Best Buy’s Struggle in the Digital Era

On December 4th, 2014, Best Buy, the largest consumer electronics corporation in the US, announced officially that it would sell its Five Star business in China to the Jiayuan Group, a China-based real estate firm.


This was another huge movement for Best Buy in the Chinese market after it closed all its retail stores in China in 2011. After several years of struggle, the company finally decided to exit the Chinese market, only keeping some of the private label operations, with brand names that included Dynex, Insignia, Modal, Platinum and Rocketfish.

Although it seems to be the signal of Best Buy’s failure in China, investors are actually happy about that. The truth is, the company’s business in China didn’t bring any profit, but instead, it became a huge burden for the company on its way to further development.

The sale of Five Star business will bring about $300 millions to Best Buy, which allows the company to focus more on the North American business and further develop its online business section. Facing strong competition from online shopping websites like Amazon, the only way that Best Buy could survive is to transfer from a big box store franchise to a consumer electronic provider with different distribution channels, both online and offline.


Best Buy entered the Chinese market in the year of 2006 by acquiring local electronic franchise “Five Star.” Then, it opened nine mortar-and-brick stores in big cities like Shanghai and Beijing. At first, Best Buy applied the same business model it used in the US market to the Chinese market: the stores were located in city centers; the company operated it own inventory and bought products directly from other brands; the stores focused more on customer experience and after-sales service.

However, this kind of business model was not applicable to the Chinese market. Chinese customers are extremely sensitive with the price. However, as Best Buy insisted on managing its own inventory instead of lending space to other brands and letting them operate on their own, it was hard for Best Buy to lower its operating expense and provide a competitive price. While local electronic retailers, for example, Guomei and Suning, were able to provide consumers with a much lower price by lending space to other brands and saving huge operating expense, it was almost impossible for Best Buy to earn a favorable market share in China. Chinese consumers might go to Best Buy to experience the product, but when they actually made the purchase, they went to local electronic stores that offered a more competitive price.

The situation was the same in the US market. However, this time, Best Buy’s competitor was no longer mortar-and-brick stores, but the world’s e-commerce giant, Amazon. Unlike Best Buy, Amazon did not have to pay for the operating cost of real stores, and was thus able to provide a lower price. Also, the online environment for consumer electronic industry was already mature in the US. People felt comfortable with ordering electronic appliances online. As a result, Best Buy became a place where consumers could touch and experience the product, but it eventually failed to turn the store traffic into buying power.

Under this situation, Best Buy realized the need to make a transformation in its business model. However, as it was impossible for offline retailers like Best Buy to compete with Amazon on price, the company had to figure out another way to differentiate from its competitors.

As a result, in 2012, Best Buy’s new CEO Hubert Joly initiated a transformation project “Renew Blue,” aiming to combine the offline stores with online website and thus create an “ominichannel” that could make Best Buy products available to customers everywhere.

On one side, in order to save operating expense, Best Buy changed its business focus by closing big mortar-and-brick stores. In 2013 alone, the company shuttered 47 stores in the US, which saved it nearly $ 765 million in operating expense. At the same time, the company also opened more Best Buy Mobile stores, which were 10 times smaller than traditional stores. These small-sized mobile stores were located near the community, which made it easier for consumers to order online and pick up in the nearest store. At the end of 2012, the number of Best Buy Mobile stores had already reached 409, and was expected to increase continually in the future.

On the other side, Best Buy put more emphasis on developing its online business through “” Best Buy realized that the only thing that differentiated itself from Amazon was that the company had real stores where consumers could touch and feel the products. Hence, since 2013, Best Buy has been dedicating itself to connect its mortar-and-brick stores with the online website. Before that, Best Buy managed its offline store inventories and the online website separately. Some products might be available in the store, but didn’t show up in the official website. Now, as Best Buy successfully connected the two folds, people were able to shop across different channels, which not only brought more traffic to the offline big box stores, but also saved the company huge money on the shipping cost. In addition, it became easier for consumers to return if they were not satisfied with the product they ordered online after experiencing it in the store. In fact, Best Buy used its offline stores as a shipping center to support online sales, which provided better shopping experience to the consumers.

