LI & FUNG RESEARCH CENTRE China Distribution & · PDF fileLi & Fung Research Centre Member of the Li & Fung Group 2 China Distribution & Trading Issue 89 August 2011 Department stores

Li & Fung Research Centre Member of the Li & Fung Group

LI & FUNG RESEARCH CENTRE

China Distribution & Trading Issue 89 August 2011

I. Overview

II. Operation modes of

department stores in

China

III. Competitive landscape

IV. Challenges

V. Recent developments

Li & Fung Research Centre

11/F, LiFung Tower

868 Cheung Sha Wan Road,

Kowloon, Hong Kong

Tel: (852) 2300 2399

Fax: (852) 2635 1598

E-mail: [email protected]

http://www.lifunggroup.com

IN THIS ISSUE:

Department stores in China, 2011

Overview

The total sales value of department stores in China was 249.8 billion

yuan in 2009; sales of select member enterprises of the China Commerce Association for General Merchandise registered 17.5% growth in 2010.

Operation modes of department stores in China

Department stores operators in China generate revenue from (1) commissions on concessionaire sales, (2) merchandise direct sales, (3) rental income from store tenants, (4) agency fee earned by serving as agents and (5) management fee etc.

Commissions on concessionaire sales are the predominant source of income.

Competitive landscape

Compared with many mature markets, China’s department store sector is very fragmented.

Domestic department store operators tend to focus on regional markets, while leading foreign department store operators have wider footprints.

A growing number of department store operators look for opportunities in lower-tier cities.

Challenges

Many department stores in China are poorly differentiated. Reliance on commissions from concessionaire sales is a major reason behind.

Heavy initial capital outlays, lack of expertise in merchandising and long nurturing period for new brands are some common concerns for operators to try out new operating models.

Department stores are facing Increasing challenges from other retail formats such as shopping malls, professional stores, discount outlets and online retail stores.

Recent developments

Some department store operators have refined their market positioning strategies to cater to specific customer demographics.

Department store operators pay growing attention to transform purchasing practices; the development of private labels and proprietary brands is drawing attention.

A number of department store operators explore opportunities online.

Department store operators try to incorporate more elements of shopping experiences.

Department store operators seek M&A opportunities; a number of department store operators have sought public listings in recent years.

Impact of new prepaid card restrictions on department store operators remains to be seen.

mailto:[email protected]

http://www.lifunggroup.com/


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Department stores in China, 2011

Department stores1 have long been one of the major retailing channels in China. It is the chief distribution channel for

branded apparel, cosmetics, jewelry and watches, etc, targeting mid-to-high income consumers. In the past decades,

many consumer companies have viewed department stores as their top-of-choice retail channel to build brand

recognition in China. That said, there is growing concern over department stores gradually losing appeal to Chinese

consumers due to poor differentiation. Department stores operators are also facing increasing challenges from other

format retailers such as shopping malls, internet retailers, outlets, etc. They are taking steps to improve operations.

I. Overview

1. The total sales value of department stores in China was 249.8 billion yuan in 2009; sales of select member

enterprises of the China Commerce Association for General Merchandise registered 17.5% growth in 2010

According to the National Bureau of Statistics of China (NBS), the total sales value of department stores was 249.8

billion in 2009 (Exhibit 1).

Exhibit 1: Total sales value of department stores, 2003-2009

59.7

93.0

127.5148.2

162.5

211.0

249.8

0

50

100

150

200

250

300

2003 2004 2005 2006 2007 2008 2009

Sa

les v

alu

e (

billio

n y

ua

n)

Source: National Bureau of Statistics of China

1 Department stores are stores with sales area between 6,000 and 20,000 m

2, usually multi-storey, selling wide range of merchandises with emphasis

on clothing and accessories, footwear, household items and home appliances etc. Special concessionaire counters and open shelves are the chief sales formats.


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According to the China Commerce Association for General Merchandise (CCAGM), sales revenue of its 66 member

department store operators climbed by 17.5% yoy in 2010 (see Exhibit 2). Most of the surveyed enterprises are leading

department store operators in China.

