Liu Buchen

 

After high-profile mergers and acquisitions between Gome and Paradise, BestBuy and Five Stars in 2006, China's electronics retail market does not show any sign of reduced intensity in consolidation this year.

 

First, the second-largest player Suning posted a statement saying it would invest 2.4 billion yuan to build 250 chain stores, as well as a logistics center in Shenyang and two flagship stores in Shanghai and Wuhan.

 

Then BestBuy was rumored to buy No 6 electronics retailer Sanlian in Shandong Province. The biggest electronics chain operator Gome was reported to spend 6.5 billion yuan to increase operational efficiency and improve relations with suppliers, which was followed by the news that Gome will take back product sales in 100 stores from manufacturers' sales representatives. 

 

Thus, questions arise: Why is the consolidation activity so intense this year? What is the background? What impacts will these events bring to the market?

 

In my view, the activity is a sign of the transition from quantity-driven expansion to quality-focused operations.

 

For a long time, China's retail electronics market has faced problems such as worsening relations between retailers and suppliers, quantity-driven expansion, lack of core competitiveness and low profitability.

 

In the face of the invasion from BestBuy, a necessary step for domestic retailers is to solve the old problems and reform their businesses. This is the background of changes in this year.

 

A harmonious relationship

 

In the eyes of industry observers, the biggest problem for China's retail electronics chains is the tense relationship between retailers and suppliers, as retailers ask for various kinds of charges and use money that they should pay to suppliers for several months without paying interest.

 

However, this knot is harmful to appliance manufacturers and does no good to retailers.

 

Seeing this and anger from manufacturers, Gome is determined to fix the bind. In April, Gome said to hundreds of suppliers that it would reduce the varieties of charges not stipulated in contracts. The 6.5-billion-yuan investment shows its intention to honor the commitment.

 

However, this is a commitment that is difficult to honor. The business model of many Chinese electronics retailers includes abuses of manufacturers and suppliers, namely from entry fees, special fees for festivals and anniversaries, and delayed payments to vendors. So, how far Gome can really go is something hard to say.

 

International practice

 

In almost 30 years of history of China's reform and opening up, we have realized that the country will have to experience what developed nations have experienced. Retail electronics is no exception.

 

An international practice is: retailers charge reasonable entry fees, vendors do not have representatives at shops and payment is stated in contracts. Now, Gome has started to dismiss sales representatives from suppliers in a move toward international practice. However, it has received objections from suppliers.

 

This may seem strange to outsiders: why do suppliers want to share costs, but retailers decline the offer? The reason is that China's electronics sales are driven by functions of products, not brands. A function-based model needs sales representatives to explain the function in great detail to customers and how bad the products from competitors are. They usually tend to add too much false information in the explanation.

 

After the representatives are dismissed, consumers are on their own, free from false information.

At this time, if your brand is not good, consumers do not even want to take a look at the functions. This is a big disadvantage for local brands and will hurt their sales, so domestic manufacturers are especially dissatisfied.

 

Suning, which usually has a better relationship with suppliers, seems to be lagging behind Gome this time, as it put more resources in building new stores and the logistics center.

 

China's electronics retail market is more and more like a trio-play - Gome, Suning and BestBuy, but while Gome and Suning made some significant steps, BestBuy seems to be in an embarrassing position.

 

In the electronics retail business, foreign companies do not have much say. In this market, resources are the biggest edge to competitiveness, namely whoever has the most stores has the leadership. Gome and Suning both have more than 800 shops, but BestBuy has just one directly operated store, so how can it compete against Gome and Suning?

 

The shortcomings of BestBuy are also highlighted by a varying China strategy: it used to say no to price wars, but some suppliers have stopped doing business with the United States firm due to very low procurement prices. BestBuy took a controlling stake in the Chinese firm Five Stars in March, 2006, but we did not see any significant changes in the fate of Five Stars. Actually, its steps toward expansion even slowed in 2006.

 

The author is a veteran electronics retail consultant and chief consultant at SBFM Consulting in Guangzhou

 

(China Daily July 4, 2007)