Department Stores Re-invented

Transcription

1 China Retail Department Stores Re-invented March 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. Furthermore, China s increased efforts to curb corruption and tighten its policy on issuing pre-paid or gift cards have significantly affected the profitability of department stores, especially those targeting a high-end clientele. 1

2 MARKET OVERVIEW Department stores see lowest sales growth among all retail formats; operators are wary about new store openings Exhibit 2: Retail sales growth for different retail formats, 1-3Q14 Yoy growth (%) Retail format 1-3Q14 The National Bureau of Statistic (NBS) reports that total sales revenues for department stores reached 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). Department stores 6.6 Convenience stores 12.6 Supermarkets 11.5 Hypermarkets 7.1 Specialty stores 9.6 Professional stores 6.7 Exhibit 1: Total department store sales revenues, Billion yuan % 18.4% 6.9% 20.8% Source: National Bureau of Statistics, PRC 35.0% 30.0% 25.0% 20.0% 13.9% 15.0% 0.8% YOY Growth 10.0% 5.0% 0.0% 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). Total 10.5 Source: Ministry of Commerce, PRC 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 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. 2

3 Exhibit 3: Total sales of major department store operators in China Ranking 2013 Ranking 2012 Enterprise Sales value in 2013 (million yuan) yoy change Number of stores 2013 yoy change Place of origin Major footprints by region 1 1 Shanghai Friendship Group Incorporated 上 海 友 誼 集 團 股 份 有 限 公 司 *60, % % Shanghai Shanghai 2 2 Dalian Dashang Group Co., Ltd. 大 商 股 份 有 限 公 司 *39, % Dalian, Liaoning Liaoning, Jilin, Heilongjiang, Henan, Sichuan, Shandong 3 3 Chongqing Department Store Co., Ltd. 重 慶 百 貨 大 樓 股 份 有 限 公 司 37, % % Chongqing Chongqing, Sichuan, Guizhou, Hubei 4 4 Yingzuo Group 銀 座 集 團 34, % % Jinan, Shandong Jinan, Shandong Shandong, Hebei, Henan Changchun Eurasia Group Co., Ltd. 長 春 歐 亞 集 團 股 份 有 限 公 司 Beijing Wangfujing Department Store (Group) Co., Ltd. 北 京 王 府 井 百 貨 ( 集 團 ) 股 份 有 限 公 司 28, % % Changchun, Jilin Jilin 23, % % Beijing National 7 24 Liqun Group Co., Ltd (department store section) 利 群 集 團 股 份 有 限 公 司 22, % % Qingdao, Shandong Shandong 8 7 Rainbow Department Store Co., Ltd. 天 虹 商 場 股 份 有 限 公 司 22, % % 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, % % Yantai, Shandong Shandong Jiangsu Wenfeng Great World Chain Store Development Co., Ltd. 文 峰 大 世 界 連 鎖 發 展 股 份 有 限 公 司 Parkson Retail Group Ltd. 北 京 百 盛 商 業 發 展 有 限 公 司 Hefei Department Store Group Co., Ltd. 合 肥 百 貨 大 樓 集 團 股 份 有 限 公 司 20, % % Nantong, Jiangsu Shanghai, Jiangsu *20, % % Malaysia National 18, % Hefei, Anhui Anhui Golden Eagle Retail Group Ltd. 金 鷹 國 際 商 貿 集 團 18, % % Nanjing, Jiangsu Jiangsu, Anhui, Yunnan, Shanghai Intime Department Store (Group) Co., Ltd. 銀 泰 商 業 ( 集 團 ) 有 限 公 司 18, % % Hangzhou, Zhejiang Beijing, Shanxi, Hubei, Anhui, Zhejiang Wanda Department Store Co., Ltd. 萬 達 百 貨 有 限 公 司 15, % 75 - Dalian, Liaoning National 16 - Wei Bai Group 山 東 濰 坊 百 貨 集 團 股 份 有 限 公 司 15, % % Weifang, Shandong Shandong 3

