Department Stores Re-invented

China RetailDepartment Stores Re-invented

2014 was a challenging year again for department store operators

in China, as many saw significantly falling sales and net profit declines. Fragile global and domestic economies and intensified competition from shopping malls, specialty stores and online retailers were major reasons for stores’ weak performances.

March 2015

1

Furthermore, China’s increased efforts to curb corruption and tighten its policy on issuing pre-paid or gift cards have signifi-cantly affected the profitability of depart-ment stores, especially those targeting a high-end clientele.

2

China Retail - Department Stores Re-invented

The latest figures published by the Ministry of Commerce (MOFCOM) show that retail sales growth for department stores in 1-3Q14 was 6.6%, the lowest for all retail formats (see Exhibit 2).

In April 2013, the China Chain Store & Franchise Association (CCFA) released its rankings of the top 50 department stores in China by total sales (see Exhibit 3). Such sales increased 9.6% yoy to reach 641.1 billion yuan in 2013; by contrast, the growth rate for store numbers was 0.4% yoy, indicating most department store operators were wary about opening new stores for the future. The top 10 department store operators were all domestic players. Topping the list was Shanghai Friendship Group, followed by Dalian Dashang Group and Chongqing Department Store.

Yoy growth (%)

Retail format 1-3Q14

Department stores 6.6

Convenience stores 12.6

Supermarkets 11.5

Hypermarkets 7.1

Specialty stores 9.6

Professional stores 6.7

Total 10.5

Exhibit 2: Retail sales growth for different retail formats, 1-3Q14

Source: Ministry of Commerce, PRC

MARKET OVERVIEW

Department stores see lowest sales growth among all retail formats; operators are wary about new store openings

The National Bureau of Statistic (NBS) reports that total sales revenues for de-partment stores reached 370.4 billion yuan in 2013, up 13.9% year-on-year (yoy). The growth rate increased by over 13 percentage points (ppt) in 2013 compared to 2012 (see Exhibit 1).

Exhibit 1: Total department store sales revenues, 2008-2013

Source: National Bureau of Statistics, PRC

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%400.0

0.0

50.0

2008 2009 2010 2011 2012 2013

100.0

150.0

200.0

250.0

300.0

350.0

Billion yuan YOY Growth

13.9%

0.8%

20.8%

6.9%

18.4%

29.8%

3


Ranking 2013

Ranking 2012 Enterprise

Sales value in 2013

(million yuan)yoy

change

Number of stores

2013yoy

change Place of origin

Major footprints by

region

1 1Shanghai Friendship Group Incorporated

上海友誼集團股份有限公司

*60,800.0 6.7% 45 -8.2% Shanghai Shanghai

2 2Dalian Dashang Group Co., Ltd.

大商股份有限公司

*39,483.9 6.1% 200 -Dalian, Liaoning

Liaoning, Jilin, Heilongjiang,

Henan, Sichuan, Shandong

3 3Chongqing

Department Store Co., Ltd.重慶百貨大樓股份有限公司

37,632.1 12.6% 292 1.4% ChongqingChongqing,

Sichuan, Guizhou, Hubei

4 4 Yingzuo Group銀座集團

34,434.6 12.8% 179 11.2%Jinan, Shandong

Jinan, Shandong

Shandong, Hebei, Henan

5 5Changchun

Eurasia Group Co., Ltd.長春歐亞集團股份有限公司

28,278.3 17.1% 75 29.3% Changchun, Jilin Jilin

6 6

Beijing Wangfujing Department Store

(Group) Co., Ltd.北京王府井百貨（集團）

股份有限公司

23,643.5 9.6% 29 3.6% Beijing National

7 24Liqun Group Co., Ltd

(department store section)利群集團股份有限公司

22,862.0 6.8% 580 -21.2%Qingdao, Shandong Shandong

8 7Rainbow Department Store

Co., Ltd.天虹商場股份有限公司

22,022.5 8.1% 62 5.1%Shenzhen, Guangdong

Guangdong, Jiangxi, Hunan,

Chengdu, Fujian, Beijing , Zhejiang

9 12

Zhenghua Department Store Development Co., Ltd.煙台市振華百貨集團

股份有限公司

21,964.0 15.2% 113 3.7%Yantai, Shandong Shandong

10 9

Jiangsu Wenfeng Great World Chain Store

Development Co., Ltd.文峰大世界連鎖發展

股份有限公司

20,716.8 6.3% 921 -7.4% Nantong, Jiangsu Shanghai, Jiangsu

11 8Parkson Retail Group Ltd.北京百盛商業發展有限公司

*20,452.3 4.3% 58 20.8% Malaysia National

12 11Hefei Department Store

Group Co., Ltd.合肥百貨大樓集團股份有限公司

18,800.0 11.2% 190 - Hefei, Anhui Anhui

13 10Golden Eagle Retail

Group Ltd.金鷹國際商貿集團

18,791.4 0.7% 27 -3.6% Nanjing, Jiangsu

Jiangsu, Anhui, Yunnan,

Shanghai

14 13Intime Department Store (Group)

Co., Ltd.銀泰商業（集團）有限公司

18,165.1 11.4% 36 20.0%Hangzhou, Zhejiang

Beijing, Shanxi, Hubei, Anhui,

Zhejiang

15 20Wanda Department Store Co., Ltd.

