Ｈｏｍｅ ＤｅｐｏｔＩｓ Ｈａｖｉｎｇ ａ Ｈａｒｄ Ｔｉｍｅ ｉｎ Ｃｈｉｎａ

Home Depot, as an American retailer of home improvement and construction products and services, entered China in 2006. Three years later, it has to face a hard period ahead.

The situation of Home Depot is mingled with hope and worries.

On June 3, the US market research company Baird initiates the coverage of Home Depot with an “Outperform” rating. 20 days before Baird, Citi Investment & Analysis also increased the rating for Home Depot to “Buy”.

On May 19, Home Depot Inc. issued its financial report of the first quarter, which showed that its net profit increased from 356 million US dollars in Q1, 2008 to the current 514 million US dollars, up 44% year on year.

However, if you study the financial report carefully, the growth in profit is mainly attributed to the decrease of expenditures, not the increase in business performance. Actually, the operating revenue in the first quarter fell by 9.7% year on year. Home Depots operation is still in a tough period. During the period of financial report, the same-store sales fell by 10.2%. Compared with the 8.6% decrease rate of the same-store sales in the USA, its operation in the overseas markets, like China, is looking blue.

For the employees of Home Depot China, this is absolutely bad news. In May, Home Depot suddenly closed its storefront in Qingdao, Shandong.

The official reason of the closure of its Qingdao storefront is the “decoration by the owners”. However, this is the fuse for the closure. The financial crisis and the depressed Chinese property market only play the role of deteriorating the operating situation of Home Depot in China. In truth, the basic of Home Depots hard time in China is its inadaptability to the Chinese market.

An insider from the top management of Home Depot China said that its business in China, which has been fluctuating around the bottom line, is considered with little importance by its US headquarters. The remaining 11 storefronts in China are also facing the danger of being closed right now.

In 2006, Home Depot acquired Tianjin Jiashijie Group Home Corporation (Jiashijie) and entered China in a high profile. In the following years, it was greeted by many things, including personnel changes. The negative effect of those things has gradually come out in this year.

If Home Depot doesnt want its other storefronts in China to share the same fate with the Qingdao storefront, it must change the development strategies in China, find a proper way of combining the hypermarket culture and the Chinese market and resolve the contradiction between the localized operation and the globalization management.

A Sudden Closure

In early May, the employees of the Home Depot Qingdao storefront, after busy work in the Labor Day Holiday, were expecting the Qingdao storefront to become the flag store in China after being decorated. However, the following news was that the store was closed.

The apparent cause for the closure was the failure in reaching an agreement between Home Depot and the property owners in decoration.

Home Depot said in a declaration replying the 21st Century Economic Report: “The property owners for our storefront in Qingdao noticed us that they will start a business reconstruction and rebuilding in the place where the Home Depot Qingdao storefront is located. Therefore, they asked us to stop business for one year. We thought it nearly impossible to resume our business in Qingdao to its previous scale after one year. Therefore, we closed the Qingdao storefront.”

Home Depot accentuated that this is the only case in Qingdao and will not have influence on the operating strategy in China.

However, an insider of Home Depot said: “This is the first storefront of Home Depot closed because of the failure in reaching an agreement with the property owners. But it is not the only case.” According to the insider, all the storefronts of Home Depot in China have problems in contract extension.

In 2006, Home Depot acquired the 12 storefronts of Jiashijie in China. However, it only got the commodities inside the stores and their operating rights. The property rights were sold to Sunshine Estate.

The insider mentioned above said that the property rights of nine storefronts of Home Depot China belong to the same property owner.

“Earlier in last year, Home Depot refused to give rents for the nine stores to the property owner,” said this insider. “At that time, the property owner just bought the property rights from Jiashijie. The current president of Home Depot China Chen Yaodong didnt build up a good relationship with the owner and both sides have mutual collusions. Therefore, Chen Yaodong was sacked from the post of president.”

Presently, the top management of Home Depot and Sunshine Estate are still holding negotiations. Before the closure of the Qingdao storefront, this information about closure is confidential. Most of the employees, including some senior managers, didnt know this till it really happened.

A Complete Retreat

Whats behind the breakdown of the negotiation about the Qingdao storefront may be the complete retreat of Home Depot from China.

According to another insider from Home Depot, except the two storefronts in Tianjin, all the storefronts of Home Depot in China are in the losing status. Even the Qingdao storefront, which is in a leading place in scale, is also struggling around the bottom line.

In 2008, the Qingdao storefront saw a sales amount of 99.67 million yuan (USD 14.58 million). Based on Home Depots net profit margin which is 18%, its net profit was 18 million yuan (USD 2.63 million). But after deduction of 3 million yuan (USD 438.9 thousand) of value-added tax and the property rent of more than 5 million yuan (USD 731.6 thousand), less than 10 million yuan (USD 1.46 million) was left. Then the human resources cost, electrical charges and the fees given to the US headquarters should be also deducted from the net profit. Therefore, quite a little net profit can be seen.

The insider also said: “Home Depot should be fully responsible for the adverse operating situation. Its development strategy in China is not clear and went through great personnel changes after acquiring Jiashijie, resulting in the chaos of management.”

“The US headquarters lost confidence in the business in China. When the property owners want to restructure the property, Home Depot has no will to continue the cooperation with them. Furthermore, Home Depot has no budget in continuing the cooperation. The management of the US headquarters has not spent too much time in considering this matter and made up a simple decision – close the storefront directly.”

“Like the other multinationals, Home Depot also hoped that the business in China would have a bright future. But the wish doesnt come true; instead, its global business was pulled down by the business in China. The US headquarters attaches little importance to the business in China. If the business in China is continued, it has no apparent contributions to the global business in a short time; but if it is abandoned, it would be a pity to give up a market with so much potential,” the insider mentioned above concluded the headquarters thoughts about the business in China like this.

This insider pointed out that Home Depot global president Frank Blake directly told the journalists from Reuters his opinions in the Chinese business.

He said: “We have not found a successful winning pattern by now. The demand for DIY home construction materials in China is not strong. In the future we will either find a profit pattern in China or leave China.”

The insider mentioned above said that the US headquarters are talking about whether the other storefronts in China should be closed. “The other storefronts in China may share the same fate like the one in Qingdao.”

“In this accident, the employees in this storefront had an unusually big contradiction with the management of Home Depot China. In truth, the management of Home Depot usually has good performance in the USA and Europe and the managers in China followed the suits. However, the managers in China made a mistake, which is the management and business pattern which is successful in the USA and Europe is not suitable in China or Asia,” said a formal senior management personnel of Home Depot China. “They must find a proper way; otherwise they will be eliminated from the Chinese market.”