4.1 Reasons for the Merger of the Two Companies
4.1.1 Issues Faced by Gome:
4.1.1.1 Gome's Revenue and Net Profit
According to Gome Electrical Appliances' (00493, HK) 2008 financial report, during the reporting period, the company's revenue was 45.889 billion yuan, an increase of 8.03% compared to 42.479 billion yuan from the same period last year. However, the annual profit was 1.099 billion yuan, a decrease of nearly 70 million yuan compared to 1.168 billion yuan in 2007. This was the first time since its listing in Hong Kong in 2004 that Gome Electrical Appliances experienced a decline in net profit.
By reviewing Gome Electrical Appliances' third-quarter report of 2008, it was found that the company's net profit for the first three quarters of last year was 1.593 billion yuan. This means that Gome Electrical Appliances suffered a net loss of about 500 million yuan in the fourth quarter.
On November 19, 2008, Huang Guangyu, the former chairman of Gome Electrical Appliances, was taken away by the police for suspected economic crimes. Since November 24, 2008, Gome Electrical Appliances has announced an emergency suspension of trading and has not yet resumed trading. The impact of the Huang Guangyu incident on Gome is immeasurable.
Revenue growth with declining net profit - Source: NetEase Technology
According to Gome Electrical Appliances' 2008 financial report, the amount of the company's payable notes significantly increased while cash levels decreased. Cash flow sharply reduced by over 3 billion yuan. By the end of 2008, its payable notes and bank loans reached 8.657 billion yuan, and payable accounts and notes were as high as 12.9 billion yuan. Meanwhile, the company held approximately 3.051 billion yuan in cash and cash equivalents, a reduction of 50% compared to 6.27 billion yuan at the end of 2007. Gome incurred losses of nearly 2.5 billion yuan in equity investments in 2008.
Gome Electrical Appliances' 2007 annual report disclosed that the company reduced the turnover cycle of accounts payable and notes from 135 days to 124 days in 2007. The 2008 annual report showed that the turnover cycle of accounts payable and notes for Gome further decreased by 7 days, reaching 117 days. Gome Electrical Appliances accelerated payment speed to suppliers.
A home appliance manufacturer's responsible person stated that under the financial crisis, all manufacturers hope to accelerate the speed of cash return to enhance operational safety. This person frankly admitted that there were some concerns regarding Gome's settlement process at the end of last year. However, Gome also demonstrated its stance, and these concerns are no longer present.
4.1.1.2 Number of Gome Stores
Chairman and President of Gome, Chen Xiao, expressed that although the operating environment remains severe, Gome has emerged from the most difficult period. He said that Gome's management team began implementing a transformation strategy in 2009, focusing work on network optimization adjustments and profitability enhancement. In transitioning from "sales-led" to "profit-first," Gome will implement stricter internal governance for its own team. According to the announcement, in 2009, Gome will evaluate personnel in various positions based on performance evaluations and adopt a bottom-tier elimination system to streamline the team.
Starting from the beginning of this year, Gome began experimenting with its strategic transformation. Vice President and Spokesperson of Gome, He Yangqing, indicated that the company plans to close around 100 underperforming stores in 2009 while opening some large flagship stores and quality stores, maintaining a total of approximately 1,300 stores. Gome has already completed its extensive network layout and is entering another development phase—network optimization—with the sole purpose of improving single-store efficiency. According to Gome's first-quarter financial report, in the first three months of this year, Gome has already closed more than 40 stores.
The growth rate of the number of Gome stores has slowed down - Source: NetEase Technology
4.1.1.3 Competition between Suning and Gome
Suning, as Gome's largest current market competitor, saw Gome's revenue and profit fall below Suning for the first time in 2008.
Comparing Gome's 2008 annual income and profit with Suning's February-published annual report, Gome's annual total revenue and net profit fell below Suning for the first time. Gome's total revenue in 2008 was 45.89 billion yuan, which was 4.1 billion yuan less than Suning. In terms of profit, Gome's net profit was approximately half of Suning's, at 1.048 billion yuan, while Suning's profit was 2.17 billion yuan.
Through mergers and acquisitions and store openings, Gome's total number of stores reached 859, an increase of 133, but the sales revenue per square meter of each store slightly decreased. Suning had slightly fewer stores, totaling 812.
Gome's board does not have plans for dividends, whereas Suning plans to distribute 680 million yuan in profits this year.
