The List

Why Home Depot is failing in China: 4 theories

The massive home improvement chain is shuttering all seven of its big-box stores in China — even while competitors like Ikea are making money hand over fist

This week, Home Depot announced that it would close all seven of its big-box stores in China, all but ending an investment that will cost the company some $160 million. (The home improvement chain will retain two, much smaller specialty stores in China, as well as an online presence.) Home Depot, like almost every big company on the planet, saw a huge opportunity in China, where an expanding middle class has opened up a vast new market and the potential for profits. So what went wrong for the Atlanta-based company? Here, four theories:

1. The Chinese economy is slowing down Retailers in China, both foreign and domestic, have been hurt by an economic slowdown. Just before Home Depot's announcement, luxury retailer Burberry saw its stock price drop by 20 percent on projections that Chinese consumer demand was falling. And "sellers of furniture, paint, and other home-improvement products" have been particularly hard-hit, says The Associated Press, because the slowdown has taken a sharp toll on "housing sales, cutting demand from buyers to outfit new properties."

2. The Chinese housing boom was a bust Home Depot had dollar signs in its eyes when the Chinese housing market took off. However, more homes did not translate into more home improvement. "China's residential building boom may have looked like a terrific opportunity to Home Depot, but the reality was that real estate market activity was driven by speculators snapping up homes and trying to flip them," says Martha C. White at NBC. "In other words, buyers didn't plan to live there, so they weren't buying cabinets, appliances, flooring, and all the other kinds of products Home Depot sells."

3. Home Depot didn't get Chinese culture "When in Rome, do as the Romans do," says Josh Noble at Britain's Financial Times. "When in China, don't import your business model from Atlanta and expect it to work." Home Depot assumed that middle-class Chinese would act like their American counterparts in areas of home improvement. But the "comparatively low cost of labor prompts middle-class Chinese consumers to pay handymen or independent contractors to do the kinds of projects American homeowners tackle on their own," says White. Indeed, Home Depot spokeswoman Paula Drake described China as a "do-it-for-me market, not a do-it-yourself market."

4. Home Depot is no Ikea You can blame the slowing economy or cultural idiosyncrasies all you want, but that hasn't stopped Ikea. "The furniture retail juggernaut from Sweden is killing it in China, and it's famous for making its customers put everything together themselves," says Kim Bhasin at Business Insider. The difference? Ikea understands that the Chinese consumer is relatively new to a Western style of home improvement. The company's meticulously decorated showrooms teach consumers "how to decorate their home, and thereby experience Western culture." Home Depot, on the other hand, only offers the tools and know-how for isolated, mundane tasks, like installing a ceiling fan.

Sources: The Associated Press, Business InsiderThe Financial Times, NBC, ReutersThe Wall Street Journal

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