China’s consumers may be increasingly liberal in their spending habits, but that has not always translated into success for retailers. Many are dragged into cut-price competition and few are able to truly differentiate themselves.
Nowhere is that more true than the consumer electronics retail segment – despite this being ranked as the category most Chinese hope to spend more money on, according to a report by the Boston Consulting Group.
Gome and Suning are the leaders in this US$115 billion market, which is growing at about 11% per year.
The stores are based on a sales model that prizes volume and benefits from low land and labor costs. Rather than buying products from suppliers to sell, the stores invite suppliers to choose products, set up and even staff product displays.
“They don’t have to pay for the products themselves until the products are sold. It means suppliers are the ones taking the risk,” said Howard Abe, head of the Greater China consumer industry retail practice at consultancy A.T. Kearney. Salespeople typically work for commissions on products sold, he added.
Vincent Lui, principal at Boston Consulting Group in Hong Kong says this model’s success is possible because retailers get much of their money and profits from suppliers. “The more brands and products they carry, the more money they make,” he said.
But Gome and Suning face threats in a number of areas. Foreign competitors like BestBuy are moving into the market while higher real estate and labor costs are threatening to erode the foundations of their volume sales model.
Furthermore, putting the consumer’s retail experience in the hands of suppliers removes an opportunity for electronics chains to differentiate themselves – particularly since the chains typically use the same suppliers.
“If I go to the Haier booth in Gome or Suning, it doesn’t matter if I’m in a Gome or a Suning,” said Jeff Walters, principal at Boston Consulting Group.
And it’s not just direct competitors that they have to watch out for.
“These electronics retailers aren’t just competing with other players in the category. They’re competing with restaurants and other retailers for the same retail space and staff,” said Lui.