CHINA'S DEPARTMENT STORES REPORT 2017-2018 - Fung Business Intelligence
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CHINA’S DEPARTMENT
STORES REPORT
2017-2018
March 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 �������������������������������������������������������������������������������������������������3 1. Overview of China’s retail market 2. Overview of China’s department store sector II. New developments and key trends �����������������������������������������������������������������11 1. 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 �������������������������������������������������������������������������33 1. 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���������������������������������������������������������������������������35 1. 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
China’s Department Stores Report 2017-18
Executive Summary
Against the backdrop of China’s supply-side structural reforms coupled with the unprecedented growth
of 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 retailing
In 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 synergy
2017 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 margins
Many 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.
1
China’s Department Stores Report 2017-18
• Improving 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 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).
2
China’s Department Stores Report 2017-18 I. Market Overview 3
China’s Department Stores Report 2017-18
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 consumption
made up 58.8% of GDP growth. At the same time, China’s nominal retail sales of consumer goods rose
10.2% 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).
Exhibit 1. Total retail sales of consumer goods, 2013 – 2017
40.0
36.6
35.0 33.2
30.1
30.0
27.2
25.0 24.3
20.0
15.0
10.0
5.0
0.0
2013 2014 2015 2016 2017
Retail sales of consumer goods (trillion yuan)
Source: CCAGM; National Bureau of Statistics of the PRC, compiled by Fung Business Intelligence
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.
4
China’s Department Stores Report 2017-18
Exhibit 2. Consumer confidence index, 1Q15 – 4Q17
106 112
116
114 114
114
112
112
110
110
108
108 107 107
106 106 106 106
106 105
104
102
100
1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17
Consumer confidence index
Source: Nielsen, compiled by Fung Business Intelligence
(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.
5China’s Department Stores Report 2017-18
(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.
6China’s Department Stores Report 2017-18 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. Exhibit 3. Annual sales of 85 surveyed department store operators, 2017 Annual sales in 2017 Number of surveyed Percentage of total Cumulative percentage (million yuan) enterprises sample 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 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). 7
China’s Department Stores Report 2017-18
Exhibit 4. Operating results of 85 surveyed department store operators, 2017
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%
Source: CCAGM; compiled by Fung Business Intelligence
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 Accumulated number Cumulative percentage
revenue of department store
operators
(i) >0% 55 64.71%
>20% 4 4.71%
>10% 9 10.59%
>5% 28 32.94%
(ii)China’s Department Stores Report 2017-18 (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. 9
China’s Department Stores Report 2017-18
(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.
10China’s Department Stores Report 2017-18 II. New developments and key trends 11
China’s Department Stores Report 2017-18
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
2.2%
11.3%
Yes, already started O2O, 86.3%
No, but planned to start O2O, 11.3%
86.3% No, no plan for O2O, 2.2%
Source: “Department store survey 2017-2018”. CCAGM and Fung Business Intelligence.
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.
12China’s Department Stores Report 2017-18
Exhibit 7. Penetration of e-commerce business among surveyed department store operators
Yes, have already started their
e-commerce business
54.8%
Source: “Department store survey 2017-2018”. CCAGM and Fung Business Intelligence.
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%)
Source: “Department store survey 2017-2018”. CCAGM and Fung Business Intelligence.
13China’s Department Stores Report 2017-18
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
Yes, have launched mobile apps 37.0%
Source: “Department store survey 2017-2018”. CCAGM and Fung Business Intelligence.
Exhibit 10. Major functions of mobile apps of surveyed department store operators
Push marketing and sales information 92.2%
Product promotion 92.2%
Membership scheme 88.9%
Product transaction 88.6%
Provide value-added services (in-store navigation, 42.8%
restaurant reservation, etc.)
Source: “Department store survey 2017-2018”. CCAGM and Fung Business Intelligence.
14China’s Department Stores Report 2017-18
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
Yes, have collected consumer data for
big data analysis
92.6%
Source: “Department store survey 2017-2018”. CCAGM and Fung Business Intelligence.
15China’s Department Stores Report 2017-18
Exhibit 12. Means of collecting customer data by surveyed department store operators
Membership card/ membership scheme 96.1%
Store WiFi 42.7%
Online merchandise purchase history 24.0%
iBeacons 13.3%
Source: “Department store survey 2017-2018”. CCAGM and Fung Business Intelligence.
Exhibit 13. Major purposes of collecting consumer data of surveyed department store operators
Understand consumer preferences 86.4%
Carry out precision marketing 77.8%
Provide customers with more products/ 67.9%
services personalized
Optimize in-store merchandise mix 66.7%
Develop new products 11.1%
Others 1.2%
Source: “Department store survey 2017-2018”. CCAGM and Fung Business Intelligence.
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.
16China’s Department Stores Report 2017-18
(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
Set up free WiFi storewide 83.4%
Set up QR code system 37.1%
Analyze customer flow based on iBeacon 26.5%
Launch in-store digital directory 19.9%
Analyze customer flow based on dynamic track 14.6%
Install virtual mirrors 9.3%
Others 1.3%
Source: “Department store survey 2017-2018”. CCAGM and Fung Business Intelligence.
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).
17China’s Department Stores Report 2017-18
Exhibit 15. Proportion of surveyed department store operators that have added experiential elements
in stores in the last 12 months
Yes, have added
experiential elements
83.9%
Source: “Department store survey 2017-2018”. CCAGM and Fung Business Intelligence.