Exhibit 2: Performance of the member enterprises by CCAGM, 2005-2010

2005 2006 2007 2008 2009 2010

Sales revenue growth (% yoy) 18.0 13.7 17.8 16.9 15.2 17.5

Source: China Commerce Association for General Merchandise (CCAGM)

According to the CCAGM, 92.4% of the member enterprises enjoyed sales revenue growth in 2010, higher than that of

81.7% in 2009 (Exhibit 3).

Exhibit 3: Sales growth of select member enterprises by CCAGM, 2010

Sales revenue growth Number of enterprises Share (%)

Over 20% 22 33.3

Over 15% 32 48.5

Over 10% 47 71.2

With improving sales revenue 61 92.4

With declining sales revenue 5 7.6

Source: China Commerce Association for General Merchandise (CCAGM)


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II. Operation modes of department stores in China

Department stores operators in China generate revenue from (1) commissions on concessionaire sales, (2)

merchandise direct sales, (3) rental income from store tenants, (4) agency fee earned by serving as agents and (5)

management fee etc.

Commissions on concessionaire sales

Under concessionaire sales arrangements, department store operators do not own the title to the goods. They enter into

agreements with concessionaires and grant the latter the rights to sell the products in designated store areas.

Department store operators generally provide a range of services including advertising, marketing, store decoration and

renovation, inspection of goods, safety inspections, and centralized payment settlements. Concessionaires need to

hand over a certain percentage of their total sales proceeds to department stores as commissions, usually with a

guaranteed base-figure for sales each month (see Exhibit 4 for the concessionaire rate of select department operators

listed in Hong Kong).

Exhibit 4: Concessionaire rate of select department store operators, 2009-2010

2010 2009

Golden Eagle Retail Group Ltd. 20.0% 20.3%

Intime Department Store (Group), Co., Ltd. 17.8% 18.0%

New World Department Store China Ltd. 19.4% 20.3%

Maoye International holdings Ltd. 17.5% 18.0%

Source: company annual reports

Merchandise direct sales

Under direct sales arrangements, department store operators source and sell their own directly purchased merchandise.

Department store operators own the title to the goods and profit from merchandise mark-ups.


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Rental income from store tenants

Department store operators lease designated areas to other business operators and receive rental income. Department

store operators do not own the title to the goods and are generally not responsible for sales management. Brand

companies, as the tenants, need to pay rent, while all the revenue is independent of the department stores.

Commissions on concessionaire sales are the predominant source of income

Commissions on concessionaire sales are the predominant source of income for China’s department store operators.

Take several listed department store operators as example. From Exhibit 5, we can see that commissions from

concessionaire sales accounted for more than 50% of the total sales proceeds. That said, compared to previous years,

Intime, Golden Eagle and New World Department Store were less dependent on concessionaire sales and have put

more focus on merchandise direct sales.

Exhibit 5: Revenue breakdown of department store operators from select companies, 2010

Intime Golden Eagle New World

Department

Store

Parkson

Commissions from concessionaire sales 60.87% 70.56% 63.91% 58.42%

Sale of goods - direct sales 31.64% 27.60% 21.22% 36.20%

Rental income 6.35% 1.49% 6.63% 4.59%

Management fee income from the operation of

department stores

1.14% 0.35% 8.24% 0.79%

Source: company annual reports

III. Competitive landscape

1. Compared with many mature markets, China’s department store sector is very fragmented

According to China Chain Store and Franchise Association (CCFA), among the top 100 retail chain operators in 2010

(hereafter the top 100s), there were 35 players chiefly operating the department store format (see Exhibit 6). Their

average growth of sales revenue and growth of number of stores was 23.2% and 18.5% respectively in 2010.


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Exhibit 6: Department store operators among the Top 100s, 2010

Enterprise Sales value

(million yuan)

yoy growth

(%)

Number of stores*

yoy growth

(%)

Place of origin

Dalian Dashang Group Co., Ltd.

大連大商集團有限公司

86,157.7 22.1 170 6.3 Chinese Mainland

Chongqing Commerce (Group) Ltd. 重慶商社（集團）有限公司


Shandong Commercial Group Corporation

山東銀座商城股份有限公司


Hefei Department Store Group Co., Ltd.

合肥百貨大樓集團股份有限公司


New World Department Store China Limited**

新世界百貨中國有限公司**

17,900.0 19.3 37 8.8 Hong Kong

Jiangsu Wenfeng Great World Chainstore Development Co., Ltd.

