LI & FUNG RESEARCH CENTRE China Distribution & Trading Issue 89 August 2011
Department stores in China, 2011
IN THIS ISSUE: Overview
. The total sales value of department stores in China was 249.8 billion I. Overview yuan in 2009; sales of select member enterprises of the China Commerce Association for General Merchandise registered 17.5% growth in 2010. II. Operation modes of Operation modes of department stores in China department stores in . Department stores operators in China generate revenue from (1) China commissions on concessionaire sales, (2) merchandise direct sales, (3) rental income from store tenants, (4) agency fee earned by serving as agents and (5) management fee etc. III. Competitive landscape . Commissions on concessionaire sales are the predominant source of income.
IV. Challenges Competitive landscape
. Compared with many mature markets, China’s department store sector is very fragmented. V. Recent developments . Domestic department store operators tend to focus on regional markets, while leading foreign department store operators have wider footprints. . A growing number of department store operators look for opportunities in lower-tier cities.
Challenges
. Many department stores in China are poorly differentiated. Reliance on commissions from concessionaire sales is a major reason behind. . Heavy initial capital outlays, lack of expertise in merchandising and long nurturing period for new brands are some common concerns Li & Fung Research Centre for operators to try out new operating models. . Department stores are facing Increasing challenges from other retail 11/F, LiFung Tower formats such as shopping malls, professional stores, discount outlets and online retail stores. 868 Cheung Sha Wan Road, Kowloon, Hong Kong Recent developments
Tel: (852) 2300 2399 . Some department store operators have refined their market positioning strategies to cater to specific customer demographics. Fax: (852) 2635 1598 . Department store operators pay growing attention to transform E-mail: [email protected] purchasing practices; the development of private labels and proprietary brands is drawing attention. http://www.lifunggroup.com . A number of department store operators explore opportunities online. . Department store operators try to incorporate more elements of shopping experiences. . Department store operators seek M&A opportunities; a number of department store operators have sought public listings in recent years. . Impact of new prepaid card restrictions on department store operators remains to be seen.
Li & Fung Research Centre Member of the Li & Fung Group
China Distribution & Trading Issue 89 August 2011
Department stores in China, 2011
Department stores1 have long been one of the major retailing channels in China. It is the chief distribution channel for branded apparel, cosmetics, jewelry and watches, etc, targeting mid-to-high income consumers. In the past decades, many consumer companies have viewed department stores as their top-of-choice retail channel to build brand recognition in China. That said, there is growing concern over department stores gradually losing appeal to Chinese consumers due to poor differentiation. Department stores operators are also facing increasing challenges from other format retailers such as shopping malls, internet retailers, outlets, etc. They are taking steps to improve operations.
I. Overview
1. The total sales value of department stores in China was 249.8 billion yuan in 2009; sales of select member enterprises of the China Commerce Association for General Merchandise registered 17.5% growth in 2010
According to the National Bureau of Statistics of China (NBS), the total sales value of department stores was 249.8 billion in 2009 (Exhibit 1).
Exhibit 1: Total sales value of department stores, 2003-2009
300 249.8 250 211.0 200 162.5 148.2 150 127.5 93.0 100 59.7
50 Salesvalue (billion yuan)
0 2003 2004 2005 2006 2007 2008 2009
Source: National Bureau of Statistics of China
1 Department stores are stores with sales area between 6,000 and 20,000 m2, usually multi-storey, selling wide range of merchandises with emphasis on clothing and accessories, footwear, household items and home appliances etc. Special concessionaire counters and open shelves are the chief sales formats.
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China Distribution & Trading Issue 89 August 2011
According to the China Commerce Association for General Merchandise (CCAGM), sales revenue of its 66 member department store operators climbed by 17.5% yoy in 2010 (see Exhibit 2). Most of the surveyed enterprises are leading department store operators in China.
Exhibit 2: Performance of the member enterprises by CCAGM, 2005-2010
2005 2006 2007 2008 2009 2010 Sales revenue growth (% yoy) 18.0 13.7 17.8 16.9 15.2 17.5
Source: China Commerce Association for General Merchandise (CCAGM)
According to the CCAGM, 92.4% of the member enterprises enjoyed sales revenue growth in 2010, higher than that of 81.7% in 2009 (Exhibit 3).