4.1.1.4 Impact of the E-commerce Market on Gome
According to a recent report released by Analysys International, JD.com holds a 47.6% share of the online retail market for 3C products, far exceeding Joyo's 9.6% and Dangdang's 1.8% in the same period.
Gome's strategic transformation is urgently needed, requiring the identification of new growth points to expand market share and maintain advantages in competition with Suning and the rapidly developing e-commerce market.
4.1.2 Issues Faced by JD:
4.1.2.1 Scale Restricts Profitability
From 2005 to 2008, JD.com's annual sales were 30 million yuan, 80 million yuan, 360 million yuan, and 1.32 billion yuan respectively, with an average compound annual growth rate of 340%. Data published by Analysys International also shows that in the fourth quarter of 2008, JD.com led the market with 440 million yuan, accounting for 15.6% of the 2.818 billion yuan Chinese B2C market. This marked the third consecutive quarter where JD.com maintained the top position, followed by Dangdang and Joyo in second and third place respectively.
In traditional channels, it took Gome 15 years to break through 1 billion yuan in sales from its establishment, while Dangdang and Joyo have never surpassed 2 billion yuan. However, after becoming the first and only B2C company in China to surpass 200 million yuan in monthly sales in March this year, Liu Qiangdong believes that achieving 1 billion yuan in sales in 2010 will not be too difficult. From the birth of 8848, Dangdang, and Joyo in 1999 until now, several rounds of fluctuations in China's B2C wave have never produced a company with sales exceeding 2 billion yuan or even tens of billions of yuan. On the other side of the world, Amazon's sales in the United States reached 19.27 billion US dollars in 2008.
JD.com's profit mainly comes from higher sales rebates obtained by expanding sales scale. When the company's sales were only a few billion yuan, increasing the gross margin by two or three percentage points would yield tens of millions of yuan in profit, which is insignificant. However, when the company's sales reach 1 billion yuan, the net profit will exceed 200 million yuan. By using the "frequent purchase fast sale" model to quickly turn over funds and maintain a high absolute profit, thus ensuring the company's profit. Without scale, there can be no talk of industry status; scale is the only source of industry discourse power.
4.1.2.2 Optimize Supply Chain to Reduce Costs
High gross margins are meaningless for the retail industry; micro-profits are the foundation of JD's existence. If a distribution company demands high gross margins, it can only prove that its operating costs are too high. Such companies have no value in the industrial chain. For the past 100 years, every new business model has revolved around two lines: supply chain efficiency and cost. As long as efficiency can be improved and costs reduced, the new model will disrupt the old one. Department stores have gross margins as high as 50%, Walmart only 15%, but Walmart's value is much higher than department stores because Walmart has lower costs and higher efficiency, so it doesn't need a 50% gross margin; 15% is enough to make money. With the help of its own global satellite system, Walmart controls its inventory turnover rate to around 30 days. Gome and Suning achieve 47-60 days, while Amazon achieves 7-10 days. Bezos said that Amazon's greatest value does not come from its profit margin but from the huge cash flow generated by the improvement in supply chain efficiency. In 2008, 40% of Walmart's gross profit came from reinvesting its cash flow.
JD.com digests daily orders with a powerful IT system; the number of product categories sold online exceeds 30,000, with prices 10%-20% cheaper than offline retail stores; its inventory turnover rate is 12 days, with immediate settlement with suppliers, while Gome and Suning have inventory turnover rates of 47-60 days and account periods of 112 days; its expense ratio is 7% lower than Gome and Suning, maintaining a gross margin of around 5%. But Liu Qiangdong believes it's still not fast enough, hoping to shorten the turnover rate by another day next year, providing more value to suppliers and end customers in the industrial chain.
4.1.2.3 Finding New Profit Points
In March 2009, JD invested 20 million yuan to establish Shanghai Yuanmai Express Company. JD Mall plans to establish its own delivery stations in 14 cities including Tianjin, Nanjing, and Suzhou within the year, with all logistics services provided by its self-built express company. In the long term, building its own express company allows effective control over the delivery cycle and quality, ultimately saving costs. However, extending its business into express delivery will undoubtedly increase the company's logistics costs. It is reported that JD's investment in logistics in 2009 reached 67 million yuan, accounting for nearly 70% of the entire company's costs. Additionally, JD's advertising expenses last year were hundreds of thousands of yuan, but from the start of 2009 to date, advertising revenue has exceeded 10 million yuan. Liu Qiangdong has not estimated the future amount and proportion of advertising revenue. Currently, B2C websites rely solely on product sales for "minimal profits", which clearly cannot meet JD's current high investment needs. JD Mall is attempting to open up some other profit-making channels.