萬達百貨有限公司15,500.0 38.6% 75 -

Dalian, Liaoning

National

16 -Wei Bai Group

山東濰坊百貨集團股份有限公司15,129.0 14.7% 570 14.2%

Weifang, Shandong Shandong

Exhibit 3: Total sales of major department store operators in China

4


Ranking 2013


Sales value in 2013

(million yuan)yoy

change

Number of stores

2013yoy


Major footprints by

region

17 14New World Department Store

China Ltd.新世界百貨中國有限公司

*14,800.0 14.7% 41 5.1% Hong Kong National

18 19Zhengzhou Dennis

Department Store Co., Ltd.鄭州丹尼斯集團

14,200.0 16.4% 181 25.7% Zhengzhou, Henan Henan

19 18Liaoning Xinglong

Big Family Business Group 遼寧興隆大家庭商業集團

14,098.1 12.6% 29 -3.3%Shenyang, Liaoning Liaoning

20 15Beijing Capital

Retailing Group北京首商集團股份有限公司

14,076.9 2.0% 17 - Beijing Beijing

21 17Beijing Caishikou

Department Store Co., Ltd.北京菜市口股份有限公司

13,520.8 8.5% 16 6.7% Beijing Beijing

22 23Guangzhou

Grandbuy Co., Ltd.廣州市廣百股份有限公司

11,418.0 8.0% 29 -3.3% Guangzhou, Guangdong Guangdong

23 16Maoye International

Holdings Ltd.茂業國際控股有限公司

11,374.4 2.8% 40 2.6%Shenzhen, Guangdong

Guangdong, Chengdu

24 22Anhui Commercial

Capital Co., Ltd.安徽商之都股份有限公司

11,325.6 3.0% 72 -10.0% Hefei, Anhui Anhui

25 21

Shijiangzhuang Beiguo Group

(department store part)石家庄北國人百集團

有限責任公司(百貨部分)

11,303.6 16.4% 15 15.4%Shijiazhuang, Hebei Hebei

26 26Nanjing Central Emporium Group

Stocks Co., Ltd.南京中央商場股份有限公司

8,788.0 8.8% 10 25.0%Nanjing, Jiangsu

Jiangsu, Shandong, Henan,

Hubei

27 25Hunan Friendship and

Apollo Co., Ltd.湖南友誼阿波羅控股有限公司

7,881.9 5.9% 11 - Changsha, Hunan Changsha, Hunan

28 27Yinchuan Department Store

銀川新華百貨商業集團

股份有限公司

*7,727.8 10.1% 210 10.5% Yinchuan, Ningxia Ningxia, Qinghai, Gansu

29 28Jinan Hualian

Commercial Group濟南華聯商廈集團股份有限公司

7,152.7 17.0% 27 3.8%Jinan, Shandong Shandong

30 29Wuhan Zhongnan

Commercial Group Co., Ltd.武漢中商百貨連鎖有限責任公司

6,421.5 11.3% 9 - Wuhan, Hubei Hubei

31 32

Handan Sunshine Department Store

(Group) Co., Ltd.邯鄲市陽光百貨集團總公司

6,020.0 15.5% 170 28.8% Handan, Hebei Hebei

32 31 Charter Group Holdings Ltd.卓展集團控股有限公司

*5,500.0 4.2% 4 - Changchun, JilinBeijing,

Liaoning, Jilin, Heilongjiang

5


Ranking 2013


Sales value in 2013

(million yuan)yoy

change

Number of stores

2013yoy


Major footprints by

region

33 30Beijing Cuiwei Plaza

Shopping Center北京翠微大厦股份有限公司

5,276.3 -4.9% 5 -16.7% Beijing Beijing

34 35Xinyulou Department Store Group

Co., Ltd.信譽樓百貨集團有限公司

4,813.5 33.1% 16 6.7% Huanghua, Hebei Hebei

35 33Guangzhou Friendship Group

Co., Ltd.廣州友誼集團股份有限公司

4,769.4 -8.3% 6 -Guangzhou, Guangdong Guangdong

36 34Beijing Shunyi Guotai Commercial Building

北京市順義國泰商業大廈

4,014.8 -13.1% 13 8.3% Beijing Beijing

37 36 Xiongfeng Group Co., Ltd.雄風集團有限公司

3,970.3 20.5% 150 4.9%Zhuji, Zhejiang

Zhejiang, Anhui, Chongqing

38 38Nanjing Xinjiekou

Department Store Co., Ltd.南京新街口百貨商店股份有限公司

*3,923.4 17.7% 3 - Nanjing, Jiangsu Jiangsu

39 -Inner Mongolia

Minzu Group內蒙古民族商場

*3,454.5 4.7% 4 -Hohhot , Inner Mongolia Inner Mongolia

40 -Nanning Department Store

Co., Ltd.南寧百貨大樓股份有限公司

*3,178.3 3.9% 17 88.9% Nanning, Guangxi Guangxi

41 -Beijing Urban- Rural Trade Central

Co., Ltd.北京城鄉貿易中心股份有限公司

*2,878.7 9.4% - - Beijing Beijing

42 39Shirble Department Store Hold-

ings (China) Ltd.深圳歲寶百貨有限公司

2,598.6 -0.9% 23 4.5% Shenzhen, Guangdong

Guangdong, Hunan

43 -Chengshang Group Co., Ltd.

成商集團股份有限公司*2,588.2 3.1% 10 11.1%

Chengdu, Sichuan Sichuan

44 -Hangzhou Jiebai Group Co., Ltd.

杭州解百集團股份有限公司*2,456.5 -2.2% 4 -

Hangzhou, Zhejiang Zhejiang

45 -Shanghai Xujiahui

Commercial Co., Ltd.上海徐家匯商城股份有限公司

*2,455.3 0.2% - - Shanghai Shanghai

46 -Qingdao Weekly Group (Department Store part)

青島維客集團股份有限公司

2,418.2 13.3% 3 -Qingdao, Shandong Shandong

47 -Fujian Dongbai Group Co., Ltd.福建東百集團股份有限公司

*2,383.0 -1.5% - - Xiamen, Fujian Fujian

48 -Wuhan Zhongbai Group Co., Ltd.