Exhibit 3: Sales growth of select member enterprises by CCAGM, 2010
Sales revenue growth Number of enterprises Share (%)
Over 20% 22 33.3 Over 15% 32 48.5 Over 10% 47 71.2
With improving sales revenue 61 92.4 With declining sales revenue 5 7.6
Source: China Commerce Association for General Merchandise (CCAGM)
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China Distribution & Trading Issue 89 August 2011
II. Operation modes of department stores in China
Department stores operators in China generate revenue from (1) commissions on concessionaire sales, (2) merchandise direct sales, (3) rental income from store tenants, (4) agency fee earned by serving as agents and (5) management fee etc.
Commissions on concessionaire sales
Under concessionaire sales arrangements, department store operators do not own the title to the goods. They enter into agreements with concessionaires and grant the latter the rights to sell the products in designated store areas. Department store operators generally provide a range of services including advertising, marketing, store decoration and renovation, inspection of goods, safety inspections, and centralized payment settlements. Concessionaires need to hand over a certain percentage of their total sales proceeds to department stores as commissions, usually with a guaranteed base-figure for sales each month (see Exhibit 4 for the concessionaire rate of select department operators listed in Hong Kong).
Exhibit 4: Concessionaire rate of select department store operators, 2009-2010
2010 2009 Golden Eagle Retail Group Ltd. 20.0% 20.3% Intime Department Store (Group), Co., Ltd. 17.8% 18.0% New World Department Store China Ltd. 19.4% 20.3% Maoye International holdings Ltd. 17.5% 18.0%
Source: company annual reports
Merchandise direct sales
Under direct sales arrangements, department store operators source and sell their own directly purchased merchandise. Department store operators own the title to the goods and profit from merchandise mark-ups.
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China Distribution & Trading Issue 89 August 2011
Rental income from store tenants
Department store operators lease designated areas to other business operators and receive rental income. Department store operators do not own the title to the goods and are generally not responsible for sales management. Brand companies, as the tenants, need to pay rent, while all the revenue is independent of the department stores.
Commissions on concessionaire sales are the predominant source of income
Commissions on concessionaire sales are the predominant source of income for China’s department store operators. Take several listed department store operators as example. From Exhibit 5, we can see that commissions from concessionaire sales accounted for more than 50% of the total sales proceeds. That said, compared to previous years, Intime, Golden Eagle and New World Department Store were less dependent on concessionaire sales and have put more focus on merchandise direct sales.
Exhibit 5: Revenue breakdown of department store operators from select companies, 2010
Intime Golden Eagle New World Parkson Department Store Commissions from concessionaire sales 60.87% 70.56% 63.91% 58.42% Sale of goods - direct sales 31.64% 27.60% 21.22% 36.20% Rental income 6.35% 1.49% 6.63% 4.59% Management fee income from the operation of 1.14% 0.35% 8.24% 0.79% department stores
Source: company annual reports
III. Competitive landscape
1. Compared with many mature markets, China’s department store sector is very fragmented
According to China Chain Store and Franchise Association (CCFA), among the top 100 retail chain operators in 2010 (hereafter the top 100s), there were 35 players chiefly operating the department store format (see Exhibit 6). Their average growth of sales revenue and growth of number of stores was 23.2% and 18.5% respectively in 2010.
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China Distribution & Trading Issue 89 August 2011
Exhibit 6: Department store operators among the Top 100s, 2010
Enterprise Sales yoy Number of yoy Place of origin value growth stores* growth (million (%) (%) yuan)