文峰大世界連鎖發展股份有限公司

17,649.3 12.7 1,016 3.9 Chinese Mainland

Beijing Wangfujing Department Store (Group) Co., Ltd. **

北京王府井百貨（集團）股份有限公司**


Parkson Retail Group Ltd. **

百盛商業集團有限公司**

16,560.0 33.9 47 6.8 Malaysia

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


Rainbow Department Store Co., Ltd.

天虹商場股份有限公司


Golden Eagle Retail Group Limited**

金鷹商貿集團有限公司**


Intime Department Store (Group) Co., Ltd.

銀泰百貨（集團）有限公司


Shandong Weifang Department Store (Group) Co., Ltd.

山東濰坊百貨集團股份有限公司


Liaoning Xinglong Big Family Business Group

遼寧興隆大家庭商業集團


Anhui Commercial Capital Co., Ltd.

安徽商之都股份有限公司

9,048.1 24.6 885 -4.6 Chinese Mainland

Zhengzhou Dennis Department Store Co., Ltd.

鄭州丹尼斯百貨有限公司


Beijing Yansha Friendship Shopping Mall Co., Ltd.

北京新燕莎控股（集團）有限責任公司



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Enterprise Sales value

(million yuan)

yoy growth

(%)

Number of stores*

yoy growth

(%)

Place of origin

Maoye International Holdings Ltd.

茂業國際控股有限公司


Guangzhou Grandbuy Co., Ltd.

廣州市廣百股份有限公司


Jinan Renmin Shopping Group Co., Ltd.

濟南人民商場集團股份有限公司


Nanjing Central Emporium Group Stocks Co., Ltd.**

南京中央商場股份有限公司**


Tangshan General Merchandise Group Co., Ltd.

唐山百貨大樓集團有限責任公司


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


Wuhan Zhongbai Group Co., Ltd.

武漢中商百貨連鎖有限責任公司


Beijing Cuiwei Plaza Shopping Center

北京翠微大廈股份有限公司


Guangzhou Friendship Group Co., Ltd.

廣州友誼集團股份有限公司


Hunan Friendship & Apollo Co., Ltd.**

湖南友誼阿波羅股份有限公司**


Beijing Shunyi Guotai Commercial Building

北京市順義國泰商業大廈


Shandong Weihai Department Store Group Stock Co., Ltd. 山東威海百貨大樓集團股份有限公司

4,010.6 -5.9 24 -7.7 Chinese Mainland

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


Beijing Xidan Friendship Group

北京西單友誼集團


Hunan Jiahui Department. Store Co., Ltd.

湖南佳惠百貨有限責任公司（集團）


Shirble Department Store Holdings (China) Ltd.

深圳歲寶百貨有限公司


Guangxi Nancheng Stores Joint-stock Co., Ltd.

廣西南城百貨股份有限公司


Xiongfeng Group Co., Ltd.

雄風集團有限公司


* Number of stores included stores of other retail formats ** Estimated figures

Source: China Chain Store and Franchise Association (CCFA)


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According to a Euromonitor report released in early 2011, the top 20 mixed retailers2 in China accounted for a 19.2%

retail value share of the sector; all of the top 20 mixed retailers are department store operators. The department store

sector is very fragmented, compared with many mature markets. In China, many department stores are single-store

independents. With huge regional disparities in consumers’ tastes and spending patterns, national chain operation for

department stores is not easy. Unlike in the United States where we see players such as JC Penny and Kohl’s operating

hundreds of department stores across the nation, national department store chains is a rare sight in China. For example,

as of August 2011, leading foreign players such as Parkson and New World Department Store have 48 and 38 stores

respectively in the country; while bigger domestic players such as Intime, Wangfujing and Guangzhou Grandbuy all

have fewer than 30 stores in China.

2. Domestic department store operators tend to focus on regional markets, while leading foreign department

store operators have wider footprints

Domestic department stores

Most of the domestic department store operators in China are region-focused. For instance, Golden Eagle has a “one

city, multiple stores” strategy, aiming to strengthening foothold in respective markets. As mentioned, there are huge

regional disparities in consumers’ tastes; regional department store operators usually have better understandings of

local consumers. Besides, a big number of suppliers in China operate on a regional rather than on a national basis;

longstanding relationship with local suppliers gives domestic operators an extra edge. Not to mention that many

state-owned domestic players have received huge support by local governments and occupy the prime locations in city

centers or developed commercial circles; this partly explains the strong performance of a number of domestic players in

respective cities and provinces.

