Hong Kong closures signal Gome retreat

Appliance seller's decision to close stores in the city comes after battling losses and may mark temporary halt to its overseas expansion

PUBLISHED : Tuesday, 22 January, 2013, 12:00am
UPDATED : Tuesday, 22 January, 2013, 4:12am

Gome Electrical Appliances' decision to close its Hong Kong operations signals a temporary halt to its overseas expansion plans, which have been losing momentum since its founder Wong Kwong-yu was jailed four years ago.

Analysts said Gome's Hong Kong business has been making losses for the past decade due to a "smaller business scale" and "lack of local resources" compared to domestic players like Fortress and Broadway.

More importantly, the company's long-term plan to shift its focus to the online market and lower-tier mainland cities has further marginalised the position of Hong Kong in its corporate strategy.

Gome Hong Kong announced on Sunday that its six shops in the city would be shut by March 16 and it would focus on wholesaling in the future.

The six shops are privately held by Wong and his family, and are not part of the assets of the listed company. The company's stock price yesterday fell 8 per cent before closing at 94 HK cents, down 5.05 per cent.

"Actually, I think this is not a bad decision by Gome," said Charlie Chen, head of China consumer research of BNP Paribas. "The Hong Kong market has become 'chicken ribs' for Gome, which is of little value for the company."

In October 2003, Gome invested around HK$50 million to open a 25,000 sq ft shop in a prime location in Mong Kok. Wong, then Gome's chairman, vowed to grab as much as 30 per cent of the city's market share within two years by offering customers cheap goods in supersized shops. Prior to that, the businessman had successfully opened hundreds of big shops across the border, taking a good lead ahead of rivals including Suning Appliance.

Despite the small market size, Wong believed Hong Kong was a good place to gain international experience and raise its brand awareness before expanding to other countries. Gome opened shops in Macau in 2006.

At their peak, there were up to 20 Gome shops in Hong Kong. However, the outlets have barely eked out any profit over the past decade.

The mainland press reported that Gome has lost about HK$200 million since 2003. Inquires to Gome's headquarters went unanswered.

Analysts said Gome, which has dominated retailing channels on the mainland, has weaker bargaining power when negotiating with suppliers in Hong Kong. And it has been harder for Gome to secure good shop locations compared to local retailers like Fortress, a subsidiary of Hutchison Whampoa.

"Gome's [Hong Kong] business scale is too small, which made it hard to prosper considering the high rent and labour costs here," said Chen. Local rival Fortress now has more than 50 units and Broadway has 38 shops in the city.

Suning Appliance, Gome's major rival, took another approach to tap the Hong Kong market. It acquired local chain store Citicall for HK$215 million in 2009. Suning said sales from Hong Kong grew 40 per cent in 2010 and 2011, and expected the Hong Kong business to become profitable in 2012.

Forrest Chan, an analyst at CCB International Securities, said Gome shifted its focus from overseas markets to the mainland after Wong's arrest in 2008. He was sentenced to 14 years in prison for insider trading, bribery and illegal business operations.

"Its expansion [in Hong Kong] has not been aggressive since," said Chan.

From January to September 2012, Gome reported a net loss of 687 million yuan (HK$847.92 million) due to sluggish consumer demand and intensified market competition. The firm earlier said it planned to close loss-making shops and those with limited growth potential.

"Hong Kong, for Gome, is obviously one of those [markets] with limited growth potential," said Chen.