china’s department stores report 2017-2018€™s department stores report 2017-2018 m 2018...

CHINA’S DEPARTMENT STORES REPORT

2017-2018March 2018

DEPARTMENT OF CIRCULATION INDUSTRY DEVELOPMENT, MINISTRY OF COMMERCE OF THE PRC

CHINA COMMERCE ASSOCIATION FOR GENERAL MERCHANDISE

FUNG BUSINESS INTELLIGENCE

Introduction

In 2017, China’s department store sector witnessed a positive rebound with some

signs of stable recovery. After consecutive years of lackluster sales and dropping

profitability, the sector as a whole has started to reap the benefits of business

upgrading and transformation. The majority of department store operators have

stepped up efforts to construct omni-channel business models, optimize supply

chain systems, enrich merchandise and service portfolios, explore new retail formats

and enhance customer experience. They have actively deployed new technologies

to meet the rapidly changing consumer needs.

For the third consecutive year, Fung Business Intelligence collaborated with China

Commerce Association for General Merchandise (CCAGM) to produce the China’s

Department Stores Report 2017-2018. This year, we are honored to have the

insightful contributions from the Department of Circulation Industry Development,

Ministry of Commerce of the People’s Republic of China in producing this report.

The report analyses macroeconomic data, collects financial reports from 85 domestic

department store operators to gauge the sector’s performance in 2017. It also

discusses the key trends and major challenges faced by the sector and addresses

the implications and future outlook of China’s department store sector in the “New

Retail” regime. We would like to express our utmost gratitude to all department

store operators and industry experts who have supported us and participated in the

preparation of this report.

Table of Contents

Executive Summary � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � 1

I� Market Overview � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � 31. Overview of China’s retail market

2. Overview of China’s department store sector

II� New developments and key trends � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � 111. Pursuing omni-channel retailing

2. Diversifying retail formats and tapping into other business sectors to achieve synergy

3. Enriching and expanding self-operated business to enhance product uniqueness and gross profit margins

4. Improving supply chain management and focusing on the basics of retailing

5. Promoting cooperation with all stakeholders along the supply chain

III� Major issues and challenges � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � 331. Business transformation requires fundamental changes in business mindset and mechanism

2. Supply chain integration is needed for successful transformation

3. Obstacles to engaging in merchandise direct sales

IV� Implications and conclusion � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � 351. Optimizing merchandising and enriching offerings in response to consumption upgrading

2. Venturing into O2O retailing with constant business model innovations

3. Advocating consumer-centric business transformation and focusing on the basics of retailing

About the Organizations � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � � 39

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China’s Department Stores Report 2017-18 China’s Department Stores Report 2017-18

Executive Summary

Against the backdrop of China’s supply-side structural reforms coupled with the unprecedented growthof e-commerce over the past years, the department store sector has made relentless efforts to transform and adjust to keep pace with China’s economic and social changes, be it hardware and stores upgrade, merchandise and service refinement, supply chain integration, business models and operation system restructuring. In 2017, the sector as a whole has started to reap the benefits of business upgrading and transformation. Sales of some leading players have improved, while the emergence of new retail formats have been welcomed by customers.

Key trends and developments of China’s department store sector include:

• Pursuing omni-channel retailingIn recent years, pursuing online-to-offline (O2O) integration has become a mainstream for China’s department store sector. More and more department store operators have adopted digital transformation strategies to achieve seamless integration across physical stores, online platforms and mobile terminals. Some operators have become more customer-focused, and considered big data analytics and digitalization of operation management as crucial elements for success. At the same time, some leading players have leveraged advanced technologies including artificial intelligence (AI), augmented reality (AR) and virtual reality (VR) to enhance customer experience. Increasing numbers of department store operators have also realized the importance of partnering with leading Internet companies and e-commerce players to deepen O2O integration.

• Diversifying retail formats and tapping into other business sectors to achieve synergy2017 saw the emergence of various new formats and business models. Increasing numbers of department store operators have sought to expand their scope of business and engage in multi-format and multi-sector operations to adapt to the changing needs of consumers. Supermarkets/hypermarkets, shopping malls and convenience stores are the three most common retail formats that department store operators have ventured into over the past years.

• Enriching and expanding self-operated business to enhance product uniqueness and gross profit marginsMany department store operators have expedited the expansion of direct sales business; they have taken bolder steps to develop their own private labels and operate multi-brand shops with exclusive brands sourced from overseas in order to enhance product and services uniqueness, provide customers a differentiated shopping experience and satisfy the increasingly sophisticated consumer demand. By expanding self-operated business, department store operators can impose control and oversee the manufacturing and supply chain of their merchandise, and hence enjoy long-term competitive advantages and ensure better profit margins.

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• Improving supply chain management and focusing on the basics of retailingIn response to the consumption upgrade phenomenon and consumers’ aspirations for quality products and services, many department store operators have devoted tremendous efforts to revitalizing and restructuring their supply chains, and accelerating the digital transformation processes. They have sought to harness resources in the best way possible, particularly by digitizing their supply chains. This could streamline procedures and supply chain operations, optimize resources and reduce costs. Some players have formed strategic alliances and partnerships with stakeholders along the supply chains in the hope of enhancing the overall competitiveness of the supply chains and building synergies.

As the Chinese government has constantly rolled out measures to unleash domestic consumption and stimulate spending, there will be vast room for China’s retail sector to expand and grow, and open up tremendous opportunities for department store operators. Going forward, the department store sector should focus on the basics of retailing by redefining an operational framework that integrates online and offline businesses, engaging in multiple businesses, enriching product offerings, and enhancing shopping ambience. The department store sector should strive to become the leading industry to meet people's growing demand for a better life, as highlighted by the government in the 19th National Congress of the Communist Party of China (CPC).

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I. Market Overview

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1� Overview of China’s retail market

(1) Retail sales maintain stable growth; consumption is the major economic growth driver

Consumption has been the top economic growth driver for four consecutive years. In 2017, final consumptionmade up 58.8% of GDP growth. At the same time, China’s nominal retail sales of consumer goods rose10.2% yoy to 36.6 trillion yuan, reaching double-digit growth for 14 consecutive years (Exhibit 1). Sales of 2,700 retail enterprises monitored by the Ministry of Commerce (MOFCOM) increased by 4.6% yoy in 2017, 3 percentage points (ppts) higher than in 2016. Growth rates for operating income and total profits increased by 8.0% yoy and 7.1% yoy respectively, up 6.5 ppts and 11 ppts compared with 2016. The physical retail market saw a positive rebound. By retail format, sales growth of specialty stores was the highest, reaching 8.3% yoy in 2017, up 6.6 ppts, followed by professional stores (6.2% yoy, up 3.3 ppts), supermarkets (3.8% yoy, up 1.9 ppts) and department stores (2.4% yoy, up 2.7 ppts).

Chinese consumers are more upbeat as consumption environment improves and their disposable incomes increase. According to Nielsen, Chinese consumer confidence index reached 112 in 2017, up 6 points from 2016, indicating that Chinese consumer confidence has risen and provided a solid foundation for the steady development of the consumer market. Exhibit 2 shows the consumer confidence index from 1Q15 to 4Q17.

Exhibit 1� Total retail sales of consumer goods, 2013 – 2017

Source: CCAGM; National Bureau of Statistics of the PRC, compiled by Fung Business Intelligence

2013

40.0

35.0

30.0

25.0

20.0

15.0

10.0

5.0

0.0

24.3

2014

27.2

2015

30.1

2016

33.2

2017

36.6

Retail sales of consumer goods (trillion yuan)

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(2) Consumption upgrading continues; new consumer group evolves and becomes the major driving force of consumer market

Thanks to the proliferation of the Internet, Chinese consumers have reached a new level of empowerment. With so much information and data at their fingertips, the empowered consumers are now at the center of the consumer market. As living standards of Chinese consumers continue to rise, they are less price-sensitive and prefer better quality products and services. They have high aspirations for a better life and a strong desire for premium goods and services that can give them a sense of entitlement. Purchasing solely online is no longer the trend, a seamless, O2O shopping experience across various retail channels would be a preferred shopping mode for consumers.