In recent years, many established domestic department store operators, especially those with strong regional heritage

such as Golden Eagle, Intime and Maoye, have strived for regional dominance. Some of them also seek to expand

beyond their home provinces. Golden Eagle plans to focus on the provincial capitals when expanding into other regions.

That said, expansion into other provinces has been a challenge for most domestic operators. For instance,

Zhejiang-based Intime Department Store reportedly has a poorer performance in Beijing than its home province for its

joint venture project with Lotte Department Store from Korea. The lackluster performance is reportedly due to

worse-than-expected consumers’ response towards Korean high-end products that Lotte Intime tried to introduce to the

Chinese market. Lotte Intime later changed the merchandizing mix and reduced product offerings from Korea.

2 According to Euromonitor, mixed retailers in China include department stores, mass merchandisers, variety stores and warehouse clubs.

Department stores is the most important channel in mixed retailers in China due to its longstanding tradition.


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Exhibit 7 demonstrates the store locations of select domestic players in China.

Exhibit 7: Store locations of select domestic department stores operators in China, as of July 2011

Company Store locations

Intime Department Store (Group), Co., Ltd. 銀泰百貨（集團）有限公司

Beijing

Zhejiang province: Hangzhou, Jinhua, Ningbo, Wenzhou, Zhoushan

Hubei province: Wuhan, Ezhou, Xiangfan, Xianning, Xiantao

Shaanxi province: Xi'an

Golden Eagle Retail Group Ltd.

金鷹商貿集團有限公司

Jiangsu province: Huai’an, Nanjing, Nantong, Suzhou, Yancheng, Yangzhou, Xuzhou

Anhui province: Hefei, Huaibei

Yunnan province: Kunming

Shanghai

Jiangsu province: Taizhou

Shaanxi province: Xi’an

Beijing Wangfujing Department Store (Group) Co., Ltd.

北京王府井百貨（集團）股

份有限公司

Beijing

Inner Mongolia province: Baotou, Hohhot

Hunan province: Changsha

Sichuan province: Chengdu

Chongqing

Guangdong province: Guangzhou


Henan province: Luoyang

Shanxi province: Taiyuan

Xinjiang province: Urumqi

Hubei province: Wuhan

Qinghai province: Xining

Dalian Dashang Group Co., Ltd.

大連大商集團有限公司

Liaoning province

Heilongjiang province

Jilin province

Henan province

Sichuan province

Shandong province: Qingdao

Maoye International Holdings Ltd.


Guangdong province: Shenzhen, Zhuhai

Hebei province: Baoding

Jiangsu province: Changzhou

Chongqing

Liaoning province: Shenyang

Jiangsu province: Taizhou, Wuxi


Shandong province: Zibo

Beijing Xidan Department Store Co., Ltd. 北京市西單商場股份有限公

司

Beijing


Gansu province: Lanzhou

Qinghai province: Xining



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Company Store locations

Fujian Dongbai Group Co., Ltd.

福建東百集團

Fujian province: Fuzhou

Changchun Ouya (Group) Co., Ltd.

長春歐亞集團股份有限公司

Jilin province: Changchun

Hangzhou Jiebai Group Co., Ltd

杭州解百集团股份有限公司

Zhejiang province: Hangzhou

Chengshang Group Co., Ltd. 成商集團股份有限公司

Sichuan province: Chengdu, Luzhou, Mianyang, Nanchong

Silver Plaza Group Co., Ltd.

銀座集團股份有限公司 Shandong province

Hebei province

Hunan province

Hefei Department Store Group Co., Ltd. 合肥百貨大樓集團股份有限

公司

Anhui province: Bengbu, Chaohu, Hefei, Huainan, Huangshan, Lu'an, Tong Ling

Wuhan Zhongnan Commercial (Group) Co., Ltd.

中商集團股份有限公司

Hubei province: Huanggang, Jingmen, Jingzhou, Shiyan, Suizhou, Wuhan, Xianning

Wuhan Zhongbai Group Co., Ltd. 武漢中百集團股份有限公司

Hubei province: Jianli, Jingzhou, Wuhan

Guangzhou Friendship Group Co., Ltd.