1. Entering the B2B Market
While consolidating its existing B2C market, JD Mall is starting to venture into the B2B market. It plans to set up branches in over 20 first-tier cities domestically and aims to increase this number to 100 by 2010. Moreover, Liu Qiangdong is secretly building a call center team of approximately 300 people in Chengdu. This call center team plans to cooperate with 300,000 to 500,000 small and medium-sized enterprise clients this year, facilitating transactions worth at least 1 billion yuan.
2. Advertising and Information as Profit Breakthroughs
JD Mall may charge merchants promoting "first-launch" products certain promotion fees. On Telecom Day, May 17th, two telecom operators, China Mobile, chose JD Mall as the first platform to launch their 3G terminals, and companies like Intel have repeatedly chosen JD as the first platform to release their products.
Liu Qiangdong stated that JD currently charges mainly for promoting new brands, but these big brands do not require special introductions. JD's model for product promotion fees is still under exploration.
Additionally, Liu Qiangdong believes that JD's independently developed information system is also a potential profit resource in the future. Apart from possibly selling paid information surveys and reports, JD will provide suppliers with a pre-procurement platform. For example, consumers might only see simple descriptions and reviews of products on the screen, but JD will analyze hundreds or thousands of parameters such as past sales figures, consumer clicks, tags, paths, browsing times, and dwell times, aggregating them according to certain weights to derive procurement information. Currently, the accuracy rate of this procurement system has reached 95%.
He mentioned that JD has already connected with Lenovo and HP, aiming to complete 30% of the connections by the end of this year, planning to reach 80% next year, and any supplier willing can use it by simply adding a code.
4.1.2.4 Impact of Newegg.cn on JD Mall
From 2007 to 2008, Newegg established itself as the leader in the U.S. IT and digital B2C e-commerce sector with $2 billion in sales. In the second half of 2008, vertical e-commerce sites in China began to emerge, prompting Newegg to increase its investment in China. Today's Newegg.cn will fiercely compete with JD Mall, which operates on a similar model.
Within a 400-kilometer radius of eight warehouses, delivery within 24 hours is possible, with 95% of goods delivered twice a day. In the U.S., customer satisfaction for Newegg far exceeds Amazon, ranking first across all industries, both online and offline. High-level executives personally handle important category customer complaints. Even if operations have very few touchpoints, they must be profitable. The backend construction is still in the investment phase. The board insists on adopting the Newegg model despite the low labor costs in China. In its Shanghai warehouse, all picking is done by robotic arms, ensuring smooth operation as business grows rapidly.
4.1.2.5 Other Factors
Many brand manufacturers limit JD's discount range by not supplying directly but through first- and second-tier distributors, severely restricting its discount space. Although JD has received two rounds of investment totaling $31 million, investors' patience is limited. If Liu Qiangdong cannot generate profits in the long term, subsequent financing will be extremely difficult. In fact, pursuing scale requires continuously upgrading related services, including logistics systems, posing a constant risk of breaking the capital chain.
Five, Prospects After the Merger of the Two Companies
5.1 Integration of Logistics Systems:
Integrate JD's regional warehouses and logistics resources in major cities with Gome's local logistics systems. Utilize Gome's 700,000 square meters of warehouse space across more than 200 large and medium-sized cities, multiple transport vehicles, and over 20,000 logistics employees, including more than 200 logistics management professionals. A vast and well-established logistics network consisting of 49 branch logistics centers and more than 200 secondary and tertiary market external warehouses efficiently and swiftly serves Gome's 800 sales outlets and over 200,000 daily customers. The headquarters logistics center acts as the command center for the national logistics system, while the branch logistics centers serve as operational centers. Through seamless integration between the headquarters and branches, a tightly organized and responsive home appliance logistics system is formed.
In terms of information management, utilize JD's independently developed ERP system to integrate the warehousing system into unified management, allowing flexible adjustments as needed for business development. During this period of rapid change in the IT industry, respond quickly to intense competition. Through this ERP system, analyze hundreds or thousands of parameters such as past sales figures, consumer clicks, tags, paths, browsing times, and dwell times, aggregate them according to certain weights, and derive procurement information.