Meanwhile, China’s consumer market will continue to be driven by the growingly influential Chinese millennials (post-80s, post-90s and post-00s generations). According to Boston Consulting Group, consumption by young Chinese spenders under the age of 35 accounts for 65% of consumption growth. In addition, consumption by these young consumers is forecast to grow at an annual rate of 11% from 2016 to 2021—twice than that of consumers older than the age of 35. The share of total consumption by the young generation is projected to reach 69% by 20211.

Chinese millennials have different consumption habits and desires compared to the older generations. They are highly connected, sophisticated, mobile and social fluid, and convenience-driven; they demand personalized products and services, and look for differentiated shopping experience. This group of consumers is set to become the dominant force and the most influential consumer segment in the consumer market. To stay relevant in the rapidly changing market, retailers need to constantly revamp and adapt to the needs of Chinese millennials.

Exhibit 2� Consumer confidence index, 1Q15 – 4Q17

Source: Nielsen, compiled by Fung Business Intelligence

1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17

106 112

Consumer confidence index

100

102

104

106106

107106

107

105106 106

108

110

112

114 114

108

110

112

114

116

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(3) Robust government support for the development of the retail market

During the 19th National Congress of the Communist Party of China (CPC), the Chinese government stated its determination to build a moderately prosperous society to meet people’s ever-growing need for a better life, but social contradictions in the society still remain, especially in the form of unbalanced and inadequate development. In terms of consumption, there has been imbalance and mismatch between people’s consumption upgrading and the inadequate supply of quality products and services. New consumer demands have yet to be fully met. To achieve a more balanced and thorough development of the retail sector in the new era, industry practitioners need to continue to upgrade and revamp their businesses and focus on satisfying the rapidly changing consumer needs.

Meanwhile, the government has also emphasized the importance of deepening supply-side reform so as to reduce unnecessary, excessive, low-end supply, while expanding mid- and high-end supply. Traditional retailers are urged to adopt advanced technologies such as big data, analytics and artificial intelligence (AI), and cultivate new growth points and generate momentum by adapting to consumption upgrading, especially in the areas of mid- to high-end consumption, green and low-carbon consumption, innovative business models, shared economy, modern supply chains, and human capitals.

Over the years, the government has been launching various policies to support the development of domestic consumption market. For instance, the State Council has lowered import tariffs on selected consumer products, including food, healthcare products, pharmaceuticals, daily necessities, clothes and footwear, home products, recreational products, and other miscellaneous consumer goods, covering a total of 187 products under the 8-digit HS codes from 1 December, 2017. The tariffs are lowered from 17.3% to 7.7% on average. This is the third time the government lowered the import tariffs for certain consumer goods including clothes and shoes, bags, and selected food and pharmaceuticals since 2015. With lower import tariffs, it is expected that consumers would spend more domestically and therefore help to boost domestic consumption. Mid- to high-end department stores, as well as fresh food supermarkets which focus on offering imported goods would benefit from lower import tariffs.

Going forward, the Chinese government is set to put greater emphasis on innovation in the retail market and further strengthen the role of consumption in economic development. New business models and new retail formats will continue to evolve.

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2� Overview of China's department store sector

(1) Sales of department store operators rebounded in 2017

The China Commerce Association for General Merchandise (CCAGM) conducted a survey with 85 key department store operators from November to December 2017 to obtain information on their financial and operating results in 2017. The survey provides a panoramic and representative view of the industry’s performance as the majority of surveyed department store operators are leading enterprises and typical operators in China’s department store sector.

In terms of business scale, 91.76% of surveyed enterprises had annual sales of 100 million yuan or above; among them, 51.76% had annual sales over 1 billion yuan and 18.82% in excess of 10 billion yuan. Exhibit 3 shows the number of surveyed department store operators by annual sales in 2017.

According to the survey, total sales proceeds of the 85 surveyed department store operators increased 9.10% yoy to 715,513.61 million yuan in 2017 and core operating profits up 2.32% yoy to 19,194.80 million yuan. Total expenses and operating expenses soared 4.88% and 14.65% yoy to 27,849.35 million yuan and 19,049.85 million yuan respectively. Net profits dropped 10.15% yoy to 6,120.63 million yuan and sales margins also dropped noticeably by 12.81% yoy. Year-end total assets of the surveyed department store operators amounted to 147,035.88 million yuan, up 0.32% yoy. In terms of operating area, the 85 surveyed department store operators registered a total operating area of 20,465,055.03 sqm in 2017, an increase of 4.51% yoy. The average number of employees of the surveyed department store operators dropped slightly by 1.93% yoy to 175,982 (Exhibit 4).

Annual sales in 2017 (million yuan)

Number of surveyed enterprises

Percentage of total sample

Cumulative percentage

Total 85 100.00% -

10,001 or above 16 18.82% 18.82%

5,001-10,000 7 8.24% 27.06%

2,001-5,000 11 12.94% 40.00%

1,001-2,000 10 11.76% 51.76%

501-1,000 14 16.47% 68.24%

101-500 20 23.52% 91.76%

100 or below 7 8.24% 100.00%

Source: CCAGM; compiled by Fung Business Intelligence

Exhibit 3� Annual sales of 85 surveyed department store operators, 2017

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2017 2016 Yoy changes

Total sales proceeds (million yuan) 715,513.61 655,849.89 9.10%

Core operating profits (million yuan) 19,194.80 18,758.80 2.32%

Total expenses (million yuan) 27,849.35 26,553.62 4.88%

Operating expenses (million yuan) 19,049.85 16,615.27 14.65%

Net profits (million yuan) 6,120.63 6,812.16 -10.15%

Sales margins (%) 2.20% 2.52% -12.81%

Year-end total assets (million yuan) 147,035.88 146,572.19 0.32%

Year-end net asset value (million yuan) 54,910.39 54,609.25 0.55%

Average number of employees 175,982 179,444 -1.93%

Operating area (sqm) 20,465,055.03 19,581,767.45 4.51%


Exhibit 4� Operating results of 85 surveyed department store operators, 2017

As shown in Exhibit 5, 64.71% of the surveyed department stores enjoyed positive yoy sales growth in 2017, while 35.29% witnessed a drop in sales revenue. Among those who have registered positive sales growth, 4.71% of the operators enjoyed exceptional sales growth of more than 20% yoy in 2017.


Exhibit 5� Yoy changes in sales revenue of 85 surveyed department store operators, 2017

Yoy changes in sales revenue

Accumulated number of department store

operators

Cumulative percentage

(i) >0% 55 64�71%

>20% 4 4.71%

>10% 9 10.59%

>5% 28 32.94%

(ii) <0% 30 35�29%

<-10% 24 28.23%

>-10% 6 7.06%

TOTAL (i) + (ii) 85 100�00%

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(2) Diverging development in new store openings; regional differentiation is still obvious

In 2017, new store openings in the department store sector showed diverging development. Community-based department stores with merchandise direct sales business particularly those that have self-owned supermarkets saw rapid expansion. Aeon and Rainbow Department Store were the two operators that opened most new stores last year. Meanwhile, Hebei-based regional department store operator Xinyulou Department Store, with its strong local networks and mass market positioning in tier-4 and 5 cities opened four new stores. On the contrary, department stores which adopt a modern and premium positioning were more affected by the fierce competition with shopping centres; hence the number of new store openings declined. Key sector players such as Intime Retail, Golden Eagle Group, Wangfujing Group, Bailian Group, etc. generally placed more emphasis on developing shopping centre and factory outlet businesses, and slowed down in the pace of opening new department stores.

From a regional perspective, new department stores opened in 2017 were mainly concentrated in the northern region and tier-4 and 5 cities. Tier-1 cities, on the other hand, due to matured economies and versatile consumption patterns, saw many department stores upgrading and transforming into shopping centres.