4 Ranking 2013 Ranking 2012 Enterprise Sales value in 2013 (million yuan) yoy change Number of stores 2013 yoy change Place of origin Major footprints by region New World Department Store China Ltd. 新 世 界 百 貨 中 國 有 限 公 司 *14, % % Hong Kong National Zhengzhou Dennis Department Store Co., Ltd. 鄭 州 丹 尼 斯 集 團 14, % % Zhengzhou, Henan Henan Liaoning Xinglong Big Family Business Group 遼 寧 興 隆 大 家 庭 商 業 集 團 14, % % Shenyang, Liaoning Liaoning Beijing Capital Retailing Group 北 京 首 商 集 團 股 份 有 限 公 司 Beijing Caishikou Department Store Co., Ltd. 北 京 菜 市 口 股 份 有 限 公 司 14, % 17 - Beijing Beijing 13, % % Beijing Beijing Guangzhou Grandbuy Co., Ltd. 廣 州 市 廣 百 股 份 有 限 公 司 11, % % Guangzhou, Guangdong Guangdong Maoye International Holdings Ltd. 茂 業 國 際 控 股 有 限 公 司 11, % % Shenzhen, Guangdong Guangdong, Chengdu Anhui Commercial Capital Co., Ltd. 安 徽 商 之 都 股 份 有 限 公 司 11, % % Hefei, Anhui Anhui 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, % % Shijiazhuang, Hebei Hebei Nanjing Central Emporium Group Stocks Co., Ltd. 南 京 中 央 商 場 股 份 有 限 公 司 8, % % Nanjing, Jiangsu Jiangsu, Shandong, Henan, Hubei Hunan Friendship and Apollo Co., Ltd. 湖 南 友 誼 阿 波 羅 控 股 有 限 公 司 7, % 11 - Changsha, Hunan Changsha, Hunan Yinchuan Department Store 銀 川 新 華 百 貨 商 業 集 團 股 份 有 限 公 司 *7, % % Yinchuan, Ningxia Ningxia, Qinghai, Gansu Jinan Hualian Commercial Group 濟 南 華 聯 商 廈 集 團 股 份 有 限 公 司 7, % % Jinan, Shandong Shandong Wuhan Zhongnan Commercial Group Co., Ltd. 武 漢 中 商 百 貨 連 鎖 有 限 責 任 公 司 Handan Sunshine Department Store (Group) Co., Ltd. 邯 鄲 市 陽 光 百 貨 集 團 總 公 司 6, % 9 - Wuhan, Hubei Hubei 6, % % Handan, Hebei Hebei Charter Group Holdings Ltd. 卓 展 集 團 控 股 有 限 公 司 *5, % 4 - Changchun, Jilin Beijing, Liaoning, Jilin, Heilongjiang 4

5 Ranking 2013 Ranking 2012 Enterprise Sales value in 2013 (million yuan) yoy change Number of stores 2013 yoy change Place of origin Major footprints by region Beijing Cuiwei Plaza Shopping Center 北 京 翠 微 大 厦 股 份 有 限 公 司 Xinyulou Department Store Group Co., Ltd. 信 譽 樓 百 貨 集 團 有 限 公 司 5, % % Beijing Beijing 4, % % Huanghua, Hebei Hebei Guangzhou Friendship Group Co., Ltd. 廣 州 友 誼 集 團 股 份 有 限 公 司 4, % 6 - Guangzhou, Guangdong Guangdong Beijing Shunyi Guotai Commercial Building 北 京 市 順 義 國 泰 商 業 大 廈 4, % % Beijing Beijing Xiongfeng Group Co., Ltd. 雄 風 集 團 有 限 公 司 3, % % Zhuji, Zhejiang Zhejiang, Anhui, Chongqing Nanjing Xinjiekou Department Store Co., Ltd. 南 京 新 街 口 百 貨 商 店 股 份 有 限 公 司 *3, % 3 - Nanjing, Jiangsu Jiangsu 39 - Inner Mongolia Minzu Group 內 蒙 古 民 族 商 場 *3, % 4 - Hohhot, Inner Mongolia Inner Mongolia Nanning Department Store Co., Ltd. 南 寧 百 貨 大 樓 股 份 有 限 公 司 Beijing Urban- Rural Trade Central Co., Ltd. 北 京 城 鄉 貿 易 中 心 股 份 有 限 公 司 *3, % % Nanning, Guangxi Guangxi *2, % - - Beijing Beijing Shirble Department Store Holdings (China) Ltd. 深 圳 歲 寶 百 貨 有 限 公 司 2, % % Shenzhen, Guangdong Guangdong, Hunan 43 - Chengshang Group Co., Ltd. 成 商 集 團 股 份 有 限 公 司 *2, % % Chengdu, Sichuan Sichuan 44 - Hangzhou Jiebai Group Co., Ltd. 杭 州 解 百 集 團 股 份 有 限 公 司 *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, % - - Shanghai Shanghai 46 - Qingdao Weekly Group (Department Store part) 青 島 維 客 集 團 股 份 有 限 公 司 2, % 3 - Qingdao, Shandong Shandong Fujian Dongbai Group Co., Ltd. 福 建 東 百 集 團 股 份 有 限 公 司 Wuhan Zhongbai Group Co., Ltd. 武 漢 中 百 百 貨 有 限 責 任 公 司 Jialeyuan Group (Department Store part) 家 樂 園 商 貿 有 限 公 司 *2, % - - Xiamen, Fujian Fujian 1, % % Wuhan, Hubei Hubei 1, % % Beijing Beijing JiaHua Stores Holdings Ltd. 深 圳 市 百 佳 華 百 貨 有 限 公 司 *1, % % Shenzhen, Guangdong Guangdong Total sales of major 50 department store operators in China 641, % 4, % - Source: China Chain Store & Franchise Association, company websites; modified by Fung Business Intelligence Centre *Note: Estimated figures 5

