Gome

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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 to the new situation, repositioning the company brand, or to go against the Alliance, defending the low price image and, if possible, changing the current difficult in an opportunity to enforce its brand position in the market and its bargaining power versus the manufacturers. ANALYSES

China color TV market had rapidly developed during the 1980s. At the beginning were especially foreign brands to be sold, but from the 1990s also domestic manufacturer keep increasing their production, and at the end of the decade China was the largest color TV producing country worldwide. In 1999 the domestic manufacturer were about one hundred, their total production capacity was 46 million and the gross output 38.6 million. Unfortunately the domestic market was changed from a seller to a buyer type, meaning that demand was hugely inferior than the production; in fact, that year total sales reached only 27 million, that means more than 10 million units of over production. The substantial saturation of the market in the big cities, where the rate of TV per householder was higher than one, and the relatively low penetration in the rural areas of the country, where the demand was still limited cause people was poor and to buy a color TV was not a primary need, carried the Chinese TV manufacturer through a strong competition that led to constant price wars and, as a result, the deep decrease of margins. Also the sales channel required to be adjusted to the new market scenario. The Traditional model, that included large and medium size departments, wholesalers and dealers, manufacturer-owned stores and home appliance superstores, allowed sellers to set a quite high price, also due to the multi-level structure of the channel; as a result, all the subject involved in the sales process could obtain huge margins. Moreover, when there was a seller market, they could focus on short-term profits, ignoring product quality or after sales services. With the change of the market also the sales...
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