(3) Transformation efforts have started to pay off

Against the backdrop of China's supply-side structural reforms coupled with the unprecedented growth of e-commerce, over the past year, the department store sector has made every effort to transform and adjust to keep pace with China’s economic and social changes, be it hardware and stores upgrade, merchandise and service refinement, supply chain integration, business models and operation systems restructuring. The sector as a whole has started to reap the benefits of business upgrading and transformation. Some leading players such as Wangfujing Group and Rainbow Department Store recorded double digit growth in revenue and profit margins; while premium and high-end department store Beijing SKP achieved record-breaking sales proceeds in 2017, reaching 12.5 billion yuan, ranked second among the department store sector in the world2. Despite facing keen market competition and rapidly changing consumer behaviors and spending mindsets, the department store sector has made pleasing progress in their transformation journey.

(4) Smart retail comes onto the scene

Technology is playing an increasingly important part in the survivability of the department store sector. New technologies applied in retailing such as mobile payment, artificial intelligence (AI), augmented reality (AR), virtual reality (VR), facial recognition technology, indoor and outdoor positioning, etc. can help department store operators enhance customers’ shopping experience. At the same time, technologies can also help drive the digital reinvention of business processes, covering the entire spectrum of the supply chain including products, marketing, sales and management. This can help traditional department store players to revamp their business model and enhance operational efficiency. Over the past year, some forward-thinking department store operators have actively deployed new technologies to meet market demands and to protect themselves from rapid market elimination.

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(5) Emergence of new retail formats and business models

In 2017, new concepts and innovative business models have spawned in the market rapidly and intensively. The emergence of new business formats in various retail segments – from Alibaba’s Hema Xiansheng to Yonghui’s “YH Super Species” to Rainbow Department Store’s Sp@ce and Bailiand Group’s RISO – has fundamentally changed the retail scene and generated new inspirations for retailers. Compared to the traditional formats, the new retail formats place huge emphasis on integrating online and offline channels, and using big data and advanced technologies to better satisfy the needs of modern consumers. They hope to redefine the core components of retailing in terms of “customers, merchandise, and physical settings”.

(6) Deeper integration of Internet/ e-commerce companies and traditional retailers

In 2017, China’s retail sector has entered a phase of deeper consolidation and integration. On the one hand, Internet giants such as Alibaba and Tencent have accelerated the pace of offline expansion by forming strategic partnerships or by merging with or acquiring physical retailers with resources that will be valuable to them. The integration of online and offline businesses has moved from capital integration to business integration. On the other hand, physical retailers have also stepped up their digital expansion efforts. They try to leverage Internet giants or leading e-commerce companies’ technological support and resources to create stronger business ecosystems, access to new technologies and talents, enhance overall competitiveness and gain a stronger foothold in the market. Some department store operators have sought cross-sector partnerships and formed alliances with Internet/ e-commerce companies to open up new opportunities. Prominent examples include the collaboration between Bailian Group and Alibaba, as well as the tie-up of Better Life with Tencent Holdings and JD.com.

(7) Continuous organizational restructuring

During this critical period of reinvention and transformation of the department store sector, organizational restructuring is inevitable. Some department store operators especially the sector leaders have taken proactive initiatives to optimize operational efficiency, including changing organizational structure and creating new departments to serve the growing market, streamlining administrative processes and adopting a new result-oriented management philosophy, introducing joint-venture projects through franchisees mechanism, improving employees’ incentive mechanism through employee stock ownership plans, etc. They hope to gear up and well-prepared for the uncertainties that may arise in the “New Retail” era.

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II. New developments and key trends

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In 2017, China’s physical retail sector saw a positive rebound with some signs of stable recovery. Meanwhile, some leading department store operators, especially those that keep on innovating, actively optimize their products and services, embrace O2O strategies, leverage technologies to improve operational efficiency and enhance customer experience, have benefited from the results of business upgrading and transformation. On the other hand, some key Internet companies have successfully extended their online dominance into physical retail by setting up offline stores or by merging with or acquiring physical retailers. Their successful “brick-and-mortar” strategies have created new business models and inspired retail practitioners to transform their businesses in the "New Retail" era.

1� Pursuing omni-channel retailing

(1) Omni-channel digitalization becomes mainstream

Nowadays in China’s retail market, pursuing full O2O integration has become a leading trend for sector players. Many department store operators have been leveraging advanced technologies such as mobile Internet, big data, IoT and even AI to achieve omni-channel integration, i.e. seamless integration across physical stores, online platforms and mobile terminals, and digital transformation.

According to a recent surveyi conducted by the CCAGM and Fung Business Intelligencei, 86.3% of department store operators have started to deploy O2O strategies, a significant increase of 40.9 ppts from our last year’s survey (Exhibit 6). Of which, 54.8% of department store operators have already started their e-commerce business (Exhibit 7), up 8 ppts from the previous year. Among them, 73.3% have established wholly-owned transactional website, while 13.3% sold solely on third-party e-commerce platforms; 13.3% sold and marketed their products on both third-party e-commerce platforms and their own website (Exhibit 8).

Exhibit 6� Deployment of O2O strategies of surveyed department store operators

Source: “Department store survey 2017-2018”. CCAGM and Fung Business Intelligence.

Yes, already started O2O, 86.3%

No, but planned to start O2O, 11.3%

No, no plan for O2O, 2.2%86.3%

11.3%

2.2%

i A quantitative survey was conducted by the China Commerce Association for General Merchandise (CCAGM) and Fung

Business Intelligence among 82 key department store operators in China during November and December, 2017.

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Exhibit 7� Penetration of e-commerce business among surveyed department store operators


54.8%Yes, have already started their e-commerce business

Exhibit 8: Forms of e-commerce business among surveyed department store operators


Have established wholly-owned transactional website (73�3%)

Sell and market their products on both third-party e-commerce platforms and their own website (13�3%)

Sell solely on third-party e-commerce platforms (13�3%)

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Besides, 37.0% of surveyed department store operators have launched mobile apps (Exhibit 9), increased 10 ppts as compared to last year. They use the apps mainly for pushing marketing and sales information to customers, promoting and selling merchandise and providing members with value-added services such as in-store navigation and restaurant reservation, etc. (Exhibit 10).

Exhibit 9� Proportion of surveyed department store operators with and without mobile apps


37.0%Yes, have launched mobile apps

Exhibit 10� Major functions of mobile apps of surveyed department store operators


92.2%

92.2%

88.9%

88.6%

42.8%

Push marketing and sales information

Product promotion

Membership scheme

Product transaction

Provide value-added services (in-store navigation,restaurant reservation, etc.)

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Rainbow Department Store is the forerunner in business innovation and O2O model transformation. Since 2013, Rainbow has started to carry out business model innovation and put forward three strategic directions – "full O2O integration", "experiential consumption" and "vertical integration of value chain". Rainbow's O2O strategies emphasize on the seamless integration of its online and offline channels, and data sharing across marketing, payment and logistics systems. Rainbow has strategically implemented digitalization across all physical stores, while upgrading and remodeling its supply chains. Its inventory system, CRM system and merchandise system are managed on a centralized digital platform which is led by big data analytics. Since last year, Rainbow has put further emphasis on digitalization of its business model. In April 2017, the e-commerce division of Rainbow Department Store changed its name to Digital Business Center. According to the company, by 1H17, it had more than 5.6 million WeChat members and nearly 5 million Red Scarf members; sales of “Rainbow Daojia” (Rainbow Home Delivery), a platform that provides express delivery service for products offered by Rainbow, increased by 872.6% yoy3.

(2) More customer-focused – master accurate customer data to achieve targeted marketing

Today, Chinese consumers are becoming increasingly sophisticated and highly connected. They demand increasingly convenient shopping options both on their smartphones and in physical stores. In order to offer customers a more efficient and flexible retail experience, many department store operators use data and technologies to accurately predict and describe consumers' needs, and provide relevant products and services accordingly. They consider big data analytics and digitalization of operation management as crucial elements for success.

