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Culture Determines Business Models: Analyzing
Home Depot's Failure Case in China for
International Retailers from a Communication
Perspective
May Hongmei Gao
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173
FEATURE ARTICLE
Published online in Wiley Online Library (wileyonlinelibrary.com)
© 2013 Wiley Periodicals, Inc. • DOI: 10.1002/tie.21534
Correspondence to: May Hongmei Gao, Kennesaw State University–Communication, 1000 Chastain Road MD#2207, Kennesaw, Georgia 30144, 770-598-7009
(phone), 770-423-6740 (fax), [email protected]
This article is a result of a longitudinal case study regarding Home Depot’s operation in China. From
2006 to 2011, the author conducted 37 in-depth interviews with Home Depot executives, managers,
lawyers, employees, suppliers, and consumers, as well as its Western and Chinese competitors.
These interviews generated 500+ pages of transcripts and eld notes. Home Depot entered China in
2006 by acquiring 12 stores from a Chinese company, Home Way. However, by September 2012 all
Home Depot stores in China had been closed.
Culture Determines
Business Models:
Analyzing Home Depot’s
Failure Case in China for
International Retailers
from a Communication
Perspective
By
May Hongmei Gao
174
FEATURE ARTICLE
Thunderbird International Business Review Vol. 55, No. 2 March/April 2013 DOI: 10.1002/tie
This article uses the Home Depot’s operation in China as
a case study to stress that “culture” determines business
models for international retailers. This article strives to
generate a framework of host culture analysis for inter-
national retailers to find a proper business model in a
foreign market.
Industry insiders say many foreign companies have
been too rigid with their approach of business models
to the China market. “You have to be nimble and willing
to react quickly to changes,” said Peter Lau, chairman
of Hong Kong–based apparel retailer Giordano Inter-
national Ltd. Mr. Lau said he encourages regional and
individual managers at his nearly 1,400 Giordano outlets
in China to create local marketing and sales models.
The people on the ground know their customers better
than employees in corporate head offices, Mr. Lau said
(Burkitt, 2012).
Borrowing from its strategy in the United States,
Home Depot operated with a Do-It-Yourself (DIY) business
This interview-based single-case-study research has these notable contributions. First, this research
stresses the importance of host culture in creating a business model when an international retailer
expands to a foreign country. Second, the research develops a new Host Culture Analysis Frame-
work: CELM (host Culture, business Environment, target consumer Lifestyle, and target consumer
Mentality). Third, by applying the CELM framework to the Chinese market, this research suggests
that Home Depot could have replaced its ineffective DIY (Do-It-Yourself) model with the new DIFM
(Do-It-for-Me) business model for China. Fourth, this article proposes a new urban boutique store
(UBS) retail format for international retailers
entering emerging markets.
Finally, this research shows
that in-depth interview is a solid research method to be applied to case studies, for the discovery of
deeper reasons of international expansion failures. © 2013 Wiley Periodicals, Inc.
Introduction
I
n 2010, China surpassed Japan and became the second-
largest economy in the world (Hamlin & Li, 2010).
China is projected to surpass the US economy and
become the largest economy by 2030 (Torres, 2011). In
2011, American companies such as General Motors and
Kentucky Fried Chicken announced that, for the first time,
they made more sales in China than in the United States.
However, the emerging Chinese market, with its dis-
tinct Chinese cultural elements, poses great challenges
for international retailers (Letovsky, Murphy, & Kenny,
1997). On September 15, 2012, the Wall Street Journal
reported that Home Depot Inc. decided to close all seven
of its remaining big-box stores in China and to pull out
of China after six years of losses (Burkitt, 2012). Home
Depot joins a growing list of American retailers who
have stumbled in China. Mattel Inc. shut its China-based
Barbie flagship store in March 2011 after it learned that
conservative Chinese parents would rather have their
children read books than spin a sexy doll in a plastic Cor-
vette. In February 2011, five years after entering China in
2006, Best Buy shut down all nine of its branded stores,
after discovering that Chinese consumers needed wash-
ing machines and air conditioners more than espresso
makers and surround-sound stereo systems (Burkitt,
2012; MacLeod, 2011; Schmitz, 2011). The retreat by
Home Depot, Mattel and Best Buy highlight the difficul-
ties that international retailers encounter while doing
business in China, with over 1.3 billion consumers.
The popular mentality of international expansion
for American businesses has been the strategy that “If it’s
good enough for us, it will be good enough for them.”
However, this perspective of moving a business model
from the United States and using it exactly the same way
in a foreign country has shown cases of failure in China.
Industry insiders say many
foreign companies have been
too rigid with their approach
of business models to the
China market.
Culture Determines Business Models: Analyzing Home Depot’s Failure Case in China for International Retailers from a Communication Perspective
175
DOI: 10.1002/tie Thunderbird International Business Review Vol. 55, No. 2 March/April 2013
1. To demonstrate the cultural challenges of an interna-
tional retailer doing business in China.
2. To propose CELM (Culture, business Environment,
consumer Lifestyle, consumer Mentality), a new “host
culture analysis framework” for international retailers
entering foreign markets.
3. To develop DIFM (Do-It-for-Me), a “new business
model” for an international retailer, such as Home
Depot, after applying the CELM analysis framework.
4. To suggest UBS (urban boutique store), a “next
generation store format concept” for international
retailers.
5. To showcase the effectiveness of using qualitative
in-depth interviews and systematic observation as a
research method to enrich case studies.
China expects its urbanization rate to rise from 47.5%
in 2010 to 51.5% by the end of 2015, according to the
12th Five-Year Plan (Xinhua News Agency, 2011). Clearly,
the Chinese economy is booming and China is quickly
urbanizing. Investment analyst Meyers (2011) stated that
a home improvement company such as Home Depot is
very sensitive to positive economic growth, especially the
growth in housing and urbanization areas. A booming
housing market such as the one in China should boost
the business of Home Depot. Why did Home Depot fail
in China?
This article is a result of a longitudinal case study with
in-depth interviews and systematic observation regarding
Home Depot’s operation in China. From 2006 to 2010, the
author conducted 37 in-depth interviews in China and the
United States with Home Depot executives, store manag-
ers, employees, and consumers, as well as its international
and Chinese competitors. By analyzing the key customer
segment in the target market for Home Depot—“urban
model in a Big-Box retailing format in China. In 2009,
Frank Blake, chairman and CEO of Home Depot, said at
a Bank of America–Merrill Lynch consumer conference:
“We’re still not confident we’ve got the right business
model.” In 2011 Blake said the company’s business in
China remained “problematic” and that the company was
working to build a profitable business model by focusing
on “select” Chinese cities (Yung, 2011). However, the
recent retreat from China indicates Home Depot never
found a proper business model for the Chinese market.
This article intends to suggest a new business model of
DIFM for international retailers such as Home Depot to
operate in China successfully.
While the attention given to emerging markets in
the retailing literature has been minimal, retailing inter-
nationalization has been widely discussed in the current
marketing literature (Arnold & Quelch, 1998; Eckhardt,
2005; Hoskisson, Eden, Lau, & Wright, 2000; Khanna &
Palepu, 2006; Kim, Kandemir, & Cavusgil, 2004; Walters
& Samiee, 2003; Yiu, Bruton, & Lu, 2005; Zhang, Zhang,
& Liu, 2007). Gandolfi and Strach (2009) studied the
case of Walmart’s retreat from South Korea. Walmart,
the world’s largest retailer, failed to capture the hearts
of South Korean consumers, ultimately withdrawing in
2006 after eight years in the market. Walmart is only one
among several retailers that have underestimated the
role of cultural due diligence prior to entry into a foreign
country. K-Mart and Carrefour in the Czech Republic,
Ahold in China, Lane Crawford in Singapore, Tesco and
Toys “R” Us in France, C&A in the United Kingdom, and
Home Depot stores in Chile (Burt, Dawson, & Sparks,
2003) are prime failure examples of international retail-
ers in foreign markets.