廣州友誼集團股份有限公司

Guangdong province: Guangzhou

Guangxi province: Nanning

Guangzhou Grandbuy Co., Ltd.

廣州市廣百股份有限公司

Guangdong province: Guangzhou, Huizhou, Jieyang, Maoming, Shenzhen, Zhaoqing, Zhanjiang


Source: Company websites

Foreign department stores

Foreign department store operators generally target the higher-income consumers. Exhibit 8 demonstrates the store

locations of select foreign department store operators in China. Hong Kong-based New World Department Store China

Ltd and Malaysia-based Parkson Retail Group Ltd were the only two foreign department store operators among the Top

100s in 2010. Both have wider national footprints than most of their domestic counterparts.


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Exhibit 8: Store locations of select foreign department stores operators in China, as of July 2011

Department stores operators Place of origin

Store locations

Parkson Retail Group Ltd.

百盛商業集團有限公司

Malaysia Liaoning province: Anshan, Dalian, Shenyang

Beijing

Jiangsu province: Changshu, Nanjing, Wuxi

Sichuan province: Chengdu, Mianyang, Zigong

Chongqing

Guizhou province: Guiyang, Zunyi

Heilongjiang province: Harbin

Anhui province: Hefei


Jiangxi province: Nanchang

Guangxi province: Nanning

Shandong province: Qingdao, Yantai

Shanghai

Guangdong province: Shantou

Hebei province: Shijiazhuang


Tianjin


Shaanxi province: Xi’an

Hunan province: Yueyang

Henan province: Zhengzhou

New World Department Store China Ltd.

新世界百貨中國有限公司

Hong Kong Liaoning province: Anshan, Dalian, Shenyang

Beijing

Hunan province: Changsha


Chongqing

Heilongjiang province: Harbin


Ganzu province: Lanzhou

Jiangsu province: Nanjing

Zhejiang province: Ningbo

Shanghai

Zhejiang province: Taizhou

Tianjin


Henan province: Zhengzhou

Aeon Group

永旺集團

Japan Beijing

Guangdong province

Shandong province


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Department stores operators Place of origin

Store locations

Far Eastern Group

遠東集團

Taiwan Beijing


Chongqing

Liaoning province: Dalian

Shanghai

Tianjin

Jiangsu province: Wuxi

Isetan Co., Ltd

株式會社伊勢丹

Japan Sichuan province: Chengdu

Shanghai


Tianjin

Ito Yokado

伊藤洋華堂

Japan Beijing


Shin Kong Mitsukoshi (With Hualian)

新光三越百貨

Taiwan Beijing

Lotte Group

韓國樂天集團

Korea Beijing (with Intime)

Tianjin


Lifestyle International Holdings Ltd.

利福國際集團有限公司

Hong Kong Shanghai

Source: Company websites

Eyeing better growth potential, new foreign entrants are flocking to China. Galeries Lafayette (China), a 50-50 joint

venture established by French Galeries Lafayette and Hong Kong-based IT Limited, plans to open its first department

store in Beijing in 2013. Central Retail Corporation (CRC) from Thailand, on the other hand, is working with China

Resources Land – for which the well-known MixC shopping malls launched by the China Resource Land will host a

number of department stores of CRC in China.

3. A growing number of department store operators look for opportunities in lower-tier cities

Today, market competition in first-tier cities such as Beijing and Shanghai are very intense for department store

operators, and increasingly so in some second-tier cities such as Chengdu, Shenyang and Wuhan. Thus, a growing

number of department store operators are looking for opportunities in China’s fast-growing lower-tier cities. For instance,

Hong Kong-listed Springland Department Store (華地百貨) plans to devote its resources to new operations in second-

and third-tier cities such as Jintan, Changxing and Changzhou in the Yangtze River Delta in order to take advantage of

high growth prospects and relatively less intense competition. Parkson has opened new stores in Zhaoqing, Wuxi and

Hefei in 2010 and in Zigong in 2011; and New World Department Store plans to expand into Mianyang in 2012.


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IV. Challenges

Many department store operators in developed markets have long paid huge attention to offering unique merchandise

assortment and developing private labels and proprietary brands, etc to enhance customers’ shopping experiences.

