Crisis on the breakaway of listed shops and non-listed shops

There were 135 GOME electrical appliance shops in 37 Chinese cities throughout the country in the year 2004 when GOME was initially listed. Huang, the initiator of GOME, included 96 shops in 22 Chinese cities into the listed company and preserved the other 39 shops in 15 cities and added them into the non-listed company. The explanation for the non-listed entities was the limitation on business operations. During these years, the listed company ran the nonlisted shops in the form of trusteeship and the non-listed shops earned profits for the listed company in the form of management fees. Six years later, the number of listed shops has reached 740 and non-listed shops 372. The two parts are distinctive from each other in day to day operations—listed shops function in 22 cities including Beijing, Tianjin, Chongqing, Shenzhen, Guangzhou and Wuhan, while non-listed shops in Shanghai, Zhejiang, Henan, Heibei and most cities in northeast China. A non-disclosed party from Gome s t a t e d , “An ‘Ag r e emen t o f No Competition’ was signed. It was agreed that the two parts do not conduct business in the same city. Concurrently, there was also a limitation to this ‘Agreement on No Competition,’ that is, it is only valid when Huang’s shares go beyond 30%. Otherwise, it will become invalid.” Until now, the focus of the GOME dispute has also transferred to the breakaway of listed shops and nonlisted shops. The distinction between the two parts which has existed for six years has seemingly been the cause of today’s confusion.

Brand crisis behind the breakaway

According to persons concerned, the Board of Directors with Chen Xiao as the representative sent Huang “A Letter To Beijing GOME Electrical Appliance Co., Ltd”, claiming that “Our company agrees with the requirements raised by your honorable company and at the same time make the following notifications to your honorable company: Our company decides to end the gross supply agreement, the gross purchase agreement, purchase service agreement for 2010 as well as operation agreement for 2010 on the date of October 31, 2010. Your honorable company operates the nonlisted shops on your own as of the date of November 1, 2010.” The agreements mentioned above refer to the trusteeship agreement between listed and non-listed company. That is to say, if no consensus is reached on the problems of non-listed shops, GOME will face the problem of a break. How many GOMEs will there be in the future? Will Chen Xiao continue to be the chairman of the Board? The focus of this dispute has pointed to these questions. It is easy to see that GOME will be confronted will a serious brand crisis once the separation occurs. In fact, people are now concerned more with the development of this dispute rather than the quality of the GOME’s service and products. It is obvious as to the depth the impact will be on GOME once the listed and non-listed shops split. What will happen if the secession really takes place? How can the public tell this “GOME” from that “GOME”? Li Xingguo, chief consultant from the China Brand Culture Committee, commented “will there be GOME in the future? Who will be responsible for my aftersale service? Consumers generally make favorable choices. Doubt is the largest challenge for a brand.” Chen Yunfeng, prior general manager of GOME sales center, also expressed his concern “Once there is problem in the brand, it will take a long time for a new brand to be established. People are used to buying electrical appliances from GOME, so it takes time and effort for a new brand to be recognized and at the same time, the company has to undertake the risk.” In addition, based on the “Agreement on No Competition” between the listed company and Beijing GOME, business of the listed company will be restricted from entering regions like Shanghai, Henan, Hebei. Furthermore, since there is no limitation for the expansion of the other brands owned by listed company like “Yong Le” and “Da Zhong” in the abovementioned regions, a listed company can compete with non-listed companies in the name of those brands. The confusion can be easily imagined. The largest winner is the competitor SUNING. If we define the tacit balance between GOME and SUNING on the basis of competition in the electrical appliance market, the brand crisis of GOME will definitely break this balance. In this fierce competitive market, SUNING will have the opportunity to play catch up and exceed GOME in a relatively short period of time. According to the Mid-term Report 2010 from SUNING, due to a good market environment and management, the revenue in first half of the year has reached 1.97billion Yuan, with a growth of 56% compared to the same period ast year. The statistic reveals a 2.05 times revenue increase compared to the revenue indicated in GOME’s Mid-term Report.

This is not the intention of shareholders

“No matter who wins in this battle, what we are concerned most with is that the company runs well,” Commented Investors at the Extraordinary General Meeting of shareholders held on September 28. A person concerned stated that ending the trusteeship agreement is not the intention of Huang. “The letter was aimed to change some of the investor’s minds and win additional support. Since the goal was not reached, the key to solving the problem is to go back to the conference desk and find some proper solutions.” A report from Merrill on September 28 said, “If the two parties can ease the dispute through negotiation, GOME will avoid from being divided into two companies and more resources can be concentrated to the well management of business. Compromises are needed for a peaceful resolution, but it is better than a result with two losers both paying heavy expenses.” Forbes and Interbrand have jointly published the “list of 50 best Chinese Brand Value 2010” in Beijing. GOME was listed with its outstanding achievement and brand impact. According to the latest evaluation from “Rui Fu Chinese List of the World Most Valuable Brands”, GOME ranked number five with a brand value of 52.612 billion Yuan. Holding first place as the Chinese electrical appliance chain-store franchiser, GOME will be heavily hit by any incident. This is not the intention of shareholders.