Research has provided evidence that retailers may
falter when establishing international operations. An
international retailer who fails to create a business model
compatible with local cultures usually results in a com-
plete shutdown or sale of its operation to a local chain
or to an international retailer already established in the
local market. The primary managerial implication is that
the local culture determines the business model for an
international retailer. The secondary managerial impli-
cation is that international retailers usually retreat from
a foreign market after seven years of losses (Burt et al.,
2003). Bianchi (2008) stresses that the failure of interna-
tional retailers may be due to their insufficient adaptation
to local cultures.
Built upon this body of work, this research focuses
on the impact of culture on business models for interna-
tional retailers in emerging markets, such as China. The
purpose of this article is fivefold:
A booming housing market
such as the one in China
should boost the business
of Home Depot. Why did
Home Depot fail in China?
176
FEATURE ARTICLE
Thunderbird International Business Review Vol. 55, No. 2 March/April 2013 DOI: 10.1002/tie
new three-bedroom, two-bath condominium in urban
China need to fix the basics, such as flooring, painting,
plumbing, light fixtures, and home appliances. This phe-
nomenon creates a daunting task for homeowners and
generates a huge market for products and services for
home improvement retailers in China.
Founded in 1978, Home Depot, Inc. is the world’s
largest home improvement specialty retailer, and the
fourth-largest retailer in the United States. The com-
pany’s fiscal 2010 retail sales were $68.0 billion, and
earnings from continuing operations were $3.3 billion.
Currently, the company has more than 2,200 retail stores
in the United States, Canada, Mexico, Puerto Rico, the
US Virgin Islands, and China. The company was ranked
No. 30 on the Fortune 500 list in 2010 (CNN, 2011; Home
Depot, 2011).
Home Depot entered China in 2006 by acquiring
12 stores from the Chinese home improvement com-
pany Home Way, China’s first big-box home improve-
ment retailer (China Daily, 2011). In 2006, Home Depot
employed 3,000 associates and operated 12 stores across
six cities in China—Tianjin (5), Beijing (2), Xi’an (2),
Qingdao (1), Shenyang (1), and Zhengzhou (1). Tianjin
was the anchor city because it was the headquarters of
Home Way. Home Depot China’s store format was big-
box operation, with an average of 90,000 square feet per
store, based on a DIY model developed in the United
States. The stores offer such services as delivery, instal-
lation, design, and remodeling (Home Depot, 2010).
The Chinese translation for Home Depot is “Jia De Bao
(
),” which literally means “getting treasures for
your home”.
Home Depot has closed all 12 stores that it purchased
from Home Way in 2006. In May 2009 Home Depot
suddenly closed its storefront in Qingdao, Shandong
Province, a coastal city in East China. The official excuse
for the closure was “renovation by the landlord.” The
employees of the store were disappointed with the sud-
den closure and actually took control of the store for a
short period of time (China Business Focus, 2009). On the
surface, the quickly expanding home improvement mar-
ket seems to create an “ideal” opening for Home Depot.
Why did Home Depot fail in China? How can an interna-
tional retailer succeed in China? This article searches for
answers to these research questions:
1. To what extent can the local culture influence the
business model in a foreign market for an interna-
tional retailer?
2. How should an international retailer analyze the host
culture of a foreign market?
Middle Class in China”—the research reveals that Home
Depot did not overcome significant challenges in China,
especially in its cultural understanding of the Chinese
market. Its “Do-It-Yourself” (DIY) business model, bor-
rowed from the US market, did not work in China.
Home Depot and Its Market in China
The Chinese government’s reform and deregulation of
the housing system led to a sharp increase in private
home ownership, which grew from almost nonexistent in
the 1990s to 90% today, far exceeding the global average
of about 60%, according to the China Household Finance
Survey Report jointly issued by Southwestern University of
Finance and Economics and the People’s Bank of China
(China’s reserve bank) on March 13, 2012. However,
these data may be inflated due to the fact that the survey
was not done by independent sources. China’s urban
households owned over 1.2 homes on average in 2011, a
substantial increase from over 0.7 homes in 2010, accord-
ing to statistics from China International Capital Cor-
poration. Li Daokui, a professor at Tsinghua University,
said that the survey results do not contradict the strong
demand for homes: “Many young people have left their
hometowns for other cities, which causes strong housing
demand,” Li explained (Fan, 2012).
The rise in people’s income level and purchasing
power, along with mortgage incentives and property
investment potentials, fueled private home ownership in
China. In March 2007, the National People’s Congress
strengthened this trend by enacting China’s first law to
protect private property (Flanagan, 2011). As a result,
China has been the world’s largest building material mar-
ket, both in production and in sales in recent years. It is
estimated that the production of China’s building mate-
rial industry would surpass 1,000 billion yuan
1
annually.
The Chinese market has attracted home improvement
retailers such as B&Q, IKEA, and Home Depot. The B&Q
chain, owned by UK-based Kingfisher PLC, the largest
big-box retailer in Europe, has been growing rapidly in
China since 1999. It has 58 stores in 25 Chinese cities,
from Shenzhen in the south to Harbin in the north.
Rising home ownership fuels the growth of the home
improvement market. In addition, most new Chinese
homeowners must do home renovation because the
homes they purchase are usually concrete shells. Since
the 1990s, the rapidly changing tastes of style in home
décor by Chinese homeowners led to a collective decision
on the part of home builders that they would leave homes
in urban China as empty shells so that home owners can
satisfy their own preferences. Homeowners of a typical
Culture Determines Business Models: Analyzing Home Depot’s Failure Case in China for International Retailers from a Communication Perspective
177
DOI: 10.1002/tie Thunderbird International Business Review Vol. 55, No. 2 March/April 2013
retailers entering emerging markets. Thus, a study of the
Home Depot China case can provide a useful lesson for
other international retailers planning to enter China or
other foreign markets. The single-case-study approach
has been applied in retail internationalization literature,
and it has enabled various researchers to provide impor-
tant new insights into the field (Palmer & Quinn, 2007;
Sparks, 2008). Additionally, exploratory methods such as
case studies have been recognized as being particularly
useful for examining strategies in emerging markets
(Hoskisson et al., 2000).
From 2006 to 2011, a total of 37 interviews were con-
ducted with Home Depot’s executives, lawyers, store man-
agers, employees, consumers, suppliers, and competitors.
The author visited Home Depot stores in China multiple
times, and witnessed its ups and downs from 2008 to
2011. A grounded-theory influenced approach was used
(Glaser & Strauss, 1967), which meant the research was
not limited by a priori hypotheses. Please see the list of
key persons interviewed for this research in Table 1. The
interviews were guided by, but not confined to, a list of
topics and themes derived from Reid and Walsh’s (2003)
model of strategic management:
• Company information
• Corporate positioning (product, service, strategic
partnership, advertisement)
• Product management strategy
• Market trends
• Competition
• Review of relative competencies
• Cultural trend of Chinese consumers
• External factors impacting the progress
• Advice for others
3. In what specific ways should an international retailer
such as Home Depot adapt its business model to the
Chinese market?
Research Method
The research method for this article is a longitudinal study
of a single case, with in-depth interviews and systematic
observation. The failure of Home Depot in China serves
as a good case for the analysis of international retailers’
choice of business model in a foreign market. The research
method was qualitative, and the inquiry was guided by the
search for “why” rather than “what” (Lindlof & Taylor,
2002) in regards to the effectiveness of a business model’s
fitness with the target consumers in a host culture.
Given the relatively unexplored nature of the
research topic of host culture analysis for a business
model in China for international retailers, this study
adopted an exploratory qualitative research strategy. Case
study methodology was used to assess the challenges and
opportunities of a home improvement retailer in China.
Yin (2003) suggests that case studies are epistemologi-
cally justifiable when research questions focus on reasons
behind observed phenomena, when behavioral events
are not controlled, and when the emphasis is on con-
temporary events. Case studies in organizational research
are suited to illustrate and examine research frame-
works, particularly in differentiated or unique instances
(Eisenhardt, 1989, 1991). The case study methodology
employed in this research has long been established as
a valid tool of mainstream academic inquiry, with par-
ticular support for its utilization in international business
research (Ghauri, 2004). Circumstances indicate that a
case research approach is appropriate when the com-
plexity of situations necessitates researchers to examine
a case in its entirety (Flyvbjerg, 2004). A single case such
as Home Depot in China is appropriate for the discovery
of new theoretical relationships for international retailers
entering a foreign market.