武漢中百百貨有限責任公司1,960.7 52.0% 9 12.5% Wuhan, Hubei Hubei

49 37Jialeyuan Group

(Department Store part)家樂園商貿有限公司

1,878.3 49.2% 18 80.0% Beijing Beijing

50 40 JiaHua Stores Holdings Ltd.深圳市百佳華百貨有限公司

*1,800.0 -14.0% 9 -25.0%Shenzhen, Guangdong Guangdong

Total sales of major 50 department store operators in China 641,103.3 9.6% 4,623 0.4% -

Source: China Chain Store & Franchise Association, company websites; modified by Fung Business Intelligence Centre*Note: Estimated figures

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Store closures significant

Department store operators have suffered from slower economic growth and weak con-sumer sentiment over recent years, as well as increased competition from online retailers and those in other retail formats. Moreover, the government’s frugality campaigns and measures to counter extravagance have had significant impact on the sale of pre-paid

Department store County of origin City Branch Closing month Opening year

Balloon Department Store1,2

寶萊百貨China Qingdao

Cangzhou June 2014 2011

Jimo June 2014 2011

Central Department Store3,4

尚泰百貨Thailand

Shenyang MixCity June 2014 2011

Hangzhou MixCity June 2014 2011

Mopark Department Store5

摩登百貨China Zengcheng Xintang May 2014 2010

Nanning Department Store6

南寧百貨China Nanning Jinhu May 2014 2005

Simgo Department Store7

新光百貨China Foshan Nanhai May 2014 2013

Parkson Department Store8,9

百盛百貨Malaysia

Beijing Dongsihuan July 2014 2007

Jinan Quancheng May 2014 2012

Changzhou Zhengfang Jingcheng November 2014 2011

Changzhou Xinbei May 2014 2012

Ito Yokado Department Store10,11

華堂商場

Japan Beijing

Xizhimen December 2014 2005

Beiyuan August 2014 2009

Wangjing April 2014 2006

Wangfujing Department Store12

王府井百貨

China Zhanjiang Zhanjiang July 2014 2012

Zhongdu Department Store13,14

中都百貨

China Hangzhou

Qingchun June 2014 2009

Linping June 2014 2003

Anji June 2014 2008

New Century Department Store15

新世紀百貨

China Chongqing Kairui October 2014 2005

Novo Department Store16,17

NOVO百貨Hong Kong

Guangzhou Zhangjiang Plaza June 2014 2010

Chengdu Tianfu December 2014 2013

Rainbow Department Store18

天虹商場China Hangzhou Xiaoshan October 2014 2009

Spring Plaza19

春天廣場China Qingdao Shandong Road August 2014 2006

Exhibit 4: Selected department stores closure in China, January 2014-January 2015

Source: Internet sources; compiled by Fung Business Intelligence Centre

cards and gift cards, which formed a major source of income for department store before anti-corruption policies came into effect. Such factors have severely affected depart-ment stores’ profitability. Rising store clo-sures underlines their challenges, with sev-eral operators closing their lower-performing stores over the past year (see Exhibit 4).

7


Source: China Chain Store & Franchise Association, Deloitte

Source: China Chain Store & Franchise Association, Deloitte

Exhibit 5: Cost structures for surveyed department stores, 2012-2013

Labour accounts for almost 60% of total costs

As shown in Exhibit 5, labour expenditures accounted for 59.7% of total operating costs among surveyed department stores in 2013, while rentals accounted for 25.7% and utilities represented 14.6%, according to a survey conducted by CCFA and Deloitte. Labour contributed the largest increase at 18% yoy, compared to rentals (9.4% yoy) and utilities (-4.3% yoy) in 2013.

It is notable that rentals increased at a slow-er pace in 2013, 7.9 ppt lower than in 2012. That was due, in part, to the slowing pace of expansion among surveyed department stores, although some actually increased the number of their self-owned properties.

80.0%

100.0%90.0%

0.0%10.0%

RentalsLabour costsUtility fees

20.0%30.0%40.0%50.0%60.0%70.0%

2012 2013

56.6%

26.3%

59.7%

17.1% 14.6%

25.7%

400Million yuan

050

2012 2013

100150200250300350

Rentals Labour costs Utility fees

152.9 167.3

329.2388.3

99.5 95.2

8


Exhibit 6: The proportion of concessionary and direct sales of total merchandise for selected department stores, 1H2014

Overseas M&A deals on the rise

For many department store operators, merg-ers and acquisitions (M&A) offer a fast and efficient way to expand their networks and increase market share. In 2014, M&A activity in the department store sector was particu-larly high.

A very significant purchasing deal was Nan-jing Xinjiekou Department Store’s acquisition of British department store chain House of Fraser; Nanjing Xinjiekou is a subsidiary of San Power Group. In April 2014, Nanjing Xinjiekou bought an 89% stake in Highland Group Holdings Ltd., the owner of House of Fraser. The deal is expected to enhance Nan-jing Xinjiekou’s competencies so it can lever-age on House of Fraser’s operational model. The deal also enables Nanjing Xinjiekou to own and operate House of Fraser’s unique brands in China20.

Exhibit 7 shows the overall map of recent M&A deals in China’s department store sector.

Department stores generate their largest income from concessionary sales

Most department stores in China adopt a concessionary business model. They lease designated store areas to concessionaires and receive a percentage of total sales proceeds from these arrangements, representing their major source of income. Other sourc-es include merchandise direct sales, rental incomes and agency fees.

Exhibit 6 shows the proportion of concession-ary and merchandise direct sales as against total merchandise sales for selected depart-ment stores.

Source: Parkson, Intime, Golden Eagle 1H14 financial reports, New World FY2014 annual report; compiled by Fung Business Intelligence Centre*Note: New World Department Store’s figures are for FY2014

80.0%

100.0%90.0%

0.0%10.0%

Direct salesConcessionary sales

20.0%30.0%40.0%50.0%60.0%70.0%

Parkson10.1%

89.9%

New World*5.1%

94.9%

Intime11.6%

88.4%

Golden Eagle9.1%

90.9%

9


Date Bidder company

Bidder company country

Bidder company industry

Target company

Target company country Deal value Note

March 2014 Alibaba Group

Holding Limited21

阿里巴巴集團

China E-commerce Intime Retail

Group

銀泰商業(集團)

有限公司

China HK$ 5.37 billion

25% equity

interest

April 2014 SanPower Group 三胞集團;

Nanjing Xinjiekou

Department Store22

南京新街口百貨商店

China Department store

House of Fraser UK 480 million pounds

89% stake

May 2014 Better-Life Commercial

Chain Share Co.23

步步高商業連鎖

股份有限公司

China Retail Nancheng

Department

Store

南城百貨

China 1.58 billion yuan

100% share

August 2014 Beijing Cuiwei Tower

Co., Ltd24

北京翠微大廈股份有限公司


MixCity Beijing

Modern

Plaza

北京當代商城;