Exhibit 16. Types of experiential elements added in-store by surveyed department store operators
Food & beverages 87.2%
Kids-related facilities 69.7%
Lifestyle services 59.6%
(e.g. beauty and hair salon)
Entertainment (e.g. cinema, KTV) 50.8%
Others 16.0%
Source: “Department store survey 2017-2018”. CCAGM and Fung Business Intelligence.
(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.
18China’s Department Stores Report 2017-18
Exhibit 17. Selected examples of strategic partnerships or alliances between department store
operators and Internet companies or e-commerce players (as of February 2018)
Time Department Store Internet companies/ Details of the strategic partnerships or
e-commerce players alliances
January Parkson Retail Secco.com The two parties will integrate their resources
2018 Group (Asia's largest online to construct a fully integrated online and
integrated upscale offline sales and service network. They will
products and services jointly explore the application of “smart retail”.
platform)
January Xinhua Department Dmall.com (an intergrated Dmall will provide merchandising and O2O
2018 Store O2O retail platform for services to Xinhua Department Store through
daily consumer goods) Dmall’s app.
November New World Wanda Feifan (an O2O 15 stores of New World Department Store will
2017 Department Store e-commerce platform) cooperate with Feifan for “click and collect”
(China) service.
March Pacific Department Fanli.com (one of China’s All stores of Pacific Department Store in
2017 Store largest e-commerce Shanghai will provide promotions and daily
platforms) discounts on Fanli.com.
February Bailian Group Alibaba Group Under the agreement, the two companies
2017 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 Intime Retail Group Alibaba Group Intime Retail Group received a proposal for
2017 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.
Source: Various Internet sources; compiled by Fung Business Intelligence
19China’s Department Stores Report 2017-18
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
Yes, have formed partnerships, 54.0% 32.4%
No, no plan for partnerships, 32.4% 54.0%
No, but planned to formed partnerships, 13.5%
13.5%
Source: “Department store survey 2017-2018”. CCAGM and Fung Business Intelligence.
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.
20China’s Department Stores Report 2017-18
Exhibit 19. Selected department store operators that have tapped into shopping mall, convenience
store, supermarket and other business sectors (as of February 2018)
Department Shopping Mall Convenience Supermarket format Other formats
Store format Store format
Wangfujing Wangfujing Wangfujing Wangfujing Sofly (community- Wangfujing Factory
Group Shopping I Believe based fresh food-focused Outlet
Centre 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
Rainbow • Rainbow • Rainbow • Sp@ce (lifestyle supermarket) • Rain & Co
Department Shopping O2O Store • self-owned supermarkets (multi-brand stores)
Store Centre • Well Go • Rainbow app
• Dreams-On (unmanned (e-commerce platform)
CVS) • Rainbow Finance
(consumption finance)
New World Ba Li N+ • N+Baby (children’s themed- • Xinshuo (multi-brand
Department Chun Tian Convenience supermarket) store)
Store (China) Shopping Mall Store • self-owned supermarkets • LOL Lifestyle Concept
Store
• N+ Natural Taste Plus
(bakery)
• Peter’s Meadow (F&B)
• Aza Aza! (F&B)
Intime Retail • Intime City / • self-owned supermarkets • Onmine snack store
• In Series (partnered with Alibaba)
Parkson Retail / Parkson Supermarket Parkson Beauty (beauty
& skincare specialty
store)
Liqun Group Liqun Shopping • Liqun Supermarket • Liqun Home Appliance
Centre • “Liqun ·Fuji Farm” (fresh
community store)
Chongqing / • self-owned supermarkets • Chongqing Alliance
Department Trading Company
Store • Chongqing Car
Trading Company
• Mashang Consumer
Finance Co. Ltd.
Source: Various Internet sources; compiled by Fung Business Intelligence
21China’s Department Stores Report 2017-18
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 20. Percentage of surveyed department store operators that have tapped into other retail
formats
Yes, have tapped into other
retail formats
83.5%
Source: “Department store survey 2017-2018”. CCAGM and Fung Business Intelligence.
Exhibit 21. Retail formats surveyed department store operators have already tapped into
Supermarkets/ Hypermarkets 68.6%
Shopping malls 55.5%
Convenience stores 29.2%
Factory outlets 17.5%
Professional stores 14.6%
Specialty stores 11.7%
Others 10.2%
Source: “Department store survey 2017-2018”. CCAGM and Fung Business Intelligence.
22China’s Department Stores Report 2017-18
Exhibit 22. Percentage of surveyed department store operators that have plans to tap into other retail
formats in the next 12 months
Yes, plan to tap into other retail
formats in the next 12 months
41.3%
Source: “Department store survey 2017-2018”. CCAGM and Fung Business Intelligence.
Exhibit 23. Retail formats surveyed department store operators plan to tap into in the next 12 months
Shopping malls 26.6%
Convenience stores 23.6%
Factory outlets 23.6%
Professional stores 20.7%
Supermarkets/ Hypermarkets 8.9%
Specialty stores 5.9%
Others 17.7%
Source: “Department store survey 2017-2018”. CCAGM and Fung Business Intelligence.
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.
23China’s Department Stores Report 2017-18
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.
Well Go Convenience Store in Shenzhen
Photo source: Fung Business Intelligence
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 .
24China’s Department Stores Report 2017-18
(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. Sp@ce supermarket in Shenzhen
Photo source: Fung Business Intelligence
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
25China’s Department Stores Report 2017-18
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.
RISO of Bailian Group,
Photo source: Fung Business Intelligence
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.
26China’s Department Stores Report 2017-18
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
Yes, have engaged in
merchandise direct sales
76.8%
Proportion of merchandise Among operators with merchandise
direct sales direct 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%
Source: “Department store survey 2017-2018”. CCAGM and Fung Business Intelligence.
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