6 Store closures significant Department store operators have suffered from slower economic growth and weak consumer 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 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 department stores profitability. Rising store closures underlines their challenges, with several operators closing their lower-performing stores over the past year (see Exhibit 4). Exhibit 4: Selected department stores closure in China, January 2014-January 2015 Department store County of origin City Branch Closing month Opening year Balloon Department Store 1,2 寶 萊 百 貨 Central Department Store 3,4 尚 泰 百 貨 Mopark Department Store 5 摩 登 百 貨 Nanning Department Store 6 南 寧 百 貨 Simgo Department Store 7 新 光 百 貨 Cangzhou June China Qingdao Jimo June Shenyang MixCity June Thailand Hangzhou MixCity June China Zengcheng Xintang May China Nanning Jinhu May China Foshan Nanhai May Parkson Department Store 8,9 百 盛 百 貨 Malaysia Beijing Dongsihuan July Jinan Quancheng May Changzhou Zhengfang Jingcheng November Changzhou Xinbei May Ito Yokado Department Store 10,11 Japan Beijing Xizhimen December Beiyuan August 華 堂 商 場 Wangjing April Wangfujing Department Store 12 王 府 井 百 貨 China Zhanjiang Zhanjiang July Zhongdu Department Store 13,14 China Hangzhou Qingchun June Linping June 中 都 百 貨 Anji June New Century Department Store 15 新 世 紀 百 貨 Novo Department Store 16,17 NOVO 百 貨 Rainbow Department Store 18 天 虹 商 場 Spring Plaza 19 春 天 廣 場 China Chongqing Kairui October Guangzhou Zhangjiang Plaza June Hong Kong Chengdu Tianfu December China Hangzhou Xiaoshan October China Qingdao Shandong Road August Source: Internet sources; compiled by Fung Business Intelligence Centre 6

7 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 It is notable that rentals increased at a slower pace in 2013, 7.9 ppt lower than in 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. Exhibit 5: Cost structures for surveyed department stores, % 90.0% 80.0% 70.0% 60.0% 50.0% 40.0% 30.0% 20.0% 10.0% 0.0% 17.1% 14.6% 56.6% 26.3% Utility fees Labour costs Rentals 59.7% 25.7% Source: China Chain Store & Franchise Association, Deloitte Million yuan Rentals Labour costs Utility fees Source: China Chain Store & Franchise Association, Deloitte 7