Beijing

Ganjiakou Plaza

北京甘家口大厦

China 2.47 billion yuan

100% stake

January 2015 SanPower Group 三胞集團;

Nanjing Xinjiekou

Department Store25

南京新街口百貨商店


Meici.com

美西時尚

China US$ 7 million

59% stake

Exhibit 7: Major M&A deals in China’s department store sector, January 2014- January 2015

Source: Internet sources, compiled by Fung Business Intelligence Centre

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Enterprise Standalone transactional website Store on third-party online platform

Shanghai Friendship Group Incorporated Company上海友誼集團股份有限公司

http://www.blzoom.com/ nil

Dalian Dashang Group Co., Ltd.大商股份有限公司

http://www.51tiangou.com/ nil

Chongqing Department Store Co., Ltd.重慶百貨大樓股份有限公司

http://www.cbmall.cn/ nil

Changchun Eurasia Group Co., Ltd.長春歐亞集團股份有限公司

http://www.oysd.cn/ nil

Beijing Wangfujing Department Store (Group) Co., Ltd.北京王府井百貨(集團)股份有限公司

http://www.wangfujing.com/ http://wangfujing.tmall.com/

Liqun Group Co., Ltd (department store section)利群集團股份有限公司

http://www.liqunshop.com/ nil

Rainbow Department Store Co., Ltd.天虹商場股份有限公司

http://www.tianhong.cn/ nil

Zhenghua Department Store Development Co., Ltd.煙台市振華百貨集團股份有限公司

http://eshop.zhenshang.com/ nil

Jiangsu Wenfeng Great World Chain Store Development Co., Ltd.文峰大世界連鎖發展股份有限公司

http://www.iwenfeng.com/ nil

Parkson Retail Group Ltd.北京百盛商業發展有限公司

http://www.parkson.com.cn/ nil

Intime Department Store (Group) Co., Ltd.銀泰商業(集團)有限公司

http://www.yintai.com/ http://yintaibaihuo.tmall.com/

Wei Bai Group山東濰坊百貨集團股份有限公司

http://www.zbasw.com/ nil

Exhibit 8: Online stores of selected department stores

#1. “E-commerce”

Faced with losing customers to online re-tailers, an increasing number of department store players have stepped into the e-com-merce space. Currently, 29 of the Top 50 department store operators have established online presences (see Exhibit 8). Two typical approaches are adopted to establish an online

store – either by setting up a standalone website or by opening a store on a third-par-ty online platform. Some retailers, such as Wangfujing Department Store, adopt a dual approach by setting up a wholly-owned transactional website, as well as by launch-ing a store on Tmall at the same time.

HOT TOPICS IN 2014-2015

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Source: Company websites; compiled by Fung Business Intelligence CentreNote: As of February 2015

Enterprise Standalone transactional website Store on third-party online platform

New World Department Store China Ltd.新世界百貨中國有限公司

http://buy.xinbaigo.com/ nil

Liaoning Xinglong Big Family Business Group遼寧興隆大家庭商業集團

http://www.xlgoo.net/ nil

Beijing Capital Retailing Group北京首商集團股份有限公司

http://www.igo5.com/ nil

Beijing Caishikou Department Store Co., Ltd. 北京菜市口股份有限公司

nilhttp://caibai.tmall.com/ http://caibai.jd.com/

Guangzhou Grandbuy Co., Ltd.廣州市廣百股份有限公司

http://www.gbhui.com/ nil

Shijiangzhuang Beiguo Group (department store part)石家庄北國人百集團有限責任公司

(百貨部分)

http://www.ruyigou.cn/ nil

Nanjing Central Emporium Group Stocks Co., Ltd.南京中央商場股份有限公司

http://www.600280.com/ nil

Hunan Friendship and Apollo Co., Ltd.湖南友誼阿波羅控股有限公司

http://www.tepin.com/(Online outlet platform)

nil

Jinan Hualian Commercial Group濟南華聯商廈集團股份有限公司

http://www.hlyigou.com/ nil

Handan Sunshine Department Store (Group) Co., Ltd.邯鄲市陽光百貨集團總公司

http://www.ygttg.com/ nil

Guangzhou Friendship Group Co., Ltd.廣州友誼集團股份有限公司

http://mall.cgzfs.com/ nil

Xiongfeng Group Co., Ltd.雄風集團有限公司

nil http://hopeful.tmall.com/

Nanning Department Store Co., Ltd.南寧百貨大樓股份有限公司

http://www.mmgo.cn/ nil

Shanghai Xujiahui Commercial Co., Ltd.上海徐家匯商城股份有限公司

http://www.xjh.com/ nil

Wuhan Zhongbai Group Co., Ltd.武漢中百百貨有限責任公司

http://www.zon100.com/ nil

Jialeyuan Group (Department Store part)家樂園商貿有限公司

http://www.subuy.com/ nil

JiaHua Stores Holdings Ltd.深圳市百佳華百貨有限公司

http://go.szbjh.com/ nil

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For department store operators to develop their own transactional websites gives them absolute control over their online businesses and also helps strengthen their brand image. However, there are challenges. First, they need to deploy a new set of strategies: Run-ning an online store is completely different from operating an offline one. Operators need to re-consider their targeted consumers, merchandise mix as well as pricing strategies. Second, most traditional department store operators do not have a powerful and transparent database to support their online operations. Finally, it requires large amounts of invested capital to operate and promote online stores and the payback period is often lengthy, in addition to the time cost involved.

Alternatively, operators can set up stores on third-party online platforms. The major advantage is that they can benefit from the huge traffic flows that these online platforms generate. However, stores have less control over online operations and need to follow rules set by the third-party platforms. Such platforms also charge a variety of service fees and commissions.

#2. “M-commerce”

Mobile shopping has been gaining mo-mentum among Chinese consumers, with the total number of mobile Internet users reaching 557 million by the end of Decem-ber 2014, accounting for 85.8% of total Internet users26. Up to December, there were nearly 236 million people using their mobile

devices for shopping, up 63.5% yoy27. Mobile commerce (m-commerce) is and will continue to be the driving force behind the growth of e-commerce. In view of this, an increasing number of department store players have launched mobile apps. Some support mobile shopping, while others are mainly for mar-keting.