Our survey shows that up to 92.6% of surveyed department store operators have collected consumer data for big data analysis (Exhibit 11). Among them, 96.1% of department store operators have collected consumer data through membership card/ membership scheme, 42.7% through store WiFi, 24.0% through online merchandise purchase history, and 13.3% through iBeacons (Exhibit 12). The collected consumer data were mainly used to understand consumer preferences (86.4%), carry out precision marketing (77.8%), provide customers with more personalized products/services (67.9%), and optimize in-store merchandise mix (66.7%) (Exhibit 13).

Exhibit 11� Proportion of surveyed department store operators that have collected consumer data for big data analysis


92.6%Yes, have collected consumer data for big data analysis

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In recent years, Intime Retail Group has put considerable efforts in strengthening its membership system, aiming to master more accurate consumer data and better satisfy the needs of customers. In August 2017, Intime launched a paid memerbership program which collects customer data on both online and offline channels4. Members could enjoy discounts when shopping at Intime Department stores. Based on customers’ purchasing history in-store, on Intime’s mobile app and or its online store on Tmall, Intime could identify customers’ needs and preferences, thus providing more personalized product recommendations and services. Meanwhile, Intime would also roll out promotional activities that are exclusive to members including discount offerings, customization service, etc.; all these initiatives would allow the company to easily collect consumer data and carry out targeted marketing.

Exhibit 12� Means of collecting customer data by surveyed department store operators

Exhibit 13� Major purposes of collecting consumer data of surveyed department store operators



96.1%

42.7%

24.0%

13.3%

Membership card/ membership scheme

Store WiFi

Online merchandise purchase history

iBeacons

86.4%

77.8%

67.9%

66.7%

11.1%

1.2%

Understand consumer preferences

Carry out precision marketing

Provide customers with more products/services personalized

Optimize in-store merchandise mix

Develop new products

Others

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(3) Leveraging technologies to enhance customer experience

The rising middle class and the growingly influential Chinese millennials have high aspirations for a better life. They have a strong desire for premium products and services, as well as convenience-driven shopping experience. With China entering the “New Retail” regime, many department store operators have shifted their focus towards customers, and regarded satisfying consumers’ demand for unique and engaging experience as one of the most important factors to succeed. Meanwhile, more department store operators have leveraged advanced technologies to enhance consumer experience.

Intime Retail Group is a case in point. In May 2017, Intime’s Ningbo Dongmen branch was closed for renovation. The store has been upgraded and transformed in all aspects, including the exterior design, interior decoration, floor layout, etc. Apart from placing strong emphasis on upgrading the hardware and software of the store with better shopping facilities and lifestyle offerings, Intime has also increased the proportion of experiential elements substantially. For instance, it has added a 3D fitting room with the support of "black technologies" such as AR and VR, as well as an “unmanned supermarket”. The innovative operation model and payment methods will also fully exemplify the "New Retail" concept5.

Among the department store operators in our survey what have applied technologies in their physical stores, 83.4% have set up free WiFi storewide, 37.1% have set up QR code system, 19.9% have launched in-store digital directory and 9.3% have installed virtual mirrors, aiming to enhance customer’s shopping experience and better engage with them through the adoption of technologies in physical stores (Exhibit 14).

Exhibit 14� Adoption of technologies in physical stores of surveyed department store operators


In addition, many department stores have endeavored to enhance the overall shopping experience of customers by introducing more experiential elements. 83.9% of our surveyed department stores have added experiential elements in their physical stores over the past year (Exhibit 15), with 87.2% of them have increased F&B items, 69.7% have added more kids-related facilities, 59.6% have increased service offerings (such as beauty and hairdressing), and 50.8% have added entertainment elements (such as cinema and KTV) (Exhibit 16).

83.4%

37.1%

26.5%

19.9%

14.6%

9.3%

1.3%

Set up free WiFi storewide

Set up QR code system

Analyze customer flow based on iBeacon

Launch in-store digital directory

Analyze customer flow based on dynamic track

Install virtual mirrors

Others

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(4) Partnering with leading Internet companies and e-commerce players to deepen O2O integration

An increasing number of department store operators have realized the importance of forming strategic alliances with Internet companies or large scale e-commerce players in order to stay competitive and grasp the opportunities created by the “New Retail” regime. As such, department store operators can leverage the huge traffic resources, big data as well as logistics capabilities of the Internet or e-commerce companies, so as to roll out O2O initiatives more easily and effectively.

Selected examples of strategic partnerships between department store operators and Internet companies or e-commerce players are shown in Exhibit 17.

Exhibit 15� Proportion of surveyed department store operators that have added experiential elements in stores in the last 12 months


Exhibit 16� Types of experiential elements added in-store by surveyed department store operators


83.9%Yes, have added experiential elements

69.7%

87.2%

59.6%

50.8%

16.0%

Food & beverages

Kids-related facilities

Lifestyle services (e.g. beauty and hair salon)

Entertainment (e.g. cinema, KTV)

Others

19


Time Department Store Internet companies/ e-commerce players

Details of the strategic partnerships or alliances

January 2018

Parkson Retail Group

Secco.com (Asia's largest online integrated upscale products and services platform)

The two parties will integrate their resources to construct a fully integrated online and offline sales and service network. They will jointly explore the application of “smart retail”.

January 2018

Xinhua Department Store

Dmall.com (an intergrated O2O retail platform for daily consumer goods)

Dmall will provide merchandising and O2O services to Xinhua Department Store through Dmall’s app.

November 2017

New World Department Store (China)

Wanda Feifan (an O2O e-commerce platform)

15 stores of New World Department Store will cooperate with Feifan for “click and collect” service.

March 2017

Pacific Department Store

Fanli.com (one of China’s largest e-commerce platforms)

All stores of Pacific Department Store in Shanghai will provide promotions and daily discounts on Fanli.com.

February 2017

Bailian Group Alibaba Group Under the agreement, the two companies will develop new technologies and take advantage of each other’s user data to integrate offline stores, logistics and payments to boost efficiency. They will also jointly develop new technologies for retail applications such as AI, IoT and big data.

January 2017

Intime Retail Group Alibaba Group Intime Retail Group received a proposal for privatization from joint offerors. Both parties would collaborate in big data analytics and implement more comprehensive O2O strategies so as to optimize customer experience, improve inventory turnover, and increase operation and supply chain efficiencies.

Exhibit 17� Selected examples of strategic partnerships or alliances between department store operators and Internet companies or e-commerce players (as of February 2018)

Source: Various Internet sources; compiled by Fung Business Intelligence

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The keen efforts of department store operators to form partnerships with Internet companies or e-commerce players have been manifested in our survey. 54.0% of surveyed department stores have cooperated with Internet companies to carry out O2O strategies; 13.5% of them said they are planning to cooperate with Internet companies in the near future (Exhibit 18).

Exhibit 18� Percentage of surveyed department store operators that have formed partnerships with Internet companies or e-commerce players


2� Diversifying retail formats and tapping into other business sectors to achieve synergy

(1) Actively engaging in multiple retail formats, particularly shopping malls, supermarkets and convenience stores

Competition in China's department store market is fierce, and the single format model has gradually faded out as it lost its competitiveness in the rapidly changing marketplace. More and more department store operators have sought to expand their scope of business and engage in multi-format and multi-sector operations to adapt to the changing needs of consumers (Exhibit 19). For instance, Golden Eagle Retail Group has been actively expanding its business scopes in recent years. In 2017, Golden Eagle launched a new G · LIFE series and developed six business units including G · MART (boutique supermarket), G · TAKAYA (bookstore), G · QUTE (pet store), G · BEAUTY (beauty store), G · HEALTH (healthcare products), G · BABY (mother-and-baby products)6 to meet the discerning needs of middle class consumers.

