Expansion plans

Since Gome acquired China Paradise in 2006, it has moved quickly to consolidate its position as the strongest electronics retailer in China.

In an effort to deal with new competition from global retailers such as Wal-Mart and Best Buy, which opened in Shanghai in January, Gome announced in March that plans to sell a stake in its Hong Kong-listed electronics retailing unit.

The company is also integrating China Paradise – the nation's third-largest electronics retailer, bought by Gome last year – into its branch network. In March, it shut down 40 of its 850 stores to avoid overlaps.

"Investors will have to closely observe Gome's integration with China Paradise – this includes efficiency, human resources, management and the progress of where they will shut down or add new stores," said Mavis Hui of DBS Vickers in Hong Kong.

The success of a single Best Buy store in Shanghai will not directly affect Gome's leading position, but the US firm is not wasting any time. It took over Jiangsu Five Star Appliance in May 2006 and, in February, announced plans to open 26 new stores within a year.

Long-term plans

Having seen sales in 2005 jump 85% to US$2.3 billion, Gome plans to increase that to US$32.5 billion by 2012, roughly equal to Best Buy's global total in 2006. While Gome's position is strong now, Hui said it needs long-term strategies such as improving customer service in its low margin business to keep the lead.

There are signs that it is already happening. Gome opened its first Eagle Electric Appliance store in Beijing which, like Best Buy, provides personal and after-sale services including delivery and installation.

"Gome is beginning to cater to higher-end clients," said Yang Lei, an equity analyst with ABN Amro.

As living standards improve, Yang expects Best Buy to carve out a niche by offering better service to high-value customers. This will raise the bar for domestic players in the consumer electronics industry even while they continue to concentrate on domestic brands. Best Buy, by contrast, carries international brand names.

Paul French, director of market research company Access Asia, believes Gome's progress has been stronger than ever and international retailers have a long way to go to catch up.

He argues that Best Buy's US business model is the wrong fit for China because high end consumers buy their electronics in Hong Kong. Gome, on the other hand, is closely in tune with the local market.

"Gome is catering to the massive population of low-end consumers; that's where the money is," he said. "Chinese consumers see the nice carpet and shiny uniforms and they know who's paying for it. Most appliances are pretty similar, so Chinese consumers just want the lowest price – service is secondary."