Dalian Dashang Group Co., Ltd. 86,157.7 22.1 170 6.3 Chinese Mainland 大連大商集團有限公司 Chongqing Commerce (Group) Ltd. 38,215.9 27.2 319 1.9 Chinese Mainland 重慶商社（集團）有限公司 Shandong Commercial Group 37,000.0 44.3 264 28.2 Chinese Mainland Corporation 山東銀座商城股份有限公司 Hefei Department Store Group Co., Ltd. 24,900.0 19.1 171 25.7 Chinese Mainland 合肥百貨大樓集團股份有限公司 New World Department Store China 17,900.0 19.3 37 8.8 Hong Kong Limited** 新世界百貨中國有限公司** Jiangsu Wenfeng Great World Chainstore 17,649.3 12.7 1,016 3.9 Chinese Mainland Development Co., Ltd. 文峰大世界連鎖發展股份有限公司 Beijing Wangfujing Department Store 16,600.0 25.1 22 15.8 Chinese Mainland (Group) Co., Ltd. ** 北京王府井百貨（集團）股份有限公司** Parkson Retail Group Ltd. ** 16,560.0 33.9 47 6.8 Malaysia 百盛商業集團有限公司** Changchun Eurasia Group Co., Ltd. 16,175.9 20.1 35 16.7 Chinese Mainland 長春歐亞集團股份有限公司 Rainbow Department Store Co., Ltd. 14,705.6 26.6 44 18.9 Chinese Mainland 天虹商場股份有限公司 Golden Eagle Retail Group Limited** 12,400.0 32.5 19 11.8 Chinese Mainland 金鷹商貿集團有限公司** Intime Department Store (Group) Co., 11,962.4 32.7 24 4.3 Chinese Mainland Ltd. 銀泰百貨（集團）有限公司 Shandong Weifang Department Store 10,992.5 15.4 356 11.9 Chinese Mainland (Group) Co., Ltd. 山東濰坊百貨集團股份有限公司 Liaoning Xinglong Big Family Business 9,193.8 16.6 15 36.4 Chinese Mainland Group 遼寧興隆大家庭商業集團 Anhui Commercial Capital Co., Ltd. 9,048.1 24.6 885 -4.6 Chinese Mainland 安徽商之都股份有限公司 Zhengzhou Dennis Department Store 8,774.4 23.6 67 34.0 Chinese Mainland Co., Ltd. 鄭州丹尼斯百貨有限公司 Beijing Yansha Friendship Shopping Mall 8,004.2 24.8 10 0.0 Chinese Mainland Co., Ltd. 北京新燕莎控股（集團）有限責任公司
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China Distribution & Trading Issue 89 August 2011
Enterprise Sales yoy Number of yoy Place of origin value growth stores* growth (million (%) (%) yuan)
Maoye International Holdings Ltd. 7,266.7 49.7 36 63.6 Chinese Mainland
茂業國際控股有限公司 Guangzhou Grandbuy Co., Ltd. 6,776.0 5.3 23 21.1 Chinese Mainland 廣州市廣百股份有限公司 Jinan Renmin Shopping Group Co., Ltd. 5,985.5 14.2 6 0.0 Chinese Mainland 濟南人民商場集團股份有限公司 Nanjing Central Emporium Group Stocks 5,300.0 18.3 7 0.0 Chinese Mainland Co., Ltd.** 南京中央商場股份有限公司** Tangshan General Merchandise Group 5,018.3 25.3 10 25.0 Chinese Mainland Co., Ltd. 唐山百貨大樓集團有限責任公司 Jinan Hualian Commercial Group 4,623.0 36.8 22 29.4 Chinese Mainland 濟南華聯商廈集團股份有限公司 Wuhan Zhongbai Group Co., Ltd. 4,615.9 18.2 9 0.0 Chinese Mainland 武漢中商百貨連鎖有限責任公司 Beijing Cuiwei Plaza Shopping Center 4,342.0 39.5 5 66.7 Chinese Mainland 北京翠微大廈股份有限公司 Guangzhou Friendship Group Co., Ltd. 4,150.0 21.0 5 25.0 Chinese Mainland 廣州友誼集團股份有限公司 Hunan Friendship & Apollo Co., Ltd.** 4,140.0 38.0 9 0.0 Chinese Mainland 湖南友誼阿波羅股份有限公司** Beijing Shunyi Guotai Commercial 4,080.0 29.1 13 8.3 Chinese Mainland Building 北京市順義國泰商業大廈 Shandong Weihai Department Store 4,010.6 -5.9 24 -7.7 Chinese Mainland Group Stock Co., Ltd. 山東威海百貨大樓集團股份有限公司 Handan Sunshine Department Store 3,810.0 26.0 89 107.0 Chinese Mainland (Group) Co. Ltd. 邯鄲市陽光百貨集團總公司 Beijing Xidan Friendship Group 3,531.4 5.9 222 16.2 Chinese Mainland 北京西單友誼集團 Hunan Jiahui Department. Store Co., Ltd. 3,091.0 7.3 209 4.5 Chinese Mainland 湖南佳惠百貨有限責任公司（集團） Shirble Department Store Holdings 2,887.7 15.5 13 18.2 Chinese Mainland (China) Ltd. 深圳歲寶百貨有限公司 Guangxi Nancheng Stores Joint-stock 2,433.6 27.2 24 41.2 Chinese Mainland Co., Ltd. 廣西南城百貨股份有限公司 Xiongfeng Group Co., Ltd. 2,380.0 18.5 118 2.6 Chinese Mainland 雄風集團有限公司 * Number of stores included stores of other retail formats ** Estimated figures Source: China Chain Store and Franchise Association (CCFA)
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China Distribution & Trading Issue 89 August 2011
According to a Euromonitor report released in early 2011, the top 20 mixed retailers2 in China accounted for a 19.2% retail value share of the sector; all of the top 20 mixed retailers are department store operators. The department store sector is very fragmented, compared with many mature markets. In China, many department stores are single-store independents. With huge regional disparities in consumers’ tastes and spending patterns, national chain operation for department stores is not easy. Unlike in the United States where we see players such as JC Penny and Kohl’s operating hundreds of department stores across the nation, national department store chains is a rare sight in China. For example, as of August 2011, leading foreign players such as Parkson and New World Department Store have 48 and 38 stores respectively in the country; while bigger domestic players such as Intime, Wangfujing and Guangzhou Grandbuy all have fewer than 30 stores in China.
