Home Depot Opens China Business

BEIJING — The Home Depot launched its bid to sell to the world's most populous nation on Sunday.

At a ceremony in Beijing that included drummers and dragon dancers – a traditional Chinese symbol for luck – Annette Verschuren, Home Depot's president for Asia and Canada, called the company's investment in 12 stores "an historic milestone for The Home Depot," the world's largest home improvement retailer.

Home Depot's push into China is likely to be difficult in coming years but could produce significant long-term profits.

Since Home Depot bought Chinese home improvement retail chain Home Way last December, executives said the company has spent "millions" of dollars to redesign stores, set up supply chains and train staff.

Home Depot has not said how much it paid for Home Way, but Chinese media have reported the Atlanta-based company paid 700 million Chinese yuan, an amount equivalent to $92.6 million at current exchange rates. Verschuren declined on Sunday to say whether that figure was accurate.

Home Depot's China operations are likely to return low profits for the foreseeable future because of intense competition, low average family incomes and high distribution costs, Verschuren and economists said.

"With the number of people moving into apartments in China over the past few years, (home improvement stores) should have made fortunes, but nobody has because of the low, low prices and the lack of profit margins," said Paul French, a Shanghai-based economist with Access Asia, a consulting firm.

Although B&Q, a home improvement chain that is a subsidiary of the UK-based Kingfisher Group, entered China in 1999, "they have only begun to see a dribble of profits ... over the last 18 months," French said.

Verschuren said price competition in China will be fierce.

"The discounting is much greater here than in the U.S.," she said. "If we had everyday low pricing on everything then I think we'd be profit negative."

Instead, Home Depot hopes to gain long-term as Chinese become richer and China's cities swell. China's government expects 400 million people – more than the entire U.S. population – to move from rural to urban areas by 2030, feeding an unprecedented construction boom.

"This is the beginning of an economy that's going to become strong," Verschuren said. "It's going to be slow ... but we see big opportunity here."

"We're going to grow this business," she said.

To differentiate itself from thousands of smaller home improvement retailers in China, Home Depot will focus on providing top tier service and reliable, high quality products, executives said.

Increasingly, Chinese are seeking brand name products to avoid dangerous and counterfeit goods.

Ji Changchun, a 45-year-old accountant shopping for lighting fixtures in the new Beijing store on Sunday said he wouldn't buy construction materials at a smaller store.

"Some stores are cheaper than Home Depot, but I can't trust that their products are genuine and the quality is good," he said.

The Home Depot stores are located in six cities in northern China: Beijing, Tianjin, Xian, Qingdao, Shenyang and Zhengzhou.

Each store features large sections selling water filters and "environmentally-friendly products," according to a company press release.

"We see the Chinese customer being very concerned about their environment because the needs are so much greater here," Verschuren said.

For some shoppers, however, price is a more important consideration.

In a section of the Beijing store selling floor coverings, 31-year-old electronics salesman Qi Jingkai said he was shopping at Home Depot because of an opening day sale.

"The store is nice, but for most Chinese price really is the only consideration," he said.