8 Department stores generate their largest income from concessionary sales Overseas M&A deals on the rise 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 sources include merchandise direct sales, rental incomes and agency fees. Exhibit 6 shows the proportion of concessionary and merchandise direct sales as against total merchandise sales for selected department stores. Exhibit 6: The proportion of concessionary and direct sales of total merchandise for selected department stores, 1H % 90.0% 80.0% 70.0% 60.0% 50.0% 40.0% 30.0% 20.0% 10.0% 0.0% 89.9% 10.1% Parkson 88.4% 11.6% Intime 94.9% 5.1% New World* 90.9% 9.1% Golden Eagle For many department store operators, mergers 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 particularly high. A very significant purchasing deal was Nanjing 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 Nanjing Xinjiekou s competencies so it can leverage on House of Fraser s operational model. The deal also enables Nanjing Xinjiekou to own and operate House of Fraser s unique brands in China 20. Exhibit 7 shows the overall map of recent M&A deals in China s department store sector. Concessionary sales Direct sales 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 8

9 Exhibit 7: Major M&A deals in China s department store sector, January January 2015 Date Bidder company Bidder company country Bidder company industry Target company Target company country Deal value Note March 2014 Alibaba Group Holding Limited 21 China E-commerce Intime Retail Group China HK$ 5.37 billion 25% equity interest 阿 里 巴 巴 集 團 銀 泰 商 業 ( 集 團 ) 有 限 公 司 April 2014 SanPower Group 三 胞 集 團 ; Nanjing Xinjiekou China Department store House of Fraser UK 480 million pounds 89% stake Department Store 22 南 京 新 街 口 百 貨 商 店 May 2014 Better-Life Commercial Chain Share Co. 23 China Retail Nancheng Department China 1.58 billion yuan 100% share 步 步 高 商 業 連 鎖 Store 股 份 有 限 公 司 南 城 百 貨 August 2014 Beijing Cuiwei Tower Co., Ltd 24 China Department store MixCity Beijing Modern China 2.47 billion yuan 100% stake 北 京 翠 微 大 廈 股 份 有 限 公 司 Plaza 北 京 當 代 商 城 ; Beijing Ganjiakou Plaza 北 京 甘 家 口 大 厦 January 2015 SanPower Group 三 胞 集 團 ; Nanjing Xinjiekou China Department store Meici.com 美 西 時 尚 China US$ 7 million 59% stake Department Store 25 南 京 新 街 口 百 貨 商 店 Source: Internet sources, compiled by Fung Business Intelligence Centre 9

10 HOT TOPICS IN #1. E-commerce Faced with losing customers to online retailers, an increasing number of department store players have stepped into the e-commerce 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-party 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 launching a store on Tmall at the same time. Exhibit 8: Online stores of selected department stores 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 Dalian Dashang Group Co., Ltd. 大 商 股 份 有 限 公 司 Chongqing Department Store Co., Ltd. 重 慶 百 貨 大 樓 股 份 有 限 公 司 Changchun Eurasia Group Co., Ltd. 長 春 歐 亞 集 團 股 份 有 限 公 司 Beijing Wangfujing Department Store (Group) Co., Ltd. 北 京 王 府 井 百 貨 ( 集 團 ) 股 份 有 限 公 司 Liqun Group Co., Ltd (department store section) 利 群 集 團 股 份 有 限 公 司 Rainbow Department Store Co., Ltd. 天 虹 商 場 股 份 有 限 公 司 Zhenghua Department Store Development Co., Ltd. 煙 台 市 振 華 百 貨 集 團 股 份 有 限 公 司 Jiangsu Wenfeng Great World Chain Store Development Co., Ltd. 文 峰 大 世 界 連 鎖 發 展 股 份 有 限 公 司 Parkson Retail Group Ltd. 北 京 百 盛 商 業 發 展 有 限 公 司 Intime Department Store (Group) Co., Ltd. 銀 泰 商 業 ( 集 團 ) 有 限 公 司 Wei Bai Group 山 東 濰 坊 百 貨 集 團 股 份 有 限 公 司 10

