Retailers Focus on High-end Products

CHINA''S two biggest home appliance retailers, stung by declining sales as a decade of aggressive expansion succumbs to the economic slowdown, have a major foreign competitor nipping at their heels.

Gome Electrical Appliances Holding and Suning Appliance Co, which operate a combined 2,000 stores across China, have reined in expansion plans and reworked marketing strategies to improve profitability and compete against Best Buy Co, the biggest United States consumer electronics retailer.

"In the face of slower market growth this year, domestic retailers will be taking higher risks if they open new stores," said Guo Yang, a senior analyst at Orient Securities Co. "They will be seeking bigger profit margins instead of the benefits of economies of scale."

China''s home appliance and consumer electronics product market is expected to generate revenue of 792 billion yuan (US$116 billion) this year. Gome and Suning account for about an eighth of total sales.

Best Buy is seeking a bigger slice of the pie. It opened its first store in China in 2006 and, after a slow start, has carved out its niche and is seeking to replicate it across the country.

"Developing the China market is not about a race for expansion," said Robert Willet, chief executive officer at Best Buy International. "We want to become the No. 1 choice for customers, which we believe can help raise our market share."

Still, expansion is on the cards. Best Buy, which now operates six self-branded stores in China, completed the acquisition of Jiangsu Five Star Appliance Co earlier this year. Five Star has 170 stores, mainly in eastern China.

More stores to open

Willet announced last month that Best Buy would open up to 12 new stores this year, including some under the Five Star brand, and is forecasting the number may rise to several hundred in the next 10 years.

Gome and Suning have felt the sting of slower consumer spending among tougher economic times. Same-store sales at Suning declined 11.98 percent in the first quarter. Gome did not reveal its figures but BOC International (China) Ltd estimated same-store sales at Gome were flat in 2008. Both retailers have scaled back aggressive expansion plans in favor of focusing on improved profit margins.

Gome said its gross margin, as a proportion of revenue, was about 17 percent last year. Suning reported a similar ratio for the first quarter. By contrast, Best Buy''s margin in the fiscal fourth quarter ended February rose to 24.6 percent from 23.7 percent a year earlier.

Gome and Suning have adopted a strategy of focusing more heavily on higher-margin products and the prime segment of computers, consumer electronics and home appliances.

The retailers also are seeking to boost sales by sprucing up their shopping environments and providing enhanced after-sales service.

As part of this new thrust, Gome opened a new flagship store in Beijing last month. It covers 20,000 square meters and has four times more products on display than the average shop.

About 40 percent of the showroom is devoted to computers, consumer electronics and appliances, and the megastore also provides areas for product demonstrations.

"Domestic players with stores of similar layout, products and pricing are engaged in cut-throat competition," said Chen Xiao, president of Gome. "So we are taking a page from foreign retailers and introducing higher-margin goods and our own brand products to set ourselves apart and increase our profitability."

Gome''s strategy highlights a developing trend among Chinese retailers, said Lin Yang, an analyst with Dongxing Securities Co. Domestic retailers, who once opposed the entry of foreign competition in the market, are now trying to emulate overseas counterparts well versed in the art of separating a consumer from his money.