In addition, Best Buy also initiated store-in-store concepts inside the company. In 2011, Apple, Samsung, Microsoft and Sony reached an agreement with Best Buy to open their boutiques inside Best Buy stores, which saved money on both sides. By the end of 2014, Samsung has opened more than 1400 boutiques in Best Buy stores, which was almost the same number as Best Buy’s existing stores.

In the latest fiscal third quarter results, Best Buy reported a significant increase in its profit, which were two times the number of last year. In addition, the offline sales in the US also increased by 3.2%, which was relatively high comparing to other similar companies, for example, Wal-Mart.

Although the increase in sales doesn’t necessarily indicate the effectiveness of the transformation, it at least shows that the offline retail business is not dying. In fact, nowadays, e-commerce websites like Amazon have also realized the advantage of mortar-and-brick stores in their ability to provide better shopping experience to the customers. For those who want the product immediately, stores like Best Buy are still their favorable choice. As a result, in order to acquire that segment of customers, Amazon announced its first showroom in New York City while eBay put extreme emphasis on its “eBay Now” shipping service.



And as for Best Buy, its real stores seem to be the only opportunity for the company to differentiate from the other e-commerce websites. The combination of offline stores and online websites might be the only way to save companies like Best Buy in the future.

Is Affordable Care Act Affordable?

The Patient Protection and Affordable Care Act, commonly known as Affordable Care Act (ACA) or “Obamacare,” is a revolutionary regulation aimed to change the landscape of American healthcare system.

The two major changes under ACA include expanding the number of subsidies available to people with lower income, and also providing insurance to people regardless of their pre-existing conditions. The Obama government wishes to enroll more people into the healthcare system through the establishment of ACA, and thus cover the deficit the government has been spending on healthcare industry. However, is it really going to work? Probably not.


If we take a closer look at how ACA works, we will be able to see the problem. The fundamental principal of Affordable Care Act is to use the money from young and healthy people to pay for the bill of unhealthy or elder people who have higher medical costs. Hence, the health insurance company should enroll younger demographics to balance the risk pool. According to a research conducted by California Association of Health Plans, people in their 20s will experience an increase in premiums by 33% under Affordable Care Act, whereas elder people will see an decrease in their cost of premiums. Now, here comes the question, will young and healthy people who only spend a small amount of money every year on visiting hospitals or doctors be willing to pay more for health insurance? Moreover, will they be able to pay that amount of money since they just start to live on their own? I guess most young people will find that hard.


In fact, although the health plan premiums for young people grow by over 30%, the benefits under ACA also increase by 42%, which means the health company is able to provide members with better services and networks. However, it seems that young people don’t care much about the benefits. According to a survey conducted by USC Annenberg students, the issue that concerns young people the most is the cost of health insurance. They use the word “expansive” frequently to describe the healthcare system. And most people admit that it’s the high cost of insurance that prevent them from enrolling in it.

2Some people may argue that there are subsidies available for young people with limited income. Yes, there are. But the truth is, for those who earn a little more than the poverty line, it’s hard for them to choose whether to earn more with no subsidy or to earn less with a small amount of subsidy. More importantly, for those healthy people who usually don’t have health problem, they would rather end up with paying penalties instead of purchasing health insurance, which is far more expansive than the penalty.

All in all, the Affordable Care Act alone couldn’t make the healthcare system operate better. If the government tries to enroll more young people, they should definitely invest more on educating younger demographics the importance of purchasing health insurance. As long as people feel the necessity of doing so, they will be willing to purchase the health insurance initiatively.

The Dark Side of the K-pop Industry

On Sep 21st, 2014, Joon Young, a member from the K-pop boy band, ZE:A, tweeted that his entertainment company had been squeezing cash out of the team without giving team members a fair salary. He then posted his paycheck on Twitter, which showed that his monthly income was only $300.


Since the year 2012 when Psy’s “Gangnam Style” went viral on YouTube, K-pop has experienced a huge increase in its market share all over the world. However, behind the glamorousness of the K-pop industry, K-pop stars are actually experiencing unfair treatment and limited freedom.