2. Domestic department store operators tend to focus on regional markets, while leading foreign department store operators have wider footprints
Domestic department stores
Most of the domestic department store operators in China are region-focused. For instance, Golden Eagle has a “one city, multiple stores” strategy, aiming to strengthening foothold in respective markets. As mentioned, there are huge regional disparities in consumers’ tastes; regional department store operators usually have better understandings of local consumers. Besides, a big number of suppliers in China operate on a regional rather than on a national basis; longstanding relationship with local suppliers gives domestic operators an extra edge. Not to mention that many state-owned domestic players have received huge support by local governments and occupy the prime locations in city centers or developed commercial circles; this partly explains the strong performance of a number of domestic players in respective cities and provinces.
In recent years, many established domestic department store operators, especially those with strong regional heritage such as Golden Eagle, Intime and Maoye, have strived for regional dominance. Some of them also seek to expand beyond their home provinces. Golden Eagle plans to focus on the provincial capitals when expanding into other regions. That said, expansion into other provinces has been a challenge for most domestic operators. For instance, Zhejiang-based Intime Department Store reportedly has a poorer performance in Beijing than its home province for its joint venture project with Lotte Department Store from Korea. The lackluster performance is reportedly due to worse-than-expected consumers’ response towards Korean high-end products that Lotte Intime tried to introduce to the Chinese market. Lotte Intime later changed the merchandizing mix and reduced product offerings from Korea.
2 According to Euromonitor, mixed retailers in China include department stores, mass merchandisers, variety stores and warehouse clubs. Department stores is the most important channel in mixed retailers in China due to its longstanding tradition.
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China Distribution & Trading Issue 89 August 2011
Exhibit 7 demonstrates the store locations of select domestic players in China.
Exhibit 7: Store locations of select domestic department stores operators in China, as of July 2011
Company Store locations Intime Department Store Beijing (Group), Co., Ltd. Zhejiang province: Hangzhou, Jinhua, Ningbo, Wenzhou, 銀泰百貨（集團）有限公司 Zhoushan Hubei province: Wuhan, Ezhou, Xiangfan, Xianning, Xiantao Shaanxi province: Xi'an Golden Eagle Retail Group Jiangsu province: Huai’an, Nanjing, Nantong, Suzhou, Ltd. Yancheng, Yangzhou, Xuzhou 金鷹商貿集團有限公司 Anhui province: Hefei, Huaibei Yunnan province: Kunming Shanghai Jiangsu province: Taizhou Shaanxi province: Xi’an Beijing Wangfujing Beijing Department Store (Group) Inner Mongolia province: Baotou, Hohhot Co., Ltd. Hunan province: Changsha 北京王府井百貨（集團）股 Sichuan province: Chengdu 份有限公司 Chongqing Guangdong province: Guangzhou Yunnan province: Kunming Henan province: Luoyang Shanxi province: Taiyuan Xinjiang province: Urumqi Hubei province: Wuhan Qinghai province: Xining Dalian Dashang Group Co., Liaoning province Ltd. Heilongjiang province 大連大商集團有限公司 Jilin province Henan province Sichuan province Shandong province: Qingdao Maoye International Guangdong province: Shenzhen, Zhuhai Holdings Ltd. Hebei province: Baoding 茂業國際控股有限公司 Jiangsu province: Changzhou Chongqing Liaoning province: Shenyang Jiangsu province: Taizhou, Wuxi Shanxi province: Taiyuan Shandong province: Zibo Beijing Xidan Department Beijing Store Co., Ltd. Sichuan province: Chengdu 北京市西單商場股份有限公 Gansu province: Lanzhou 司 Qinghai province: Xining Xinjiang province: Urumqi
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China Distribution & Trading Issue 89 August 2011
