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
At the beginning, Gome mostly dealt with foreigner brands, especially Japanese; when the domestic producers kept increasing their position, the company changed the operational structure in order to shift its purchase from imported to Chinese brands.
The base of Gome strategy was to focus on retail, seeking for high volumes with thin margins. To offer low prices to its customer, Gome needed to bargain with manufacturers in order to obtain discounts. The key leverages for the company to reduce the purchasing price were:
To guarantee the sales of certain models of product for a defined period of time
To include manufacturers’ rebates in the calculation of cost of purchase, allowing an additional reduction in the retail price. The greater were the sales, the higher were the rebates, and with this approach Gome was able to further increase volumes, obtaining higher rates of rebates
To centralize purchase of goods for all the stores, reaching significant economy of scale; national agreements with manufacturers were signed through standard contracts that covered price, rebates, cooperation, rights and obligations, and the new stores could immediately enjoy those particular conditions for their supplies. Order of goods were managed daily and the manufacturers delivered directly