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Chen game for the Gome draw
By Ding Qingfen (China Daily)
Updated: 2009-02-17 10:19

Entering the retail business in 1985, Chen made Paradise, set up with an initial investment of 6 million yuan in 1997, the third largest consumer electronics retailer with annual sales of 16 billion yuan in 2002 before it was taken over by Gome. The secret of his success lies partly in his personal skill in garnering the support of suppliers, especially when the company was still small.

Gome's executives conceded that Chen's personal relationship with suppliers had averted a revolt that could have completely paralyzed it in the early days of the crisis. Since then, he and his aides have continued to improve relationships with suppliers.

"In the past, we simply dictated our terms to the suppliers," said He. The threat of shutting them out from Gome's stores was enough to make them comply, he pointed out. Now, "we discuss with our suppliers on how Gome can help to maximize their profits," said He.

Chen game for the Gome draw

According to He, Gome has agreed to make faster payments to suppliers for goods sold and is trying to work closely with them on product development by sharing the information of consumer needs based on feedback from its stores. "We also cooperate with our suppliers to directly promote their new products on all those who visit Gome stores," He said.

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Funding is another issue that Chen must address urgently as bank borrowings are becoming less forthcoming, stock analysts said. The company has between 940 million yuan and 3.4 billion yuan of short-term liabilities, according to a Nomura report. It also has convertible bonds of 4.6 billion yuan that need to be repaid in 2010, the report said.

The company is reportedly preparing for a bond issue in Hong Kong to help reduce debt. Gome has said that the task on hand was to complete the audit of the company's accounts and to ascertain that the company's finance is separate and independent of its former chairman's personal endeavors.

Industry experts and stock analysts agree that Chen's real imprint will be seen on Gome's make-over strategy.

He said: "In 2009, Gome will focus on increasing sales in each store instead of opening more stores."

The company, He said, will try to keep the same number of stores it now has. It will open new stores only after underperforming stores in undesirable locations are closed.

Meanwhile, the new management of the company is also taking steps to improve the in-store environment to entice shoppers. At the urging of Chen, a 60-member research team has been set up to advice management on store locations, in-store product display, product mix, consumer trends and purchasing requirements.

In addition, the company has also streamlined its operations into three major divisions: traditional consumer electronics, computer products and small electrical appliances.

By the end of 2007, Gome had a total of 41 telecommunications stores. But it was seen to be far from enough. In mature markets, sales from 3C goods typically account for over 50 percent of the total of a normal-sized consumer electronics store. The ratio for Gome was less than 20 percent in 2007.

The emphasis on small appliances was also profit-driven. Compared with traditional consumer electronics, small appliances yield higher profit margin at an average of 20 percent, while it is 10 percent for air-conditioners and 5 percent for television sets.

There are compelling reasons for Gome to change its strategy. While the total store area has grown rapidly, the average profit per sq m in Gome stores had dropped from 1,800 yuan in 2004 to 442 yuan in 2007.

"Because the capital of Gome is not as adequate as in the past, it would be a sound strategy to improve the profitability of the existing stores rather than increasing market share on the mainland market," said Linus Yip, a strategist at First Shanghai Securities.

Li of Vanguard praised the new management for helping to "ameliorate the company's relationship with suppliers and maintain its strategy of focusing on first-tier cities. He also lauded Chen's steps to strengthen the management team, reduce infighting and focus on competing with rivals like Suning.

Despite the accolades, Chen has yet to win the full confidence of investors and financiers, stock analysts said. The shares of the company are still rated as "risky" and have "sell" ratings by many Hong Kong brokerages. "As long as Gome's management succeeds in stabilizing the company's operation and with the absence of any surprise in future audit reports, it would be reasonable to expect banks to gradually ease on Gome," said Sandy Chen, analyst, Citigroup Hong Kong.

Zhou Yan in Shanghai and Joey Kwok in Hong Kong contributed to the story

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