Yes, have formed partnerships, 54.0%

No, no plan for partnerships, 32.4%

No, but planned to formed partnerships, 13.5%54.0%

32.4%

13.5%

21


Department Store

Shopping Mall format

Convenience Store format

Supermarket format Other formats

Wangfujing Group

Wangfujing Shopping Centre

Wangfujing I Believe

Wangfujing Sofly (community-based fresh food-focused supermarket)• Guan Park (an independent supermarket brand by Wangfujing)• Wangfujing Jixuan Supermarket (a supermarket brand jointly established with third-party supermarkets)• Wangfujing self-owned supermarkets

Wangfujing Factory Outlet

Rainbow Department Store

• Rainbow Shopping Centre• Dreams-On

• Rainbow O2O Store• Well Go (unmanned CVS)

• Sp@ce (lifestyle supermarket)• self-owned supermarkets

• Rain & Co (multi-brand stores)• Rainbow app (e-commerce platform)• Rainbow Finance (consumption finance)

New World Department Store (China)

Ba LiChun Tian Shopping Mall

N+ Convenience Store

• N+Baby (children’s themed-supermarket)• self-owned supermarkets

• Xinshuo (multi-brand store)• LOL Lifestyle Concept Store• N+ Natural Taste Plus (bakery)• Peter’s Meadow (F&B)• Aza Aza! (F&B)

Intime Retail • Intime City• In Series

/ • self-owned supermarkets • Onmine snack store (partnered with Alibaba)

Parkson Retail / Parkson Supermarket Parkson Beauty (beauty & skincare specialty store)

Liqun Group Liqun Shopping Centre

• Liqun Supermarket • “Liqun ·Fuji Farm” (fresh community store)

• Liqun Home Appliance

Chongqing Department Store

/ • self-owned supermarkets • Chongqing Alliance Trading Company• Chongqing Car Trading Company• Mashang Consumer Finance Co. Ltd.

Exhibit 19� Selected department store operators that have tapped into shopping mall, convenience store, supermarket and other business sectors (as of February 2018)

Source: Various Internet sources; compiled by Fung Business Intelligence

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Meanwhile, a number of department store operators have changed their company name to show their eagerness to transform into multi-format and integrated retail enterprises. In January 2018, Liqun changed its name from “Qingdao Liqun Department Store Group Co., Ltd.”7 to "Liqun Commercial Group Co., Ltd." to better reflect its evolving business nature as the company continued to expand and strengthen their core retail competencies in the operation of shopping centres, supermarkets, home appliances specialty stores, convenience stores and fresh community shops. During the same period, Xinhua Department Store under Wumart Group also changed its name to "Wumart Xinjiekou Plaza"8 to highlight its intention to turn into a shopping centre. In March 2017, Rainbow Department Store Co., Ltd. decided to change its tracking stock name on the Shenzhen Stock Exchange to “Rainbow Shares”9, hoping to better align with the company's omni-channel and multi-format strategies.

According to our survey, 83.5% of department store operators have already been engaging in multi-format operations (Exhibit 20). Among which, supermarkets/hypermarkets, shopping malls and convenience stores are the three most common retail formats that department store operators have ventured into (Exhibit 21). 41.3% of surveyed department store operators reflected that they plan to expand their current scope of business and engage in other retail formats in the next 12 months, particularly shopping malls, convenience stores and factory outlets (Exhibit 22 & 23).

Exhibit 21� Retail formats surveyed department store operators have already tapped into

Exhibit 20� Percentage of surveyed department store operators that have tapped into other retail formats



83.5%Yes, have tapped into other retail formats

68.6%

55.5%

29.2%

17.5%

14.6%

11.7%

10.2%

Supermarkets/ Hypermarkets

Shopping malls

Convenience stores

Factory outlets

Professional stores

Specialty stores

Others

23


Exhibit 22� Percentage of surveyed department store operators that have plans to tap into other retail formats in the next 12 months

Exhibit 23� Retail formats surveyed department store operators plan to tap into in the next 12 months



In China, small-format stores represented by convenience stores are gaining popularity. According to the 4Q17 China’s Convenience Store Business Index released by the MOFCOM, the quarterly prosperity index of the convenience store sector remained at a relatively high level in 201710, reflecting the fact that convenience store practitioners generally maintained high confidence in their businesses. More and more department store operators have extended their footprint into the convenience store sector in order to expand revenue streams and business ecosystems.

41.3%Yes, plan to tap into other retail formats in the next 12 months

26.6%

23.6%

23.6%

20.7%

8.9%

5.9%

17.7%

Shopping malls

Convenience stores

Factory outlets

Professional stores

Supermarkets/ Hypermarkets

Specialty stores

Others

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Well Go Convenience Store in ShenzhenPhoto source: Fung Business Intelligence

Example 1: Wangfujing Group tapped into convenience store business

Department stores, shopping malls, factory outlets and supermarkets have long been the four core retail businesses of Wangfujing Group. However, since 2017, Wangfujing Group has also set foot in the convenience store business. In March 2017, Wangfujing Group and Henan convenience store chain “I Believe” formed a chain convenience store franchise under a joint venture arrangement. The joint venture company announced the opening of 106 stores in Beijing in June 201711. The two companies will jointly transform and upgrade all existing stores of I Believe, invite mom-and-pop stores in Beijing to become franchisees, and provide O2O services to consumers in Beijing.

Example 2: Rainbow Department Store launched unmanned convenience store “Well Go”

In 2017, "unmanned retail" has triggered a great deal of attention in China’s retail sector. The unmanned convenience store format has continued to mushroom and become increasingly popular. In August 2017, Well GO, the first unmanned convenience store of Rainbow Department Store, opened in Nanshan District, Shenzhen. In November of the same year, Rainbow also introduced the 2.0 version of Well GO unmanned convenience store. The store uses RFID radio frequency identification technology, intelligent equipment control system, remote monitoring system and other IoT technologies. To enter the store, consumers can simply scan the QR code at the entrance via WeChat app; to make purchase, they can also use the app to settle payment. According to the company’s plan, the total number of Rainbow convenience stores will exceed 800 shops by 202012.

Example 3: New World Department Store opened the first “N+ Convenience Store”

N+ Convenience Store is a new store format of New World Department Store. Opened in New World Department Store’s Chongwenmen branch, Beijing in November 2017, N+ Convenience Store’s target customers are working people aged 18- 40 and surrounding office crowds. In terms of merchandise, N+ Convenience Store provides mainly fresh food, as well as beverages and daily necessities sourced from New World Department Store. In addition, N+ Convenience Store also provides other value-added services for consumers such as express delivery, free mobile phone charging, free toolbox, free medicine, free water, etc. According to the company’s plan, more N+ Convenience Stores will be opened nationwide in the future13 .

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(2) Going “fresh and experiential”; self-operated boutique supermarkets and fresh food become new growth points

In the past year, "fresh" and "experience" became the new focuses of the fast-moving goods and grocery markets. Increasing numbers of department store operators have transformed and upgraded their existing supermarkets, and stepped up efforts to provide more fresh food, catering service, and select premium and unique products from all over the world in response to the ever-growing consumer demands for higher quality of life.

For example, in January 2017, Rainbow Department Store opened the first Sp@ce supermarket in Shenzhen. The new store was previously an ordinary Rainbow Supermarket and has been transformed and upgraded into the first store of the new brand. As a new supermarket format, by using Rainbow's official app "Rainbow Scarf", consumers can purchase their products online and deliver directly to their homes within 2 hours through the "Rainbow Daojia" service. Sp@ce also supports the "self-check-out" function; Customers can pay by app or mobile payment using Wechat Pay, Alipay and also by credit card as card machines are also available at the counters. Rainbow aims to open 100-150 Sp@ce supermarkets in the coming three years14.

(3) Exploring new models, new formats and new concepts

Over the past few years, China’s retail market has seen an unprecedented evolution with rapid emergence of various new retail models and formats. Many department store operators are actively exploring new business models, developing new retail concepts and targeting more specific groups of customers.

Example 1: Rainbow Department Store debut new retail format “Global In Select”

In August 2017, Rainbow Department Store debuted a new retail format named Global In Select at its Houhai Branch in Shenzhen. With an operating area of 1,500 sqm15, Global In Select houses six sections with a mix of merchandise from different categories, including beauty and cosmetic, maternity and baby, products from Australia and New Zealand, food products, specialty products from Europe and the U.S., and wine. By leveraging RFID technologies, Global In Select supports self-checkout service. The system can recognize the product categories, volume, total price, discounts, etc. all by itself without human touch. Customers can use Rainbow’s app to scan the QR code displayed on the screen to complete the payment process.