Reid and Walsh (2003) state: “In seeking to under-
stand international business, it is essential to understand
the countries involved and the particular local market
conditions prevailing. This is best achieved by conduct-
ing personal, in-depth interviews with leading executives
engaged with international businesses” (p. 294). From
in-depth interviews, abundant information can be gained
for this type of exploratory and inductive studies (Palmer
& Quinn, 2005). Case-based research requires a sampling
approach focusing on theoretically useful cases (Eisen-
hardt, 1989; Teagarden et al., 1995). The struggle Home
Depot faced in China is common for many international
The struggle Home Depot
faced in China is common
for many international
retailers entering emerging
markets.
178
FEATURE ARTICLE
Thunderbird International Business Review Vol. 55, No. 2 March/April 2013 DOI: 10.1002/tie
2011). This section uses Home Depot as an example to
illustrate international retailers’ target market in China.
Research shows that the Chinese population can be
categorized into four areas: (1) urban population in first-
and second-tier cities, (2) suburban population in first-
and second-tier cities, (3) population in third-tier cities,
and (4) population in rural areas. These four categories
take into consideration people’s income, education, pro-
fession, and lifestyle (Torres, 2011). The interview data
shows that Home Depot’s target market should have been
the urban middle class in first- and second-tier cities.
Why Should International Retailers Ignore Suburban
and Rural Customers for the Moment?
The research data shows that Home Depot can ignore the
rural and suburban population in China as its customers,
and needs to open stores in downtown areas for its target
customers—the urban population in first- and second-tier
Research findings are generated from analyzing the
patterns of 500+ pages of interview transcripts and field
notes. The interpretation of the data was triangulated
with secondary data and institutional analysis.
An International Retailer’s Target
Market in China
Market segmentation is usually defined as the process
of dividing potential customers into distinct groups for
the purpose of targeting and designing segment–specific
marketing strategies. A market strategy for China or any
other foreign market must begin with an understanding
of the cultures of the target market (Park & Sternquist,
2007).
The first priority of an international retailer in a for-
eign country is to identify segments for which an effective
marketing program can be developed (Xu & Greenwood,
TABLE 1 List of Key Interviewees for This Research
Interview Totals: 37 Position Time of Interview Location of Interview
3 Attorney, Home Depot (China) July 2009
July 2010
July 2011
Beijing/Shanghai
1 Vice President, Home Depot USA November 2006 Atlanta
2 Store Manager, Home Depot China August 2010 Beijing
2 Store Manager, Home Depot China August 2010 Xi’an
5 Home Depot China employee July 2009
August 2010
Beijing
Xi’an
2 B&Q Manager July 2009
August 2010
Beijing
2 IKEA China Manager July 2009
August 2010
Beijing
2 Chinese Red Star Chain Manager July 2009
August 2010
Beijing
2 Store owners at Traditional Chinese Flower & Bird Market July 2009
August 2010
Beijing, Hefei, Yangzhou,
Shanghai
2 Construction Material suppliers July 2009
August 2010
Beijing, Hefei, Shanghai
5 Chinese customers who frequently visit Home Depot July 2008
July 2009
July 2010
July 2011
Beijing, Xi’an
5 Chinese customers who frequently visit Home Depot
competitors such as B&Q, Red Star, etc.
July 2008
July 2009
July 2010
July 2011
Beijing, Shanghai, Hefei
4 Chinese contractors/construction company managers August 2009
August 2010
Beijing, Hefei, Shanghai
Culture Determines Business Models: Analyzing Home Depot’s Failure Case in China for International Retailers from a Communication Perspective
179
DOI: 10.1002/tie Thunderbird International Business Review Vol. 55, No. 2 March/April 2013
Why Should International Retailers Target the Middle
Class in Top-Tier Cities?
Who are the target customers for Home Depot? The
interview data reveal that target customers for interna-
tional retailers such as Home Depot are the new-gener-
ation urban dwellers in first- and second-tier cities—the
“Zhong Chan ( )” class or “middle class.” China’s
middle class is larger than the entire population of the
United States and is expected to reach 800 million by
2025 (Chao, 2010; Wang, 2011). There is evident wealth
in the growing Chinese middle class. Interview data
indicates that Home Depot’s target market segment is
“Chinese customers aged from 20 to 45 in urban China.”
These consumers are price conscious, but demand high-
quality products and services.
The Chinese middle class consumers are fond of
Western name brands and luxury products. The “Luxury
Goods Worldwide Market Study” by Bain & Company
(2011) shows that global luxury sales grew 8% in 2011
to 185 billion euros, with China overtaking Japan as the
world’s second-largest consumer market of luxury goods,
only after the United States. The Boston Consulting
Group’s 2009 study reports that China is expected to
become the world’s largest luxury goods market in 2015,
accounting for 32.0% of the global market.
Some American companies try to connect their
products with the luxury concept. In 2009, Levi Strauss &
Co. launched a new brand in China tailoring to Chinese
tastes. Models were wearing high-heels instead of cowboy
boots. The newest Levis jeans, which sell for more than
US$100, are available in the upscale malls along Shang-
hai’s Nanjing Road shopping strip (Debnam & Svinos,
2011). Interview data suggests that Home Depot should
have redesigned its image and packaged its products and
services that carry the cache of “luxury from America.”
The new generation of Chinese consumers desire
status, and they are unabashed about flaunting their new
wealth as the “nouveau riche.” With a traditional focus
on “face” (reputation and status) in Chinese culture,
coupled with a growing amount of disposable income,
the new generation of Chinese middle class aspires to
conspicuous consumption. The Chinese middle class in
first and second tier cities is the target customer group
for international retailers in China.
Why Should International Retailers Target
Contractors?
Other than targeting middle-class consumers in top tier
Chinese cities, Home Depot should have tried to sell
to contractors, because many Chinese consumers hire
cities. Contrary to the United States, where the well-to-do
live in the suburbs, most of the Chinese well-to-do live
downtown. Despite the fact that home ownership in the
rural areas is 95% based on a 2012 survey (Fan, 2012),
international retailers such as Home Depot will not focus
on rural China in the current economic situation.
First, there is a greater urban population than rural
population in China. In 2011, China’s urban population
surpassed that of rural areas for the first time. There are
now over 690.79 million people living in urban areas,
compared with 656.56 million in the countryside, the
National Bureau of Statistics said in Beijing. The Chinese
urban population now doubles the total US population
(Rong & Zheng, 2012).
Second, urban dwellers have more disposable income,
as compared to suburban dwellers and the rural popula-
tion. On the one hand, contrary to American markets, the
Chinese suburban dwellers are not the well-to-do. In 2006
the income gap ratio in China between urban and subur-
ban residents reached about 3.3:1 (Chen & Wu, 2007).
On the other hand, income for China’s city dwellers more
than triples that of rural residents. Based on National
Bureau of Statistics of China data, in 2011, per capita dis-
posable annual income was 21,810 yuan for urban house-
holds, and only 6,977 yuan for rural households (Rong &
Zheng, 2012). “I am afraid the (urban-rural) income gap
will continue to expand as the country focuses its efforts
on urban sprawl, rather than rural development,” said
Song Hongyuan, director of the Research Center for the
Rural Economy in the Ministry of Agriculture (Fu, 2010).
International retailers such as Home Depot should focus
on the urban population as its target market, which is
twice as large as the US population.
International retailers such
as Home Depot should focus
on the urban population as
its target market, which is
twice as large as the US
population.
180
FEATURE ARTICLE
Thunderbird International Business Review Vol. 55, No. 2 March/April 2013 DOI: 10.1002/tie
However, Torres’s eight elements are repetitive in nature
and not well defined.
