net Income on Metro AG's Income Statement

year

Mill

ions

Eur

o

More importantly the end-of-year cash balance on Metro AG’s

balance sheet had been steadily increasing from 2005’s 1.76

billion to 2010’s 4.8 billion.

2010 2009 2008 2007 2006 20050

1,000,0002,000,0003,000,0004,000,0005,000,0006,000,000

Cash & Cash Equivalent on Metro AG's EOY Balance sheet

Year

Mill

ions

Eur

o

Also, the Metro AG’s stock price steadily increased from end

of year 2008’s of 23 Euro to 2010’s 55 Euro.

These results suggested that the company was in a good

financial state, and that it had plenty of cash in its savings

account that was not invested into working capital. That also

implied that the company management should be looking for

investment opportunities for these cash which are sleeping in

the bank making very little interest profit.

New management board

In September 2010, Metro AG’s General Manager Dr Rolf Giebeler

left the company and this led to a series high management

personnel changes in the company. The executive management of

Metro AG was restructured. This could be implied that the new

management of the company would be under heavy expectation to

make strategic changes to bring more earnings to the

shareholders. Thus, with a new management board that had

plenty of cash, and between putting the cash in the bank and

reinvesting it into a rapidly growing market, between the

gloomy future in Europe and the seemingly bright future in

China, Media Markt set its sight on China.

Media Markt believed in its business model

Media Markt believed that by offering unparalleled service and

experience, it could replicate its success from the European

market to China. Media Markt’s business model is completely

different from Chinese local electronic-retailers Gome and

Suning- that every product on the shelf is already 100% owned

by Media Markt, so the customers are free to “test and try.”

Media Markt also has a “decentralize and localize strategy”

which gives individual retailer shops a great autonomous

power; they can decide their own discount & promotion plans

and even decide product supply and stuffing.

Media Markt formed a joint venture with Foxconn as Media Markt

believed this alliance would bring it good local connections

and sales channels.

Media Markt believed all these strategies would differentiate

itself from other competitors in China, and make its foray

into Chinese electronic-consumer market a successful move.

4. Why Media Markt failed- the Wrong Strategies

Fierce competition from local rivals is often cited as the

primary reason for the failure of these international

companies, and although this is definitely a major factor, we

believe that ultimately it was the failure of these companies

to understand the local market and consumers that have

prevented them from positioning themselves competitively

against local rivals.

Late- comer disadvantage

Firstly, at the time of Media Markt’s entry into the Chinese

market, local competition was very strong and the two largest

players, Suning and Gome already had a very strong presence

with hundreds of stores throughout the country. They had

already invested hundreds of millions of dollars into

developing the market and reached a scale that provided them

with strong market consolidation. There was much brand

awareness of these two companies in China. In the short run,

foreign competitors would find it very hard to compete.

In addition, Suning and Gome had been around before the rising

rent and were able to establish themselves at venues that

probably cost very little not too long ago. Thus, they had

already built their presence and they had no need to start in

a venue as costly as that of Huai Hai Road.

Also, being in the business for over 20 years meant that

Suning and Gome had already built up very close connections

with the suppliers. This implied that they could probably get

lower prices for the products, up to 5% lower than the prices

offered at Media Mart.

Another disadvantage that Media Markt suffered was that the

traditional model of making profit was used- they purchased

all their goods outright from suppliers and then sold them at

a mark up. The industry itself consisted of razor thin

margins, and as such domestic operators developed a model

whereby they would rent out space to manufacturers in addition

to taking commissions on sales, enabling them to operate at

much lower costs compared to Media Markt and subsequently

price much more aggressively.

As the Global Times stated “homegrown retail titans like Gome

and Suning have managed to thrive because they make most of

their money charging suppliers fees to display their goods”.

Although Media Markt had originally planned to open 100 stores

within five years of entering the Chinese market, at the time

of its announcement to withdraw from the market it had only

opened seven stores. This clearly indicated that the company

was not fully committed to developing its presence in the

market, and this would have negatively reflected back on its

potential customer base, by creating an unease with making

purchases from the stores that might potentially no longer

exist to offer the after sales support that is usually offered

with retail electronic products.

Further by displaying a lack of commitment and unwillingness

to make the necessary investments required to build up

sufficient scale in operations, the company was unable to

position itself competitively against domestic rivals that

could leverage off their much larger countrywide operations.

Digital Revolution

Media Markt failed to understand the rapidly changing retail

environment and behaviour of consumers. China is a country

that has been and is continuing to experience tremendous

growth and change, and as such what may appear to be

successful one year can completely change the following year.

