Gome Chases Odd Tie-Up, Bain Exit Near?
The latest signals coming from former electronics retailing high-flyer Gome (HKEx: 493) are a bit confusing, reflecting the fast change of pace in China’s retail environment. I also get a slight sense of desperation in the latest news that Gome will close 50 stores in top-tier cities this year, as it explores an odd-looking partnership with Wumart (HKEx: 1025), a mid-sized supermarket chain. It has now been nearly 5 years since Bain Capital purchased a 10 percent stake of Gome, and I suspect the US equity giant is getting restless with the investment and looking for reasons to sell it.
Gome was once one of China’s leading retailers, rising on its chain of well-managed, colorful stores selling home appliances and other consumer electronics. But an overzealous expansion, coupled with the company’s failure to recognize the importance of e-commerce, have taken a toll on Gome over the last 3 years. Its stock has lost more than half of its value over that period as it retrenched and struggled for direction, and the situation only looks set to worsen as China’s leading e-commerce firms all make aggressive plays into the consumer electronics business.
In the latest news for this former high-flyer, media are reporting that Gome will shutter another 50 stores in first-tier cities over the next year, though a media report points out the company will also open 80-100 stores in smaller cities. (Chinese article) But the more interesting element of this latest report is word of the tie-up talks with Wumart, a pairing that in my view brings together 2 unimpressive companies in a broader traditional retailing business with very limited potential.
This Wumart tie-up would follow another similar pairing that saw Gome’s branch in the southern city of Guangzhou partner with another traditional retailer, Modern Department Store to promote each other’s products. These two partnerships indicate Gome is trying to pool resources with traditional retailers from other product categories to extend its sales network. The strategy looks slightly similar to one by crosstown rival Suning (Shenzhen: 002024), which has embarked on a campaign to convert its hundreds of consumer electronics stores into broader general merchandise superstores.
This sudden flurry of tie-ups with other traditional retailers comes nearly 2 years after Gome formed a partnership with Dangdang (NYSE: DANG), one of China’s oldest online retailers. Gome entered that partnership after failing to realize the importance of e-commerce to the future of retailing in China, and at the time I even predicted the pair could ultimately end up merging to create a company with strong traditional and online retailing presences. (previous post)
Gome’s new moves comes as its fortunes finally start to reverse after several years of retrenchment. The company reported a 420 million yuan ($70 million) profit in the first 9 months of last year, reversing a massive 600 million yuan loss for all of 2012. Much of the turnaround has come from improvement in its operating costs, even as the company still faces the very real threat from e-commerce.
This new series of tie-ups with traditional retailers looks like an interesting strategy to boost its sales networks, in a bid to keep its revenue growing following its return to profitability. I suspect the return to profits and these latest new tie-ups could be the prelude to an exit by Bain, which will want to sell its investment during this time of positive changes. But I really don’t expect the positive momentum to remain over the longer term due to the decline of traditional retailing, and expect that Gome could slip back into the red over the next 5 years unless it makes a major acquisition in the e-commerce space.
Bottom line: Gome’s new string of tie-ups with other traditional retailers looks like a short-term fix for its recent woes, and the company is likely to return to the red if it doesn’t do more in e-commerce.
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