However, many department stores in China are poorly differentiated. Reliance on commissions from concessionaire

sales is a major reason behind. It is true to say that department store operators do not need to incur any inventory risks

under concessionaire arrangements; however, heavy reliance on concessionaire sales also leads to highly similar brand

mix in many department stores. Heavy initial capital outlays, lack of expertise in merchandising and long nurturing

period for new brands are some common concerns for operators to experiment with new operating models.

In recent years, although many department stores in China have frequently reviewed and reshuffled their merchandise

and brand portfolio to improve their income, the problem of having highly similar brand and tenant mix remains very

common. The fact that the market is crowded with a large number of undifferentiated players has made many resorted

to price competition to boost sales. Discount-driven promotions are hurting the growth prospects of many.

Not to mention that there are increasing challenges from other retail formats such as shopping malls, professional stores,

discount outlets and online retail stores, which are winning appeal from many Chinese consumers. In fact, to many

brand companies or vendors, these other retail channels also offer them better discretions in many areas such as visual

merchandising, which are highly important in brand building.

On the other hand, a number of other format retail operators have expanded into department store format, such as

Jiulong Department Store (久隆百货) launched by Beijing Jingkelong Company Limited (京客隆). Competition is

intensifying.

Indeed, brand companies today have more choices distributing their products in China. In particular, competition

between department stores and shopping malls are the most often discussed. Nonetheless, several edges of

department stores should not be ignored. First, brand companies face more complicated business registration

procedures opening stores in shopping malls than setting up concessionaire counters in department stores. Besides,

opening stores in shopping malls usually involves higher upfront costs, such as decoration. And for many brand

companies and vendors, they can better control their risks as the concessionaire commissions paid to department store

operators is usually in proportion to sales; meanwhile, rental payment to shopping mall operators is usually fixed,

regardless of business performance. Not to say that the lease contracts of shopping malls often last several years,

which may be less flexible for brand companies which do not have sound knowledge of the Chinese market. Further,

department store gift cards is a popular gifting item in China – a big number of consumers make their purchases using

the gift cards in department stores.


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V. Recent developments

1. Some department store operators have refined their market positioning strategies to cater to specific

customer demographics

There are growing calls for department store operators to improve differentiation. Some operators have refined their

market positioning strategies to cater to specific customer demographics. Department stores with distinct themes and

positioning have emerged to cater to specific market segments, such as discount department stores, luxury department

stores and department stores for female, etc. For instance, the Novo Department Store in Beijing’s Chaoyang District

Wanjing, targets fashion consumers aged between 20 and 35; Wangfujing Department Store has also unveiled a new

store brand Fashion Headquarters, or HQ, in Beijing in September 2010 positioned to attract fashion consumers

between the ages of 18 and 35; targeting young consumers, Guangzhou Grandbuy has launched a new store brand

Grandbuy Fashion (GBF) in G.T. Land Plaza in Guangzhou in December 2010.

Despite the huge potential of different segmented markets, many department store operators are cautious testing the

market. Indeed, New World Department Store failed to attract footfall as it had hoped for its Beijing New World Women’s

Fashion Department Store targeting female consumers opened in May 2010; the positioning for the store was later

revised in 2011.

2. Department store operators pay growing attention to transform purchasing practices; the development of

private labels and proprietary brands is drawing attention

Department store operators in China are working hard to streamlining their supply chains, of which centralized

purchasing is winning attention. China has a multi-tier distribution system, and most brand companies have assigned

different local distributors and agents for different regions. It is not uncommon to see that a distributor or agent

representing a same brand has to make sales pitch individually to the different stores under the same department store

operator. Wangfujing Department Store hopes to change the picture by increasing centralized purchasing – as early as

in 2008, its head office in Beijing attempted to deal with brand companies directly and negotiate better concessionaire

margin on behalf of its stores in Beijing. Running a so-called “headquarter to headquarter” purchasing model, the

purchasing authority of individual stores is withdrawn; instead, purchasing is carried out by the head office directly with a

national sole agent or distributor of brand companies instead of with various regional distributors and agents. The

initiative was further extended to four sales regions in 2010. According to a spokesperson of Wangfujing Department

Store, the head office now centrally purchases different products for dozens of brands.