At the time of Media Markt’s entry, it failed to recognize the

shift in the Chinese consumer electronics market. Domestic

retailers were launching a fierce price war that was driving

them rapidly shift operations online to survive. The large

domestic players were looking starting to look at shutting

down their large physical store foot print and increase their

online operations, while Media Markt on the other hand was

looking at establishing its own physical stores with no online

presence whatsoever.

The development of online-trading platforms, including Taobao

and 360buy, has mounted a strong challenge to digital product

retailers in malls in China because consumers can go online

and get the same products for less.

Meanwhile, the booming e-commerce market in China has already

eaten into the profitability of electronics retailers, as its

lower prices and greater convenience attracts the younger

consumers. Most Chinese consumers are very price sensitive and

can hardly resist attractive discount. They are not so

interested in the value-added services that Media Mart touted.

Moreover, many of these e-commerce platforms also guarantee

the same after-sales service just like the traditional retail

stores.

As a result, operating within the traditional distribution

channels has become more difficult. The influx of

international electronics retailers will intensify the already

fierce competition in the Chinese market. Leading local

retailers such as Gome and Suning will have to rack their

brains to attract customers, having already slashed their

profit margins.

Hence, having the traditional brick-and-mortar operations did

not do Media Mart much good as that incurred too many

overheads.

The decision on October of 2011 to begin focusing on online

sales also seemed to have been a case of too little, too

late.   By the time Media Markt CEO Bussalb announced the

expansion of online sales, the top four e-retailers in China

already occupied 90% of web traffic.   In fact, as many in

both the English and Chinese press noted, Chinese consumers

were happy to visit Media Markt as a testing center for

products they would later buy online, through other online

retailers at a lower cost. 

Although Media Markt generally had larger stores with a large

number of products, especially in its flagship store, by

focusing its attention to purely physical stores the company

was confined to offering a smaller range of products and

higher prices when compared to the online operations of its

competitors. In fact, Media Markt would be assisting its

competitors by allowing consumers to test and try out items at

their stores before they went home and purchased them online

at much lower prices. Its domestic competitors had their own

physical stores, already possessed a high level of brand

recognition and reliability that enabled their online models

to work, thus the physical stores provided Media Markt with no

competitive advantage.

Furthermore, the Media Markt’s online operation was incomplete

as only 40% of the in-store products were available for

purchase through the Media Markt’s official website, and

delivery was only available to residents of Shanghai and the

surrounding provinces.

Customer Differentiation

A study from the Shanghai Commercial Economic Research Center

indicated that customers are paying more attention to the

brands of the products, than the brand of the retailer. Thus,

an entrant into a market should be able to offer something

unique from the existing competitors such as Suning and Gome.

This was something that Media Mart did not take into

consideration. Instead, Media Mart touted itself as an

appliance market that ‘offered everything under the sun at

rock bottom prices’3.

Whilst it sought to differentiate itself through offering very

good services, the aims of the customers were still primarily

that of price and quality of products. Hence, value- added

services such as free installation and after sales service

were not well taken.

Media Mart should have done the homework better to realize

that the Chinese customers were more interested in low price

and good quality than the value added services, which incurred

more costs.

The Chinese retail consumer and environment are extremely

price sensitive. Although consumers have enjoyed significant

increases in disposable income, those in the major cities that

Media Markt was targeting were still very price sensitive and

as such it was critical in how a company, especially in the

retail electronics industry, looked at delivering value to the

consumer. Coming from more developed and established markets,

Media Markt would have better understood the type of consumer

that placed importance on both service and low prices, which

was the model that Media Markt tried to bring into its Chinese

venture. However what it failed to realise was that its

foreign business model would not enable it to compete

competitively in such a fierce environment that was present in

China. Chinese consumers did not display a high level of brand

loyalty and as such led to behaviours discussed previously

where they would try products at a Media Markt store before

purchasing it online elsewhere.

Too large a flagship store in one of the the most expensive

retail streets in China

A major mistake the Media Mart did was to set up a very large

flagship store in downtown Shanghai, Huai Hai Road, which was

one of the most expensive retail streets in China. With over

9000 square metres spanning five storeys, that definitely

incurred a huge amount of rent and expenses. Coupled with the

lowest price guarantee of its products, Media Markt’s profit

margins were hugely squeezed.

