Gome Is Tops in China

(page 2 of 2)

A saving grace was that Gome was the first Chinese retail chain to be picky about opening stores in good locations, giving it an edge over China's second-largest electronics retailer, Suning. Gome has expanded also by gobbling up rivals left and right, including then-third-largest electronics retailer China Paradise, fourth-largest Beijing Dazhong Electronics, and fifth-largest Sanlian Commercial, as well as cell-phone specialty retailers Dalian Xundian Communications and Shaanxi CellStar Telecommunications. Gome has spent more than $1.1 billion on acquisitions since July 2006.

But as Gome rapidly expanded, it began to experience teething problems. Some of the second- or third-tier cities in which Gome planted stores were not big enough to justify one. Also, Gome did not have enough talented and experienced managers to run the newly opened stores. Gome's sales per square meter of shop space—a metric to evaluate a retail chain's success—plummeted 28% in 2006. It was a wake-up call for Gome's management. Starting in 2006, Gome tweaked its strategy to place less emphasis on growing bigger. "The change in strategy was primarily because the company had already finished the first steps of expanding its network and scale. Future development would place greater attention on raising the sales per square meter of store space," He Yangqing, Gome vice-president, wrote in a response to question submitted by BusinessWeek.

A Custom-Made Strategy

The centerpiece of the new strategy was to ink exclusive distribution rights to the so-called "3C" category—computers, communication, and consumer electronics. Not only do these 3C products carry fatter margins, they also see double-digit growth from China's rising consumer class. Gome agreed to open up Motorola-branded shops-within-shops inside 30 of its largest stores across China almost one year before Suning reached a similar deal, so it sold Motorola's ROKR2 cell phone before anyone else. Dell chose Gome to be its first retail partner in China before signing a deal with rival Suning six months later. So far, Gome holds the exclusive rights to sell Apple products in China. Gome has also been working more closely with suppliers such as TCL and Haier to make custom-made products consumers want.

This strategy appears to be succeeding. However, that doesn't mean it will be all smooth sailing for Gome. Originally, the company was targeting 4% or 5% in same-store growth this year but has lowered that forecast by one or two percentage points. When Gome announced interim earnings Aug. 13, Gome President Chen Xiao admitted it may not be able to meet sales targets this year due to the earthquake in Sichuan and floods in southern China depressing consumer spending. Moreover, Gome was originally hoping for a boost in TV sales this summer from the Olympics, but initial feedback from stores showed that more people chose to stay at home to watch the Olympics rather than go shopping. In the second quarter, Gome saw some hiccups, says DBS' Hui, but adds, "We believe that there is still room for them to actually expand stores and also improvements in the profitability."

Business Exchange related topics:
China Marketing
China Innovation
Retail

Tschang is a correspondent in BusinessWeek's Beijing bureau.