Gome Case Study Anaylsis

Parties involved in case:

Gome – Leading specialized home appliance chain Vs The Color Television Price Alliance (9 core members including Konka, TCL, Hisense, Skyworth, Prima, Rowa, LG, Panda and Westlake)

Problem Statement:

The color television manufactures have joined hands to form an alliance and decided to control the prices of the color television in the China market. The purpose of this alliance is to stop any further price wars that might happen in the market and thus recapture the channel leadership from the sales agent. This strategy was working against Gome's business model where it used to focus on thin margins and high volumes. Due to the high volumes, Gome could always negotiate a higher rebate from manufacturers which it used to pass on to its customers; thus being cheaper than competition and further pushing its sales volumes. This model was working very well for Gome as it was like a continuous loop, but with the alliance fixing the price it was a direct threat to Gome business strategy as they would no longer be able to push for higher rebate from manufactures and thus lose their edge over the competition.

Analysis

Background of China's Home Appliance Market:

China's electrical appliances industry had developed rapidly during the 1980s but lately had experienced a phase of slow growth in the 1990s. The market had also changed from a seller market to a buyer market. In 1999, the gross value of the China's home appliance production had exceeded RMB 150 billion, with the number of domestic enterprises reaching 2,675. Also demand in the big cities was approaching saturation; though rural market had great potential, it was not well developed. This led to fierce competition among the home appliance enterprises leading to price wars. As a result, the entire industry entered a phase of low profit margin.

a. Many comprehensive retail chain stores were set up by foreign chain retail giants such as Wal-mart, Carrefour and Metro; but their focus was not on home appliances business.

b. A large number of chain retail stores specializing in the sales of home appliances were opened up. Major players like Gome, Shandong Sanlian, Suning Electrical Appliances, Beijing Daizhong and Shanghai Yongle were developing rapidly during 1990s with an increasing market influence and growing market share in the home appliances market every year.

Consumer Behavior

Initially the Chinese home appliances consumers behaved like a typical buyer's market consumer where they concentrated purely on the price of the product and would wait for a better and cheaper deal to be introduced in the market. As soon, a price cut or any promotion would be announcement consumers would rush in to make their purchases. But over time, the consumption