Mobile payment plays a key role in facilitat-ing the mobile shopping experience. Some de-partment stores have partnered with leading e-commerce companies, such as Alibaba and Tencent, to offer mobile payment services. Here, the two most popular payment tools are the Alipay and WeChat.

#3. “Social media”

The increasing popularity of social media in China has prompted many department stores to adapt their operational strategies. Many have leveraged social media in varying

13


degrees to reach and engage with customers. Weibo and WeChat are by far the most pop-ular and influential social media platforms. Almost all major department stores have set up Weibo and WeChat accounts. Some even have separate accounts for different branch-es. Social media, when used correctly, can help department stores communicate with customers in an interactive and direct way. For example, customers can contact Rainbow Department Store’s customer service team via its WeChat account and can receive an immediate response from them28.

Over recent years, some department store players have put increasing emphasis on social media marketing strategies. They con-stantly inform consumers about the arrival of new products and exclusive promotions via their social media platforms. Intime Depart-ment Store is an example. In May 2013 the company launched a programme called “gui-miquan” (閨蜜圈) or “circle of close friends” on WeChat. The “guimiquan” is normally composed of between three and six members, usually close friends or family; members can earn double reward points when they purchase in the Intime Department Store, both online and offline. They can also share

reward points or help other members to accumulate these, while points may be used to offset spending in both online and offline stores. According to Morgan Stanley29, the programme resulted in a two-fold increase in spending among young female consumers. It was estimated that sales generated from this contributed to over 5% of Intime Department Store’s total sales, up from 2% in 2013.

Having said that, not all department stores are making the most of their social media accounts. While some department stores constantly send to customers their latest sales promotions, product updates or fashion trends via social media networks, others barely provide updated information and their social media accounts may be idle for months.

#4. “O2O”

O2O is not just a trend for China’s depart-ment store operators, but a core strategy that they need to adopt. Indeed, after building multiple sales channels, an increasing number of department stores have started to implement O2O strategies. These involve mainly integrating their offline, online and mobile channels. They hope to create a closed loop between digital and physical sales and provide consumers with a consistent shop-ping experience across all channels. Exhibit 9 shows the O2O initiatives undertaken by selected stores.

14

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16


In short, department store operators in China have taken a variety of approaches to launch their O2O initiatives, albeit not truly seamlessly across all shopping channels. The following are the most common O2O strate-gies adopted by stores.

Launching online stores and mobile apps; improving store awareness through digi-tal channels

While some department store operators have set up online stores and mobile apps to tap rapidly growing e-commerce and m-com-merce users, many are actively promoting and communicating with consumers through social media networks.

Offering in-store mobile payment and wallet services

Mobile technology is a key enabler for O2O development. More and more department store operators have partnered with leading e-commerce companies, such as Alibaba and Tencent, to offer mobile payment and wallet services. Some common mobile payment tools used by department store operators include the Alipay and WeChat payment schemes. New World Department Store is an example. The company has teamed with Tencent to launch a NWDS T-VIP card, a WeChat-based virtual prepaid card. Upon successful activation of the NWDS T-VIP card, users can shop without a physical card, and can receive real-time promotional infor-mation and check account balances through their WeChat accounts. Users can also top up virtual cards via WeChat35.

Creating a shared customer database and loyalty programme

A single, integrated customer database and loyalty programme allows department store operators to capture consumers’ shopping behaviour across different channels. Increas-ing numbers of department stores have been working on this initiative. Rainbow Depart-ment Store and Intime Department Store are pioneers in integrating their online and offline membership programmes.

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Offering more pick-up points, and supporting product returns

Some department store operators have made it possible for customers to buy online and pick the purchased items up in a physical store. In addition to offering pick-up services at its physical outlets, Rainbow Depart-ment Store, for instance, has expanded such services, allowing customers to also pick up their online purchases from its convenience store outlets in Shenzhen36.

Integrating back-end operation

Some department store operators have inte-grated their back-end operations and systems such as inventory, warehousing and logistics management systems. Beijing Wangfujing Department Store (Group) is a case in point. The company has integrated its store inven-tory system with those provided by suppli-ers; this has undergone trials in two of its department stores - Wangfujing Department Store (Wangfujing branch) and Shuangan Department Store37.

#5. “Retail innovations and Big Data”

To capture increasingly tech-savvy O2O shoppers, a larger number of operators have adopted retail technologies to improve the in-store experience. More operators have turned to launching their own mobile apps with the aim of creating location-based and in-store navigational services; free WiFi is often provided and customers can receive customised mobile coupons and promotional materials in-store through their mobile apps. Some operators, such as Wangfujing Depart-ment Store, have launched mobile apps with geo-locational functionality; customers can

Different online and offline product offerings

To avoid competition between their online platforms and physical stores, some depart-ment store players have offered different products for online and offline outlets, sometimes even targeting different custom-er groups. For example, products available on Intime Department Store’s online site are largely different from those available at physical outlets. The physical stores sell relatively high-priced products targeting mid- to high- end customers, while its online site sells cheaper products targeting the mass market. The overlap rate between Intime Department Stores’ online and offline assort-ment is reportedly lower than 50%.

Source: http://news.sina.com.cn/o/2014-12-17/032831294455.shtml

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#6. “Shopping experience, lifestyle experience”

Without doubt, enhancing the customer shopping experience is a central focus for de-partment store operators. O2O initiatives and retail innovations mentioned above all aim to provide customers with a more pleasant shopping journey. In tandem, some operators are keen to turn their stores into “lifestyle” outlets – with more restaurants, leisure and entertainment features that include cine-mas, kids’ play areas, spas and exhibitions. To provide customers with a unique and

use apps to locate themselves and the brands they are looking for inside the store. Another case is Intime Department Store. In Septem-ber 2014, the company announced that it would trial BaiduEye, a wearable device in-vented by Baidu38, in its outlets. When wear-ing BaiduEye at Intime Department Store, customers are able to obtain detailed infor-mation of the products they are interested in via the earphone attached to the BaiduEye device as well as though their smartphones; BaiduEye can also guide shoppers to the loca-tion of their preferred brands. Furthermore, BaiduEye is equipped with a price comparison function; consumers can weigh up prices from other retailers before making a purchase39. Other retail technologies trialed by department stores to enhance the in-store experience include 3D virtual dressing mirrors, touch-screen information kiosks and digital walls, among other innovations.