This research was approached with a theoretical
foundation incorporating various communication the-
ories applied to the international business context,
including Hofstede’s five cultural dimensions, Hall’s
context analysis, Ting-Toomey’s Face Negotiation argu-
ment, Schulster’s task-relationship dichotomy, and Fons
Trompenaars and Charles Hampden-Turner’s cultural
orientation. Gao and Prime’s (2010) American-Chinese
Communication Facilitators and Obstacles framework
was referenced. Unfortunately, very few case studies have
been conducted to introduce a host culture analysis
framework. This interviews-based case study approach
adds new insights not currently available in the current
literature. From this research, a new framework of CELM
(Culture-Environment-Lifestyle-Mentality) for analyzing
host-country consumer culture was developed.
The 2012 Ernst & Young study identifies a key area
that will determine the success of companies in imple-
menting “innovations with minimum resources”—adapt-
ing to local consumer specifics. Companies will have to
adapt to the culture and mind-set of consumers they
wish to target, catering to their specific needs. The 2012
Ernst & Young study concludes: “The key to success will
be with those companies that know how to combine
local relevance with global presence, making sure that
their products and services are relevant for the local con-
sumer, while also enabling the company to benefit from
its global resources.” Gandolfi and Strach (2009) studied
the Walmart failure case in South Korea, and stated:
“The most important aspect for firms going global is an
in-depth understanding of what the local customers really
want, desire and need” (p. 195).
This article will analyze Home Depot’s challenge
in China from four dimensions: Culture, Business Envi-
ronment, Lifestyle, and Mentality. This article proposes
that CELM (culture, environment, lifestyle, mentality)
should be a cultural analysis framework for all inter-
national retailers entering foreign markets. The four-
dimensional cultural analysis framework is illustrated by
Figure 1.
Culture Determines Business Models
Osland (1990) states that the single greatest barrier to
business success is the one erected by culture. Interview
data shows that culture is a key determinant that influences
business models in a foreign market for an international
retailer. Lee (2000) states that culture is the way of life
of a people, and he stresses that theories of management
contractors to complete their home improvement jobs. As
a result of the 28th Meeting of the 8th National Congress,
Clause 24, s. 2, Ch. 3 of the Construction Law of China
encourages the procurement of construction projects
through design-and-build as a packaged deal ( ).
In a typical design-and-build project, prequalified design-
and-build contractors submit their tender documents
(including preliminary designs and cost estimates)
against the client’s requirements. Based on the evalu-
ation of the various bidders’ plan, one contractor is
selected (Xu & Greenwood, 2011). This contractor is
charged with purchasing construction materials, and
such contractors are an important segment of Home
Depot’s market in China.
Home Depot should have identified contractors as
a key segment of market in China. Li, a retired military
officer, was a regular customer at Home Depot. In 2010,
Li paid 6,000 yuan ($909) to the Home Depot Beijing
store for a bathtub and cupboard for her condo in Bei-
jing. She said she did not like Home Depot’s big-box
superstore culture. “I think most Chinese prefer hiring a
decoration company rather than going the do-it-yourself
way … and shopping assistants here are not enthusiastic
about giving advice as I need help to understand the
differences among various brands. Most shop assistants
only promote the brands that they are paid to represent.”
An interview with a Home Depot store manager indi-
cates that there were two types of salespeople wearing
the orange Home Depot aprons in the stores in China:
the first group (with orange straps) were Home Depot
employees; and the second group (with black straps)
were salespeople hired by certain brands. The second
group, who are the “shopping assistants” mentioned by
customer Li, were actually paid sales reps for certain
brands; of course, they were not helpful in explaining
other brands to the customers. Home Depot China could
have paid more attention to contractors as representa-
tives for the middle-class homeowners.
CELM—A Four-Dimension Host
Country Culture Analysis Model
for International Retailers
Torres (2011) suggested a Chinese cultural and philo-
sophical framework for developing marketing strategies
and research that includes eight elements: (1) culture
definitions, (2) cultural dimensions, (3) cultural dynam-
ics, (4) emotional intelligence, (5) cultural intelligence,
(6) country-specific culture and philosophy, (7) Chinese
communication, and (8) Chinese culture and philosophy.
Culture Determines Business Models: Analyzing Home Depot’s Failure Case in China for International Retailers from a Communication Perspective
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DOI: 10.1002/tie Thunderbird International Business Review Vol. 55, No. 2 March/April 2013
Hofstede et al., 2010). In order to prosper in China,
international retailers such as Home Depot need to
adjust their business models to the culture of the Chinese
consumers. Home Depot’s DIY model, which requires
consumers to labor on the projects themselves, is compat-
ible with American culture. However, the interview data
and field notes show that the DIY model is not compat-
ible with the Chinese culture. Most Chinese homes are
condominiums with no garages and limited space to store
tools; labor is inexpensive in China; and for thousands of
years, manual labor has been looked down upon in the
Confucian tradition.
To succeed in China, international retailers need
to reposition themselves and redesign their business
models. National cultures determine business models,
and regional subcultures further refine business mod-
els. “While America is a big country, 95% of what the
standard home-improvement store in Texas and in
Alaska offer is similar. That’s not true in China. Tsingtao
(Northeastern China) and Shenzhen (Southern China)
might as well be in different countries,” said Mr. Sli-
winski, CEO of B&Q, a top British home improvement
retailer. Mr. Sliwinski told the researcher that B&Q
in Northern China sell lots of carpeting and wooden
flooring while homeowners in Southern China prefer
tile or marble due to the heat and humidity. Ovens are
for sale in Beijing (Northern China) but not in Kun-
ming (Southern China). China’s vast income disparities
and regional differences indicate that a one-size-fits-all
approach to home improvement does not work. B&Q
also adjusted its prices for the same product and service
in different cities. In Shanghai it charges up to 100,000
yuan for a fully designed apartment, including all the
materials. In second-tier cities such as Chongqing, a city
with 35 million people, B&Q offers a similar deal for
less than 50,000 yuan. Customers receive a money-back
guarantee that the products are authentic and the work
is done right, no matter what price they have paid. Local
culture determines business models for an international
retailer.
Business Environment
In a crowded bustling marketplace with competition from
domestic and foreign companies, Chinese consumers live
in an environment where countless choices of products
and services are available within close reach. The research
data shows that the unique Chinese business environment
features changing rules and regulations, under-the-table
kickbacks, and different methods of business operation.
Being successful in the US market does not guarantee
that an American retailer will be successful in China.
and marketing are culture bound (Hofstede, 1993).
The fundamental marketing concept refers to the philo-
sophical conviction that customer satisfaction is the key
to achieving organizational goals. When customers in a
foreign culture have different needs, marketers have to
come up with different product and service offerings.
Interview data shows that Home Depot miscalculated its
target market, and misunderstood its customers in China.
The research findings suggest that host-country culture
is a determinant in the choice of business models for
international retailers in China. A culture is a group’s
“shared software of the mind” (values, traditions, social
and political relationships, history, language, etc.) based
on a collection of symbols used to interpret the meaning
of nature, human life, and the environment (Gao, 2005;
FIGURE 1 Host Culture CELM Analysis Model
When customers in a foreign
culture have different needs,
marketers have to come up
with different product and
service offerings.
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Fourth, middle-class Chinese customers usually live
in downtown areas in metropolitan Chinese cities. Dif-
ferent from the United States, in China, proximity of
one’s home to downtown adds to home value. However,
based on Home Depot’s DIY model borrowed from the
United States, Home Depot stores were located mostly in
the suburbs, not in downtown. In Beijing, a city with 17
million people, B&Q has six stores, and Home Depot had
only one functional store in 2010 (this store was closed in
January 2011). The store was on the fourth ring road, far
away from the downtown, hidden behind trees. To drive
from one end of the city to the other usually takes two to
three hours in Beijing. Who would like to take a taxi for
two to three hours to this one Home Depot store to buy
a lightbulb?
With such a limited number of stores (12 stores in
four cities in 2006 and then 7 stores in three cities in 2011,
and now all closed), the percentage of market share for
Home Depot in China was negligible. As a result, suppli-
ers were unwilling to strike deals, and thus Home Depot
prices were not competitive for price-conscious Chinese
customers. Many Chinese suppliers were aware of the fact
that Home Depot was a Fortune 500 company, but when
they compared Home Depot to its foreign and Chinese
competitors in China regarding sales volume, they chose
not to favor Home Depot. Suppliers in China jokingly
compared Home Depot China to a thin chicken wing: “to
eat it, it is tasteless; to abandon it, it is pitiful.”
