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

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Also, a key new strategy is adjusting Gome's product lines. The company plans to reduce its reliance on durable, long-lasting TVs, refrigerators, and washing machines, instead selling more higher-end and more regularly replaced products like digital cameras, PCs, and cell phones. Also attractive: newly popular kitchen appliances like toasters and coffee makers, which have average margins of more than 13%, vs. margins of only 10% for traditional white goods. "These products have good profitability, and price competition is not as fierce," says Wang Junzhou, a senior executive vice-president at Gome.

Expanding to Faster-Growing Provinces

Gome also aims to expand beyond its traditional markets in China's biggest urban areas into second- and third-tier cities, as well as away from the coast into China's interior. That goal is particularly important as economic growth in China's hinterlands begins to outpace that in coastal areas. While Shanghai's gross domestic product rose only 3.1% and neighboring Zhejiang province grew 3.4% in the first quarter, interior provinces including Anhui, Sichuan, and Guizhou all saw double-digit growth. "Urbanization in central and western China is developing very fast," says Chen. "We will continue opening stores in these markets."

But Gome is hardly alone in its pursuit of new markets in China. Best Buy, for example, is focusing on Chinese consumers. The U.S. retailer has a relatively small presence in China, with just seven of its own branded stores, but it has 170 shops nationwide under the brand of its wholly owned local subsidiary, Five Star. Best Buy purchased a 75% stake in Five Star in 2006, and in February bought the remaining 25%.

Moreover, local rivals like Suning Appliance are expanding fast. The Nanjing (Jiangsu)-based company saw flat growth, with revenues of $1.9 billion, while profits grew 10%, to $70 million, in the first quarter—both exceeding Gome's performance—and says it will add at least 200 more stores this year for a total of more than 1,000, exceeding the 850 stores held by Gome's listed company. "Now we are the largest home appliances retailer in China; our revenues and net profits are both higher than our competitor," says Min Juanqing, manager of brand planning at Suning Appliance, whose Shenzhen-listed stock is up 36% this year.

Founder's Fate a Mystery

Meanwhile, uncertainty remains about the fate of Gome's founder, Huang, who, with one-third of Gome's Hong Kong-listed shares, is still the company's largest shareholder. (Bain will become the second-largest with as much as a 23.5% stake after its investment is finalized.) According to Chinese media reports, the former chairman is being held while authorities continue to examine possible financial improprieties. "Since last November, I haven't been able to contact Mr. Huang and I don't think Bain has been able to reach him either," says Chen, responding to rumors that the former chairman weighed in on the deal from his jail cell. "So I don't think Huang was able to voice his views on this deal."

Delays in settling Huang's case are likely to slow plans to transfer to the listed enterprise an additional 450-plus Gome-branded stores still owned by the founder and his wife, says Huang Zhigang, a retail analyst at Everbright Securities in Shanghai. "Suning wishes to overcome Gome in the shortest time possible. The Huang incident gives them this opportunity."

Gome's Chen, though, points to a company-commissioned audit by Ernst & Young that has given Gome a clean bill of health. He says the retailer still plans to meet its goal of expanding the company's assets with the Huang-owned stores by 2011. "We are pleased and proud that even with the economic downturn and our company's incident, we have successfully faced the difficulties and coped with the crisis," says Chen. "Gome is like a long-distance runner. We see ourselves continually developing for another century."

Roberts is BusinessWeek's Asia News Editor and China bureau chief.

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