11 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 Liaoning Xinglong Big Family Business Group 遼 寧 興 隆 大 家 庭 商 業 集 團 Beijing Capital Retailing Group 北 京 首 商 集 團 股 份 有 限 公 司 Beijing Caishikou Department Store Co., Ltd. 北 京 菜 市 口 股 份 有 限 公 司 Guangzhou Grandbuy Co., Ltd. 廣 州 市 廣 百 股 份 有 限 公 司 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 ) Nanjing Central Emporium Group Stocks Co., Ltd. 南 京 中 央 商 場 股 份 有 限 公 司 Hunan Friendship and Apollo Co., Ltd. 湖 南 友 誼 阿 波 羅 控 股 有 限 公 司 Jinan Hualian Commercial Group 濟 南 華 聯 商 廈 集 團 股 份 有 限 公 司 Handan Sunshine Department Store (Group) Co., Ltd. 邯 鄲 市 陽 光 百 貨 集 團 總 公 司 Guangzhou Friendship Group Co., Ltd. 廣 州 友 誼 集 團 股 份 有 限 公 司 Xiongfeng Group Co., Ltd. 雄 風 集 團 有 限 公 司 Nanning Department Store Co., Ltd. 南 寧 百 貨 大 樓 股 份 有 限 公 司 Shanghai Xujiahui Commercial Co., Ltd. 上 海 徐 家 匯 商 城 股 份 有 限 公 司 Wuhan Zhongbai Group Co., Ltd. 武 漢 中 百 百 貨 有 限 責 任 公 司 Jialeyuan Group (Department Store part) 家 樂 園 商 貿 有 限 公 司 JiaHua Stores Holdings Ltd. 深 圳 市 百 佳 華 百 貨 有 限 公 司 Source: Company websites; compiled by Fung Business Intelligence Centre Note: As of February (Online outlet platform)

12 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: Running 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. devices for shopping, up 63.5% yoy 27. 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 marketing. Mobile payment plays a key role in facilitating the mobile shopping experience. Some department 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. #2. M-commerce Mobile shopping has been gaining momentum among Chinese consumers, with the total number of mobile Internet users reaching 557 million by the end of December 2014, accounting for 85.8% of total Internet users 26. Up to December, there were nearly 236 million people using their mobile #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 12

13 degrees to reach and engage with customers. Weibo and WeChat are by far the most popular and influential social media platforms. Almost all major department stores have set up Weibo and WeChat accounts. Some even have separate accounts for different branches. 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 them 28. Over recent years, some department store players have put increasing emphasis on social media marketing strategies. They constantly inform consumers about the arrival of new products and exclusive promotions via their social media platforms. Intime Department Store is an example. In May 2013 the company launched a programme called guimiquan ( 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 Stanley 29, 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 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 department 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 shopping experience across all channels. Exhibit 9 shows the O2O initiatives undertaken by selected stores. 13

14 M n bas ed s ervic Loc atio king boo taur ants es Res card VIP Cur rent in-s to r e prom otio ns Link ed t o stor e form Own tran sac t io nal web site Source: Company websites; field trips; expert interviews; compiled by Fung Business Intelligence Centre Note: As of February 2015 Guangzhou Friendship Department Store 廣州友誼商場 New World Department Store 新世界百貨 Intime Department Store 銀泰百貨 Rainbow Department Store 天虹商場 Wangfujing Department Store 王府井百貨 aym e nt obil ep Department Store alle t ile w Mob Transactional functions WeChat g Social media Weibo WiF i ing Value-added services ketin g Mar plat arty Thir d-p opp e sh Mob il Offline store t Mobile app ketin Mar of th e r pla n Floo men pay Mob ile very Online website O2O initiatives Inte g offlin rated on e m emb line an ersh d ip Exhibit 9: Selected department stores O2O initiatives deli Hom e up pick tore In-s 14