Finally, labor is cheap in China. In a nation with a
sizable pool of unskilled labor and countless small-time
construction companies, it is simply more convenient
and cheaper to outsource such manual labor jobs as
home improvement. As a result, most Chinese consumers
do not Do-It-Themselves on home improvement. They
choose to hire contractors.
Target Consumer Lifestyle
A 2012 Ernst & Young study indicates that companies will
have to adapt their development strategies to answer to
the new demands of the middle-class rapidly growing at
a global level, especially in emerging markets. Changes
will have to include the development of brand new prod-
ucts and services, if these companies are willing to com-
mit to achieving true innovation and to obtain growth.
This study by Ernst & Young includes a survey with 547
executives all over the world, as well as in-depth inter-
views with influential global entrepreneurs. The study
emphasizes the fact that most companies in developed
economies are now focusing their efforts and actions on
the high-end segment of the market. Even in the case of
companies in emerging markets, high-end segment sales
First, homes purchased in Chinese cities are primarily
unfinished condos, and need to be completed by profes-
sionals, as a comprehensive project. Managers at B&Q in
China rarely talk about the DIY model, because much of
what customers do in China is to pay contractors for the
fix-up work (Desvaux & Ramsay, 2006). Most customers
do not do it themselves in terms of shopping for building
materials and fixing up the condos.
Second, the Chinese home-improvement market is
heavily fragmented. Home Depot specializes in build-
ing materials, home improvement supplies, and lawn
and garden products. However, the playing field in
the home improvement market is not level. The mar-
ket system is chaotic at the moment, to say the least.
Chen, a store manager of Home Depot China, says that
this market is currently a “blind spot” for any foreign
retailer and that nobody knows the rules of the game.
B&Q, the No. 1 foreign retailer, is no exception. The
top three home improvement companies combined
occupy only 3% of the total Chinese home improve-
ment market, making the rest up for grabs (Moody,
2009). Numerous small-scale Chinese manufacturers
and retailers, who rent buildings from developers in
edge-of-city retail developments, dominate the Chinese
home improvement market. These retail developments
tend to have one floor for lighting, one for flooring,
one for furniture, one for paint, and another for drap-
ery. “Many of these used to ship all their stuff off to the
West to the likes of Home Depot but now they just open
up relatively inexpensive shops in Nanjing, Shanghai or
Hangzhou. They put three guys in there on minimum
salary and they get all the margin, both wholesale and
retail,” said Tong at Roland Berger Strategy Consultants
(Moody, 2009).
Third, there are many “gray areas” of doing business
in China. As a US company bound by US laws, Home
Depot cannot utilize the “gray channels” that Chinese
firms use to secure government or business favors by pay-
ing them with fat gifts and commissions. In addition, in
Chinese home improvement stores, the price of virtually
everything is up for negotiation between the seller and
buyer on the spot, similar to a flea market. Various makes
of tiles and bathtubs, after negotiation and payment,
will be delivered for free to customers’ homes (Schmitz,
2011). Most Chinese homeowners hire designers to
shop for building materials. When designers buy tiles
from a Chinese home improvement store, they receive
cash bonuses on the spot. This is the system that Home
Depot is up against in China, where business depends on
“guanxi” (long-term reciprocal connections, ) and
under-the-table commissions.
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of them get the down payments from their parents. Most
Chinese parents are willing to spend their lifelong savings
securing a home for their only son or daughter, because
the one-child policy has put the only child at the center of
the Chinese family structure. “It is almost impossible for
me to buy a home without the support from family,” Mr.
Zhu, a young groom-to-be, told the researcher.
For the Chinese people, the word “home” repre-
sents not only “a place to live in,” but also a precondi-
tion of marriage, a badge of social status, and a sense of
security. A 2010 survey indicates that 60% of the young
homeowners buy their homes in order to get married.
A total of 64% of the respondents agree that there is a
direct relationship between owning a home and a happy
life. In China, pressure to buy a home also comes from
parents and other family members. For example, 70% of
the parents would mind if their daughters’ future hus-
bands do not own a home; while 50% of the parents with
a son express a positive attitude in helping their sons
to buy a home before marriage. Some young couples
even delay their marriages due to an inability to buy a
house (Jin, 2010). Renting an apartment is possible, but
it is not a sign of success for a couple to settle down in
China.
“Naked marriage (
)” is a new concept created
by the post-1980s generation in China. Naked marriage
means a couple marrying without a house, a car, a wed-
ding, and even a honeymoon. However, males and females
hold distinctive attitudes toward “naked marriage” in
China. An online survey indicates that 80% of the male
respondents are in favor of “naked marriage,” while 70%
of their female counterparts regard “naked marriage” as
“absolutely infeasible” (Jin, 2010). Apparently, the concept
of “naked marriage” is not popular in China with women,
and therefore home ownership is still critical for young
couples, especially among the middle class.
Yu, a 40-year-old construction contractor, said: “All
my customers are designers. I never talk to homeown-
ers. Homeowners in China hire designers for all their
home improvement projects, helping the decision of
even where to put a vase.” In other words, many middle
class homeowners in China will not come to Home Depot
personally to shop for building materials, a fact that rein-
forces that the DIY business model is not compatible with
the lifestyle of the target customer in China.
In summary, the lifestyle of the Only Child genera-
tion of the middle class does not support a DIY business
model for Home Depot. These only children are usually
not hands on, and they have the disposable cash to hire
others to complete the home improvements, including
building, designing, and even purchasing.
share amounts to 40% (Ernst & Young, 2012). Similarly,
the interview data revealed that the target customers of
international retailers such as Home Depot in China are
middle-class homeowners in top-tier cities. The lifestyle
of this group of urban dwellers needs to be analyzed. A
person’s lifestyle is indicated by how he/she spends time
and resources and what he/she considers important. The
analysis of target consumer lifestyle helps to distribute
products and services (Strategic Business Insights, 2011).
In 1975, China adopted the “One Child Policy” as a
national regulation for population control, with urban
dwellers allowed only one child per couple. These only
children, the “little emperors and empresses” of China,
are now in their 20s, 30s, and approaching their 40s. They
are the vital components of international retailers’ target
consumers in China. Most of these only children become
homeowners when they get married, usually with finan-
cial contributions from their parents. These only children
have been somewhat spoiled by their two parents and
four grandparents, and have normally not done much
manual labor work growing up in urban China. The
research data shows that Home Depot’s DIY model does
not seem to be suitable to this group of key customers.
In 2010, China Ever-bright Bank and the Beijing-
headquartered real-estate corporation Homelink jointly
published an analytical report, indicating that the average
age of people in Beijing who buy their first homes on a
housing loan is 27, which is much lower than that in most
developed countries (42 in Japan and Germany, 30 in
the United States). Ninety percent of the young people
in China buy their homes with a mortgage loan and most
Changes will have to include
the development of brand
new products and services, if
these companies are willing
to commit to achieving true
innovation and to obtain
growth.
184
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However, Home Depot as a brand was basically unknown
in China. Visiting China in August 2010, the author had
great difficulty finding the Home Depot store in Beijing,
and most taxi drivers had never heard of Home Depot.
Third, the middle class is price savvy. A typical Chinese
consumer practices comparative shopping, rather than
impulsive buying. A popular Chinese saying goes: “Never
make a purchase until you have compared three shops
(
)” (Letovsky et. al, 1997). Inaugurating its
first Chinese store in Shanghai in 1999, B&Q soon real-
ized that a cookie-cutter version of its British stores did
not work in China. Chinese shoppers, who like to handle
the merchandise before buying, were frustrated that prod-
ucts were stacked high on shelves. Many never ventured
far into the store at all because they were intimidated
by the prices of the most expensive goods at the head of
each aisle. B&Q then changed the display of goods; now
everything is within easy reach, and the bargains are front
and center (Bloomberg Business Week, 2006). Zhan, a home-
owner who had lived and worked in the United States and
who had been to Home Depots in both countries, told the
researcher that compared to its Chinese competitors, the
Home Depot in China price point was a serious problem.