The key players in the industry, big entertainment companies in Korea, take full control over the business from casting to production, and from marketing to distribution. They casted and trained talents, and when the artists finally get debuted, they will be forced to sign a long-term contract with the company. Some of the contract even last for 17 years, which is impossible to imagine here in America.

The contract is extremely harsh to artists and beneficial to the company. Artists have to work 7 days a week with only one-week holiday at the end of the year. Three former members from TVXQ complained that they could only sleep 3 hours a day and were not allowed start their own business unless getting permission from the company. Moreover, although TVXQ brought millions of dollars to the company each year, the members only received 1% of what they’ve earned. As a result of that, the three members ended up filing a lawsuit against the company and formed another band themselves.

This lawsuit, which lasted for 4 years, aroused widely concern over the so-called “slave contract” inside the industry. In 2010, the Fair Trade Commission in Korea finally realized the seriousness of the problem, and asked SM Entertainment, the entertainment company of TVXQ, to revise its unfair contract with the artists. SM Entertainment did that, and held a press conference to address people’s concern. Now, everyone seemed relieved, however, this was not the end of the story.

On May 15th, 2014, Kris, a member from the boy band EXO, filed another lawsuit against his entertainment company, and claimed that the intense working condition caused him adverse health problems. Five month later, another member from EXO, Luhan, followed Kris and asked to end the contract with the company. Several days later, Jessica, a member from one of the most well-known K-pop girl band, Girl’s Generation, claimed through weibo platform that she was kicked out of the team because the company didn’t allow her to start her own fashion business.


All of what happened above remind us that the “slave contract” is still there, and it not only hurt the interest of the artists, but also hurt the feeling of K-pop fans all over the world. In fact, this kind of situation is hard to be changed in a short period of time. As the K-pop industry growing bigger and bigger, the competition among entertainment companies and K-pop artists will only be more, not less. This made people worry if the growing speed of the industry surpasses the capacity it can actually handle, which made the industry vulnerable in its expanding process. However, there were also people arguing that this process is what every industry would experience during its expansion. No matter what the answer is, one thing is for sure: if the K-pop industry didn’t make any changes in the way they manage their artists, it will absolutely affect the future development of the industry.

Double 11- The Shopping Carnival of Alibaba

Have you ever heard of “Double 11?” Double 11, which is on November 11th, is well recognized as Bachelor’s Day in China. However, during the past few years, it was given a new definition of shopping carnival by Alibaba Group, the company that recently went public with the largest IPO in history.


In 2009, Alibaba’s B2C website, Tmall, started to offer flash sale and huge discounts on its various products. Although at first, Alibaba was just trying to take advantage of Bachelor’s Day to generate hype over its event, it soon became a national celebration for online shopping websites. Now, e-commerce giants in China like Jindong and Amazon also joined Double 11. So did some brick-and-mortar retailers in China.

This year, Alibaba Group announced that it would implement the strategy of “Buying anything from anywhere” by providing huge discounts on certificated foreign products and offering free shipping service to overseas customers. Alibaba’s unprecedented movement on the global market shows its determination to become an international e-commerce company. In addition, it’s also a great opportunity for Alibaba to showcase its potential to the shareholders after its going public in New York.

Double 11 is the most important profit-generating moment for Tmall. Last year, Tmall created a one-day sales record of $ 5.7 billion on Double 11. You can hardly imagine how passionate people are towards Double 11. Usually, they add their favorites in shopping cart in advance, then when the time comes, all they need is to hit the purchase button and pay for it. Since hot items always run out so fast, some people even stay up until 00:00 a.m. in the morning in order to get the products they want. Moreover, retailers and logistic companies are also under high pressure of cooperating with Tmall to address customer service issues and the shipping of the goods.


