China July 13, 2009, 9:37AM EST

A Comeback Plan for Gome, 'China's Best Buy'

One of China's largest electronics retailers hopes a Bain investment and a focus on profits will help it move past charges involving its ex-chairman

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One might think Gome executives would be patting themselves on the back these days. Since the Beijing-based electronics retailer, which aspires to be China's equivalent of Best Buy (BBY) in the fast-growing China market, announced late last month that it had won at least $417 million in investment from private equity firm Bain Capital, its Hong Kong-listed stock has soared more than 55%. The new financing should help Gome, which has more than 850 stores in almost 300 cities across China, tap strong Chinese consumer demand, up 15% in the first five months of this year. "Consumer-related businesses in China have a lot of potential going forward, and the company clearly has a tremendous platform," says Bain managing director Jonathan Zhu. "They have the footprint, they have the brand, and they have the vendor relationships. All of these are critical factors to succeed."

Thanks to the Bain investment, Gome looks well set to put the bad days behind it. In November, the company's founder and former chairman, Huang Guangyu, resigned following news he was under investigation for alleged economic crimes. That led to a seven-month suspension in the trading of Gome's stock and a severe drop in consumer confidence in the company. With the Chinese economy weakening because of the global financial crisis, first-quarter revenues were down 20%, to $1.4 billion, while profits of $47 million were off 37%. In response to the slowdown, Gome shuttered 43 stores and revamped product offerings in others.

Focus on "More Careful Management"

The Bain investment and comments from Chinese officials suggest Beijing is confident the company is not involved in any malfeasance, says Chen Xiao, Gome's new chairman and president. The investigation of the company's former chairman is "a personal matter of Huang Guangyu's," says Chen, 50, with "no connection to the company."

But Chen is hardly sounding smug. With China's economy suffering from recessions in the U.S. and among other major trading partners, Gome still has plenty of challenges. "We have never before faced such a serious crisis as the global financial storm," frets the chain-smoking Chen, a 20-year industry veteran who assumed the chairmanship from Huang in January. With sweeping plans to boost competitiveness by revamping stores, rejiggering product lines, and expanding into new parts of China, the "future Gome [must] be different from today's," he says.

First on the docket: boosting profitability at Gome's stores. Chen says Gome over-emphasized a rapid rollout of new outlets in recent years. That helped the company win leading market share, but sometimes came at the expense of profitability. (Executives will not reveal single-store average profit levels.) Chen has set up a new comprehensive evaluation system run by 20 top staff that is rating performance of stores, products, and Gome's more than 200,000 employees, as well as training top managers nationwide. The company plans to shut some 100 more stores, reorganize others, and open new ones, with a target of zero growth overall in outlets this year and single-digit growth in new stores in 2010. "We have become too accustomed to a rapid growth pattern in the past and have neglected management," says Chen. "Gome's future success depends on more careful management," he says, adding that Gome aims to reach $36.8 billion in sales by 2014.