Having experienced rapid growth in China's major big cities, domestic home appliance chains are now spreading the fierce competition into a new battlefield -- the nation's small and medium-sized cities and towns.

Leading chain retailers like Gome and Suning all plan to open more stores this year in these markets, as well as further strengthening their competitiveness in major markets.

Statistics show Gome Appliance, founded in 1987, and Suning Home Appliance Chain, established in 1996, have expanded from small electronics retailers into leading businesses in the country's retail sector.

According to a list of China's top 30 chain store operators in the first half of 2004, published by the Ministry of Commerce, Gome and Suning ranked second and third, following hot on the heels of the Shanghai Bailian Group.

The two retail giants recorded a sales volume of 14.83 billion yuan (US$1.79 billion) and 10.55 billion yuan (US$1.27 billion) respectively in the first half of 2004, both notching up year-on-year growth in excess of 60 percent.

Other home appliance chain brands have also performed well in recent years.

For example, Yongle Electronic, previously run locally in East China's Shanghai Municipality, ranked ninth in the list.

The great success of these retail chain giants was mainly in big cities like Beijing, Shanghai and Guangzhou.

Their expansion had led to cut-throat competition, which also means there is less room for further development.

In Beijing alone, there are 12 Suning shops, 13 Gome outlets and 50 Dazhong home appliance chain stores. Retailers have kept cutting product prices to lure more customers.

Sales of these retailers account for about 60-80 percent of the city's total electric home appliance market, according to a market survey conducted by the Market Economy Research Institute under the State Council Development Research Center.

"The hot competition in the first-tier market has led to shrinking profit margins for home appliance retailers," said Lu Renbo, deputy director of the center's research institute.

But they could not shift market pressures to manufacturers, he said.

So they need to alter their strategies from competing in big cities to developing new markets in smaller cities.

So far, traditional distribution channels such as department stores and sales agents for designated brands continue to dominate the second and third-tier markets.

The retail chains' sales are less than 20 percent in these smaller markets.

"There is large room for their development, and the trend towards specialization in global economic development indicates a bright future for them," said Yuan Jianjun, a retail analyst from Huaxia Securities.

In the United States, more than 60 percent of the home appliance retail market is monopolized by two professional retailers -- Best Buy and Circuit City.

In Europe, a 55 percent share is controlled by three to four major retailers. And in Japan, some 80 percent of the market has been secured by large-scale electric retail chains.

Such huge market potentials will not be neglected by the retail giants.

"Future competition between home appliance chains will focus on the second and third-tier markets," said Wang Lihong, deputy director of corporate planning at Gome Appliance.

Due to the relative expense of home appliance products, the development of chain retailers like Gome definitely has to start in big cities, according to Wang.

"From the beginning of this year, we will shift our business emphasis on to exploring opportunities in smaller cities," Wang said.

The company plans to open some 200 stores around the country, with most of outlets located in the second and third-tier markets, he said.

Gome will soon open stores in Baoding and Tangshan in North China's Hebei Province.

"The second and third-tier markets will account for a major proportion of our future business, as there are a large number of such cities," Wang said.

With the development potential offered by these markets, Gome has laid out an ambitious plan.

By 2008, it aims to open a total of over 1,000 Gome home appliance chains and achieve annual sales of 120 billion yuan (US$14.5 billion).

The retailer had established 28 branch companies and opened more than 160 chain stores in 42 major cities around the country by the end of last year.

It sold about 30 billion yuan (US$3.6 billion) worth of products in 2004.

In order to better penetrate smaller markets, the company is currently restructuring its management organizations.

It plans to split the company's management into eight regions. And within each region, company resources like logistics and product suppliers could be shared.

"Such a management model will facilitate our business expansion from provincial capital cities to county-level cities and towns," Wang said.

Gome's biggest rival is the Suning Home Appliance chain. It also said that it will pay more attention to developing new market in different regions to boost its sales from this year.

Most of the 130 Suning stores are currently in first-tier markets.

"More and more smaller cities will be included in Suning's business," the company's Vice-President Sun Weimin said in an earlier interview with China Daily.

But he did not elaborate on this.

According to Sun, the future competition between home appliance chains lies in how to successfully develop smaller markets.

One way is to establish logistics centers in big cities, which are able to serve businesses in the smaller cities around it.

The other way is to develop franchised stores in third-tier markets, said Sun.

Wang Lihong from Gome said that none of the companies has so far found a successful business model for the second and third-tier markets.

But he believes that doing business in these markets is much easier than in bigger cities.

"The traditional distribution channels in these markets have much lower competitiveness than in major cities," he said.

In addition, Gome's successful experience and the relatively relaxed market environment also make business development much easier.

However, industry expert Lu Renbo said it is difficult to say whether they can be successful in second and third-tier markets.

"Home appliance retailers started to develop in smaller cities several years ago and the competition has never let up," he said.

Local players like Dazhong, Yongle and Sanlian have all successfully expanded their businesses into the rural markets in their respective regions.

Their success is due to the fact that when they entered the smaller cities, the market was immature, with huge development potential and fewer competitive traditional sellers.

"The situation would be different when all home appliance chain retailers plan to develop the second and third-tier markets," Lu said.

Meanwhile, with lower average incomes, the market in these cities is not as huge as people expected.

"It is a great challenge for home appliance chains to develop business in second and third-tier markets," he said.

"The early comers would have the priority."

Choosing the right business model and outlet locations are the most important factors.

In the near term, their expansion into smaller markets will not be too fast, as major cities are still their major profit sources, Lu predicted.

Nationwide leaders Gome and Suning, although planning to enter the small market, will not ignore the crowded big markets, because regional players continue to fight for a bigger share of the market in major cities.

Each company will continue to strengthen its market position in the first-tier markets, as well as gradually exploring new markets.

(China Daily February 3, 2005)