Combining sales growth with cost cutting is not an innovative idea. It represents, nonetheless, a shocking return to sanity in Chinese retailing. The 9 per cent opening pop in Gome’s shares after it raised its profits shows the importance of the simple improvements the company has made.
Last year Gome was lossmaking. It became caught in a vicious online battle for market share in China’s electrical appliances market, the largest ecommerce sector after clothes. Rivals such as 360 Buy, a purely online operator, had pledged zero gross margins for three years and other disrupting tactics. Slowing sales that followed the expiry of some government subsidies hurt, too. Yet this week Gome talked of same-store sales growing by 15 per cent (above overall retail sales) and an 18 per cent gross margin – half as much again as the level of three years ago. Granted, that still lags behind the likes of Best Buy in the US, Japan’s Yamada Denki (23 per cent) and Europe’s Darty group (32 per cent), but the size of the improvement delivered by a tactic as basic as cost-cutting is impressive.
More gains are possible. Consider inventory turnover, where Gome managed to cut its cycle by 14 days to 56 in the first half of 2013. It said then it thought there were another eight days it could trim over the next two years. The company has focused on better positioning its store network and it is working: the rising sales have come on the back of less bricks-and-mortar space.