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The recent merger of two major retail chains and the acquisition of another by US giant Best Buy indicate an increased level of consolidation and competition in China's home appliance retail sector, according to an industry researcher.

 

Lu Renbo, a home appliance researcher with the market economy institute of the Development Research Center under the State Council, said mergers and acquisitions have increased this year as the electronic appliance retail market continues to consolidate.

 

"This is just the time for consolidation," Lu said yesterday.

 

Competition in large cities like Beijing, Shanghai, Guangzhou, and Nanjing is intense and leading players are shifting their focus to the markets of smaller cities and rural areas.

 

Meanwhile, sales of professional home appliance retail chains like Gome, Suning, Paradise and Five Stars only accounted for about 20 percent of total home appliance sales in China in 2005 leaving plenty of room for retail chain operators.

 

On May 12, US giant Best Buy Co announced that it paid US$180 million for a majority stake in Nanjing-based Five Stars, the fourth-largest home appliance retail chain in China.

 

The US firm had been investigating ways to enter China for several years and began building its own outlets in Shanghai. But the acquisition was a fast way to gain a stronghold in the highly competitive market.

 

"Five Stars may not be the best target to acquire, but it has the highest potential," said Yang Qingsong, a director with the China Chain Store & Franchise Association (CCFA).

 

The cost of acquiring one of the top three retail chains can be high and acquisition can pose risks for foreign firms. The top three players represent about 10 billion yuan (US$1.25 billion) of market capitalization and Five Stars is the only private company among the top four.

 

Yang pointed out that Best Buy will face the challenge of finding space for development in big cities, as Gome, Suning and Paradise all have good coverage in Beijing, Shanghai and Guangzhou.

 

Five Stars operates mainly in Jiangsu Province, neighboring Shanghai, although it has a presence in eight provinces, so it may be difficult for Best Buy to quickly break into other regions.

 

In April, the country's third-largest retail chain Paradise and its fifth-largest retailer Dazhong announced they would merge.

 

This has seen the creation of a retail chain comprising 320 shops in China, with Paradise's foothold in Shanghai and Dazhong's in Beijing.

 

Lu predicted that as these retail chains move into the smaller cities the industry will see more frequent acquisitions.

 

(China Daily May 26, 2006)