Gome Electrical (OTCPK:GMELY) is in trouble.
There is a lot of happy-talk coming out of China's electronics retail giant, suggesting that despite a 14% drop in revenues and a 39% plunge in earnings for the first nine months of the year, things are actually looking pretty good. Same store sales are apparently up 2.1%, and they expect the chain to grow.
Reading between the lines of the WSJ report, Gome management is suggesting that the drop in sales was due to the global financial crisis. I am not so sure. Even if you grant that the crisis did have an effect on China's economy (and therefore electronics sales), there are several other factors at play that the company does not seem to be addressing.
Hoping for Amnesia
What has kept Gome in the headlines over the past year has not been its prices, its selection, or its stores, but the arrest of its founder and allegations of serious ethical and legal violations on the part of the company's most senior management. This is what is known as "bad publicity."
Now, bad things happen to good companies, and usually when something like this happens the correct response would be to own up to the problem, distance the company from the wrongdoing, demonstrate that any malfeasance had no effect on customers or their purchases, make an all-out effort to prove that the bad behavior is history, and show how that the company has been made better by the process.
Gome has done none of that.
Instead, it has chosen to ignore the strategy and hope that it goes away and that people just forget about it all. That does not happen too often in China: remember, this is a country where the people are still pissed off at the British and French for sacking the Summer Palace 150 years ago. Memories are long. It would be dumb for a foreign company to bet on mass public amnesia to solve its image problem in China. It is incomprehensible that a local company would do so.
Unfortunately, the longer you allow negative perceptions to fester, the more deeply seated they become. It is not too late for GOME to address these problems, but the cost of doing so is rising by the day.
Problems In Store
The perception problem is not being helped by what appears, at least to this longtime Gome customer, to be a decline in the company's operations. This is even more worrying. If the company is going to survive, much less thrive and beat local rivals Dazhong and Suning and interloper BestBuy, it needs to respond immediately to the dismal state of its shopping experience.
Stores are neither consistently sized, consistently laid out, or consistently merchandised. I went to three different Gome stores, and except for the logo on the front of the building they could have been from three separate chains. What this means is that a trip to a new Gome is like a box of chocolates: you never know what you're going to get. That inconsistency of experience undermines the value of Gome's brand.
Despite the chain's "Shanzhai Rebranding" (i.e., "Look, guys, we have a new logo - now we're re-branded"), the stores I go into in Beijing seem more dismal and rundown each time I visit. Leave aside the tired-looking fixtures, the display cabinets with the logos of one manufacturer and the products of three or four others inside, and the well-worn decor. On the third floor of the store we went into - the floor with the highest value merchandise - the smell of cigarette smoke was so choking it drove us away from even looking at the selection of home theater setups. The excuse given: "Oh, our break room is on this floor."
Having started my own career as a retail associate, I understand the need to get away from customers for a few moments and relax. But never were the needs of the worker allowed to cause inconvenience to the customer, much less physical discomfort and, potentially, harm.
The M Word
Most noticeable, however, is how miserable the selection in brands and merchandise have become. Just looking through the computer section, only a small handful of the major brands are available, and a tiny number of models. Walking through a store owned by Dazhong, on the other hand, offers dozens of computers from a number of manufacturers, and while the selection does not match, say, a Fry's, it is worlds better than Gome.
Merchandising is a craft, and Chinese retailers have historically eschewed the task of selecting the products to sell, buying and inventorying their own stock, and even working with manufacturers to create exclusive lines. Merchandising is, after all, expensive, it is hard work, and it takes a set of soft skills and hard research that are difficult to find in China.
Most companies - apparently Gome included - have outsourced the merchandising to the brands themselves, meaning that the appearance, stock, and selection in their stores is limited by how high a priority the vendors assign to that store, and how good the vendor people are in servicing that store.
In other words, they outsource their differentiation. And since the manufacturers don't seem terribly concerned about Gome's differentiation, they don't spend a lot of time working on it. Mind you, there was a time when this was different, when Gome was the buzz leader in the electronics merchandising space, and electronics brands were ready to make deals. But that means having a position of strength with vendors, and having vendor relations types that know a little bit about merchandising. In its current weakened position (perceptually, anyway), Gome has less pull with the major vendors, explaining why I couldn't find the DELL sub-notebook I wanted the other day. Nor, for that matter, would Gome sell me a battery for my mobile phone, nor did it have any stock of the new mobile phone my wife, the Hutong Party Secretary, wanted to buy (even though it was in the display.)
This is a bad thing. Because even though prices may attract buyers, unless you have what they want when they walk into the store, they'll walk right out again.
Serving the (New) People
Perhaps most telling is the difference between the post-sales experiences at Gome and one of its competitors. At Gome, we bought a high-end DVD player and a new small kitchen appliance. Three weeks later, we have yet to hear anything back from the store.
At the competitor, we spent about the same amount of money (total) on a new kitchen appliance. We have received three follow-up calls, one from the original saleslady to check on how things were, one to explain how to get a rebate on our old appliance (which the store removed for free), and one from a service auditor to ensure we were happy.
I don't mention the competitor's name because that's not the point. The problem is that Gome continues to deliver an acceptable level of service. Unfortunately, the market - the competitors, certainly - are evolving far beyond the acceptable and setting a standard that Chinese consumers to which CHinese consumers will rapidly become accustomed. Unless Gome can up its game to match or surpass the competition, the people who have money to spend will increasingly pass them by.
Make it Better, Bain
I have no doubt that the economic downturn hurt business at Gome. But These other factors, which touch on communications, marketing, merchandising, and operational excellence, underscore some more fundamental problems that suggest Gome's comeback may not be as quick as its executives hope. By ignoring the outrageous (but, given the headlines, understandable) perception that Gome stands for "Gangsters Offering Mediocre Electronics," Gome is allowing its customer base to erode like a sand castle in a typhoon.
As a longtime observer of China's retail business, a gadget freak, and a onetime Gome customer, I view the recent investment by BAIN Capital in Gome's operations as a hopeful sign. I may well be kidding myself: a 10% stake in a public company means much less in China than it does in the US. But if the Gome management and owners are smart, they'll lend an ear to some of Bain's ideas for improving the retailer's prospects.
At this point, it could only help.
Gome Electrical (OTCPK:GMELY) is in trouble.