Global In Select of Rainbow Department Store in Shenzhen Photo source: Fung Business Intelligence

Sp@ce supermarket in ShenzhenPhoto source: Fung Business Intelligence

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Example 2: Bailian Group launched new retail supermarket “RISO”

RISO is a new fresh food-focused supermarket launched by Bailian Group in Shanghai in June 2017. Located in Pudong New District, RISO occupies two floors and has a total floor space of 4,500 sqm16. RISO sells mainly grocery and fresh products and features a large catering area, restaurants and café, book section, as well as art exhibition. RISO exemplifies the concept of “future store”, one of Bailian’s recent focuses, by integrating catering into the selling of fresh products, together with books, arts and music. It aims to offer a one-stop relaxing shopping experience to consumers, and promote a unique and natural lifestyle. Moreover, RISO also introduces a great variety of imported premium products, as well as exclusive items to enhance attractiveness of the store. As part of its O2O initiatives, RISO has also launched a mobile app and provide 1-hour delivery service for consumers who live within a 3-km distance from the store.

Example 3: Intime Retail launched new snack food store “Onmine”

To accelerate format innovation, Intime Retail Group has partnered with Alibaba Group to launch a new private label snack food brand Onmine. The first store was opened in Hangzhou Zhongda Intime City in June 2017. The store has a snack display area and a leisure experiential area, covering an area of 300 sqm. It sells about 800 types of products, of which imported snacks accounted for around 80%17. The new Onmine retail concept snack store also symbolizes the officially entry of Intime Retail into the concession food industry.

Example 4: Parkson Group introduced new retail concept store “Parkson Beauty”

To continuously improve its merchandise and service portfolio and move towards a more youthful image, Parkson Group announced to open Parkson Beauty, a brand new specialty standalone concept store in Changsha in early 201818. Parkson hopes that the new store can attract customers who prefer to shop offline and enjoy lifestyle experience with fashionable products and personalised services. The store will comprise a retail section which sells beauty and cosmetics products for women and men, a café, and a home products section; it will also offer lifestyle-related services and customized make-up consultation for consumers.

RISO of Bailian Group, Photo source: Fung Business Intelligence

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3� Enriching and expanding self-operated business to enhance product uniqueness and gross profit margins

(1) Enriching and expanding direct-merchandise sales business for products and services

differentiation

Having experienced the drawbacks of the concessionary model such as homogenization of merchandise and concessionaire brands, thin profit margins, and bringing less foot traffics, etc. many department store operators have expedited the expansion of direct sales business, taken bolder steps on developing their own private labels, and launched buyer (multi-brand) shops with unique and exclusive brands from overseas in order to enhance product and services uniqueness, provide customers a differentiated shopping experience and satisfy the increasingly sophisticated consumer demand under the trends of consumption upgrading.

In our survey, 76.8% of department store operators have engaged in merchandise direct sales business (Exhibit 24). Nonetheless, over half (55.5%) of the surveyed department store operators claimed that the proportion of merchandise direct sales in their business was less than 10%. Among those operators who have engaged in merchandise direct sales, 55.6% have become a regional distributor or franchisee, 33.3% have directly owned or bought out the brands, 11.1% have sourced overseas products by their own buyer’s team (Exhibit 25). It is noteworthy that 53.9% of surveyed department store operators have increased the proportion of merchandise direct sales business in the last 12 months (Exhibit 26).

Exhibit 24� Penetration of merchandise direct sales among surveyed department store operators


Proportion of merchandisedirect sales

Among operators with merchandisedirect sales…

5.0% or less 34.9%

5.1% - 10.0% 20.6%

10.1% - 15.0% 17.5%

15.1% - 20.0% 6.4%

20.1% or above 20.6%

76.8%Yes, have engaged in merchandise direct sales

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Exhibit 25� Forms of merchandise direct sales model of surveyed department store operators

Exhibit 26� Percentage change in merchandise direct sales compared to the previous year



Example 1: Wanda Department Store introduced multi-brand store “Wanda Select”

In September 2017, Wanda Department Store made its first attempt to set up buyer (multi-brand) store by launching the first Wanda Select shop in Wanda Department Store, Tongzhou branch in Beijing19. As a buyer shop, Wanda Select operates in "shop-in-shop" and "pop-up shop" models. All products are sourced from overseas by Wanda’s buyer’s team, with categories covering fashion, jewelry, footwear, skin care products, food, etc. “Wanda Select” can leverage Wanda Department Store’s massive product categories and sourcing capability to reduce operating costs and enhance supply chain efficiency, thereby providing a better shopping experience for consumers

Example 2: Bailian Group launched premium multi-brand shop “the bálancing”

In September 2017, Bailian Group launched a multi-brand shop the bálancing inside Bailian’s Orient Shopping Centre in Xujiahui, Shanghai. All of the products sold in the store were sourced from overseas, from brands buy-out or via in-depth cooperation with local and foreign designer brands. The bálancing's buyer team tends to choose some exclusive designer and lifestyle brands to enhance the uniqueness and strengthen the competitiveness of Bailian’s merchandise portfolio20. Currently, it houses more than 150 international fashion and lifestyle brands, including Jil Sander, Masion Margiela, Nina Ricci, Victoria Beckham, Brunello Cucinelli, Paul Smith, and 3.1 Philip Lim.

55.6%

33.3%

11.1%

33.3%

Become a regional distributor or franchisee

Own or buy out the brands

Source overseas products by own buyer's team

Others

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

53.9%38.1%7.9%

Increase, 53.9%Decrease, 7.9% No Change, 38.1%

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(2) Stronger efforts in developing private labels

Today's new generation of consumers long for more unique and personalized products. As such, some leading department store operators have actively developed their own private labels, covering a large array of categories from cosmetics, apparel to home products, to food products, etc. By launching private labels, department store operators can impose control and oversee the manufacturing and supply chains of their merchandise, and hence enjoy long-term competitive advantages and ensure better profit margins.

According to our survey, 32.1% of department store operators have developed their own private labels, an increase of 7.1 ppts from last year (Exhibit 27). Over 61.5% of them claimed that they have increased the proportion of private labels in the last 12 months (Exhibit 28). These private label merchandise mainly involves clothing, cosmetics, household products and food.

Exhibit 27� Percentage of surveyed department store operators that have launched their own private labels

Exhibit 28� Percentage change in owning private labels among operators with their own private labels in the last 12 months



Yes, have developed their own private labels 32.1%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

61.5%30.8%7.7%

Decrease No Change Increase

30


Example 1: New World Department Store launched new private label “Xin Shuo”

Developing private labels is one of the key strategies of New World Department Store China in recent years. Following the launch of its own private labels "LOL" (Love • Original • Life) Concept Shop, "n+ Natural Taste Plus", a high-end bakery brand of the group and "Luis Home Bake”, a DIY baking studio for children, in June 2017, it launched another new private label apparel brand Xin Shuo in its Shanghai Wujiaochang Branch. “Xin Shuo” targets mainly the younger generation; its products have unique styles, similar to those created from a mix of designer brands and niche brands. In 2017, sales of goods for merchandise direct sales accounted for 31.8% of total revenue of New World Department Store China21. This reflected that great importance of merchandise direct sales to the company.

Example 2: Wangfujing Group launched its own brand "Wangfujing Dream Factory"

Currently, private labels launched by department stores are no longer confined to the apparel category. In April 2017, Wangfujing Group launched a new private label called Wangfujing Dream Factory, and opened the Wangfujing Dream Factory specialty store in its Beijing branch, which sells creative traditional Chinese cultural and ethnic products. Most of the products are designed by Wangfujing Group’s own design team and manufactured by their own partner manufacturers or sourced from local craftsmen for further processing22.

