IT doesn't matter if a cat is black or white, so long as it catches mice, former Chinese leader Deng Xiaoping once famously remarked.

In today's bustling market economy, introduced by Deng more than two decades ago, Chinese consumers might modernize that philosophy to observe that it doesn't matter which store you shop in as long as it offers a low price and good service.

But in the world's most populous consumer market, the world's biggest electrical appliances retailer just couldn't catch mice. United States-based Best Buy said last month that it's closing all nine of its stores in China. It plans to reopen two stores later.

The company said that it is closing them to optimize "its operations at its (two) Best Buy-branded stores in China," and re-focus on local chain Five Star it acquired several years ago.

Analysts said the shops closed because they couldn't offer competitive prices when saddled with high operating costs, and local customers are too obsessed with low prices to care about service.

Some customers see the problem in more black-and-white terms. Best Buy, they complain, offered neither low prices nor good service.

A Norwegian living in Shanghai was furious after going through an unhappy after-sales experience with Best Buy.

He said he bought an iPod from the shop two years ago and it malfunctioned after he used it only for a week. He said he was told by Apple to get a replacement at Best Buy, but the store turned him down.

"I didn't mind paying an additional two or three hundred yuan to extend an after-sale guarantee," he said. "But they don't keep their promises. I vowed never to buy anything more from Best Buy."

Days numbered

Best Buy's days were probably numbered when it first opened its Asia-Pacific headquarters in Shanghai in 2005. In the four years that followed, Best Buy gradually bought out Five Star Appliance, a Nanjing-based electrical appliance retailer that was China's fifth-largest, for US$390 million.

But Five Star, which continued to operate under that name, expanded its outlets too slowly compared with its competitors. In the past five years, Five Star outlets grew to 160 from about 140 while Suning Appliance Co, one of the largest retailers in China, boosted its store number from 350 to 1,300 stores, and GOME Appliance Holdings more than doubled its outlets to 1,400.

"Five Star could have done better without Best Buy," said an industry official, who declined to be identified. "First, it takes much longer for a foreign company to get approval to open new stores in China. Second, before the takeover, Five Star focused on development in inland and smaller cities, a strategy at odds with Best Buy's target of higher-end customers."

The first Best Buy outlet was opened in Shanghai's Xujiahui shopping district in late 2006. The company waited 22 months before opening a second outlet in the city.

In 2010, two shops were opened in Suzhou and Hangzhou, which are relatively close to Shanghai, only to be closed this year along with six outlets in Shanghai and one in Beijing.

Best Buy said it will continue to operate the Five Star chain in China, with plans to open up to 50 new Five Star stores in the next 12 months.

"We hope our investment will be more rewarding," said David Sisson, country manager of Best Buy China. "We are only changing the way we invest, not retreating from China."

For Best Buy, the closure plan might have been in the works for some time. In its fiscal report for the year ended February 28, 2010, the company said it planned to close "unprofitable stores" in China. In that year, it reported sales in China rose 7.3 percent to US$1.68 billion. That compared with a 10.4 percent rise in global sales to US$50 billion.

In the company's fiscal third-quarter report published last December, Best Buy's revenue of US$11.89 billion came in below market estimates. Same-store sales fell 5 percent in the US and 3.3 percent internationally.

In Best Buy's February 22 statement, which announced the closure of its nine China stores, the company also announced other global restructuring steps to save money.

Best Buy has reasons, perhaps, to try to build a better mousetrap on the back of its Five Star chain. Same store sales of Five Star rose 28 percent, reflecting growth in consumer spending and government stimulus programs, the company said in its third-quarter report.

Shift from US strategy

The shift to Five Star marks a move away from Best Buy's strategy model in the US.

Over there Best Buy leases or owns the store, buys all the products and trains its own sales team. That drives up operating costs but lets customers try out products before buying and allows more flexible pricing for the retailer.

In the Five Star model, which follows customary Chinese practices, the company leases or buys the store and then rents it out to its suppliers. The store has a small maintenance team to deal with customer service, while the majority of the sales team are provided by suppliers and are responsible for selling their own company's products.