15 Department store Major O2O initiatives In-store initiatives Offers free WiFi Supports mobile payments - WeChat payment and Alipay 30 Integrated store inventory management system with suppliers inventory management systems at two stores (Wangfujing and Shuang an branches) 31 Wangfujing Department Store 王 府 井 百 貨 Order online, collect offline Consumers can pick up online orders at any Rainbow Department Stores (in Shenzhen only), convenient stores owned by Rainbow Department Store, delivery lockers located in over 300 selected residential areas (size: 55cm*55cm*55cm; in Shenzhen only), 14 property management companies (in Shenzhen only) and Guoda Drug Stores (in Shenzhen only) 32 Mobile initiatives Launches WeChat store Rainbow Department Store 天 虹 商 場 In-store initiatives Offers free WiFi Supports mobile payments - WeChat payment 33 Plans to introduce virtual mirrors in its stores At Rainbow s convenience store: Provides touch-screen devices which can direct customers to Rainbow Department Store s online store Quick Response (QR) codes of selected products that are sold on Rainbow Department Store s website are displayed on the wall in the convenience store; customers can use their smartphone to scan the QR code to access the website Provides store pickup services for Rainbow Department Store Intime Department Store 銀 泰 百 貨 In-store initiatives Offers free WiFi Supports mobile payments - Alipay Supports mobile wallet Yintaibao Teams up with Alibaba to collect and analyse members shopping behaviour in order to create more personalised marketing campaigns New World Department Store 新 世 界 百 貨 In-store initiatives Offers free WiFi Supports mobile wallet NWDS T-VIP Card Teams up with Tencent to collect and analyse members shopping behaviour in order to create more personalised marketing campaigns 34 Guangzhou Friendship Department Store 廣 州 友 誼 商 場 Mobile initiatives Launches WeChat store In-store initiatives Offers free WiFi Source: Company websites, field trips, expert interviews; compiled by Fung Business Intelligence Centre 15

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 strategies adopted by stores. Launching online stores and mobile apps; improving store awareness through digital channels While some department store operators have set up online stores and mobile apps to tap rapidly growing e-commerce and m-commerce 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 information and check account balances through their WeChat accounts. Users can also top up virtual cards via WeChat 35. 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. Increasing numbers of department stores have been working on this initiative. Rainbow Department Store and Intime Department Store are pioneers in integrating their online and offline membership programmes. 16

17 Offering more pick-up points, and supporting product returns Different online and offline product offerings 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 Department Store, for instance, has expanded such services, allowing customers to also pick up their online purchases from its convenience store outlets in Shenzhen 36. To avoid competition between their online platforms and physical stores, some department store players have offered different products for online and offline outlets, sometimes even targeting different customer 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 assortment is reportedly lower than 50%. Source: #5. Retail innovations and Big Data Integrating back-end operation Some department store operators have integrated 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 inventory system with those provided by suppliers; this has undergone trials in two of its department stores - Wangfujing Department Store (Wangfujing branch) and Shuangan Department Store 37. 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 Department Store, have launched mobile apps with geo-locational functionality; customers can 17

18 use apps to locate themselves and the brands they are looking for inside the store. Another case is Intime Department Store. In September 2014, the company announced that it would trial BaiduEye, a wearable device invented by Baidu 38, in its outlets. When wearing BaiduEye at Intime Department Store, customers are able to obtain detailed information 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 location of their preferred brands. Furthermore, BaiduEye is equipped with a price comparison function; consumers can weigh up prices from other retailers before making a purchase 39. Other retail technologies trialed by department stores to enhance the instore 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 initiatives 40. By leveraging Alibaba s huge advantage in generating and manipulating customer data, Intime Department Store can better understand customers and create more personalised marketing campaigns. The numbers of Intime Department Store members have reportedly increased from one million to five million in a matter of months. #6. Shopping experience, lifestyle experience Without doubt, enhancing the customer shopping experience is a central focus for department 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 cinemas, kids play areas, spas and exhibitions. To provide customers with a unique and 18

19 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 few 41. #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, convenience stores and discount outlets. Shopping malls are especially favoured by store operators 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, Hunan Province in September The company plans to have over 40 more shopping malls in China by Other recent examples are listed in Exhibit 10. Exhibit 10: Selected department stores that have tapped into the shopping mall sector Department store Selected shopping mall project Location Intime Department Store 銀 泰 百 貨 Intime City 43 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 44, 45,46 Rainbow Shopping Centre Zhejiang: Hangzhou Guangdong: Shenzhen Grandbuy Department Store 廣 百 百 貨 Haiya Department Store 海 雅 百 貨 Better Life Department Store 步 步 高 商 場 Grandbuy Sunny Mall 47 Haiya Mega Mall 48 BBG Plaza 49 Jiangxi: Tanxin Guangdong: Zhuhai Guangdong: Shenzhen Hunan: Xiangtan, Jishou, Liuzhou, Changsha Source: Company websites; compiled by Fung Business Intelligence Centre Note: As of February

