Best Buy's China Challenge

BEIJING -- When Best Buy (BBY) announced plans this spring for a push into China, Wall Street lauded the move. Analysts figured a huge U.S. retailer should have no problem grabbing a piece of the fragmented consumer electronics market.

The stakes are temptingly big: Best Buy estimates the sector could be worth $100 billion by 2010.

But on the ground in China, no one takes it for granted that Best Buy will prevail, and skeptics think it's shown up too late. Over the past few years, domestic rivals have become increasingly ambitious -- and Best Buy's entry seems to have energized the No. 1 Chinese player, Gome, which recently swallowed one local competitor and hopes to buy more. Gome, which posted $2.2 billion in sales last year, would like to expand beyond its home base into Southeast Asia.

Best Buy claims a far bigger $31 billion in annual revenues. But its international experience is limited to Canada, far removed from the hurly-burly of Chinese retailing.

"No one's shown me what competitive advantage Best Buy's got in this market," says Paul French, a Shanghai-based retail and consumer analyst at market research firm AccessAsia. "I think Best Buy will fail."

Responding to Best Buy, in mid-August Gome said it plans to speed up its expansion through more acquisitions. That follows Gome's $680 million bid, announced in late July, to buy No. 3 electronics player China Paradise. Following the tie-up, Gome will boast 501 stores nationwide -- nearly four times as many as Best Buy.