Under this model, the retailer doesn't buy products but instead charges a commission fee for products sold in the shop. This strategy lowers operating costs and allows suppliers to stay in closer contact with customers. Suppliers are sometimes forced to cut prices to attract customers.

The problem with Best Buy's model, according to many analysts, is you can't maintain high operating costs and keep prices competitive.

"If it comes down to fancy displays and professional shopping advice or low price, Chinese customers prefer low price," said Chen Can, an Analysys International consultant. "Besides, many customers still prefer the lively atmosphere of domestic Chinese shops."

Best Buy stores no doubt felt at a disadvantage in cat-and-mouse negotiations with suppliers.

"Suppliers of course prefer higher prices, but they don't want to risk their relationship with Chinese retailers by raising prices," Chen said. "Suppliers wouldn't worry about Best Buy because it was too small compared with Chinese retailers."

Chen said that the price wars in the electrical retailing market started when chains such as GOME and Suning started aggressive expansion about 10 years ago.

Unsuitable model

Bad timing. Best Buy walked into a highly competitive market with a business model not well-tuned to the environment.

"Local retailers such as GOME and Suning had long-established ties with suppliers before Best Buy entered the market," said Lai Yang, secretary-general of the China Society of Commerce and Economy. "Best Buy's local rivals are powerful."

While it's true that most Shanghai shoppers are meticulously price conscious, there are consumers willing to pay higher prices for brands and after-sales service they trust. Best Buy failed to build a base among that target segment.

"I once shopped in Best Buy, but I found it wasn't worthwhile to keep going there because after-sales service was so poor," said one young woman.

"You waste your service if your product works well, and when it does not, the shop often finds excuses to charge you repair fees," she said.

Like many young people nowadays, she also checks prices of products on online shopping sites, which usually offer more attractive deals.

After Best Buy closed its shops, long queues formed in front of its Xujiahui store as people sought to settle after-sales disputes. The lines became a daily spectacle in the busy shopping area and a sad and grim reminder of what went wrong for the US retail giant.

"I used to believe that such a big international brand would mean good service so that I didn't mind paying more to feel assured," said Xie, a 67-year-old man, who had been waiting in the queue for five hours. "But suddenly it's gone."

Market set to grow over next 5 years

China's electrical appliance market is expected to grow up to 10 percent a year in the next five years, and industry revenue is forecast to hit 1.1 trillion yuan (US$167 billion) by 2015, according to the China Household Electrical Appliance Association.

With Best Buy's retreat, the competition in the expanding market is heating up.

Media Markt

Germany's Media Markt, Europe's largest appliance retailer, opened its second store in Shanghai five days after Best Buy's closure. It expects to open 10 stores in Shanghai by the end of 2012, and will add more than 100 nationwide from 2013 to 2015.

Analysts said it takes at least three years to determine whether a foreign retailer will achieve success in the China market as it grapples with getting its business model, operating costs and price structure right.

Suning

Suning Appliance Co said last week that it plans to open 370 new stores this year, adding to its 1,300 outlets nationwide. It is also seeking to boost online sales at Suning.com fourfold to 8 billion yuan this year. The firm said it will add 60 logistic centers by 2014 and expand online sales from mega-cities to smaller cities.

In 2010, Suning had sales of 75.5 billion yuan, up 30 percent from a year earlier. Profit surged 38 percent to 4 billion yuan.

GOME

GOME Appliance Holdings said it plans to add 400 stores to its current 1,400 outlets. It bought online store Coo8.com last November for 480 million yuan and said it plans to finish the conversion to its GOME e-commerce platform this month. The firm said it expects online sales to hit 15 billion yuan in 2015 and take a 15 percent market share in online shopping.

360buy.com

China's largest online electrical appliance retailer, 360buy.com, said 2010 sales surged 200 percent to 10.2 billion yuan. It said it expects growth in 2011 to slow down to around 150 percent and predicts online sales at between 24 billion yuan and 26 billion yuan this year.