20 Convenience stores provide another popular retail format that has attracted the attention 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 ventured 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 entertainment company in Malaysia, to start a F&B business in China 50. distribution rights direct from brand owners. For example, Parkson Department Store has secured exclusive distribution rights from fast fashion brand, Mango 51. 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 Department 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 China 52. Furthermore, the company announced in April 2014 that it has acquired a 60% stake in Skinmint, a US fashion distributor of contemporary specialty brands 53. #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 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 Department Store is a case in point. Leveraging its strong local networks and long-standing relationship with suppliers, Xinyulou purchases all of its products directly from suppliers

21 On the other hand, some department store operators have sought to differentiate themselves by launching private labels. Exhibit 11 lists some of the private label brands launched by selected department store players. 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 developed 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. Exhibit 11: Private labels of selected department stores Department store Private label Product category Intime Department Store 55 銀 泰 百 貨 Just Intime Women s apparel New World Department Store 56 新 世 界 百 貨 LOL (Love Original Life) Homeware Ito Yokado Department Store 57 華 堂 商 場 pbi IYB Apparel Homeware Wangfujing Department Store 58 王 府 井 百 貨 FIRST WERT Men s apparel Aquila D oro Men s apparel Golden Eagle Department Store 59 金 鷹 百 貨 IVREA LISALEN WONDERFUL LIFE Men s apparel Women s apparel Homeware Antonghui Kids apparel Source: Company websites and news reports; compiled by Fung Business Intelligence Centre 21

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 constantly innovate and improve business practices. Those who understand their customers, leverage technology to evolve the customer experience and seek to differentiate themselves 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 common. Before they buy a product, consumers often seek product information or peer feedback 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 advanced technologies, build their own online and mobile platforms and social networking websites in order to attract and engage customers. They also need to consider partnerships 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 department 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 offering unique products and services to seamlessly 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 operators 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 engaging 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. 22

23 Endnotes 1 Balloon Department Store closes its Cangzhou branch. 20 May, Fang.com. com/ / _all.html 2 Balloon Department Store to close its Jimo branch. 21 May, Winshang html 3 Central Department Store to close its Shenyang branch in June. 10 May, Linkshop. cn/web/archives/2014/ shtml 4 Central Department Store to leave Hangzhou. 17 September, Linkshop. archives/2014/ shtml 5 Simgo Department Store to close its Nanhai Branch; MoPark Department Store to close its Xintang branch. 15 May, Guangzhou Daily. html/ /15/content_ htm 6 Nanning Department Store is unable to continues its lease. 4 January, 2014.Guangxi News Net. news.gxnews.com.cn/staticpages/ /newgx- 52c7414b shtml 7 Simgo Department Store to close its Nanhai Branch; MoPark Department Store to close its Xintang branch. 15 May, Guangzhou Daily. html/ /15/content_ htm 8 Parkson Department Store to close more branches. 29 August, Business Value. 9 Parkson Department Store to leave Changzhou. 10 October, Century Business. com/2014/10-10/znmdazmddfmtmxnjyzna.html 10 Ito Yokado Department Store to close more stores. 16 October, Net Ease. com/14/1016/01/a8l2c1o o3.html 11 Ito Yokado Department Store to close its Wangjing branch. 3 April, Sina. ye/ /8199/2014/0403/11358.shtml 12 Wangfujing Department Store closes its Zhanjiang branch; first store closure in 10 years. 16 July, doc Hangzhou Zhongdu Department Store closes unexpectedly. 20 June, People.cn Inside Zhongdu Department Store s closure. 25 June, Hoolo.tv. html 15 New Century Department Store to close its Kairui branch. 17 November, WellHome Novo Department Store moves out from Zhengjia Plaza. 19 November, Winshang. com/news html 17 Novo Department Store to close store in Chengdu. 29 December, Ebrun. com/ / shtml 18 Rainbow Department Store s Xiaoshan branch continues to make a loss; plans to close in October. 22 August, Sina. wanggo/ /216886_2.html 19 Spring Plaza closes its Shandong road branch. 1 September, Focus. news/ / html 20 Sanpower Group website. (accessed 26 February 2014) Sanpower Group website. (accessed 26 February 2014). 21 Alibaba Group invests HK$5.37 billion in Intime Retail to fuse offline and online shopping. 2 April, PR Newswire. news-releases/alibaba-group-invests-hk537-billionin-intime-retail-to-fuse-offline-and-online-shopping html 23 Better Life mergers with Nancheng Department Store. 12 May, Sina. chanjing/gsnews/ / shtml 24 Cuiwei acquires Beijing Modern Plaza and Beijing Ganjiakou Plaza. 22 October, Beijing Daily. bjrb.bjd.com.cn/html/ /22/content_ htm 25 Sanpower Group invests in online luxury retailer Meici.com. 31 December, NBD. com.cn/articles/ / html 26 Statistical report on Internet development in China. January China Internet Network Information Centre. P Statistical report on Internet development in China. January China Internet Network Information Centre. P Rainbow Department Store to upgrade its WeChat account; adds more functions. 5 March, Ebrun The Beginning of the End to Prepaid cards (part 1). 12 August, Morgan Stanley 30 Wangfujing Department Store website. (accessed 4 March, 2015). media/72 31 Wangfujing Department Store website. (accessed 26 February, 2015). media/64 32 New World Department Store website. (accessed 3 March, 2015). html 23