The development of private labels and proprietary brands is also drawing attention. In many other mature markets,


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private labels and proprietary brands offer department store operators better margins and allow them to better

differentiate from competitors. Concessionaire sales account for the majority of sales of department stores in China, but

some players are now experimenting with private labels or proprietary brands in a bid to improve margin and strengthen

customers’ loyalty. For instance, Golden Eagle hopes that its private labels can offer it gross margin standing at around

30-40%. Meanwhile, some examples of proprietary brands include “N Only” by New World Department Store and “Justin

Time” by Intime Department Store; and Bailian has also introduced around 20 proprietary brands from France and Italy

in Orient Shopping Centre (東方商廈).

However, breaking the bold is not easy. It takes time for department store operators to accumulate knowledge on areas

such as merchandising and inventory management, etc. We expect more and more department store operators will

experiment with new merchandising practices, but the transformation will be gradual.

3. A number of department store operators explore opportunities online

According to iResearch, online retail sales in China reached 498 billion yuan in 2010, accounting for 3.2% of the total

retail sales of consumer goods. It is estimated that the share of the online retail market will further climb to 5.3% of the

country’s total retail sales in 2012. Eyeing the huge growth potential, many department store operators have adopted the

“clicks-and-bricks” strategy. For example, Intime has set up its online platform “http://www.yintai.com” in October 2010;

Guangzhou Grandbuy Department store also set up an individual company to run its online business starting in April

2011; and Wangfujing Department store announced in 2011 that it will invest over 100 million yuan in 3-5 years to

expand its online business. Department store operators going “clicks-and-bricks” is relatively new in China, and the

effectiveness remains to be seen.

4. Department store operators try to incorporate more elements of shopping experiences

In view of growing competition from shopping malls, over the past few years, some department store operators have

converted their department stores into shopping malls to incorporate different elements of shopping experiences under

one roof and to cross-fertilize foot traffic. Wangfujing Department Store, for instance, has launched revamping programs

since March 2010 to convert a number of its department stores into shopping malls.

Some large department store operators now lease 15-20% of their space to restaurants and other entertainment

operators. Many department store operators have also introduced supermarkets in their basement to attract more traffic.


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5. Department store operators seek M&A opportunities; a number of department store operators have sought

public listings in recent years

In the face of intensifying competition and growing scarcity of prime retail sites, mergers and acquisitions (M&As) have

become one of the most common expansion strategies adopted by department store operators. Exhibit 9 demonstrated

some recent examples. Many department store operators prefer expanding to other provinces through M&As.

Exhibit 9: Select examples of department stores acquisitions, 2010

Acquisition date

Company Target Details

April 2010 Dalian Dashang Group Co., Ltd.

大連大商集團有

限公司

Guilin Wei Xiao Tang Department Store

桂林微笑堂商厦

Dashang entered the Guangxi market through this acquisition

April 2010 Zhenhua Group

振華集團

Tianjin Department Store

天津百貨大樓

Zhenhua Group acquired 60% equity interest in Tianjin Department Store

July 2010 Golden Eagle Retail Group Limited

金鷹商貿集團有

限公司

Anhui Ruijing Commercial Company

安徽瑞景商業有限

責任公司

Golden Eagle acquired 100% equity interest in Anhui Ruijing Commercial Company

July 2010 Nanjing Central Emporium Group Stocks Co., Ltd. 南京中央商場

Suzhou Zhong Shang Zhi Di

蘇州中商置地

Nanjing Central Emporium Group acquired 45% of Suzhou Zhong Shang Zhi Di

August 2010 PCD Stores

中國春天百貨

Guiyang Guomao Guangchang Commercial Trading Co., Ltd. 貴陽國貿廣場商貿

有限公司

PCD Stores acquired 100% equity interest in Guiyang Guomao Guangchang Commercial Trading Co., Ltd.

October 2010 Intime Department Store (Group) Co., Ltd.

銀泰百貨(集團)有

限公司

Lufthansa Friendship Shopping Center Ltd.

燕莎友誼商場有限

公司

Intime Department Store Group acquired 100% equity interest of Sin Cheng Holdings PTE Ltd., which held 50% of equity stake of Lufthansa Friendship Shopping Center Ltd

November 2010 Intime Department Store (Group) Co., Ltd. 銀泰百貨(集團)有

限公司

Hubei New Century Shopping

Centre 湖北隨州新

世紀購物中心

Acquired 84.5% equity interest in Hubei New Century Shopping Centre

Source: China Commerce Association for General Merchandise, company annual reports


17


Besides, riding the waves of investors’ interests in mainland consumption-related themes, a number of department store

operators have sought public listings in recent years. Exhibit 10 lists some examples of initial public offerings (IPOs) of

department stores operators in China in 2010.