This year, Tmall’s goal for the transaction value on Double 11 is expected to reach $8.16 billion. There are mainly two ways for Tmall to achieve the expectation. First, Tmall has been making efforts to attract international brands to open online stores under its website. Brands like Prada, Burberry, Estee Lauder, Costco and even Tesla opened flagship stores in Tmall, and are also going to join the celebration of Double 11 by providing cheaper price and faster logistics. For example, Costco will offer 50% discount for selected products on November 11th, 2014.

Secondly, CaiNiao, the logistic company owned by Alibaba, is expanding its business to the global market by cooperating with local postal service in over 200 countries, including America, Japan, Korea, Australia, New Zealand, Great Britain, France, Italy and Germany. By doing so, Tmall will be able to send goods to customers all over the world for free, which will absolutely attract more foreign buyers and overseas Chinese customers.

Now, although there is still two weeks before Double 11, Tmall and retailers, logistic companies have already begun preparing for the biggest promotion. If Tmall could hit the sales expectation again this year, the globalization of Alibaba will definitely be much more easier. After all, those shareholders in New York are always alert of signals like this.

China Becomes a Better Place for the Medical Device Industry

Jiahong Tan, a 50-year-old engineer in the medical device industry, when leaving China twelve years ago to pursue his career in America, never thought that he would come back to China someday. However, he is back, quitting his principal engineer position in Johnson & Johnson America and working for a much smaller domestic medical device company, “Shanghai MicroPort Medical Device Co, Ltd.”

The fact is, more and more people in the medical device industry like Tan, who strived for a better career overseas, now prefer to go back to China. In 2013, the size of the medical device market in China has reached over $35 billion, and is expected to grow continuously in the next following years. The emerging of Chinese medical device industry not only creates a multitude of of job opportunities for talent, but also indicates the change of landscape of the Chinese economy.


In the early 1990s, when China was still facing poverty and backwardness, state-owned enterprises (SOEs) just started to transform into private-owned companies. There was hardly any money that can be invested on the development of medical devices, nor was the medical technology advanced enough to support researchers. In fact, almost all the medical devices in use were imported from Western countries. The only kind of medical device China was able to produce on its own were scalpels. As a result, most scholars and researchers in the medical field chose to leave China and work overseas.

Tan was also one of them. He achieved his graduate degree in biomedical engineering and worked as a researcher on heart disease at Chinese Academy of Medical Sciences. In 1996, Tan was given a chance to study as a visiting scholar at Case Western Reserve University in Cleveland. “Working in America where medical technology is highly developed was the best career path I could choose.” So he emigrated to America after finishing his study in 2003 and found a job as a medical device engineer at St Jude Medical, Los Angeles.

In 2001, China joined World Trade Organization (WTO), which brought tons of cash into the Chinese economy. The government now had extra money to develop the high-tech industry, among which the medical device industry is the most fast growing one. In addition, as SOEs grew bigger during the past few years, they were also able to invest on technology to generate more profits and to be competitive in the market. By the end of 2012, China has already grown to be the world’s fourth largest medical device market, which is over ten times that of the year 2001.


Some people, seeing the large potential in Chinese medical device market, went back to China. So did one of Tan’s previous colleges, Li Wang. She was so surprised at the platform China created for medical device engineers that she immediately introduced Tan to her company. Tan, who was already a primary engineer at Johnson & Johnson America, chose to go back to China after careful consideration. Now, Tan stayed apart from his family and spent most of his time in Shanghai.

When asked why he was willing to leave America, Tan smiled, “I found the job boring, and there was not much work for me to do.” In fact, in a giant company like Johnson & Johnson, the complicated internal structure makes it hard for engineers to develop a new project and to take full control over it.

However, the situation in China is different. Because the medical device industry in China is still in its early stages, companies encourage skilled engineers to develop innovative projects. In fact, as soon as Tan moved back to Shanghai, he was given the position of the Vice President of Technology. “I am now in charge of an important project with a crew of 70 people, including engineers, product managers, technicians and workers, which is much bigger than the one I have in America.”

Moreover, Chinese companies are also willing to pay higher salaries to attract talent, especially people like Tan who has previous working experience in the world’s leading market for medical devices. In fact, Chinese medical device industry is at least five or ten years behind that of the America. As a result, overseas talent can help China catch up with America as soon as possible.