Ms. Wu recently fixed up a new condo home for her par-
ents, who moved to the capital in June 2010. She said she
had never heard of Home Depot, even though there was
one a mere five-minute drive from her home. She chose to
turn to a local contractor to remodel the apartment after
comparing B&Q with Chinese companies. “I tried shop-
ping there [B&Q] once, but I felt there were more choices
at eHome [a Chinese competitor] and that it was cheaper
… I could bargain there,” she said.
In summary, Chinese consumers now have access
to well-known brands and are willing to spend more
for better-quality products. International retailers need
to take advantage of this trend and to promote their
store brands, as well as to keep their merchandise price
competitive. To understand the four dimensions of host
culture in the Chinese market is critical for the success of
market development strategy for international retailers,
including the understanding of the Chinese culture, Chi-
nese business environment, and Chinese target consum-
ers’ lifestyle and mentality.
DIFM—The New Business Model
for Home Depot and Other
International Retailers
Gandolfi and Strach (2009) analyzed Walmart’s failure
case in South Korea, and concluded that Walmart’s busi-
ness model of “Every Day Low Prices” did not work in
Consumer Mentality
Mentalities provide all-embracing explanations of pur-
pose in collective human activities. The mentality of the
Chinese middle class is the deciding factor for decoding
the behavior of target consumers for international retail-
ers such as Home Depot. This research shows that the
mentality of Chinese middle-class consumers does not
support Home Depot’s DIY business model.
First, there is a “social status issue” concerning the
DIY model. Since antiquity, manual labor has been looked
down upon in China. Only lower-class citizens have to deal
with manual labor. Mencius,
2
a major disciple of Confu-
cius, once said: “Those who work with their brain rule, and
those who work with their muscles are the ruled.” To be able to
avoid manual labor was a class symbol in ancient times,
and it continues to serve as a symbol of success for today’s
middle class in China. Tianjin, a 13-million-people port
city near Beijing, was a major hub for Home Depot at one
time, with four stores. One Home Depot store had a huge
paint counter near the entrance; stacks of lumber near the
exit; and aisles of screws, fixtures, and tools in between. It
looked exactly like a Home Depot in the United States,
and according to Zheng, a typical middle-class customer,
that was the problem: “Products are too cheap and simple
at Home Depot. Poor people are the only group in China
who would bother taking on a DIY project, because they
cannot afford to hire others.” However, poor people in
China live in rural areas and the suburbs, and they would
buy building materials from Chinese stores and second
hand markets, where products are much cheaper than
Home Depot. Further, many suburban and rural dwellers
do not own homes, or do not spend much money in reno-
vating their homes. In addition, many rural homeowners
are migration workers
3
in urban construction fields. Some
of these migrant workers receive building materials torn
down from old buildings as partial reward for their labor.
They do not need to purchase from expensive interna-
tional retailers such as Home Depot.
Second, the Chinese middle class is brand conscious.
A brand brings a wealth of quality, value, and high-perfor-
mance cues. Sparks (2008) and Kim (2009) found that the
Chinese people are very brand conscious, and view West-
ern brands as the embodiment of quality and authenticity.
Research conducted by Accenture (2011) indicates that the
purchasing behavior of Chinese consumers is influenced
by the brand’s national origin. American brands, such
as Starbucks, Pizza Hut, and Häagen-Dazs, are associated
with the luxury lifestyle portrayed in Hollywood movies. In
addition, consumers in China tend to trust Western brands
more because there are so many counterfeits in China.
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(2) competition from Chinese companies, foreign com-
panies, and “Chinese traditional flower and bird mar-
kets”
4
eroding Home Depot’s market; and (3) the
inability of Home Depot to adapt to its Chinese consum-
ers; (4) the brand name of Home Depot was little known
by Chinese consumers.
The research data shows that Home Depot’s DIY
Model does not work for China. Does this mean inter-
national retailers such as Home Depot should give up
the Chinese market? An old Chinese saying translates:
“Failure is the mother of success.” If international retail-
ers learn from their failures and create new business
models, then the Chinese market can be profitable. Since
the Chinese consumer market is new and still emerging,
companies have an opportunity to rebrand their products
and services with new business models. The research data
suggests that Home Depot should have replaced its DIY
model with a DIFM (Do-It-for-Me) Model.
To Adopt the DIFM Business Model
From 2006 to 2012, Home Depot applied its Ameri-
can DIY business model almost without modification
to China: its stores were operated on a big-box format
located mostly at the outskirts of Chinese cities; its display
of store merchandise required customers with substantial
knowledge for self-work; and its advertising format was
mailing printed flyers to customers. The interview data
indicates that Home Depot misread its consumers when
applying its DIY model to China. Some managers in
Home Depot hold the illusion that Chinese consumers
“will catch up” with the idea of Do-It-Yourself, even after
they discovered DIY did not work for China. Based on the
four-dimensional CELM analysis of the Chinese culture,
this research suggests that Home Depot should replace
the DIY Model in China with the DIFM business model.
The interview data shows that Chinese middle-class
consumers simply do not want to “do it themselves.” They
want to hire others to complete their home improvement
projects. The more practical Chinese business model
for Home Depot is DIFM. DIFM is a customer-centered
business model that combines products with services. In
the DIFM model, Home Depot would provide “design
and build service” in a package to customers, and the
company would establish long-term relationships with
consumers, contractors, and suppliers. The only major
task the Chinese customer would need to do is to discuss
with the Home Depot team what they want as the end
product package.
Home ownership was almost nonexistent about 15
years ago in China. It was then very common for a family,
sometimes three generations, to share a 300-square-foot
the South Korea market. Walmart failed in South Korea
primarily due to its inability to understand the shopping
preferences of local consumers. Similar to Walmart’s
failure in South Korea, interview data shows that Home
Depot’s DIY business model did not work in China.
The findings from this research are consistent with the
cultural adaptation perspective on global market expan-
sion for international retailers. Reid and Walsh (2003)
indicate that business models that have achieved success
elsewhere almost invariably must be repositioned for the
China market.
Previous research has stressed the importance of the
learning process for retail internationalization (Palmer
& Quinn, 2005). A study by Davies and Sanghavi (1995)
illustrated how market innovation helped the retailer
Toys “R” Us overcome barriers and become successful in
Japan. Retailing research suggests that it is important not
only to understand environmental differences, but also
to adapt properly to new cultural conditions (Dupuis &
Prime, 1996).
Home Depot underperformed in China and has
closed all of its 12 stores. Interviews with Home Depot’s
store managers and former attorneys revealed obvious
problems with Home Depot’s operations in China:
(1)poor margins on high-volume items affecting profit;
Chinese consumers now have
access to well-known brands
and are willing to spend
more for better-quality prod-
ucts. International retailers
need to take advantage of
this trend and to promote
their store brands, as well
as to keep their merchandise
price competitive.
186
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Home Depot was once experienced in design cen-
ters. In 1991, Home Depot established its first Expo
Design Center in San Diego. The Expo Design Centers
carried higher-end products and sold complete solutions
to household needs, such as modular kitchens, assembled
bathrooms, etc. In the mid-1990s, Home Depot collabo-
rated with the Discovery Channel and Lynette Jennings
on a home improvement program, called HouseSmart,
which was televised daily (ICMR, 2004). Companies
that invest in educating the market can expect to reap
handsome rewards. An international retailer such as
Home Depot can consider collaborating with a Chinese
television station and creating an educational home
improvement TV show to educate Chinese consumers. In
addition, such TV shows will simultaneously promote the
Home Depot brand.
From Big-Box Retailing to “Urban Boutique Store”
Format
Big-box retail stores have been icons of urban sprawl
in the United States. Because of their large footprints
big-box retailers usually choose to locate in suburbs.
Research data shows that a suburban location choice
moves the economic activities away from the urban core
of middle-class consumers in China. Chinese consumers
are keen on exploring foreign brands if the products
are readily accessible. In addition, Chinese customers do
not like to buy all their home-improvement products in
a one-stop shop. To ensure that the products are within
close proximity to consumers, the research data indicates
that Home Depot should adopt the next generation store
concept—urban boutique stores (UBS).
