Gome Is Tops in China

Knowing the value of innovation and branding helped this electronics and appliance retailer become a leader in a competitive market

By Chi-Chu Tschang

TEH ENG KOON/AFP/Getty Images

In its 15 years of existence, Gome Electrical Appliances has become China's largest electronic retailer—with a 12% market share according to the company's internal estimates. The Beijing-based company started by selling TV sets, air conditioners, and refrigerators at low prices by cutting out the middlemen and purchasing directly from manufacturers. Now, Gome (despite the unconventional spelling, the name is pronounced Guo Mei and means "beautiful nation") has shifted its focus to selling Dell (DELL) laptops, Apple (AAPL) iPod nanos, and Motorola (MOT) cell phones. "Small items don't occupy too much of the store space, but the margins may be even better than the traditional electronics," says Wang Gao, a professor at Tsinghua University who runs an executive development program for Gome.

Gome's new strategy has helped propel the retail giant to No. 46 in BusinessWeek's Asia 50. Hong Kong-listed Gome's profit surged 38%, to $165 million, in 2007 on sales of $6.2 billion. Goldman Sachs (GS) is forecasting Gome to earn $394 million in profits this year from sales of $7.2 billion. Gome's actual profits and sales are most likely even higher because parts of the company were not injected into the listed company when founder Wong Kwongyu took Gome public through a back-door listing in June 2004. According to Gome's 2008 interim earnings report, its listed entity had 828 stores in China as of June 30, but Gome says the group currently has 1,300 stores.

Optimistic About a Rebound

For all its strength last year, though, Gome has not won fans among investors more recently. Its Hong Kong share price has fallen 43% since hitting a 52-week high in late January. Analysts blame a rough climate for equities; Hong Kong's benchmark Hang Seng index, for instance, has dropped 38% from its Oct. 30 peak. Gome also was hurt by the May earthquake in Sichuan and severe spring floods in southern China, which depressed sales and sent same-store growth falling into negative territory. The disappointing stock performance is therefore "understandable," says DBS Vickers Securities' retail analyst Mavis Hui, who remains optimistic about a rebound. "On the whole, the second half is still looking very good," she says.

Most Chinese companies want to be the biggest, but few have succeeded like Gome. The company did it by constantly innovating and evolving its business model. Gome founder Wong dropped out of school at 16 and started selling imported electronic products from a roadside stall in Beijing with his brother two decades ago. In 1993, the brothers began selling their electronic products under the Gome brand at a time when there were few Chinese brands.

"The key to their success is that branding is a concept that is still evolving rapidly in China," says Warren McFarlan, a Harvard Business School professor who co-authored a paper on Gome. "What Gome was able to do was they were able to sell the Gome brand as high quality. Therefore, people used the Gome brand to trust the electronic items that were put in their store because a lot of the people didn't know who the Chinese brands were." Gome estimates its brand is now worth $7.2 billion.

Teething Pains

Like many other Chinese retailers, Gome originally focused on covering every corner of China. While management gave a lot of attention to opening new stores, they tended to lose interest in the performance of existing ones.