Establish a third subsidiary to operate the integrated logistics system as a third-party logistics company, forming three subsidiaries: Gome Mall, Gome Online Mall, and Gome Logistics Company. Gome Logistics Company handles all logistics services, including procurement transportation, distributor transportation, final consumer transportation, and after-sales service, providing better and more diverse services to terminal customers.
On the basis of maintaining reasonable logistics costs, improve system operation efficiency, enhance rapid response to terminals, and continuously increase informatization, modernization, and internationalization levels to achieve the unification of commerce flow, logistics, information flow, and capital flow, effectively reducing costs and improving customer service quality.
5.2 Utilization of Gome's Brand Effect by JD:
A brand is not just a symbolic structure or a product emblem but also a comprehensive reflection and manifestation of the cultural forms of enterprises, products, and society; it is not just an intangible asset of the enterprise and consumer recognition but also a carrier of the relationship between enterprises, products, and consumers. The essence of a brand is culture, and its goal is relationships.
Through the merger of the two companies, JD can better utilize Gome's brand effect. Gome's brand is both an intangible asset of the enterprise and a representative of the corporate image. A brand is about delivering a satisfactory product to customers and providing enthusiastic and considerate services, making the company's name synonymous with credibility. JD can use this to increase market share and better target customers who distrust online transactions. This helps cultivate JD's employees' philosophy of "truly thinking for users, striving for perfection, and giving users trust." This thought embodies the core content of the corporate brand strategy. Establishing a sound corporate management system is the basic guarantee of the brand strategy. Management is an effective method adopted to adapt to market requirements. Nowadays, competition between enterprises increasingly manifests as product competition and brand competition. However, building a brand is not something that can be achieved overnight. Although JD has gained some fame through its efforts in recent years, compared to the widely renowned Gome, there is a significant gap. For JD, this is a shortcut. Thus, Gome transforms intellectual property rights, business models, management systems, and corporate culture into capital to reform franchisees, enabling cooperation between enterprises to enter a higher stage of capital operations.
5.3 Pricing Issues for the Same Product Online and Offline After the Merger
The scale of Internet users in China continues to grow rapidly. By the end of June 2008, the number of Internet users in China reached 253 million, surpassing the United States to rank first in the world. Compared to the same period last year, the number increased by 91 million, and in the first half of 2008, the net increase in Internet users was 43 million. More and more residents recognize the convenience of the Internet, and with the decreasing cost of online devices and the rising income level of residents, the Internet is gradually entering households.
For example, in 2007, according to statistics, the proportion of online shoppers among Internet users in China was only 26%, while in the United States, it reached 94%, and in South Korea, it was as high as 99%. Also, the proportion of online shopping in the overall retail market in China lags far behind developed countries and regions. In 2007, the proportion of online shopping in the overall retail market in China was only 0.63%, while in the United States, it exceeded 3.72%, which is 5.9 times that of China, and in South Korea, it was as high as 8.65%, which is 13.7 times that of China.
We have reason to believe that the proportion of e-commerce platforms in the home appliance market sales will continue to increase. Cultivating a new group of online customers is an essential process.
After the merger, due to the optimization of the supply chain, the reduction in the number of stores, and the shortening of Gome's original inventory turnover rate through the integrated logistics system, the channel cost of the original Gome decreases, increasing cash flow. This allows for a reduction in offline sales prices, helping Gome regain its advantage in price wars with large chain stores like Suning, expanding market share, and maintaining its leading position in the home appliance chain industry.
At the same time, maintain a difference of about 10% between online and offline prices. Considering the main feature of e-commerce attracting customers with low prices, minimize the price increase as much as possible to reduce the loss of JD's original fixed customer base to the lowest extent. Avoid intensifying internal competition between online and offline channels due to excessive price differences. Using a price difference of about 10%, leverage Gome's brand effect to attract new online customers and guide the original fixed offline customer base of Gome to the online trading platform with this pricing strategy, cultivating a completely new customer base. This further streamlines the number of stores, reduces operating costs, and increases cash flow.
Through the combination of e-commerce business models and large chain store business models, achieve the goals of increasing sales volume, expanding business scale, and increasing market share.
5.4 Other:
5.4.1 Procurement
Adopt a unified procurement channel to enable direct supply from manufacturers, increase the volume of bulk purchases, and use the re-integrated rapid logistics combined with online and offline sales models to accelerate cash flow, extend the capital chain, and achieve higher profits.
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