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Suning looks to dethrone Gome

By Ding Qingfen (China Daily)
Updated: 2009-01-14 07:48

A woman passes a Suning outlet in Beijing. The retailer plans to open 200 stores this year. [China Daily]

After living in the shadow of archrival Gome for years, Suning, China's second largest consumer electronics retailer, now sees its best chance yet to capture the No 1 spot.

With founder and chairman Huang Guangyu detained by police in an investigation of alleged wrongful share dealing, Gome is in no position to object.

"Although Gome is not going to go away, the company will definitely lose its competitiveness in the next two years and the year 2010 will be the hardest period," said Wu Meiping, an analyst at Essence Securities.

Suning apparently has not lost time capitalizing on Huang's problem since it first became known late last year. In early December 2008, Suning announced it will open at least 200 new stores in addition to its existing 850, and establish five more logistics bases nationwide in 2009. In contrast, Gome is expected to open only 50 stores this year and close several old ones that did not perform well.

Related readings:  Gome may sell stake to stay afloat  Best Buy slowing expansion in China  Suning Appliance on expansion spree  GOME's revenue surges 20%, trading suspended on boss' alleged detention

The company apparently has the backing of investors. Shares of Suning, with annual sales estimated at 55 billion yuan in 2008, have bucked the market trend by rising from 12 yuan apiece in November to a high of 19 yuan in early December before falling back. Gome's shares have been suspended from trading since Nov 24, 2008.

The sprint to the top could risk overstretching Suning's management and financial resources at a time when the domestic consumer market is clouded by worsening economic prospects. With job security in doubt, many Chinese consumers are more disposed to saving than spending, especially on big-ticket items.

But the risks of expansion are obviously less of a concern in the mind of Suning's management than the benefits of growth.

Besides expanding its network of outlets, Suning has also renovated its business model with the aim of producing a higher return.

For example, it signed an exclusive partnership agreement with Whirlpool Appliances, the world's leading appliances manufacturer, giving Suning the sole right to market, sell and service the US producer's air-conditioners and water heaters on the mainland. This arrangement provides Suning a wider profit margin than agency sales, industry experts said.

Ren Jun, secretary of Suning's board of directors, said sales from business of this kind are expected to account for 30 percent of the total in the next three years.

Separately, Suning reached a partnership with Microsoft last year allowing the Chinese retailer to not only sell but also install Microsoft software into PCs sold at Suning's 66 stores in 11 Chinese cities. This should help enhance the corporate profit margins as installing software is more profitable than selling a PC.

Ren said Suning will expand categories of small household appliances, like microwave ovens and juice extractors, which yield an average 20 percent profit margin, compared with 10 percent for air-conditioners and 5 percent for television sets.