Caixin
Dec 20, 2013 05:19 PM

Appliance Retailers Run an Online Marathon, Uphill

(Beijing) -- No one expected the running to be easy when two of China's largest and most competitive retailers started racing a marathon on an e-commerce track.

Indeed, it's been an uphill race ever since Gome Electrical Appliances Holding Ltd. and Suning Commerce Group Co. Ltd. decided in around 2009 to gradually migrate business from traditional storefronts to online retailing.

Each company has invested heavily in e-commerce, but both have fought for their online stores, which sell consumer electronics, household appliances and related wares. Gome's online unit lost about 400 million yuan in the first three quarters of 2013, the company said, bleeding slightly less red ink than in the same period 2012. Although Suning didn't release profit figures of its e-commerce business, the company reported a 73 percent year-on-year decline in total net profit for the first three quarters. The company said with the rising online sales and the company's effort to unify prices of its online and offline stores, Suning's gross profit margin declined 3.48 percentage points to 15.2 percent for the first quarters compared to the same period last year.

Beijing-based Gome recently opted to slow the pace of change. At a press conference where he also announced third-quarter financial results, company President Wang Junzhou said traditional bricks-and-mortar stores would remain his company's focus, while e-commerce investment would be capped.

Wang said Gome has already proven itself an experienced winner in the race for retail store customers. To keep winning in the e-commerce era, he said, the company would adjust its retailing formula by, for example, improving its own procurement and logistics systems to directly earn money from products sales instead of leasing store space to appliance product suppliers.

No longer will Gome follow Suning's lead by investing heavily in online retail projects designed to generate Web traffic in hopes of future profits. That business course, Wang said, is unsustainable and rife with uncertainty.

Since the only winners in the retail sector are companies "with money in their pockets," Wang said, the Gome division operating the gome.com.cn site will cut its losses, slow its pace and step on the gas only after a profitable, online business model has been found.

The latest change goes against the grain of Suning's aggressive push into the e-commerce arena, which continues today. Suning has been going head-to-head against no-store startups such as Jingdong Mall, which operates the jd.com website. Suning has put great emphasis on its online operations.

Analysts have had mixed reactions to the retailers' latest decisions. Some call Suning too daring and Gome too conservative.

Chen Yi, a researcher at Peking University's Retail Research Center, said Suning has adapted well to the rapidly changing retail landscape. "Suning's retail industry experiments are rather far ahead of the curve in China and the rest of the world," said Chen.

But Gome is no longer willing to follow Suning's Internet-focused mindset if that requires abandoning profits in favor of volume.

Keen to follow a traditional business path, Gome has opted to protect gross profit margins while maintaining clearly visible financial health. Brick-and-mortar stores near consumer homes would get the most emphasis, while the company's online division would play a supporting role.

Website Waffling

As part of the revamp, Gome officials announced November 28 that the company would create a one-stop shopping site by consolidating its online platforms gome.com.cn and coo8.com. The company had initially climbed aboard the Internet bandwagon by buying an 80 percent stake in the latter website retailer in 2010 for 48 million yuan – a move spearheaded by former the chairman, Chen Xiao.

In March 2011, after Chen's resignation following an internal power struggle, Gome's now-imprisoned founder, Huang Guangyu, and his wife, Du Juan, regained control of the company. The next month, Gome spent 50 million yuan to establish www.gome.com.cn to push a dual-brand online sales strategy with coo8.com.

But, maintaining that dual-brand strategy proved difficult. And Gome's troubles mounted later that year when friction emerged between its online and traditional retail divisions. For example, division heads clashed over pricing.

Beset by these and other bumps in the road, Gome's 2011 net profit fell to 1.84 billion yuan from 1.96 billion in 2010. Gome.com.cn posted a 194 million yuan loss, and coo8 .com lost 197 million yuan.

But Gome wasn't ready to throw in the towel. It redoubled its commitment to online retailing by buying the remaining 20 percent of coo8.com in 2012 from coo8 founder Wang Zhiquan for 12 million yuan.

As soon as Gome picked up the e-commerce pace, appliance price wars broke out that pitted China's major online retailers against each other. Gome joined the fray, but its officials later regretted the decision when the company posted its first loss ever for 2012. Officials blamed the 597 million yuan loss on lower sales, rising operating costs and some 500 million yuan in e-commerce investments.

That's when Gome officials decided to change course.

One of Gome's first money-saving moves was the website consolidation. Since then, Gome officials have taken additional steps by working to boost sales and gross profit margins while controlling expenses. On the e-commerce side, the company has sought to improve its supply, logistics and IT systems.

Gome's website has been adjusted so that consumers can buy goods from the retailer or directly from manufacturers that use the website as a sales platform.

At the other end of the online spectrum is Suning, which decided to strip the traditional "home appliances" label from its corporate identity. In 2013, Suning stepped up efforts to build its online platform by, for example, matching online and in-store prices for all products.

The company is also diversifying by expanding into financing, insurance and other online businesses.

On the retail side, Suning offers all kinds of products through its own supply network and by offering its website as a platform for manufacturers seeking direct consumer sales. The company's goal is to personally handle no more than 30 percent of all inventory, and let manufacturers handle the rest. In this way, it hopes to profit by offering logistics, financing and data mining services.

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