Company Store locations Fujian Dongbai Group Co., Fujian province: Fuzhou Ltd. 福建東百集團 Changchun Ouya (Group) Jilin province: Changchun Co., Ltd. 長春歐亞集團股份有限公司 Hangzhou Jiebai Group Zhejiang province: Hangzhou Co., Ltd 杭州解百集团股份有限公司 Chengshang Group Co., Sichuan province: Chengdu, Luzhou, Mianyang, Ltd. Nanchong 成商集團股份有限公司 Silver Plaza Group Co., Ltd. Shandong province 銀座集團股份有限公司 Hebei province Hunan province Hefei Department Store Anhui province: Bengbu, Chaohu, Hefei, Huainan, Group Co., Ltd. Huangshan, Lu'an, Tong Ling 合肥百貨大樓集團股份有限 公司 Wuhan Zhongnan Hubei province: Huanggang, Jingmen, Jingzhou, Shiyan, Commercial (Group) Co., Suizhou, Wuhan, Xianning Ltd. 中商集團股份有限公司 Wuhan Zhongbai Group Hubei province: Jianli, Jingzhou, Wuhan Co., Ltd. 武漢中百集團股份有限公司 Guangzhou Friendship Guangdong province: Guangzhou Group Co., Ltd. Guangxi province: Nanning 廣州友誼集團股份有限公司 Guangzhou Grandbuy Co., Guangdong province: Guangzhou, Huizhou, Jieyang, Ltd. Maoming, Shenzhen, Zhaoqing, Zhanjiang 廣州市廣百股份有限公司 Hubei province: Wuhan
Source: Company websites
Foreign department stores
Foreign department store operators generally target the higher-income consumers. Exhibit 8 demonstrates the store locations of select foreign department store operators in China. Hong Kong-based New World Department Store China Ltd and Malaysia-based Parkson Retail Group Ltd were the only two foreign department store operators among the Top 100s in 2010. Both have wider national footprints than most of their domestic counterparts.
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China Distribution & Trading Issue 89 August 2011
Exhibit 8: Store locations of select foreign department stores operators in China, as of July 2011
Department stores operators Place of Store locations origin Parkson Retail Group Ltd. Malaysia Liaoning province: Anshan, Dalian, 百盛商業集團有限公司 Shenyang Beijing Jiangsu province: Changshu, Nanjing, Wuxi Sichuan province: Chengdu, Mianyang, Zigong Chongqing Guizhou province: Guiyang, Zunyi Heilongjiang province: Harbin Anhui province: Hefei Yunnan province: Kunming Jiangxi province: Nanchang Guangxi province: Nanning Shandong province: Qingdao, Yantai Shanghai Guangdong province: Shantou Hebei province: Shijiazhuang Shanxi province: Taiyuan Tianjin Xinjiang province: Urumqi Shaanxi province: Xi’an Hunan province: Yueyang Henan province: Zhengzhou New World Department Store Hong Kong Liaoning province: Anshan, Dalian, China Ltd. Shenyang 新世界百貨中國有限公司 Beijing Hunan province: Changsha Sichuan province: Chengdu Chongqing Heilongjiang province: Harbin Yunnan province: Kunming Ganzu province: Lanzhou Jiangsu province: Nanjing Zhejiang province: Ningbo Shanghai Zhejiang province: Taizhou Tianjin Hubei province: Wuhan Henan province: Zhengzhou Aeon Group Japan Beijing 永旺集團 Guangdong province Shandong province
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China Distribution & Trading Issue 89 August 2011
Department stores operators Place of Store locations origin Far Eastern Group Taiwan Beijing 遠東集團 Sichuan province: Chengdu Chongqing Liaoning province: Dalian Shanghai Tianjin Jiangsu province: Wuxi Isetan Co., Ltd Japan Sichuan province: Chengdu 株式會社伊勢丹 Shanghai Liaoning province: Shenyang Tianjin Ito Yokado Japan Beijing 伊藤洋華堂 Sichuan province: Chengdu Shin Kong Mitsukoshi (With Taiwan Beijing Hualian) 新光三越百貨 Lotte Group Korea Beijing (with Intime) 韓國樂天集團 Tianjin Liaoning province: Shenyang Lifestyle International Holdings Hong Kong Shanghai Ltd. 利福國際集團有限公司
Source: Company websites
Eyeing better growth potential, new foreign entrants are flocking to China. Galeries Lafayette (China), a 50-50 joint venture established by French Galeries Lafayette and Hong Kong-based IT Limited, plans to open its first department store in Beijing in 2013. Central Retail Corporation (CRC) from Thailand, on the other hand, is working with China Resources Land – for which the well-known MixC shopping malls launched by the China Resource Land will host a number of department stores of CRC in China.