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Exhibit 29� Percentage of surveyed department store operators that have strengthened collaborations with suppliers and brands


72.8%Yes, have strengthened collaborations with suppliers

4� Improveing supply chain management and focusing on the basics of retailing

In response to the consumption upgrade phenomenon and consumers’ aspirations for quality products and services, many department store operators have devoted tremendous efforts on revitalizing and restructuring the supply chain, and accelerating the digital transformation process in order to promote product and services upgrades. Increasing numbers of traditional department store operators now realize the weak relationship with upstream suppliers and brands have led to supply chain inefficiency; some operators have sought to harness resources in the best way possible, and improve supply chain management with digitalization approach, which largely simplified procedures and supply chain system, optimized resources and reduced costs.

According to our survey, 72.8% of department store operators claimed to have stronger collaborations with suppliers and brands in the past 12 months (Exhibit 29). Most of the collaborations are in the form of joint point-of-sale system management and data sharing (68.6%), SKU management (65.3%), Enterprise Resource Planning (ERP) and inventory system management and data sharing (53.6%), followed by product design, development, display and sale (43.5%) (Exhibit 30).

Exhibit 30� Types of collaborations between surveyed department store operators and upstream suppliers or brand owners


68.6%

65.3%

53.6%

43.5%

3.3%

Joint POS system management and data sharing

ERP and inventory system managementand data sharing

Product design, development, display and sale

SKU Management

Others

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Bailian Group is one of the department store operators which has put huge emphasis on supply chain expansion. With "i-Bailian" O2O shopping platform as the backbone, Bailian Group has actively built and controlled resources in the supply chain by extending towards the upstream. At the same time, Bailian has promoted the expansion of sales channels horizontally. For offline channel, Bailian has rolled out new convenience stores, shopping malls and factory outlets nationwide, and strengthened its global supply chain organizational capabilities.

5� Promoting cooperation with all stakeholders along the supply chain

Many department store operators have actively formed strategic alliances and partnerships with stakeholders along the supply chain in the hope of enhancing the overall competitiveness of supply chain and build synergies. For instance, in July 2017, Golden Eagle Group collaborated with Tencent’s online banking affiliate WeBank to launch a co-brand "Social Gift Card"23. This is the first cross-sector cooperation between a large department store enterprise and an Internet finance company for integrating online and offline consumption, big data analytics and targeted marketing. Golden Eagle’s Social Gift Card is similar to a postcard; users can convey wishes and greetings to their social circles’ friends on WeChat. The gift card also carries cash value. Users can use it to buy products at any Golden Eagle Department Stores. This collaboration is Golden Eagle Group’s major initiative in retail social marketing. It has reportedly increased members' loyalty and stickiness to the Golden Eagle brand and is expected to bring significant long-term sales growth to Golden Eagle Group.

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III. Major issues and challenges

34


1� Business transformation requires fundamental changes in business mindset and mechanism

Over the past years, most of the business transformations that have taken place in the department store sector were related to hardware and retail format upgrading, aiming to enhance consumer experience. Many operators have put overwhelming emphasis on adding various types of experiential elements in-store to create a unique shopping environment, and improving product display and spatial planning, etc. However, the mere hardware and format upgrading may not necessarily be able to generate more sales, or solve the underlying problems of the department store sector. What is needed is a fundamental rejuvenation of business mindset and philosophy, operation systems and practices, organization structure and culture, etc. of department store operators. They should consider adopting a consumer-centric approach in their operations, striving to balance supply and demand, creating core competencies in supply chain capabilities, enhancing format-layout and planning capabilities, and strengthening brand-building and omni-channel capabilities. They should transform their business by shifting focus from selling products to providing lifestyle services.

2� Supply chain integration is needed for successful transformation

At present, the department store sector as a whole is still fragmented and geographically dispersed, hence making the operators difficult to enjoy economies of scale. As a result, many department store operators are still suffering from high distribution costs, weak bargaining power against suppliers and brand owners, low supply chain efficiencies, and diminished pricing power. The key to the successful transformation of the department store sector lies heavily on effective supply chain integration. Some leading department stores have collaborated with their rivals to establish joint procurement platform to enhance purchasing power. This allows the operators to expand production scale and reduce supply chain costs, while enhancing distribution efficiency of the sector.

3� Obstacles to engaging in merchandise direct sales

For many department store operators, engaging in and/or expanding merchandise direct sales is a challenge. First, the operation capabilities of many department store operators have worsened after operating under the concessionary model for many years, where they have been overly relied on their suppliers. Second, the merchandise direct sales model involves higher inventory risk and heavy investment from the department store operators, thus posing a huge challenge to operators who are satisfied with the status quo and are reluctant to move forward. Furthermore, increasing the proportion of merchandise direct sales may intrude the interests of distributors, sub-distributors and franchisees. As such, many department store operators are hesitant to disrupt the relationships that have long been established with these stakeholders. Fourth, the lack of experienced in-house buyers has made their strategies to enlarge the proportion of private labels and merchandise direct sales hard to realize. Last but not least, the task of controlling costs during the procurement and direct sourcing process is difficult. Many department store operators are exposed to the risks of commercial bribery especially when launching their own private brands or engaging in merchandise direct sales businesses.

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IV. Implications and conclusion

36


1� Optimizing merchandising and enriching offerings in response to consumption upgrading

To capitalize on the opportunities arising from consumption upgrading and the trend of younger generations becoming the mainstream of consumption, the department store sector should keep abreast of the latest market trends, optimize operations models and strive to create a stronger merchandise portfolio which aligns with the new lifestyles and spending habits of the dominating consumer group. Emphasis should be placed on strengthening and covering a wider scope of in-demand spending categories related to consumption upgrading, such as children and education, healthcare, tourism, cultural and creative products, etc. Department store operators should gear their business reform direction towards offering high quality products and services with better shopping experience to meet the increasingly sophisticated consumer demand.

2� Venturing into O2O retailing with constant business model innovations

To keep pace with the rapidly evolving retail landscape, increasing numbers of department store operators have started to revitalize and reinvent their traditional businesses, often by leverging advanced technologies as well as upgrading their operations with innovative business models. These have greatly increased their risk-bearing ability and overall competitiveness.

In recent years, the government has committed support for O2O development with the promulgation of a number of major policies, including the Opinions on Promoting Online-Offline Interaction to Expedite the Innovation Development, Transformation and Upgrade of Commercial Circulation, the Opinions on Implementation of the Action Plan for Internet Plus Circulation and the Opinions on Facilitating Innovation and Transformation of the Physical Retail Industry. These measures have greatly contributed to the advancement of online-offline integration, particularly in enhancing efficiency and facilitating cross-sector collaborations. Against the backdrop of a positive policy environment, coupled with increasing adoption of advanced technologies and continual consumption upgrading, the O2O development will continue to shape the development of China’s retail sector in 2018; undoubtedly, new retail formats and business model innovations will dominate the retail scene.

To achieve sustainable development and growth, into the future, we expect more and more department store operators to constantly evaluate their business models and carry out format revamps and innovative transformation to better satisfy the needs of a new generation of customers.

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3� Advocating consumer-centric business transformation and focusing on the basics of retailing

Regardless of how the retail formats change and how the business models evolve; ultimately, the essence of retail business should remain providing desirable goods and services to a specific target market. While new technologies can drastically reduce costs and increase efficiency in many aspects, after all, driving sales and boosting foot traffics should still depend on the merchandise and service offerings of the retailers. Moving forward, department store operators should strive to optimize the composition of three core business elements, namely “customers, merchandise, and physical settings”.

As the Chinese government has constantly rolled out measures to unleash domestic consumption and stimulate spending, there will be vast room for China’s retail sector to expand and grow, and open up tremendous opportunities for department store operators. Going forward, the department store sector should focus on the basics of retailing by redefining an operational framework that integrates online and offline businesses, engaging in multiple businesses, enriching product offerings, and enhancing shopping ambience. The department store sector should strive to become the leading industry to meet people's growing demand for a better life, as highlighted by the government in the 19th National Congress of the CPC.

