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Chain Stores Show Their Muscle

The growing strength of China's electrical appliance chain retailers is putting an immense strain on the traditional relationship between them and the nation's manufacturers of these goods.

The two sides are vying for control over price-setting, in a bid to obtain increased profit margins in this intensely competitive market.


A typical example was last year's battle between leading home appliance retailer Gome and the top air conditioner maker Gree.


Co-operation between the two firms came to an end after Gree was unable to accept Gome's additional high charges and the ever-decreasing retail price of its products at the retail chain.


Such disputes have now become commonplace.


A number of overseas home appliance makers including Siemens and Panasonic announced at the new year that they would raise their product prices in 2005, due to continuously rising production costs, especially high raw material prices.


However, retailers like Gome refused to follow suit. The Chinese retailers insisted that the market should determine prices, not a diktat from the manufacturer.


It was later reported that a dispute had also erupted between Gome and electronics giant Samsung, after the retailer asked the South Korean firm to pay for the costs of promoting its products.


But this was denied by the two firms, who then signed a 2 billion yuan (US$242 million) deal in February to show the extent of their co-operation.


However, industry insiders say that this dispute, no matter whether it existed or not, reflects the subtle relationship between home appliance manufacturers and retailers.


Traditional distribution channels were previously heavily reliant on manufacturers or were even subsidiaries of them, pointed out Luo Qingqi, an industry expert from Qingdao-based Pully Consultancy.


But matters have changed since the early 1990s, with the appearance and rapid development of large-scale chain retailers like Gome and Shanghai-based Yongle.


These companies gradually seized control of the major sales channels, especially in big cities.


In addition, the market situation gradually altered. Oversupply and similar products in the home appliance market sparked severe competition among manufacturers.


This led to growing numbers producers dumping their own distribution channels and turning to the chain retailers, in a bid to expand their sales and cut distribution costs.


This passed the right to decide the final retail price into the retailers' hands.


"The dominant role of the manufacturers in sales channels has been weakened," said Luo.


The main reason for the current conflicts over profits between retailers and manufacturers is the intense competition among chain retailers, as well as the battle between a large number of producers, said Liu Haizhong, a spokesman for Sichuan Changhong Electric Appliance Co Ltd, one of China's leading TV makers.


"Chain retailers resort to price wars in order to seize bigger shares of this highly competitive market, eating into profit margins throughout the industry," he said.


Sun Weimin, vice-president of Suning Appliance Co Ltd, shared this view.


"We are not against price rises. On the contrary, we would like to do so, because the retailer would have higher profits after a price rise.


"However, hot market competition sometimes does not allow for such a move," Sun said.


He added that if Suning raised prices but other retailers do not, the company would lose its market.


But Sun argued the right to deciding the price still belongs to manufacturers. The sellers just make some adjustment to allow themselves to make a reasonable profit.


"Retailers' current dominance will be weakened with the emergence of more specialized chain retailers and increased competition in the sector," said Liu Haizhong from Changhong.


He argued that manufacturers should play a greater role in the industrial chain as they own more valuable resources such as technology, the products' functions and quality, and the brand and services.


He illustrated that if Changhong, as a well-known domestic brand, disappeared from one store, customers would consider this to be rather odd.


The normal business model should be that retailers, according to their market investigation, place orders with manufacturers, he said.


And they compete with each other for market information and services with higher added value.


Whether the goods are sold out or not has no relation with the manufacturers from whom they have bought the products.


Retailers currently pay producers back at the end of the year according to their sales. In the meantime, they are charged various fees, covering entry to the store, and retailers' promotion costs etc.


Liu said that a natural business model would be established in the sector as a result of its reorganization and competition.


Future competition will see companies that continue to fight price wars lose their foothold in the market, he said.


Hu Hongke, an analyst from Merchants Securities, said: "China's home appliance manufacturers now face pressures both from increasing production costs - including rising raw materials prices, and from retailers."


Such a situation means that manufacturers currently must rely on retailers to sell their products, even if they have negative profits.


And such a relationship will not end soon, he said.


However, through mergers and acquisitions in the manufacturing industry, small producers will be pushed out of the market, which will help improve market order.


"In fact, home appliance manufacturers and retailers have common interests and are closely related," said Liu Haizhong.


Manufacturers and retailers should find the point where all players are satisfied with their respective share of the profits, said Luo Qingqi from the consultancy firm.


"Establishing a co-operative, mutually beneficial relationship is the only way to improve the overall competitiveness of China's home appliance industry," Huang Guangyu, chairman of Gome Appliances, told the summit on strategic co-operation hosted by the firm on March 20 in Shanghai.


"Effective co-operation between manufacturers and retailers will contribute to the healthy development of the entire industry."


He said his company's future development and growth could not be achieved without manufacturers.


For manufacturers and retailers, customer demand is the common priority, said Wang Lihong, director of Gome's corporate planning department.


Consumer needs are also the focus of future competition, for manufacturers and retailers alike, he said.


He claimed that Gome does not intend to squeeze home appliance manufacturers' profits.


Its low-price strategy is to meet customer demand and is the result of the competition between manufacturers, he said.


"Looking back at Gome's development, the reason we won in the dispute with manufacturers is that we took consumer needs as our top priority," he said.


(China Daily April 7, 2005)


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