3. A growing number of department store operators look for opportunities in lower-tier cities
Today, market competition in first-tier cities such as Beijing and Shanghai are very intense for department store operators, and increasingly so in some second-tier cities such as Chengdu, Shenyang and Wuhan. Thus, a growing number of department store operators are looking for opportunities in China’s fast-growing lower-tier cities. For instance, Hong Kong-listed Springland Department Store (華地百貨) plans to devote its resources to new operations in second- and third-tier cities such as Jintan, Changxing and Changzhou in the Yangtze River Delta in order to take advantage of high growth prospects and relatively less intense competition. Parkson has opened new stores in Zhaoqing, Wuxi and Hefei in 2010 and in Zigong in 2011; and New World Department Store plans to expand into Mianyang in 2012.
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China Distribution & Trading Issue 89 August 2011
IV. Challenges
Many department store operators in developed markets have long paid huge attention to offering unique merchandise assortment and developing private labels and proprietary brands, etc to enhance customers’ shopping experiences. However, many department stores in China are poorly differentiated. Reliance on commissions from concessionaire sales is a major reason behind. It is true to say that department store operators do not need to incur any inventory risks under concessionaire arrangements; however, heavy reliance on concessionaire sales also leads to highly similar brand mix in many department stores. Heavy initial capital outlays, lack of expertise in merchandising and long nurturing period for new brands are some common concerns for operators to experiment with new operating models.
In recent years, although many department stores in China have frequently reviewed and reshuffled their merchandise and brand portfolio to improve their income, the problem of having highly similar brand and tenant mix remains very common. The fact that the market is crowded with a large number of undifferentiated players has made many resorted to price competition to boost sales. Discount-driven promotions are hurting the growth prospects of many.
Not to mention that there are increasing challenges from other retail formats such as shopping malls, professional stores, discount outlets and online retail stores, which are winning appeal from many Chinese consumers. In fact, to many brand companies or vendors, these other retail channels also offer them better discretions in many areas such as visual merchandising, which are highly important in brand building.
On the other hand, a number of other format retail operators have expanded into department store format, such as Jiulong Department Store (久隆百货) launched by Beijing Jingkelong Company Limited (京客隆). Competition is intensifying.
Indeed, brand companies today have more choices distributing their products in China. In particular, competition between department stores and shopping malls are the most often discussed. Nonetheless, several edges of department stores should not be ignored. First, brand companies face more complicated business registration procedures opening stores in shopping malls than setting up concessionaire counters in department stores. Besides, opening stores in shopping malls usually involves higher upfront costs, such as decoration. And for many brand companies and vendors, they can better control their risks as the concessionaire commissions paid to department store operators is usually in proportion to sales; meanwhile, rental payment to shopping mall operators is usually fixed, regardless of business performance. Not to say that the lease contracts of shopping malls often last several years, which may be less flexible for brand companies which do not have sound knowledge of the Chinese market. Further, department store gift cards is a popular gifting item in China – a big number of consumers make their purchases using the gift cards in department stores.
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China Distribution & Trading Issue 89 August 2011
V. Recent developments
1. Some department store operators have refined their market positioning strategies to cater to specific customer demographics
There are growing calls for department store operators to improve differentiation. Some operators have refined their market positioning strategies to cater to specific customer demographics. Department stores with distinct themes and positioning have emerged to cater to specific market segments, such as discount department stores, luxury department stores and department stores for female, etc. For instance, the Novo Department Store in Beijing’s Chaoyang District Wanjing, targets fashion consumers aged between 20 and 35; Wangfujing Department Store has also unveiled a new store brand Fashion Headquarters, or HQ, in Beijing in September 2010 positioned to attract fashion consumers between the ages of 18 and 35; targeting young consumers, Guangzhou Grandbuy has launched a new store brand Grandbuy Fashion (GBF) in G.T. Land Plaza in Guangzhou in December 2010.
Despite the huge potential of different segmented markets, many department store operators are cautious testing the market. Indeed, New World Department Store failed to attract footfall as it had hoped for its Beijing New World Women’s Fashion Department Store targeting female consumers opened in May 2010; the positioning for the store was later revised in 2011.