Data analytics is a further key enabler in O2O developments. State-of-the art analytic tools allow retailers to grasp and predict consumer preferences and needs, at all touch points – from online purchases to shopping journeys at offline stores. In China, it is quite common for department store operators to partner with e-commerce companies in order to carry out data analysis. For example, Intime Department Store formed a partnership with Alibaba in June 2014 to work together on data mining and facilitate their O2O initiatives40. By leveraging Alibaba’s huge advantage in generating and manipulating customer data, Intime Department Store can better under-stand customers and create more person-alised marketing campaigns. The numbers of Intime Department Store members have reportedly increased from one million to five million in a matter of months.

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Source: Company websites; compiled by Fung Business Intelligence CentreNote: As of February 2015

Department store Selected shopping mall project Location

Intime Department Store銀泰百貨

Intime City43 Zhejiang:Fenghua, Hangzhou, Haining, Huzhou, Linhai, Wenling, Shaoxing

Hebei:Tangshan, Beilun, Zibo, Hefei

Hubei:Wuhan, Wuhu

Guangxi:Liuzhou

Rainbow Department Store天虹商場

Rainbow Shopping Centre44, 45,46 Zhejiang:Hangzhou

Guangdong:Shenzhen

Jiangxi:Tanxin

Grandbuy Department Store 廣百百貨

Grandbuy Sunny Mall47 Guangdong:Zhuhai

Haiya Department Store 海雅百貨

Haiya Mega Mall48 Guangdong:Shenzhen

Better Life Department Store 步步高商場

BBG Plaza49 Hunan:Xiangtan, Jishou, Liuzhou, Changsha

Exhibit 10: Selected department stores that have tapped into the shopping mall sector

#7. “Tapping other retail formats”

Competition in China’s department store sector is fierce, and many department store operators are seeking to diversify their income streams. Some have tapped other

retail formats, such as shopping malls, conve-nience stores and discount outlets. Shopping malls are especially favoured by store oper-ators as they provide one-stop shopping and recreation services under one roof, and are able to drive customer footfall. An increasing number of players have started to step into this lucrative segment and develop their own malls. For example, Better Life Department Store is reportedly to open a shopping mall, Better Life-Meixi Plaza, in Chengsha city, Hu-nan Province in September 2015. The compa-ny plans to have over 40 more shopping malls in China by 202042. Other recent examples are listed in Exhibit 10.

personalised “lifestyle” experience, stores such as Taifu Department Store have teamed with tenants to offer customers a variety of value added-services; these include personal styling, home catering and home cleaning, to mention a few41.

20


Convenience stores provide another popular retail format that has attracted the atten-tion of department store operators. Rainbow Department Store has opened a number of convenience stores in Shenzhen to provide pick-up services for online purchases; these are made in Rainbow Department Store outlets as well as its higher-end Dreams-on Department Store.

Some department store operators have ven-tured into other business sectors such as food and beverage (F&B), commercial property, logistics, finance, hotels and entertainment. One latest example is Parkson Department Store: The company is reportedly to set up a joint-venture (JV) with AUM Hospitality & Entertainment Group, a F&B and entertain-ment company in Malaysia, to start a F&B business in China50.

distribution rights direct from brand owners. For example, Parkson Department Store has secured exclusive distribution rights from fast fashion brand, Mango51. The department store operator plans to open between 100 and 500 Mango stores in China over the next five years. Another case is Golden Eagle Depart-ment Store. The retailer has formed JVs with multiple entities, such as Taiwan-based fast fashion retailer iROO, and Pour La Victoire, a New York city-based shoes, handbags and accessories retailer, giving the store the right to bring in their brands to Parkson outlets in China52. Furthermore, the company an-nounced in April 2014 that it has acquired a 60% stake in Skinmint, a US fashion distribu-tor of contemporary specialty brands53.

It is noteworthy that regional department store operators tend to engage increasingly in merchandise direct sales when compared to their national counterparts. In some case, the proportion of merchandise direct sales can reach 100%. Hebei Xinyulou Depart-ment Store is a case in point. Leveraging its strong local networks and long-stand-ing relationship with suppliers, Xinyulou purchases all of its products directly from suppliers54.

#8. “Direct sales and private labels”

Most department stores in China have been operating under the concessionary model for years; they also understand the drawbacks of this model and have tried to develop a more sustainable approach. An increasing number of department stores have started to engage in merchandise direct sales, by obtaining

21


Source: Company websites and news reports; compiled by Fung Business Intelligence Centre

Department store Private label Product category

Intime Department Store55

銀泰百貨Just Intime Women’s apparel

New World Department Store56

新世界百貨LOL (Love Original Life) Homeware

Ito Yokado Department Store57 華堂商場

pbi Apparel

IYB Homeware

Wangfujing Department Store58 王府井百貨

FIRST WERT Men’s apparel

Golden Eagle Department Store59 金鷹百貨

Aquila D’oro Men’s apparel

IVREA Men’s apparel

LISALEN Women’s apparel

WONDERFUL LIFE Homeware

Antonghui Kids’ apparel

Exhibit 11: Private labels of selected department stores

On the other hand, some department store operators have sought to differentiate them-selves by launching private labels. Exhibit 11 lists some of the private label brands launched by selected department store play-ers. But the development of private labels in China is still at a nascent stage. According to a survey conducted by CCFA and Fung Business Intelligence Centre, private labels

accounted for less than 2% of revenues for surveyed department store operators, much lower than the 30-50% for retailers in devel-oped markets. Lack of professional in-house buyers, huge capital outlays, resistance from staff at different levels and inexperienced management are major reasons for the big differences.

22


CONCLUSIONS

It is true that more and more consumers now choose to shop online, or in shopping malls and specialty stores. Faced with increasing competition from retailers in other segments, together with the growing sophistication and changing needs of Chinese consumers, department store operators need to constant-ly innovate and improve business practices. Those who understand their customers, leverage technology to evolve the customer experience and seek to differentiate them-selves have an opportunity to thrive.

