No Good Times Here, as Gome Slashes ‘FUN’ E-Commerce Unit

Former retailing giant makes massive cuts at its recently launched service combining online shopping with social networking and entertainment

Key Takeaways:

  • Gome is scaling back its e-commerce push that was part of a drive to regain its former glory, making massive layoffs at its FUN online unit. 
  • Company’s revenues stagnated last year as its transition to e-commerce stalled, similar to the fate of other older brick-and-mortar retailers like its former rival Suning

By Trevor Mo

In early 2021, former retailing magnate Huang Guangyu was unequivocal when asked about his next move after serving an 11-year jail term for “economic crimes.” The founder of the struggling Gome Retail Holdings Ltd. (0493.HK) vowed to restore his company as one of China’s leading retailers within 18 months. A key part of that effort entailed a renewed push into e-commerce with the launch of a rebranded platform called FUN.

But the period that followed has been anything but fun for the company.

As the end of the 18 months approached, things were hardly going as Huang had planned. Gome recently fired a senior vice president and laid off many of the staff at its FUN online sales unit, as part of a wave of massive layoffs and executive reshuffling within the company, local financial outlet Caixin reported last week.

The development highlights a broader struggle facing many of China’s former traditional retailers that are struggling to adapt to a new landscape where consumers increasingly shop online, a trend that has accelerated with the Covid pandemic. Few of the country’s traditional retailers have successfully made the transition, despite trying their own hands at online sales and forming partnerships with big e-commerce names like Alibaba (BABA.US; 9988.HK) and JD.com (JD.US; 9618.HK).

Founded in 1987, Gome was one of the two most recognizable names on China’s brick-and-mortar retailing scene for electronics in 1990s and 2000s, known for its strong pricing power when negotiating with suppliers.

But both Gome and rival Suning have gradually lost market share over the last two decades with the rise of giants like Alibaba and JD.com. Before his tenure at Gome was disrupted by his incarceration, Huang was actually an early adopter of online shopping by setting up an e-commerce unit as early as 2002. Even after his imprisonment in 2010, the colorful and outspoken chief managed to lead his e-commerce development through his wife, who oversaw his strategy’s execution.

But despite the early start, Gome’s e-commerce initiative never really gained traction, and Alibaba and JD.com had collectively garnered 90% of the online market for electronics by 2014. That left only 10% for Gome, Suning and a bevy of smaller rivals.

The FUN app, a major component of Gome’s renewed e-commerce push, also failed to make a splash. More than 18 months after its launch, the app had just 728,600 monthly active users as of June this year, a fraction of the more than 800 million and 350 million for Alibaba’s Taobao and JD.com’s eponymous app, respectively, according to data from third-party research firm Analysis.

Things looked equally grim for Gome in terms of gross merchandise value (GMV), a measure of total value of sales on a platform. In 2021, FUN’s GMV rose 30% to a modest 146 billion yuan ($21.6 billion), far short of Huang’s original goal of 1 trillion yuan. By comparison, Alibaba and JD.com posted GMV of 8 trillion yuan and 3.3 trillion yuan, respectively, in their latest fiscal years. 

Investors have given Hong Kong-listed Gome the cold shoulder, despite earlier optimism that Huang could take his company back to its former glory. The company’s stock now trades at five-year lows, and its Friday closing price of HK$0.29 is down sharply from a peak of HK$2.30 it recorded in early 2021 when the shares rallied on news of Huang’s return.

Brick-and-mortar still key

As part of Gome’s broader renewed e-commerce drive, the FUN app was supposed to blend online shopping and entertainment with social media elements such as short videos and content sharing. That approach borrows from some of the country’s other internet platforms that rose to prominence in the late 2010s, such as Pinduoduo (PDD.US), Xiaohongshu and ByteDance’s Douyin, the Chinese version of TikTok.

Huang believed consumers would naturally use the app’s shopping function after being enticed by entertainment services, in a strategy he described as “user acquisition with minimal costs.” But that thesis runs contrary to a bigger reality in China, where most big internet platforms use massive subsidies to acquire users in their early stages.

Huang’s gambit was already questionable from the start, since there were already many other established alternatives in the marketplace.  

Gome’s other big move was to diversify beyond its traditional focus on electronics, saying it would add new products like groceries and clothing to its lineup. But again, such a strategy would only put the company in direct competition with far more established rivals like Alibaba and JD.com.

Some might argue that rather than shift to the crowded e-commerce sector where it has little to offer, Gome might be better served by sticking to its original brick-and-mortar retailing business. The company is in the process of ramping up a “Home Living” concept, catering to lifestyle-oriented consumers with services like home design, furniture and automobiles to complement its electronics lineup. It expects to open three such lifestyle experience centers by end of this year in Beijing, Changsha and Xi’an.

In fact, Gome still generates most of its sales from its brick-and-mortar stores, with offline channels contributing 85% of its revenue in the first half of 2021, according to its interim earnings report. Last year Gome’s revenue rose by a modest 5.3%, marking its first annual revenue growth since 2018, reflecting a return to relative calm after the first year of the pandemic. But its total revenue of 46.5 billion yuan for the year still trailed the pre-pandemic level of 2019 and was roughly the same as the 45.8 billion in revenues it recorded more than a decade ago in 2008.

Gome’s heavy spending on e-commerce and other initiatives has left the company squarely in the red, with losses totaling 4.4 billion yuan in 2021 and 6.9 billion yuan in 2020.

The company isn’t the only one suffering from failure to make the e-commerce transition. Its largest rival Suning (002024.SZ) gave up a controlling stake of itself to Alibaba in late 2020, after Suning experienced a liquidity crisis following years of losses amid its own push into e-commerce. 

In terms of valuation, Gome currently trades at a meager price to sales ratio (P/S) of just 0.13 times, roughly the same Suning’s 0.18, reflecting low investor appetite for such firms. The profitable Alibaba and JD.com have higher P/S ratios of 2.1 and 0.65, respectively.

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