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Going, Going, Gome (for Best Buy)

The wonderful world of China retail is never short of a story or two, and the ever-competitive appliance sector is a case in point – and includes educational elements with broader application.

Research company Access Asia reports that strong appliance sales growth in China has been achieved alongside lack of pricing controls (price competition being common corporate killer), and that “it finally appears that the long awaited shakeout in the industry is occurring” (China’s provincial industry structure has often resulted in highly fragmented markets, but this is changing).

The appliance sector has recently welcomed some in-bound foreign competition, in the form of Best Buy from the US (at a time when foreign investment is under scrutiny). But where does the foreign entrant stand when going head to head with a local giant (if not being overtly protected by government, as in the case of Xugong etc [1].), and what impact does the entry of leading foreign player have on the strategy of the local incumbent?

Access Asia reports that local champion, Gome is “a little nervous these days”, but that the arrival of Best Buy may have done them a favour. It may not be a real competitive threat for now, but it has made them look at some “long overdue” changes and embark on consolidating a hitherto fragmented sector (one of the positive things China’s WTO entry has done for local firms). They note that the company is seeking to solidify a dominant market position by:

So Gome is leading a consolidation – and seeking to serve the new, home-owning, affluent, urban consumer (the holy grail of so many local, and foreign, companies these days). But it is also doing some shopping of its own (as part of China’s M&A boom [2]) – they recently bought China Paradise (the Hong Kong-listed, fifth-largest player) for US$680 million, and have expressed an interest in chains such as Suning (whose President, Sun Weiming, was quoted in China Daily as saying “We will fight a bloody battle to the end”) and Dazhong as well.

As for Best Buy, its US$180 million purchase of Five Star gives it 136 stores in 8 provinces, compared to Gome’s near 500 stores, including locations in the increasingly attractive (and less competitive) 2nd and 3rd tier cities.

That cost competition [3]thing again…Access Asia make this point about competitive positioning strongly, and any number of foreign companies in China might take note:

In addition, Gome are reported to be strong on locations, price, range and customer service, and to have an improving logistics [4] system (allowing still further cost saving).

The relatively new, FMCG-focused Innovatize blog [5](from Thomas Wetherell [6]) has also looked at Best Buy’s plans [7], and agrees that “In order to succeed in China, Best Buy would be wise to avoid going toe to toe with the local players such as Gome”, and that it “must differentiate…and focus on some area of the business in which they have a competitive advantage”.

All this implies a lot of hard work for Best Buy, and other foreign firms that are trying to buy their way into the market. As Access Asia says: “It’ll be fun to watch”.

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