Digital drives foot traffic: O2O is the solution

Chinese consumers today are “digital savvy” and highly connected. They also actively engage in social media. Webrooming is com-mon. Before they buy a product, consumers often seek product information or peer feed-back via social networking. They also check prices from different retailers to find the best deals. Department store operators have to make the most of this digital environment to succeed. Stores need to utilise the most ad-vanced technologies, build their own online and mobile platforms and social networking websites in order to attract and engage cus-tomers. They also need to consider partner-ships with Internet companies like Alibaba or Tencent to launch a range of O2O strategies. Creating an online “buzz” helps people know what is happening at stores, which is wholly desirable.

Shift from “providing a consumer location” to “providing a consumer experience”

Although an increasing number of consumers like to shop online, most still go to physical

stores to do most of their shopping. For de-partment store operators, a critical priority is to take the in-store experience to a different level. The key is to create the best shopping experience possible for consumers - from store display to customer services; from offer-ing unique products and services to seamless-ly integrating different sales channels.

Leverage data analytics

In this new digital world, it is crucial for department store operators to leverage data and analytics to track customers’ needs and shopping preferences, as well as offer customised promotions, products and services. But operators should be mindful of data “flooding”. It is not easy to derive meaningful insights from large amounts of data. Those which are able to turn their data into actionable insights have a better chance of success.

Back to basics: the right merchandise mix

Last but not least, there is a fundamental part of retailing that department store oper-ators should never overlook – merchandising. Department stores in China have long been criticised for offering very similar tenant and product mixes, due to widespread adoption of the concessionary model. Indeed, a growing number of department store operators have sought to differentiate themselves by engag-ing in merchandise direct sales and launching private labels. However, these strategies are still at a nascent stage of development and will take time to bear fruit.

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1 “Balloon Department Store closes its Cangzhou branch.”20 May, 2015. Fang.com. http://news.qd.fang.com/2014-05-20/12823385_all.html2 “Balloon Department Store to close its Jimo branch.” 21 May, 2015. Winshang. http://news.winshang.com/news-247321.html3 “Central Department Store to close its Shenyang branch in June.” 10 May, 2014. Linkshop. http://www.linkshop.com.cn/web/archives/2014/288741.shtml4 “Central Department Store to leave Hangzhou.”17 Sep-tember, 2014. Linkshop. http://www.linkshop.com.cn/web/archives/2014/301231.shtml5 “Simgo Department Store to close its Nanhai Branch; MoPark Department Store to close its Xintang branch.” 15 May, 2014. Guangzhou Daily. http://gzdaily.dayoo.com/html/2014-05/15/content_2628173.htm6 “Nanning Department Store is unable to continues its lease.” 4 January, 2014.Guangxi News Net. http://news.gxnews.com.cn/staticpages/20140104/newgx-52c7414b-9371529.shtml7 “Simgo Department Store to close its Nanhai Branch; MoPark Department Store to close its Xintang branch.” 15 May, 2014. Guangzhou Daily. http://gzdaily.dayoo.com/html/2014-05/15/content_2628173.htm8 ”Parkson Department Store to close more branches.” 29 August, 2014. Business Value. http://content.businessval-ue.com.cn/post/31690.html9 “Parkson Department Store to leave Changzhou.” 10 October, 2014. 21 Century Business. http://money.21cbh.com/2014/10-10/zNMDAzMDdfMTMxNjYzNA.html10 “Ito Yokado Department Store to close more stores.” 16 October, 2014. Net Ease. http://money.163.com/14/1016/01/A8L2C1O4002526O3.html11 “Ito Yokado Department Store to close its Wangjing branch.” 3 April, 2014. Sina. http://sydc.sina.com.cn/shangye/2014-04-03/8199/2014/0403/11358.shtml12 “Wangfujing Department Store closes its Zhan-jiang branch; first store closure in 10 years.” 16 July, 2014. 360doc. http://www.360doc.com/con-tent/14/0716/22/6929130_394902810.shtml13 “Hangzhou Zhongdu Department Store closes unex-pectedly.” 20 June, 2014. People.cn.

http://finance.people.com.cn/n/2014/0620/c153180-25174193.html14 “Inside Zhongdu Department Store’s closure.” 25 June, 2014. Hoolo.tv. http://zt.hoolo.tv/2014/20140625/97024.html15 “New Century Department Store to close its Kairui branch.” 17 November, 2014. WellHome. http://sydc.well-home.cn/pinpaijujiao/baihuo/2014/1117/237924.html16 “Novo Department Store moves out from Zhengjia Pla-za.” 19 November, 2014. Winshang. http://news.winshang.com/news-411928.html

Endnotes

17 “Novo Department Store to close store in Cheng-du.” 29 December, 2014. Ebrun. http://www.ebrun.com/20141229/119645.shtml18 “Rainbow Department Store’s Xiaoshan branch continues to make a loss; plans to close in October.” 22 August, 2014. Sina. http://zj.sina.com.cn/fashion/wanggo/2014-08-22/216886_2.html19 “Spring Plaza closes its Shandong road branch.” 1 September, 2014. Focus. http://qd.focus.cn/news/2014-09-01/5468028.html20 “Sanpower Group website.” (accessed 26 February 2014). http://www.sanpowergroup.com/content/de-tails_44_1997.html 21 “Alibaba Group invests HK$5.37 billion in Intime Retail to fuse offline and online shopping.” 2 April, 2014. PR Newswire. http://www.prnewswire.com/news-releases/alibaba-group-invests-hk537-billion-in-intime-retail-to-fuse-offline-and-online-shop-ping-253670601.html22 “Sanpower Group website.” (accessed 26 February 2014).