2. Department store operators pay growing attention to transform purchasing practices; the development of private labels and proprietary brands is drawing attention
Department store operators in China are working hard to streamlining their supply chains, of which centralized purchasing is winning attention. China has a multi-tier distribution system, and most brand companies have assigned different local distributors and agents for different regions. It is not uncommon to see that a distributor or agent representing a same brand has to make sales pitch individually to the different stores under the same department store operator. Wangfujing Department Store hopes to change the picture by increasing centralized purchasing – as early as in 2008, its head office in Beijing attempted to deal with brand companies directly and negotiate better concessionaire margin on behalf of its stores in Beijing. Running a so-called “headquarter to headquarter” purchasing model, the purchasing authority of individual stores is withdrawn; instead, purchasing is carried out by the head office directly with a national sole agent or distributor of brand companies instead of with various regional distributors and agents. The initiative was further extended to four sales regions in 2010. According to a spokesperson of Wangfujing Department Store, the head office now centrally purchases different products for dozens of brands.
The development of private labels and proprietary brands is also drawing attention. In many other mature markets,
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China Distribution & Trading Issue 89 August 2011
private labels and proprietary brands offer department store operators better margins and allow them to better differentiate from competitors. Concessionaire sales account for the majority of sales of department stores in China, but some players are now experimenting with private labels or proprietary brands in a bid to improve margin and strengthen customers’ loyalty. For instance, Golden Eagle hopes that its private labels can offer it gross margin standing at around 30-40%. Meanwhile, some examples of proprietary brands include “N Only” by New World Department Store and “Justin Time” by Intime Department Store; and Bailian has also introduced around 20 proprietary brands from France and Italy in Orient Shopping Centre (東方商廈).
However, breaking the bold is not easy. It takes time for department store operators to accumulate knowledge on areas such as merchandising and inventory management, etc. We expect more and more department store operators will experiment with new merchandising practices, but the transformation will be gradual.
3. A number of department store operators explore opportunities online
According to iResearch, online retail sales in China reached 498 billion yuan in 2010, accounting for 3.2% of the total retail sales of consumer goods. It is estimated that the share of the online retail market will further climb to 5.3% of the country’s total retail sales in 2012. Eyeing the huge growth potential, many department store operators have adopted the “clicks-and-bricks” strategy. For example, Intime has set up its online platform “http://www.yintai.com” in October 2010; Guangzhou Grandbuy Department store also set up an individual company to run its online business starting in April 2011; and Wangfujing Department store announced in 2011 that it will invest over 100 million yuan in 3-5 years to expand its online business. Department store operators going “clicks-and-bricks” is relatively new in China, and the effectiveness remains to be seen.
4. Department store operators try to incorporate more elements of shopping experiences
In view of growing competition from shopping malls, over the past few years, some department store operators have converted their department stores into shopping malls to incorporate different elements of shopping experiences under one roof and to cross-fertilize foot traffic. Wangfujing Department Store, for instance, has launched revamping programs since March 2010 to convert a number of its department stores into shopping malls.
Some large department store operators now lease 15-20% of their space to restaurants and other entertainment operators. Many department store operators have also introduced supermarkets in their basement to attract more traffic.
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China Distribution & Trading Issue 89 August 2011
5. Department store operators seek M&A opportunities; a number of department store operators have sought public listings in recent years
In the face of intensifying competition and growing scarcity of prime retail sites, mergers and acquisitions (M&As) have become one of the most common expansion strategies adopted by department store operators. Exhibit 9 demonstrated some recent examples. Many department store operators prefer expanding to other provinces through M&As.
Exhibit 9: Select examples of department stores acquisitions, 2010
Acquisition Company Target Details date April 2010 Dalian Dashang Guilin Wei Xiao Dashang entered the Guangxi market through this Group Co., Ltd. Tang Department acquisition 大連大商集團有 Store 限公司 桂林微笑堂商厦 April 2010 Zhenhua Group Tianjin Department Zhenhua Group acquired 60% equity interest in Tianjin 振華集團 Store Department Store 天津百貨大樓 July 2010 Golden Eagle Anhui Ruijing Golden Eagle acquired 100% equity interest in Anhui Retail Group Commercial Ruijing Commercial Company Limited Company 金鷹商貿集團有 安徽瑞景商業有限 限公司 責任公司 July 2010 Nanjing Central Suzhou Zhong Nanjing Central Emporium Group acquired 45% of Suzhou Emporium Group Shang Zhi Di Zhong Shang Zhi Di Stocks Co., Ltd. 蘇州中商置地 南京中央商場 August 2010 PCD Stores Guiyang Guomao PCD Stores acquired 100% equity interest in Guiyang 中國春天百貨 Guangchang Guomao Guangchang Commercial Trading Co., Ltd. Commercial Trading Co., Ltd. 貴陽國貿廣場商貿 有限公司 October 2010 Intime Lufthansa Intime Department Store Group acquired 100% equity Department Store Friendship interest of Sin Cheng Holdings PTE Ltd., which held 50% (Group) Co., Ltd. Shopping of equity stake of Lufthansa Friendship Shopping 銀泰百貨(集團)有 Center Ltd. Center Ltd 限公司 燕莎友誼商場有限 公司 November 2010 Intime Hubei New Acquired 84.5% equity interest in Hubei New Century Department Store Century Shopping Shopping Centre (Group) Co., Ltd. Centre 湖北隨州新 銀泰百貨(集團)有 世紀購物中心 限公司
Source: China Commerce Association for General Merchandise, company annual reports
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China Distribution & Trading Issue 89 August 2011
Besides, riding the waves of investors’ interests in mainland consumption-related themes, a number of department store operators have sought public listings in recent years. Exhibit 10 lists some examples of initial public offerings (IPOs) of department stores operators in China in 2010.