Further highlights of Media Markt included its modern hi-fi

department and the relaxation area with massage armchairs. In

addition to a wide range of in-house services, the store

offered complimentary delivery as well as a full-fledged

installation, setup and repair services. All these added up to

the overheads amidst the extremely low profit margins.

Whilst it was not clear whether Media Mart had wanted to

expand its market share or to use the high volume, low margin

strategy, the overheads did add up and the rapid opening of

six other stores in prominent places led to its quick demise

as well.

Moreover, establishing its large flag ship store in a high-end

retail location that was not conducive for the sale of cheap

electronic products was a clear indicator that it did not

understand how the company’s operating model was not well

suited to the high cost environment of operating large

footprint retail stores in cities such as Shanghai.

Location

Media Markt’s primary mistake as noted by International

Financial Press, was selecting Shanghai as the base of its

China operations.   The consumer electronic’s market in

China’s first- and second-tier cities was already dominated by

domestic brands Guomei and Suning.  

With first-tier cities already firmly in the pockets of

domestic retail industry leaders, the China Business Herald

World News Weekend noted that competition for remaining market

share has already moved to second- and even third-tier cities.

Thus, Media Markt’s decision to start from Shanghai, in

addition to renting such a large shop space in such a pricey

area was a mistake.

Unfavorable business climate

Unfortunately for Media-Saturn and Foxconn, Media Markt

entered China during a period “when the country’s retail

industry as a whole was on the cusp of a transformative period

due to the rise of e-commerce”, as reported in the Global

Times.  

As Chen Yuefeng of the China Chain Store & Franchise

Association noted in the Global Times, retail store growth had

been slowing over the last two years. The University of

Gothenburg said regarding Media Markt, “Today, the competition

in electronics retailing is throat-cutting…The industry is

characterized by tough price competition. Sometimes economies-

of-scale is not enough.”

Year-on-year growth falls in the face of tougher competition,

rising rents.

China was an ideal business destination for global retailing

giants in the 1990s. However, changing conditions now make the

journey here less easy. In the past two years, chain store

operators have reported the lowest year-on-year growth rates

in 10 years.

International brick-and-mortar retailing giants are facing

unprecedented difficulties in China, including increasing

rental costs, fast-growing Chinese counterparts and

competition from e-commerce, industrial experts said.

In 2012, the average sales growth of top 100 large retail

companies in China was 8 percent year-on-year, down 10.5

percentage points from 2011, according to the China National

Commercial Information Center. In addition, the center

reported that the international brick-and-mortar retailing

giants closed about 26 stores in China in 2012.

In contrast, the year-on-year growth of total retail sales in

China was 14.3 percent last year from 18.12 trillion yuan

($2.9 trillion) in 2011, the National Bureau of Statistics

said.

Weak economic conditions and rising market competition caused

many foreign retailers to suffer in 2012 and forced them to

reconsider their development policies in China.

In 2012 United States-based Wal-Mart Stores Inc closed five

outlets including three convenience stores and France-based

Carrefour SA closed two in China, according to National

Business Daily.

In August 2012 Tesco China closed four shops in China. The

store closures, in Bengbu, Anhui province, Tieling, Liaoning

province, and Taizhou and Changshu, both in Jiangsu province,

reflected a move to optimize the UK company's retail network

and better serve customers.

Peng Jianzhen, deputy secretary-general of CCFA, said the

closure of stores owned by foreign retailers might be caused

by increasing rental costs and may not suggest they have

experienced unique problems in China. However, they might need

to adjust store formats to be more competitive in large

cities.

A shaken base

Europe was the home base of Media Markt, which was where it

made its first bucket of gold. However, this home base was

shaken in recent years due to the Europe debt crisis.

Germany's economy contracted 0.5% in the fourth quarter. The

government has slashed its 2013 growth forecast to 0.4% from

1%.

In 2012, Metro reported a 0.5% rise in fourth-quarter group

sales, weighed down by reduced consumer spending in Southern

Europe amid high unemployment, pay cuts and tax increases.

Germany was the only Western European country where the

retailer's sales rose. But as Europe's largest economy also

faces an economic slump, analysts expressed concern that

Metro has tougher times ahead and needs to address its

strategic weaknesses such as online sales, where it lags

behind its rivals.

Wrong Choice of Partner

Of interest was also the decision of Media Markt’s parent

company, Media-Saturn Holdings, to partner with Foxconn

Technology Group (which held a 25% stake in the company,

compared with Media-Saturn Holdings 75%).   While the

Taiwanese electronics good manufacturer would seem a good fit,

Foxconn has over the last few years expressed more interest in

opening small, stall-style electronics retailers, rather than

in the large-scale retail experience of Media Markt.  