First, in terms of location, UBS stores can be placed
in malls, street corners, or other pedestrian-heavy areas
in downtown Chinese cities. “Mall culture” has arrived
in China, and shopping is increasingly being adopted
as a leisure activity (Debnam & Svinos, 2011). Smaller
boutique stores in downtown areas are more visible
than big-box stores in the suburbs of China. UBS stores
will also be accessible to Chinese shoppers via public
transportation, such as via subway, bus, taxi, and bike.
In 2011, ZARA HOME from Spain opened two stores
in downtown Beijing, targeting trendy customers and
home-decorating enthusiasts. The stores are located
in fashionable shopping areas and department stores.
Harbor House, an interior-decorating brand; MUJI, a
retailer of household goods; and HOLA Home Furnish-
ing Store are close neighbors. Their retail merchandise
includes things often seen in a Home Depot store: furni-
ture, home accessories, carpet, tableware, glassware, and
linen (Yao, 2011).
room. Today, Chinese homeowners are eager to learn
from the West about home improvement. This is one
reason why IKEA is popular in China. Their Western-style
showrooms provide model bedrooms, dining rooms, and
family rooms. IKEA’s stylish and functional modern fur-
niture is particularly appealing to young couples (Wang,
2011). CELM analysis of the Chinese consumer culture
demands that international retail stores such as Home
Depot demonstrate strong design capability. A design
center can function as an educational base for home
improvement to the new generation of Chinese home-
owners. In China, design services have boomed, account-
ing for one third of sales, and could provide a crucial
advantage to Home Depot (CNN, 2010). In Shanghai,
B&Q has developed a full-blown in-house design center.
Homeowners can sit down with an interior decorator
using a computer displaying three-dimensional images
of their apartment. The decorator then hires contractors
to install electrical outlets, bathroom plumbing, kitchen
appliances, flooring, and almost everything else. The only
requirement is that 80% of goods must be purchased
through B&Q. In 2006 the company outfitted 30,000
apartments in China. To figure out the ever-evolving taste
of Chinese consumers, B&Q relies on its 12,000 Chinese
employees for insight. Informal chats in the stores, as
well as staff meetings, help drive the latest intelligence up
to the head office. The centers also offer free bus rides
to B&Q stores in nearby cities so that customers can see
fully built models of kitchens and bathrooms. “This is the
first apartment they have owned,” Gliwinski says. “They
need advice, and they need imagination. You need to let
them see what a home looks like” (Warner, 2007). In a
B&Q store in Shanghai, customers take photographs of
the kitchen and bathroom mock-ups, jot down notes, and
make shopping lists.
Today, Chinese homeowners
are eager to learn from the
West about home improve-
ment. This is one reason why
IKEA is popular in China.
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started to learn some interesting household consump-
tion patterns and the influence of women’s preferences.
For example, what comes with house purchases is always
furniture buying, and in China, it is mostly women who
furnish the house, regardless of who pays (Ni, 2012).
Therefore, furniture manufacturers and home improve-
ment retailers that cater to the tastes of female customers
may have a better opportunity to boost their sales. You
cannot ignore women in the home improvement busi-
ness. It is especially important that Home Depot consider
Chinese women as key purchasing agents. “Our main
customers are female, both young and mature. We not
only provide stylish decorating products, but also offer
customers interior decoration ideas as well as updates
on the latest trends and information in this field,” said
Inditex, the owner of ZARA stores. B&Q plans to open a
new generation of female-friendly stores, recognizing the
fact that women in China are often the key decision mak-
ers regarding home furnishing decisions (Moody, 2009).
Finally, many international retailers have shifted
from the big-box format to the UBS format. For example,
Best Buy decided to abandon the big-box business model
and, instead, expanded its Chinese subsidiary Five Star,
which is based more on a boutique store model. IKEA
is expected to open three regional shopping centers in
cities like Wuxi, Beijing, and Wuhan. In addition to IKEA
stores, the centers will have outlets for fashion, food,
home electronics, and entertainment.
To Focus on Strength
Home Depot can amplify its strength and develop toward
success. First, because of its successful business in the
United States, Canada, and Mexico, Home Depot has
established relationships with hundreds of suppliers in
China for its North American markets. Home Depot can
negotiate with these suppliers for its stores in China for a
favorable rate.
Second, Home Depot is a US-based Fortune 500
Company and should advertise its brand name as reli-
able, trustworthy, and representing a luxury lifestyle, as
portrayed in Hollywood movies. The company is known
to carry reliable products. For example, Home Depot
recently became the exclusive vendor of US-made Behr
paint. It’s a strategic move in a market where paint laden
with chemicals harmful to people’s health is the norm
(Schmitz, 2011). By selling environmentally friendly Behr
paint, Home Depot aligned its business with the Chinese
government’s priority of green technology. Chinese con-
sumer Qian said he came to Home Depot because he
trusted the materials there as safe and authentic. There’s
so much counterfeiting in China that people do take
Second, in terms of store appeal, a UBS store should
be fashionable, urban, technologically advanced, female
friendly, and service oriented. Home Depot would need
only to place samples of the building materials in its cozy
and chic UBS stores. In UBS, international retailers need
to create user-friendly software so that customers could
design their own condos on a laptop, iPad, or iPhone. In
other words, in addition to creating product differentia-
tion through pricing, international retailers should focus
on long-term technical and emotional benefits in China.
Further, based on the CELM analysis for Chinese con-
sumers’ lifestyle and mind-set, it seems to be a good idea
for international retailers to appeal to China’s nouveau
riche. International retailers such as Home Depot may
want to connect its brand name to a luxury lifestyle so
that to buy from Home Depot becomes a status symbol
in China. The connection between “American products”
and “luxury lifestyle” has been a recipe for success for
many international retailers in China.
Third, in UBS stores, female consumers shall be
emphasized. According to a 2008 survey by Pew Research
Center, women are key household decision makers in
North America and Asia. In 74% of homes, the woman
is fully engaged in deciding what and where to shop
(Mazurkiewicz, 2008). “The future is female,” HSBC said
in a 2010 survey on luxury goods, highlighting the impor-
tance of female consumers to the investment decision
making of many global companies (Ni, 2012). Departing
from a traditional thrifty lifestyle, middle-class women in
China are more prone to enlarge their expenditures and
lower their saving levels. The Women of China Magazine
research shows more than 60% of average household
income went into consumption in 2011. Businesses have
The connection between
“American products” and
“luxury lifestyle” has been a
recipe for success for many
international retailers in
China.
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Thunderbird International Business Review Vol. 55, No. 2 March/April 2013 DOI: 10.1002/tie
International retailers should make every effort to foster
local partnerships.
American companies usually use actions of giving
back to the community through corporate social respon-
sibility (CSR) to gain support from the Chinese govern-
ment. Participating in earthquake relief and sponsoring
sports and educational events brought attention and sup-
port from the Chinese government and from consumers
to a foreign company and its brand. For a US company,
the alternative of such public CSR—bribery—is not an
option. The Anti-Corruption Act of the United States
obstructs any US company from using this method to
promote relationships with Chinese government officials.
Home Depot does have a set of core values developed in
the mid-1990s, and such CSR work can be very beneficial
to expand the Chinese market.
In summary, the new UBS stores will be boutique in
size, female friendly, trendy, chic, and appear at many
busy street corners to increase volume of sales. The
precondition before the massive promotional effort is
to increase market share by opening more stores on a
smaller scale on populous streets and near big subdivi-
sions. Perhaps Home Depot can become an Apple Store
experience with chic home improvement centers in Chi-
nese malls. Consumers will then choose a home design
on an iPad or a MacBook in such Home Depot design
stores. To buy from Home Depot could become a symbol
of social status in China under the UBS concept.
Conclusion and Discussions
This longitudinal case study of Home Depot’s operations
in China illustrates how an international retailer may
comfort in an overt guarantee of authenticity,” says Mur-
phy, the Kingfisher chief (Warner, 2007).