Exhibit 10: Select IPOs of department stores operators in China, 2010

Company Date of listing Place

Shirble Department Store Holdings (China) Ltd.

歲寶百貨有限公司

2010/11/17 Hong Kong

Springland International Holdings Limited

華地國際控股有限公司

2010/10/21 Hong Kong

Rainbow Department Store Co., Ltd.

天虹商場股份有限公司

2010/06/01 Shenzhen

Renrenle Commercial Group Co., Ltd.

人人樂連鎖商業集團股份有限公司

2010/01/13 Shenzhen

Source: China Venture

6. Impact of new prepaid card restrictions on department store operators remains to be seen

As mentioned, department store gift cards is a popular gifting item in China – a big number of consumers make their

purchases using gift cards in department stores. Corporations are the major buyers of prepaid gift cards. The prepaid

cards, which usually carry a wide range of face values, are used as incentives for employees and as gifts for business

partners. For operators such as Golden Eagle, gift cards can account for over 20% of total sales proceeds. Exhibit 11

lists the share of gift card sales to total sales proceeds of some department store operators.


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Exhibit 11: Gift card sales to total sales proceeds, 2010

Department store operators Gift card sales to total sales proceeds

Golden Eagle Retail Group Ltd.

金鷹商貿集團有限公司

25% of total sale proceeds. Majority of cards issued to

corporate customers.

Parkson Retail Group Ltd.

百盛商業集團有限公司

About 16% of total sale proceeds. Majority of cards

issued to corporate customers.

New World Department Store

新世界百貨中國有限公司

10% of total sale proceeds. Mainly issued to retail

customers.

Intime Department Store (Group)

Co., Ltd.

銀泰百貨(集團)有限公司

Less than 10% of total sale proceeds. Mainly issued to

retail customers.

Maoye International Holdings

Ltd.


Less than 5% of total sale proceeds. Mainly issued to

retail customers.

Source: Citibank, company annual reports

However, the widespread use of gift cards can easily slip into problems such as money laundering, illegal cash

withdrawals, tax evasion and bribery. In view of this, the State Council and other relevant ministries have jointly issued

the “Opinions on the Issuance of Prepaid Cards by Non-Financial Institutes” (關於規範商業預付卡管理的意見) in May

2011, aiming to strengthen the government’s ability to monitor and regulate the issuance of prepaid cards.

Financial and non-financial institutes will not be allowed to issue multi-purpose prepaid cards without the approval from

the People’s Bank of China. A commercial enterprise may issue single-function pre-paid cards for itself subject to certain

requirements: (1) companies or individuals with purchases of prepaid cards with value over 10,000 yuan in a single

purchase will need to register their names with the prepaid card issuers; (2) companies with single purchase of gift cards

over 5,000 yuan or individuals with single purchase of gift cards over 50,000 yuan must pay by remittance through bank

wire transfer instead of cash (3) anonymous commercial pre-paid cards cannot exceed 1,000 yuan in value per card.

Registered prepaid cards cannot exceed 5,000 yuan in value per card; (4) the issuer shall provide invoices for sales of

pre-paid cards according to relevant laws and regulations; and (5) there is no restriction on the term of validity of

registered commercial pre-paid cards, while the term of validity of non-registered commercial pre-paid card shall be no

less than three years.


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The restrictions place new hurdles on the use of prepaid cards. However, some industry insiders say that there are ways

to get around with the new requirements, say issuing gift cards with smaller face values. That said, industry watchers

also caution that the new restrictions may pose new challenges for department store operators, as prepaid cards have

become an important source of financing for many. Some department store operators reflected that their sales were not

affected by the restrictions. The true impact of the tightened restrictions is yet to be seen.

© Copyright 2011 Li & Fung Research Centre. All rights reserved.

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LI & FUNG RESEARCH CENTRE China Distribution & · PDF fileLi & Fung Research Centre Member of the Li & Fung Group 2 China Distribution & Trading Issue 89 August 2011 Department stores