By Kirby Chien and Edwin Chan
BEIJING (Reuters) - Gome Electrical Appliances Holdings Ltd. (0493.HK: Quote, Profile, Research, Stock Buzz), China's top retailer of household electronics, is slowing its breakneck expansion to focus on beefing up the profitability of its stores.
GOME, which agreed in July to buy out Paradise Electronics Retail Ltd. 0503.HK for about $680 million, said it expected to wrap up the deal by November and take its web of stores across the country to more than 700, including its unlisted parent, Chairman Huang Guangyu said at the Reuters China Summit.
That deal is seen spurring more takeovers in a fragmented, $840 billion retail sales arena Beijing hopes will expand 12 percent annually.
But Huang, ranked as China's richest man by Hurun Report with a fortune of $1.7 billion, said he was in no hurry to go shopping again so soon.
Sure, GOME has said it would sacrifice profitability in favor of ramping up its network to as many as 1,000 stores in coming years and capturing market share. But, like other Chinese companies, it is starting to look at the bottom line.
"In this industry, if you don't run quickly enough you'd get killed," said Huang. "We'll look at the network and adjust store locations, sizes and so on -- improving quality. It's no longer a matter of rapid-fire store expansion.
GOME, along with stores it operates for its unlisted parent of the same name, set up 200 outlets in 2005. But so have others, depressing profits for the industry.
"It's not a good thing. You open one, I open one, everything gets more intense," said Huang, who arrived in a jet-black Mercedes stretch limousine.
With $500 and a Beijing roadside stall hawking radios and gadgets, Huang built GOME into a multi-billion dollar empire spanning nearly 100 cities across the country and representing a crucial cog in Beijing's effort to spur domestic consumption.
GOME now wants to tweak an existing network that Huang said had reached critical mass -- moving stores to better locations, replacing loss-making outlets, and integrating those inherited from Paradise.
Average net margins for China's retail industry are just above 2 percent, official data shows. GOME managed to exceed the industry average -- but only just -- with net margins of about 2.8 percent in 2006's first half and all of 2005, versus 3.85 percent in 2004.
"If we succeed in improving the store network, I hope we can then see a dramatic transformation in profitability.
Analysts believe the GOME-Paradise deal would push foreign retailers, from Best Buy Inc. (BBY.N: Quote, Profile, Research, Stock Buzz) and Wal-Mart Stores Inc. (WMT.N: Quote, Profile, Research, Stock Buzz) to Carrefour (CARR.PA: Quote, Profile, Research, Stock Buzz) and Metro (MEOG.DE: Quote, Profile, Research, Stock Buzz), to accelerate their expansion into China.
Huang argued GOME had braced for years to fend off that kind of competition -- mimicking the practices of the global giants.
"It's inevitable. There'll be pressure yes, but we can also learn from them, same as they are learning from us. Continued...
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