Mon, Dec 06, 2004 page11

• Tsann Kuen struggling in China

  DIFFICULT MARKET Despite high hopes for its China business, the retail giant has seen heavy losses. Now it's pinning its hopes on a change of its operating model

  • By Amber Chung / STAFF REPORTER
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  When Tsann Kuen Group (燦坤) opened its first China outlet in Shanghai in May last year, the nation's largest home appliance and electronics chain by sales presumed it could reproduce in China the same glory it enjoys in its home market.

  Instead, its China business has so far seen heavy losses and its chairman, Wu Tsann-kuen (吳燦坤) is facing charges of fraud and violations of the Securities and Exchange Law (證交法) in Taiwan.

  

  The Tsann Kuen store in Xiamen is filled with colorful, large advertisements of various brands which the company believes can help grab consumers' attention, while securing extra advertising income from those vendors.

  PHOTO: AMBER CHUNG, TAIPEI TIMES

  "The [China] business has caused us a loss of US$31 million so far, which ate into our net profit," said the group's chief accounting officer Jack Huang (黃功杰).

  Tsann Kuen opened more than 50 outlets across China, beginning last year. But the swelling losses have forced the company to trim back to just 31 outlets, mainly in the prosperous eastern and southern coastal areas of China.

  In the first three quarters of this year, the company saw a combined net profit of US$3.02 million, which is significantly down from US$17 million a year ago, while revenue grew to US$560 million from US$310 million year-on-year, the company said last month.

  Tsann Kuen, established in 1978, started out as a small home appliance maker. Its lucrative manufacturing business is expected to create US$600 million in total revenue this year and deliver 66 million units of home appliances, including coffee makers, grills and irons, to almost 90 percent of home appliance brands worldwide, such as Starbucks, Royal Philips Electronics, and General Electronic Co.

  The company broke into Taiwan's home appliance and electronics retailing market in 1991 and has since expanded into the sector's dominant player with 153 outlets nationwide. In the first three quarters of this year its pre-tax income was NT$1.1 billion, with earnings per share of NT$5.06, on revenue of NT$22.89 billion.

  "But it just didn't work out the way we thought," said Huang Fu-shan (黃福山), Tsann Kuen's retail operation director. "We found it hard to apply our Taiwanese business model in the Chinese market where the industry's ground rules and consumers' shopping habits are totally different."

  The fast expansion tactics also led to soaring costs for the retail in rental, personnel and inventory, he added.

  The company, for instance, intended to set a new standard by using clean and purely yellow-colored outer walls and interior designs hoping it would help differentiate the chain from rivals in China in order to attract a growing number of China's wealthy customers, Huang Fu-shan said.

  But they soon discovered that China's retail environment is very different, and they replaced their stores' design with colorful, large advertisements of various product brands to grab consumers' attention while securing extra advertising income from those vendors.

  "Unlike Taiwan, the competition among product brands in China is far sharper than that among retailers," Huang Fu-shan said. He noted that Chinese electronics retailers are more like landlords that lease space to product vendors who not only bear all the costs including furnishing, personnel and inventory but pay rebates to retailers on monthly, quarterly, or even yearly basis.

  In Taiwan, Tsann Kuen's salesclerks usually don't want to bother shoppers who are browsing in their stores. But customers in China have different shopping behavior, and actually feel insulted that no clerks come up to help them. Therefore they have introduced "shopping guides" in their China outlets, which have gotten a positive response from customers, Huang said.

  Following the adoption of a new operating model since the middle of this year, the retailer has seen sales increase by around 60 percent, boosting the monthly revenue of a single store to between 12 million and 13 million Chinese yuan from 8 million yuan before, he added.

  Tsann Kuen hopes its new business strategy will help its retail business in China break even by October next year, Huang said, noting that the company has received positive support from Taiwanese lenders such as Taishin International Bank (台新銀行) and Chinatrust Commercial Bank (中國信託). These banks, however, declined to comment.

  To analysts, the clearance of inventory is the key issue to the retailer's future success.

  "The company's retail business in China will see better performance only when they improve inventory management," said Chen Yen-liang (陳彥良), an analyst at Yuanta Core Pacific Capital Management (元大京華投顧). Another analyst at Taiwan International Securities Co (金鼎證券), however, seemed doubtful about the retailer's policy.

  "Tsann Kuen is still groping for ways to be successful in China like it was in its home market," the analyst said on condition of anonymity. Whether Tsann Kuen's new strategy will pay off is yet to be seen, he said.

  But the company's advantages -- entering the China market early and a common cultural background with Chinese -- should help it withstand competition from foreign players once China lifts its restrictions over foreign capital's direct investment in the country's retailing this month, the analyst added.
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