Exhibit 10: Select IPOs of department stores operators in China, 2010
Company Date of listing Place Shirble Department Store Holdings (China) Ltd. 2010/11/17 Hong Kong 歲寶百貨有限公司 Springland International Holdings Limited 2010/10/21 Hong Kong 華地國際控股有限公司 Rainbow Department Store Co., Ltd. 2010/06/01 Shenzhen 天虹商場股份有限公司 Renrenle Commercial Group Co., Ltd. 2010/01/13 Shenzhen 人人樂連鎖商業集團股份有限公司
Source: China Venture
6. Impact of new prepaid card restrictions on department store operators remains to be seen
As mentioned, department store gift cards is a popular gifting item in China – a big number of consumers make their purchases using gift cards in department stores. Corporations are the major buyers of prepaid gift cards. The prepaid cards, which usually carry a wide range of face values, are used as incentives for employees and as gifts for business partners. For operators such as Golden Eagle, gift cards can account for over 20% of total sales proceeds. Exhibit 11 lists the share of gift card sales to total sales proceeds of some department store operators.
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China Distribution & Trading Issue 89 August 2011
Exhibit 11: Gift card sales to total sales proceeds, 2010
Department store operators Gift card sales to total sales proceeds Golden Eagle Retail Group Ltd. 25% of total sale proceeds. Majority of cards issued to 金鷹商貿集團有限公司 corporate customers. Parkson Retail Group Ltd. About 16% of total sale proceeds. Majority of cards 百盛商業集團有限公司 issued to corporate customers. New World Department Store 10% of total sale proceeds. Mainly issued to retail 新世界百貨中國有限公司 customers. Intime Department Store (Group) Less than 10% of total sale proceeds. Mainly issued to Co., Ltd. retail customers. 銀泰百貨(集團)有限公司 Maoye International Holdings Less than 5% of total sale proceeds. Mainly issued to Ltd. retail customers. 茂業國際控股有限公司
Source: Citibank, company annual reports
However, the widespread use of gift cards can easily slip into problems such as money laundering, illegal cash withdrawals, tax evasion and bribery. In view of this, the State Council and other relevant ministries have jointly issued the “Opinions on the Issuance of Prepaid Cards by Non-Financial Institutes” (關於規範商業預付卡管理的意見) in May 2011, aiming to strengthen the government’s ability to monitor and regulate the issuance of prepaid cards.
Financial and non-financial institutes will not be allowed to issue multi-purpose prepaid cards without the approval from the People’s Bank of China. A commercial enterprise may issue single-function pre-paid cards for itself subject to certain requirements: (1) companies or individuals with purchases of prepaid cards with value over 10,000 yuan in a single purchase will need to register their names with the prepaid card issuers; (2) companies with single purchase of gift cards over 5,000 yuan or individuals with single purchase of gift cards over 50,000 yuan must pay by remittance through bank wire transfer instead of cash (3) anonymous commercial pre-paid cards cannot exceed 1,000 yuan in value per card. Registered prepaid cards cannot exceed 5,000 yuan in value per card; (4) the issuer shall provide invoices for sales of pre-paid cards according to relevant laws and regulations; and (5) there is no restriction on the term of validity of registered commercial pre-paid cards, while the term of validity of non-registered commercial pre-paid card shall be no less than three years.
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China Distribution & Trading Issue 89 August 2011
The restrictions place new hurdles on the use of prepaid cards. However, some industry insiders say that there are ways to get around with the new requirements, say issuing gift cards with smaller face values. That said, industry watchers also caution that the new restrictions may pose new challenges for department store operators, as prepaid cards have become an important source of financing for many. Some department store operators reflected that their sales were not affected by the restrictions. The true impact of the tightened restrictions is yet to be seen.
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