Retailer Gome struggles to survive China’s online revolution

Huang Guangyu, the founder of retailer Gome and once China’s richest man, had vowed to revive his electronics empire after securing an early release from prison in 2020 for insider trading and bribery.

But while he was serving his 14-year sentence, China’s retail landscape irrevocably changed, with ecommerce titans Alibaba and JD.com rising to dominate the market and growth in the world’s second-largest economy slowing.

Huang, who owns a 53 per cent stake, is now fighting for his company to stay solvent. Gome has recorded five consecutive years of losses and ended 2021 with a Rmb4.4bn ($642mn) deficit, plus the same amount left in cash. Its auditors EY resigned last November over a pay dispute and, as the retailer shutters stores, staff said they had not been paid for months.

Gome’s stock has fallen 70 per cent over the past year to HK$0.25 a share. Trading was suspended in July and only resumed on Monday, when the company said it planned to purchase a number of megamalls, without revealing how much the transaction would cost.

But the last-minute manoeuvre might be too late for Huang. “Gome’s indecisive business strategy has resulted in internal fatigue within the company,” said Mo Daiqing, a senior analyst at Hangzhou-based China E-commerce Research Centre, a consultancy. “Its retail journey is marching towards failure”.

Gome was one of a wave of retailers that took advantage of the rise of China’s middle class during years of breakneck economic growth. Huang, who rose from selling electronics on the street to building a $6bn fortune, was once one of China’s highest-profile entrepreneurs.

His company’s turmoil also comes in the wake of President Xi Jinping’s “common prosperity” crackdown, which has hit prominent entrepreneurs such as Alibaba’s Jack Ma, and as the Chinese economy stumbles in the wake of harsh coronavirus pandemic lockdowns and a property crisis.

“Headwinds remain on several fronts,” said Melinda Hu, a China retail analyst at Bernstein. With 70 per cent of Chinese households’ wealth coming from the property market, sluggish growth in the sector would hit retail demand, she added.

In 2012, Suning was China’s largest retail chain by sales according to China Chain Store & Franchise Association, while Gome took third place. In those better times for bricks-and-mortar stores, Suning’s owner Zhang Jindong became a multi-billionaire and bought Italian football club Inter Milan in 2016.

“Sometimes we didn’t necessarily have to buy anything. We were just there window-shopping the cool, trendy consumer electronics,” said a 52-year-old shopper surnamed Li who lives in the eastern Jiangsu province. “But I gradually turned to ecommerce sites in the early 2010s when I got my e-bank account”.

Gome itself launched its first online shopping site in February 2003, before Alibaba’s consumer-focused Taobao website went live in May that year and JD.com founded its online retail platform in January 2004. But Gome still focused on physical stores, and under-investment in online infrastructure led to slumping sales.

At the start of this year, its ecommerce app Zhenkuaile had 70mn monthly active users, according to company figures, compared with Taobao’s 483mn, reported by Statista.

The company’s deterioration accelerated over the summer. A HK$776.46mn (US$99mn) share placement in June to raise cash for debt payments and to expand its online platforms sent the stock price tumbling.

Gome told the Financial Times in a statement it would close up to 35 per cent of its stores by October to save as much as Rmb1.5bn. Employees complained in interviews that they were owed wages and faced job losses.

An employee with Dabanjia, Gome’s home decoration unit who was pregnant, told the FT she lost her job at the end of June when the company’s Tianjin headquarters shut down. The worker, who did not wish to be named, claimed she was owed three months’ pay and was not given any notice or compensation as required by Chinese law.

“Human resources told us the company had run out of money and just asked us to leave, saying that if you were not satisfied, you could go to arbitration,” she said. “I have worked for the company for more than six years. It’s such a sad ending.”

Dabanjia’s founder, chief executive and vice-president all resigned in July, while Zhenkuaile has also cut staff, according to two former employees.

In response, Gome said it was going through a process of “strategic adjustment” and its human resources processes were legally compliant. It said the company was “operating normally” and the salaries of “more than 100,000 staff have been paid”.

Its rival Suning’s outlook is similarly bleak. Its stock has fallen more than 60 per cent over the past year and it recorded a Rmb44.2bn loss in 2021, with overdue accounts payable of more than Rmb32.8bn.

On Gome’s future, “some investors are [giving up], while some are trying to stay confident,” said Ding Daoshi, a consumer business analyst at Beijing-based consultancy Sootoo Research. “Other investors are trembling.”