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References

1 “New China Handbook - Young, Wealthy, Smart Consumers Will Drive Growth”. 21 December 2015. BCG.com.cn. http://www.bcg.com.cn/export/sites/default/en/files/publications/reports_pdf/BCG-The-New-China-Playbook-Dec-2015.pdf2 “Beijing SKP’s sales reached 12.5billion yuan in 2017”, 24 February 2018. Winshang.com.http://news.winshang.com/html/063/4556.html3 “Rainbow Department Store seek new changes and new upgrades”. 15 November 2017. JRJ.com. http://stock.jrj.com.cn/2017/11/15114123388122.shtml4 “Intime Retail launches 365 membership cards”. 7 November 2017. Winshang.com.http://news.winshang.com/html/062/9149.html5 “Intime Ningbo Dongmen branch to close and upgrade; to build a New Retail store”. 9 May 2017. Linkshop.com http://www.linkshop.com.cn/web/archives/2017/377049.shtml6 “Interview with Golden Eagle’s CEO”. 13 March 2018. Sohu.com.http://www.sohu.com/a/128941044_4652867 “Liqun transforms and upgrades”. 16 January 2018. Chyxx.com.http://www.chyxx.com/qiye/201801/604286.html8 “Xinhua Department Store transforms”. 29 January 2018. Bbtnews.com.http://www.bbtnews.com.cn/2018/0129/228331.shtml9 “Rainbow Department Store changes name to Rainbow Shares”. April 2017. Askci.com. http://www.askci.com/news/finance/20170406/09170095198.shtml10 “The Ministry of Commerce releases the report of the China Convenience Store Business Index for 1Q17”.18 January 2018. MOFCOM. http://www.mofcom.gov.cn/article/ae/ai/201801/20180102700381.shtml11 “Wangfujing partners with I Believe to enter the community”.7 June 2017. Longsok.com. https://www.longsok.com/dt/2017/0607/40595.html12 “Rainbow’s first 2.0 version of Well GO unmanned convenience store opens”. 27 November 2017. Winshang.com. http://news.winshang.com/html/063/0201.html13 “New World Department Store's first N+ convenience store opens in Beijing”. 23 November 2017. Ebrun.com. http://www.ebrun.com/20171123/256536.shtml14 “Rainbow Department Store’s brand new supermarket Sp@ce debuts in Shenzhen”. 27 January 2018. Winshang.com. http://news.winshang.com/html/060/5136.html15 “Rainbow Department Store’s new retail format “Global in Select” debuts in Shenzhen”. 4 August 2017. Winshang.com. http://news.winshang.com/html/062/2188.html16 “Bailian Group launches new retail supermarket “RISO””. 26 June 2017. Linkshop.com. http://www.linkshop.com.cn/web/archives/2017/380932.shtml17 “Intime Retail launches new snack food store “Onmine”. 2 June 2017. Longsok.com. https://www.longsok.com/dt/2017/0602/40532.html18 “Parkson Group introduces “Parkson Beauty””.20 April 2017. Linkshop.com. http://www.linkshop.com.cn/web/archives/2017/375509.shtml19 “Wanda Department Store introduces multi-brand store “Wanda Select””.16 October 2017. Linkshop.com. http://www.linkshop.com.cn/web/archives/2017/388863.shtml20 “Bailian Group launches new multi-brand shop”. 14 September 2017. Winshang.com. http://news.winshang.com/html/062/5491.html21 “2017 Annual Report”. New World Department Store China Limited. http://www.nwds.com.hk/wp-content/files_mf/c03_ar57.pdf22 “Wangfujing launches new brand “Wangfujing Dream Factory””. 11 May 2017. Winshang.com. http://news.winshang.com/html/061/5115.html23 “Golden Eagle and WeChat jointly launches social gift card”. 1 August 2017, Linkshop.com. http://www.linkshop.com.cn/web/archives/2017/383810.shtml

http://www.bcg.com.cn/export/sites/default/en/files/publications/reports_pdf/BCG-The-New-China-Playbook-Dec-2015.pdf

http://www.bcg.com.cn/export/sites/default/en/files/publications/reports_pdf/BCG-The-New-China-Playbook-Dec-2015.pdf

http://news.winshang.com/html/063/4556.html

http://stock.jrj.com.cn/2017/11/15114123388122.shtml


http://www.linkshop.com.cn/web/archives/2017/377049.shtml

http://www.sohu.com/a/128941044_465286

http://www.chyxx.com/qiye/201801/604286.html

http://www.bbtnews.com.cn/2018/0129/228331.shtml

http://www.askci.com/news/finance/20170406/09170095198.shtml

http://www.mofcom.gov.cn/article/ae/ai/201801/20180102700381.shtml

https://www.longsok.com/dt/2017/0607/40595.html


http://www.ebrun.com/20171123/256536.shtml




https://www.longsok.com/dt/2017/0602/40532.html




http://www.nwds.com.hk/wp-content/files_mf/c03_ar57.pdf



39


About the Organizations

CHINA COMMERCE ASSOCIATION FOR GENERAL MERCHANDISE

Founded in January 1990, China Commerce Association for General Merchandise (CCAGM) is a non-profit social organisation endorsed by the Ministry of Civil Affairs, under the guidance of the Stated-owned Supervision Administration Commission and the Ministry of Commerce. The CCAGM has nearly 800 members, encompassing large-and medium-sized domestic department stores, enterprises engaging in retail, wholesale, and manufacture of daily industrial products, and enterprises which provide related services to the department store industry. Its members come from 31 provinces, autonomous regions and municipalities in the country, covering all forms of ownerships. The CCAGM has 60 corporate members, including City Department Store Industry Association, Trade Association and Trans-regional Department Store Company Union Organisation, linking more than 15,000 indirect members.

After 20 years of growth and development, the CCAGM has completed the transformation of its work model from one that was influenced by the planned economy to one influenced by socialist marketing economy. In 2009, the CCAGM was appraised as a 4A social organisation by the Ministry of Civil Affairs.

FUNG BUSINESS INTELLIGENCE

Fung Business Intelligence collects, analyses and interprets market data on global sourcing, supply chains, distribution, retail and technology. Headquartered in Hong Kong, it leverages unique relationships and information networks to track and report on these issues with a particular focus on business trends and developments in China and other Asian countries. Fung Business Intelligence makes its data, impartial analysis and specialist knowledge available to businesses, scholars and governments around the world through regular research reports and business publications. As the knowledge bank and think tank for the Fung Group, a Hong Kong-based multinational corporation, Fung Business Intelligence also provides expertise, advice and consultancy services to the Group and its business partners on issues related to doing business in China, ranging from market entry and company structure, to tax, licensing and other regulatory matters. Fung Business Intelligence was established in the year 2000.

THE FUNG GROUP

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 39,900 people across 40 economies worldwide, with total revenue of over USD22.51 billion as of December 2016. Fung Holdings (1937) Limited, a privately held business entity headquartered in Hong Kong, is the major shareholder of the Fung group of companies.


Fung Business Intelligence

Teresa LamVice President

Lucia LeungResearch Manager

Contacts

China Commerce Association for General Merchandise

Xia LinDeputy Secretary General

Address21 Beifengwo Street, Haidian District, Beijing, China; Postcode: 100055Phone: (101) 5191 9069http://www.ccagm.org.cn

Address10/F LiFung Tower888 Cheung Sha Wan RoadKowloon, Hong KongPhone: (852) 2300 2470Email: [email protected]://www.fbicgroup.com

@ Copyright 2018 Fung Business Intelligence and China Commerce Association for General Merchandise (CCAGM).

All rights reserved.

Though Fung Business Intelligence and CCAGM endeavor to ensure the information discussed in this material is

accurate and updated, no legal liability can be attached as to the contents hereof. Reproduction or redistribution of

this material without Fung Business Intelligence’s or CCAGM’s prior written consent is prohibited.

CHINA’S DEPARTMENT STORES REPORT 2017-2018

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