So why does medical industry suddenly become so important to the Chinese economy? There are two different aspects for us to understand the question.

First, it is because of the demand for cheaper medical devices in China. In fact, with the increasing number of aged people and the amount of money accumulated, people in China are willing to spend more on medical care. However, although the demand for better medical services is increasing, there is still a shortage in the supply of medical devices in China. As Tan said, China now relies mostly on imports, especially in the high-end medical device market. For example, in the area of heart disease, China produces about 70% to 80% of the stents domestically. While for the other complicated devices like pacemakers, almost 85% of them are imported from America, of which the cost even overweighs that of the military industry.screen-shot-2011-07-05-at-1-13-37-am

As a result, in order to cut medical costs and reduce burden on patients, China finds it essential to develop domestic medical device market. In this August, China’s National Health and Planning Commission (NHPC) announced that Chinese government would pursue policies explicitly designed to favor domestic manufacturers over foreign manufacturers. This accelerates the current trend of foreign multinational medical device manufacturers acquiring or joint-venturing with Chinese medical-device companies. An example for this is Medtronic, the world’s fourth largest medical device manufacturer, which recently acquired a local company in Hangzhou, aiming to expand its market share in China.

Secondly, the medical device industry is actually leading the transformation of economic structure in China. For the past few decades, China was known as the world’s factory where manufacturing industry led the economic growth. However, as the manufacturing industry has a really thin profit margin, and companies are also moving their factories to Southeast Asia for cheaper labor force, China realizes the sense of urgency to transfer its economic structure from manufacturing to innovation. During recent years, China has invested huge amount of money on high-tech industry, which encourages people to develop their own intellectual property rights instead of following the others.

Screen Shot 2014-10-23 at 12.58.18 AM

However, as good things and bad things always stay together, China is also facing great challenges in the process of economic transformation. The development of high-tech industry is extremely expansive and time-consuming. For example, Tan’s project on heart rhythm management is estimated to cost about $2 million and takes at least four years to achieve the primary goal. Moreover, medical devices also require numerous tests before they can be put into use. Hence, whether companies could ensure consistent investments on long-term projects is the key to the success, and also the key to the future of the medical device industry in China.

At the end of the interview, Tan told me that he is pretty satisfied with the current working condition in China. “What’s your plan after graduation?” He then asked me. When I said that I would like to stay in America for several years and then go back to China, he nodded his head: “That’s right. You can’t go back without any working experience. But the final destination is always China.”


Real Estate Industry-The Business That Will Never Die

Speaking of the great depression in 2008, Craven Ji was a little bit upset: “The sales of homes dropped by 50% that year, and house prices also decreased by 30% on average.” “However,” she then added, “As the economy is recovering recent years, the market is seeing a brighter future. Home prices have recovered by approximately 25%, which almost reach that of the peak time in 2006.”


Craven Ji, a real estate agent in Real Estate eBroker Inc. in Los Angeles, has been in the business of real estate for almost 9 years. Different from her colleagues, most of Ji’s customers are Chinese. According to Ji: 67% of all her customers are Chinese immigrants while another 33% of them are overseas investors from China, either looking for investment opportunities or trying to find a new house in America. Ji does most of her business in Pasadena, Arcadia, San Marino, USC and UCLA neighborhoods where Chinese people aggregate.


“The year 2008 was a hard time for me,” she said, “There were little overseas Chinese investors that time, and the local market was also frustrated by economic recession.” Ji only sold 7 properties in 2008, which was much less comparing to her average record of 20 houses sold per year. In fact, although the U.S. interest rate was pretty low during the economic downturn, most homebuyers were frightened by the poor economic performance and were thus resistant to borrow money from the bank. “When people earned money, they’d rather pay off their debt to the bank than spend them on other consumptions. They were simply not confident with the market,” said Ji. Because most of her customers rely on bank loan to buy house, the unwillingness to borrow money would definitely impact her business. Also, as bank owned foreclosures set home prices extremely low, home sellers had to cut down their price to the same level to be competitive in the market. The two sides kept going back and forth, which resulted in a huge decline in the market volume.

