Gome
PROBLEM IDENTIFICATION
Gome, founded on January 1987 by Huang Guangyu, was a national retail chain selling various types of home appliances. The impressive growth that Gome had incurred during the 1990s was especially due to its offer to final customers: low prices and high quality for after sales services, key differential factors in a buyer market as the Chinese home appliances one.
In June 2000, nine of the most important Chinese color TV manufacturers established a Price Alliance that aimed to set a time-limited price floor, in order to conclude the price wars that had affected the market during the last decade, by reducing manufacturers’ margins to a lousy 5%. Manufacturers also announced their intention to shrink production for domestic sales, currently excessive respect to real demand, by 15-20%. That action, in the medium-term, would also have caused a general raise in the prices of TV market.
Since in 1999 about 70% of Gome’s turnover depended by color TV, the new price floor and production reduction may have a strong impact on Gome’s strategy, that was based on thin unit margins for high sales volumes, that allowed significant discounts and rebates from manufacturers. The following are Gome’s main issues:
The operational model, based on purchasing high volume with a centralized control, should not be still effective consequently to the generalized volumes reduction in sales
To lose the channel leadership would also cause a lower bargaining power and consequently the lost of discount that the company was able to capture from manufacturers
The brand image built during the years represented Gome as the defender of consumers welfare, by setting lower and more affordable prices; the increase in prices should strongly affect Gome’s brand
Gome’s management has to decide what should be the best strategy to face the price control from manufacturer. There are two main different guideline between Gore has to choose: to adequate the business and operational model
Gome, founded on January 1987 by Huang Guangyu, was a national retail chain selling various types of home appliances. The impressive growth that Gome had incurred during the 1990s was especially due to its offer to final customers: low prices and high quality for after sales services, key differential factors in a buyer market as the Chinese home appliances one.
In June 2000, nine of the most important Chinese color TV manufacturers established a Price Alliance that aimed to set a time-limited price floor, in order to conclude the price wars that had affected the market during the last decade, by reducing manufacturers’ margins to a lousy 5%. Manufacturers also announced their intention to shrink production for domestic sales, currently excessive respect to real demand, by 15-20%. That action, in the medium-term, would also have caused a general raise in the prices of TV market.
Since in 1999 about 70% of Gome’s turnover depended by color TV, the new price floor and production reduction may have a strong impact on Gome’s strategy, that was based on thin unit margins for high sales volumes, that allowed significant discounts and rebates from manufacturers. The following are Gome’s main issues:
The operational model, based on purchasing high volume with a centralized control, should not be still effective consequently to the generalized volumes reduction in sales
To lose the channel leadership would also cause a lower bargaining power and consequently the lost of discount that the company was able to capture from manufacturers
The brand image built during the years represented Gome as the defender of consumers welfare, by setting lower and more affordable prices; the increase in prices should strongly affect Gome’s brand
Gome’s management has to decide what should be the best strategy to face the price control from manufacturer. There are two main different guideline between Gore has to choose: to adequate the business and operational model