24 33 Rainbow Department Store launches WeChat payment. In Chengdu. 13 February, article/ New World Department Store website. (accessed 26 Feburary, 2015) New World Department Store website. (accessed 26 Feburary, 2015) Rainbow Department Store launches stores in convenience store format. 15 July, Linkshop. linkshop.com.cn/web/archives/2014/ shtml 37 Wangfujing Department Store website. (accessed 6 March, 2015.) 38 Intime teams up with Baidu. 4 September, Sohu Rainbow Department Store to introduce virtual mirrors. 20 November, STCN. zqsb/html/ /20/content_ htm 40 Alibaba invests 1 billion yuan in Intime. 10 June, PunNode Department store operators in Fuzhou focus on improving shopping experience. 28 January, Linkshop. shtml 52 Golden Eagle Group website. (accessed 26 February, 2015) Golden Eagle Group website. (accessed 26 February, 2015). file_id=151462e634b8444a17d320f9062fa A study on the development of merchandise direct sales in major department stores in China. January Fung Business Intelligence Centre, China Chain Store and Franchise Association. 55 Analysis of private label businesses in China s department stores. 7 July, Sina. cn/?s=thread&bid=1277&tid= Interim Report 2013 of New World Department Store. 25 February, Caijing. cn/ / html 57 Ito Yokado website. (accessed 15 August, 2014) Analysis of private label businesses in China s department stores. 7 July, Sina. cn/?s=thread&bid=1277&tid= Analysis of private label businesses in China s department stores. 7 July, Sina. cn/?s=thread&bid=1277&tid= Better Life to open 40 shopping malls in five years. 4 February, Space. View-942.Html 43 Intime City website. (accessed 26 February, 2015) Rainbow Department Store opens shopping mall in Hangzhou. 30 June, Vhao. com/t/lingshouzixun/ Rainbow Department Store opens first shopping mall in Bao an, Shenzhen. 7 December, Sina. sina.com.cn/dichan/5/2012/1207/5183.shtml 46 Rainbow Department Store to open shopping mall in Jiangxi. 9 Janurary, Winshang. com/news html 47 Grandbuy Department Store to open shopping mall. 4 December, ChinaSSPP. News/Detail/ / htm 48 Haiya Group website. (accessed 26 February, 2015) Better Life Group website. (accessed 26 February, 2015) Parkson invests in AUM Hospitality. 27 January, ChinaSSPP Parkson to adjust its strategies in China. 5 May, CARI. 24

25 The Fung Group is a privately held multinational group of companies headquartered in Hong Kong whose core businesses are trading, logistics, distribution and retailing. The Fung Group employs over 45,000 people across 40 economies worldwide, generating total revenue of more than US$22.6 billion in Fung Holdings (1937) Limited, a privately held business entity headquartered in Hong Kong, is the major shareholder of the Fung group of companies. Please visit for more about the Fung Group. 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 advice 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 for more about the Fung Business Intelligence Centre.