http://www.sanpowergroup.com/content/de-tails_44_1997.html23 “Better Life mergers with Nancheng Department Store.” 12 May, 2014. Sina. http://finance.sina.com.cn/chanjing/gsnews/20140512/120219077663.shtml24 “Cuiwei acquires Beijing Modern Plaza and Beijing Ganjiakou Plaza.” 22 October, 2014. Beijing Daily. http://bjrb.bjd.com.cn/html/2014-10/22/content_226301.htm25 “Sanpower Group invests in online luxury retailer Meici.com.” 31 December, 2014. NBD. http://www.nbd.com.cn/articles/2014-12-31/887457.html26 “Statistical report on Internet development in China.” January 2015. China Internet Network Information Centre. P.2827 “Statistical report on Internet development in China.” January 2015. China Internet Network Information Centre. P.4428 “Rainbow Department Store to upgrade its WeChat account; adds more functions.” 5 March, 2014. Ebrun. http://www.ebrun.com/20140305/92971.shtml29 “The Beginning of the End to Prepaid cards (part 1).” 12 August, 2014. Morgan Stanley30 “Wangfujing Department Store website.” (accessed 4 March, 2015). http://www.wfj.com.cn/collectivism/media/7231 “Wangfujing Department Store website.” (accessed 26 February, 2015). http://www.wfj.com.cn/collectivism/media/6432 “New World Department Store website.” (accessed 3 March, 2015). http://www.tianhong.cn/help/detail-700.html

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33 “Rainbow Department Store launches WeChat payment.” In Chengdu. 13 February, 2015. http://mes.chengdu.cn/article/11394534 “New World Department Store website.” (accessed 26 Feburary, 2015). http://www.nwds.com.hk/35 “New World Department Store website.” (accessed 26 Feburary, 2015). http://www.nwds.com.hk/36 “Rainbow Department Store launches stores in conve-nience store format.” 15 July, 2014. Linkshop. http://www.linkshop.com.cn/web/archives/2014/295160.shtml37 “Wangfujing Department Store website.” (accessed 6 March, 2015.) http://www.wfj.com.cn/collectivism/media/6438 “Intime teams up with Baidu.” 4 September, 2014. Sohu. http://business.sohu.com/20140904/n404058965.shtml39 “Rainbow Department Store to introduce virtual mirrors.” 20 November, 2014. STCN. http://epaper.stcn.com/paper/zqsb/html/2014-11/20/content_631207.htm40 “Alibaba invests 1 billion yuan in Intime.” 10 June, 2014. PunNode. http://punnode.com/archives/1649541 “Department store operators in Fuzhou focus on improv-ing ‘shopping experience’.” 28 January, 2015. Linkshop. http://www.linkshop.com.cn/web/archives/2015/316029.shtml42 “Better Life to open 40 shopping malls in five years.” 4 February, 2015. Space. http://www.spacehk.hk/News-View-942.Html43 “Intime City website.” (accessed 26 February, 2015). http://www.intimecity.com.cn/44 “Rainbow Department Store opens shopping mall in Hangzhou.” 30 June, 2014. Vhao. http://www.vhao123.com/t/lingshouzixun/6378945 “Rainbow Department Store opens first shopping mall in Bao’an, Shenzhen.” 7 December, 2012. Sina. http://sydc.sina.com.cn/dichan/5/2012/1207/5183.shtml46 “Rainbow Department Store to open shopping mall in Jiangxi.” 9 Janurary, 2015. Winshang. http://hb.winshang.com/news-434155.html47 “Grandbuy Department Store to open shopping mall.” 4 December, 2014. ChinaSSPP. http://www.chinasspp.com/News/Detail/2014-12-4/186264.htm48 “Haiya Group website.” (accessed 26 February, 2015). http://www.hygroup.cc/news/150104142528000.html49 “Better Life Group website.” (accessed 26 February, 2015). http://life.bbg.com.cn/shoppingmallBigMall.aspx50 “Parkson invests in AUM Hospitality.” 27 January, 2015. ChinaSSPP.

http://www.chinasspp.com/News/De-tail/2015-1-27/189719.htm51 “Parkson to adjust its strategies in China.” 5 May, 2014. CARI. http://cnews.cari.com.my/news.php?id=583715

52 “Golden Eagle Group website.” (accessed 26 February, 2015). http://www.geretail.com/aboutus/history_c.php53 “Golden Eagle Group website.” (accessed 26 February, 2015). http://www.geretail.com/admin8/frame/filedisp.php?-file_id=151462e634b8444a17d320f9062fa49154 “A study on the development of merchandise direct sales in major department stores in China.” January 2013. Fung Business Intelligence Centre, China Chain Store and Franchise Association.55 “Analysis of private label businesses in China’s depart-ment stores.” 7 July, 2014. Sina. http://guba.sina.com.cn/?s=thread&bid=1277&tid=2812756 “Interim Report 2013 of New World Department Store.” 25 February, 2014. Caijing. http://industry.caijing.com.cn/2014-02-25/113955510.html57 “Ito Yokado website.” (accessed 15 August, 2014). http://www.yiteng365.com/pbiAndNew.do?m=pbi58 “Analysis of private label businesses in China’s depart-ment stores.” 7 July, 2014. Sina. http://guba.sina.com.cn/?s=thread&bid=1277&tid=2812759 “Analysis of private label businesses in China’s depart-ment stores.” 7 July, 2014. Sina. http://guba.sina.com.cn/?s=thread&bid=1277&tid=28127

The Fung Business Intelligence Centre (FBIC) collects and analyses market data on sourcing, supply chains, distribution and retail. It also provides thought leadership on technology and other key issues shaping their future. Headquartered in Hong Kong, FBIC leverages unique relationships and information networks to track and report on trends and developments in China and other Asian countries. In addition, its New York-based Global Retail & Technology research team follows broader retail and technology trends, specialising in how they intersect and building collaborative knowledge communities around the revolution occurring worldwide at the retail interface. Since its establishment in 2000, the FBIC (formerly known as the Li & Fung Research Centre) has served as the knowledge bank and think tank for the Fung Group. Through regular research reports and other publications, it makes its market data, impartial analysis and expertise available to businesses, scholars and governments around the world. It also provides ad-vice and consultancy services to colleagues and business partners of the Fung Group on issues related to doing business in China, ranging from market entry and company structure, to tax, licensing and other regulatory matters. Please visit www.fbicgroup.com for more about the Fung Business Intelligence Centre.

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