Confirming this are statements made by Foxconn after the

announcement Media Markt’s withdrawal from the Chinese market,

stating that it would continue to open small scale retail

shops throughout China4.

5. Lessons to be learnt

Scanning the external economic environment

Media Markt should have scanned the external economic

environment, such as why Best Buy exited the Chinese market,

why the global retail chains such as Tesco and Walmart were

scaling down their operations and also the government

directions.

A study by UNCTAD on the Foreign Direct Investments has shown

that the wholesale and retail industry had only grown

increased to 6% over a span of 10 years, from 2001- 2010.

Source UNCTAD

Perhaps Media Markt should pay attention to this data and

understand the implications for this.

Opportunities from online retail

If Media Markt had been swift in its understanding of the

rapidly shifting focus to online purchasing of retail

electronic products, Media Markt would have quickly

implemented a strong online presence that was also marketed

with a strong focus on low costs.

The company could have complemented its online services with

its physical stores by providing pick up options, return

services, and options to try out products before purchasing.

Also, a policy of matching competitor’s prices and making a

point of this would have benefited the company tremendously.

Offering the best of service and price, the company could

have positioned itself very competitively.

Understanding China’s business model

What ultimately led to Media Markt’s failure in the Chinese

market was their failure to adapt their business model to

operate competitively against domestic competitors.

Understanding how the Chinese consumer makes purchasing

decisions should have been the first and most important factor

influencing the type of business model that was adopted.

As such, by focusing on low prices, even offering the lowest

prices to establish market share and develop brand

recognition, the company would have realised the importance to

rein in costs to keep them at a minimum.

Thus the business and operating model that the company

implemented could have focused more on lower operating costs.

This is especially true with the operations of a massive

flagship store in one of the most expensive retail locations

in the country.

Opening and operating stores at locations outside of high

rental retail spaces, where people would generally go to buy

normal household products or home furnishings would have

enabled greater exposure to consumers who were out to purchase

their products and provided retail locations that could have

been much cheaper to operate.

Although Media Markt did eventually decide to withdraw from

the Chinese market, if it had taken time upfront to develop a

detailed and deep understanding of the competitive environment

and market, especially the behaviour of Chinese consumers, the

outcome could have been much more positive.

Choice of Location

Media Markt had the late comer disadvantage. It should have

done a similar model as IKEA- in inexpensive area with a large

warehouse, no frills model. Coupled this with a strong online

retail store, Media Markt might have survived after all. This

would have significantly lowered the overheads and also

differentiated themselves from the Suning and Gome.

6. Conclusion

This analysis of Media Markt’s failure in China could serve as

a study of what worked and what didn't for an MNC that seeked

to enter the increasingly difficult Chinese market. The

framework below clearly summarizes the points discussed in the

paper. As in any and every business, much homework needs to be

done before embarking on the investment.

In Media Makrt’s case, it seemed to be a case of too little,

too late.

Integrating dialectical thinking into the systems thinking

framework, this is one approach that future businesses that

seek to enter the Chinese market, or to expand out of the

Chinese market could use.

Starting from the macro level of scanning the external and

internal environmental factors such as political factors and

global economic forecast using dialectical thinking, a company

will then narrow down to analysing the particular industry

needs of the country that it seeks to enter.

Understanding the external and internal business environments through dialectical thinkingAnalysing the eletronic appliances of the country Analysing the needs of the cusotmers- low cost? Differentiation?Applying the insights into the corporate strategiesReview of strategies and refinement of them

Next up, the business should seek to understand the needs of

the customers and the strategies needed to win them over.

Aligning these insights with the corporate strategies and

putting these into actions come next.

Finally, the company should always review its actions, thereby

providing a feedback loop to always refine its actions.

If Media Markt had used this approach, it would probably still

be surviving, and perhaps, on its way to the 100 stores

expansion in China.

References

1. Industry profile: Consumer Electronics in China,

Datamonictor

2. http://www.chinadaily.com.cn/business/2011-07/15/

content_12908990.htm

3. http://www.mediamarkt.com

4. http://www.chinadaily.com.cn/business/2013-01/17/

content_16130193.htm

5. http://www.wantchinatimes.com/news-subclass-cnt.aspx?

id=20130301000078&cid=1102

6. http://chainamagazine.com/2013/04/media-markts-departure-

what-it-says-about-competition-in-chinas-retail-sector/

7. The Fifth Discipline, Peter M. Senge