Now, several years after the real estate nightmare, the situation seems to get better. “Not only does the local market start to recover, but also does overseas capital continue to pour into the U.S. market,” said Ji. According to property consultant firm CoreLogic, home prices rose by 7.4% year over year in July 2014, and are expected to rise by 5.7% from July 2014 to July 2015. Moreover, according to LA Times, overseas homebuyers and new immigrants spent $92 billion on U.S. homes in the last year. The $92 billion amounts to 7% of all money spent on U.S. homes within a year, which is 35% higher than the year before. Among those purchases, 25% of them were made by Chinese buyers. Statistic shows that they are extremely interested in the Real Estate market in southland, including the city of Los Angeles, San Francisco and Irvine, which also helps drive up home prices in these areas.

Percentage Change in Home Price Index Year After Year

Chart 1When asking about the future of real estate market in the U.S., Ji expressed her concern over the median-price house market: “One challenge we are facing now is that there are less and less affordable houses in the market.” While the demand for median price house is going up, the supply is actually going down. In July, the median transaction price was $457,000, which is 7.6% higher than that of last year. Also, the market volume, which is 7012 this year, is 12.5% less than that of last year, according to CoreLogic’s recent report. Ji is worried that if the interest rate starts going up next year, there will be more competitions in the median-price house market.


With home prices showing an upward trend and overseas cash flowing to U.S. market, some people may ask: will there be another cyclical real estate economic downturn in the future? Also, what about the housing bubble that once led U.S. economy to collapse? Well, the questions may be hard to answer now, but one thing we are pretty sure is that the housing market won’t crash, since buying house is an American dream that will never die.

Lipstick Index – A New Economic Indicator Under Recessions

During the early 2000s recession, the chairman of the board of Estée Lauder, Leonard Lauder, was surprised to notice that the sales of lipsticks under its several brands increased rapidly compared with other cosmetic products produced by the corporation. Considering the financial difficulties people encountered at that time, Lauder believed that small items like lipsticks could serve as substitutes for luxury goods that people could no longer afford. This phenomenon was then named the “Lipstick Index,” and economists began to consider it a new economic indicator.

Applying red lipstick

However, in the most recent recession, lipstick sales seemed to contradict the golden rule of the “Lipstick Index.” According to the report released by market research firm Mintel, lipstick purchases continued to fall since the year 2007. People started to doubt whether the “Lipstick Index” was valid. Was the increase in sales in early 2000s a coincidence? The answer is “No.”


In fact, one of the most famous cosmetic groups, L’Oréal,  saw its sales grow 5.3 percent in 2008, the heart of the most recent recession. This number indicates that beauty market was still active during the economic downturn. What’s interesting is that, as the sales of lipsticks underwent a certain decline, sales of nail decoration goodies like nail polish are up 65% since the first half of 2008, according to market research firm NPD Group. The unpredictable shift had to do with the glut of lipsticks on women’s dressers and their increasing demand for nail beauty. As a result, the “Nail Polish Index” has now become a new indicator of the economy.


How do products like lipsticks and nail polish measure the economy? There are several rationales behind it. First, when people could no longer afford things they used to consume, they simply turned to inferior goods. For example, it might be hard for them to consume big-ticket items like houses, jewelry or autos, but as for inexpensive goods like lipsticks, they could absolutely afford it and enjoy the fun of shopping. After all, even lipsticks of top brands are under $40 nowadays. Second, according to a research conducted by the Texas Christian University, women are more likely to buy beauty products during recessions. This is because women feel more secure with makeup and nicer clothes while their bank account balances are under pressure. They try to compensate themselves with small and affordable indulgence, like lipsticks, perfumes, nail polish and others.

Since the emerging of these unusual indicators, more and more categories were defined as the indicator of future economy. The info graphic showed below lists some weird ways of gauging the economy, including sales of cheap spirits, underwear sales and lower hemlines. Although they are not as authentic as widely recognized indicators like GDP or unemployment rate, they actually provide us with a different view of the economy.