Gome Cuts Online, As Dangdang Waits 国美和当当网或加强合作
Just days after announcing it would shutter its Hong Kong stores, we’re getting word that struggling home appliance and electronics retailer Gome (HKEx: 493) is also cutting positions in its online division as it looks to return to profitability. These latest job cuts look particularly interesting to me, as they seem to represent a retreat in the important but ultracompetitive e-commerce space, where rivals like Suning.com (Shenzhen: 002024) and Jingdong Mall continue to add staff even as everyone is losing massive money. In this case, Gome’s online cut-backs could perhaps presage a future strengthening of its current alliance with e-commerce specialist Dangdang (NYSE: DANG), and even result in a future marriage between these 2 companies whose e-commerce and traditional retailing businesses are quite complementary.
Let’s start by looking at the latest news, which has Gome, a former high-flyer whose now-disgraced founder was once one of China’s richest men, confirming it is cutting 200 jobs in its e-commerce division. (Chinese article) There’s not much detail in the reports, which simply say the move is part of Gome’s effort’s to optimize the division.
The move comes as Gome looks set to post a massive loss for 2012, after reporting a net loss of 687 million yuan, or about $110 million, in the first 9 months of the year. Unlike electronics retailing rival Suning, which has spent huge money to build up its e-commerce site, Gome has never really been a serious player in the online space and instead has spent much of the last few years trying to clean up its bloated network of real-world brick-and-mortar stores.
Gome formally merged its e-commerce operations into a partnership with the online electronics business of Dangdang last April, essentially giving over the running of the operation to Dangdang. (previous post) At the time of that partnership announcement, I predicted the tie-up could ultimately result in the full marriage between the 2 companies, both of which have emerged as mid-tier, money-losing players in their respective spaces. Such a merger would be especially attractive to Gome, which counts private equity firm Bain Capital as one of its biggest investors. Bain paid about $430 million for 18 percent of Gome in 2009. The stake value initially rose, but has fallen amid all the company’s recent financial woes and is worth just around $366 million now based on Gome’s latest share price.
Dangdang, once one of China’s biggest e-commerce sites, has also been trying to reinvent itself as it tries to stem its massive losses. Earlier this month, media reported the company was in the midst of a major makeover, which included a downplaying of many of its less successful businesses such as electronics as it focused on more successful areas like book selling. (previous post) A big obstacle to a marriage of these 2 companies could be Dangdang’s owners, who like many Chinese entrepreneurs would probably rather see their company go out of business than give up control.
But perhaps Bain could find a way to engineer a merger that would be acceptable to Dangdang’s owners, as such a deal really does look good for everyone from my perspective and would create a very solid retailer with strong presence in both the online and offline spaces. Regardless of the final outcome, I wouldn’t be surprised to see these 2 companies strengthen their alliance later this year as both look to save costs and create new synergies. If the 2 sides find they can work well together, then perhaps we really could see a true marriage by the end of the year, as Bain looks to exit this investment.
Bottom line: The latest online cuts at Gome could presage a strengthening of its alliance with e-commerce partner Dangdang, which could end with a potential merger of the pair.
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