Third, Home Depot, as a US company, has a very
good return policy. Most Chinese competitors do not
have a comprehensive return policy, and Home Depot
should advertise this policy to Chinese consumers. How-
ever, the policy has to be well written so that customers
do not take advantage of it. For example, some Chinese
customers might buy a tool from Home Depot, use it, and
then return it for a full refund.
Fourth, Home Depot, being a top American com-
pany, carries the country of origin effect of being from
the United States. Research shows that the Chinese have
a very positive image of American products (Yang, 1998).
An international retailer from the United States can
promote the country of origin equity of its products and
store brand.
To Cultivate Local Partnerships
Entry-mode literature suggests that firms entering cultur-
ally distant markets are better off having a local partner
(Barkema, Bell, & Pennings, 1996). An IKEA manager
told the researcher that trust was very important in China
where personal relationships meant so much. The inter-
views show that managers in Home Depot China faced a
challenge in communicating with various departments
and with various levels of the Chinese government, as well
as with landlords for their stores. Interview data indicate
a common theme that in Home Depot’s China policies
and strategies, there is a lack of consistency, transparency,
and clarity.
While American business culture is typically transac-
tion based, the Chinese business culture is more relation-
ship based. Guanxi, the Chinese version of relationship,
is built upon a degree of trust, reciprocity, and long-term
commitment. A top executive of Coca-Cola University in
Shanghai told the researcher that, in China, local part-
nerships were crucial. “You really have to know whom
you are getting into business with,” he said. “People
with Chinese connections can do a lot. … Local market
expertise is critical. To be successful you can’t overlay
your US or Western European private equity experience
in these markets. If you have trustworthy local partners to
help you, that would be a good start.” In China, develop-
ing a good guanxi with the relevant organizations and
authorities can make a difference to the outcome of any
business endeavor. In China, people need to get to know
their business partners and to gain mutual trust before
any business is conducted. Guanxi with local partners,
such as government, landlord, suppliers, wholesalers,
and consumers, will lead the way toward business success.
The new UBS stores will
be boutique in size, female
friendly, trendy, chic, and
appear at many busy street
corners to increase volume of
sales.
Culture Determines Business Models: Analyzing Home Depot’s Failure Case in China for International Retailers from a Communication Perspective
189
DOI: 10.1002/tie Thunderbird International Business Review Vol. 55, No. 2 March/April 2013
complex culture that influences marketing strategies and
consumer preferences. International retailers’ marketing
strategies must be locally adaptive and responsive; that is,
international retailers must think globally and act locally.
Reid and Walsh (2003) found that “critical market
assessment, in many cases, appears to have been lacking,
while simplistic analysis based on facile assumptions have
been applied” (p. 298). Some international retailers build
a company in China based on the assumption that if they
get only 0.1% of the one billion Chinese as customers, then
they will be profitable. This mentality can create major
risks for consumer products that are culturally grounded
such as home improvement. These companies, such as
Home Depot, simply have not studied the host culture
properly before they enter a foreign market. If an inter-
national retailer such as Home Depot wants to succeed,
it must change its development strategies in China and
find a proper way of combining the corporate culture of
Home Depot with the host culture of China. As the ancient
Chinese strategist Sun Tzu said, “Know yourself and know
your enemy, you will win every war (
).”
The main limitations of this study are twofold. First,
the study is based on a single case of Home Depot China,
which limits its generalizability. Second, the interviewees
were generated from a convenient sample in the United
States and China, which can increase data bias. Addi-
tional research examining international retailers in other
industries in China would help to enhance the under-
standing of the main competencies and resources needed
for the internationalization of retail success.
fail in a foreign market such as China. The interview
data and field notes contribute to the creation of a four-
dimensional “Host Culture CELM Analysis” framework,
which points out that Home Depot’s DIY business model
does not work for China, and can be replaced by the new
DIFM business model. Consequently, the DIFM business
model is best carried out in a UBS store format, which is
cozy, trendy, female friendly, and easily accessible.
This interview-based single-case study research has
these notable contributions. First, this research stresses the
importance of host culture in creating a business model
when an international retailer expands to a foreign coun-
try. Second, the research develops a new Host Culture
Analysis Framework: CELM. Third, by applying the CELM
framework to the Chinese market, this research creates a
new DIFM business model for Home Depot China, to be
viewed as an example for any international retailer. Fourth,
this article proposes a new UBS retail format for interna-
tional retailers entering emerging markets. Finally, this
research shows that in-depth interview is a solid research
method to be applied to case studies for the discovery of
deeper reasons of international expansion failures.
When a company launches a marketing program
in a different culture, the first question that should be
asked is whether the company respects the host culture.
When a company learns to respect culture, the efforts
will pay off. When the marketing program and the
local culture are glued together, sustainable competitive
advantages are created (Lee, 2000). Local cultures in a
foreign market determine business models. China has a
May Hongmei Gao is the Asian Studies Coordinator and an Associate Professor of Communication at KSU. Dr.
Gao received her Ph.D. from the University of South Florida in Speech Communication, after her education at
Brigham Young University and Shanghai International Studies University. She worked in China as a PR Specialist
and a TV Anchorwoman prior to coming to the U.S. in 1998. She conducts research in communication, business,
con ict and Asian cultures. She has published in Thunderbird International Business Review, Global Business
Languages, China Media Research, Journal of Chinese Culture and Management, and East West Connections. Dr.
Gao is the founder of the Symposium on ASIA-USA Partnership Opportunities (SAUPO), the largest Asia Business
Conference in the Southern USA.
Notes
1. Yuan ( ) is the primary unit of renminbi, (RMB, sign ¥, code: CNY;
also CN¥, and CN ), the official currency of the People’s Republic of
China. The renminbi ( ), meaning “people’s currency,” is issued
by the People’s Bank of China. It is the legal tender in mainland China,
but not in Hong Kong, Taiwan, or Macau. One yuan is subdivided into
10 jiˇao ( ), which in turn is subdivided into 10 f
¯
en ( ). Through most
of its history, the value of the renminbi was pegged to the US dollar. For
example, 1 US dollar was equal to 6.25 Chinese yuan on October 18,
2012. Renminbi is not a hard currency and usually cannot be used as a
190
FEATURE ARTICLE
Thunderbird International Business Review Vol. 55, No. 2 March/April 2013 DOI: 10.1002/tie
currency outside of China (Washington Post, 2012). China has initiated
various pilot projects to “internationalize” the RMB in the hope that it
will become a reserve currency over the long term (Wagner, 2011).
2. Mencius: Mencius (
, Mengzi, 372–289 B.C.) is regarded as the
“Second Sage” because of his significant role in promoting the thinking
of Confucius. He was born in the state of Zou, in the present day Shan-
dong Province of East China. Mencius learned from Zisi, a grandson of
Confucius. In the Book of Mencius, which earned him the title of “Second
Sage” in Chinese cultural history. Mencius stressed independent think-
ing and division of labor (Wen, 2012).
3. Migrant workers in China are mostly people from impoverished
regions who go to urban and coastal regions in search of work, and they
are the main force for urbanization in China. An estimated 230 million
Chinese have left the countryside and migrated to the cities in recent
years, and about 13 million new people join the legions every year.
They include men, women, and couples with children. Men often work
in the construction field for skyscrapers and subdivisions, while women
work in apparel and electronics factories. Most migrant workers have
traditionally gone to Beijing, Shanghai, Shenzhen, and coastal cities.
Recently, they are also heading to second- and third-tier cities where
new opportunities are opening up (Hays, 2012).
4. Chinese traditional flower and bird market (
): In
many cities in China, there are one or more Chinese traditional flowers
and birds markets. They are usually part of the Chinese bazaar, located
in the downtown popular areas. Visitors can purchase all kinds of flow-
ers and birds, as its name suggests. In addition, one can find a wide array
of plants, souvenirs, and replicas of ancient Chinese weapons, and such
pets as dogs, cats, goldfish, turtles, rabbits, and rodents. The market
offers the typical Chinese shopping atmosphere with bargaining shop-
pers and shrewd shopkeepers. Bazaar markets are direct competitors of
Home Depot’s gardening department in China.
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