Li & Fung Research Centre Member of the Li & Fung Group LI & FUNG RESEARCH CENTRE China Distribution & Trading Issue 89 August 2011 I. Overview II. Operation modes of department stores in China III. Competitive landscape IV. Challenges V. Recent developments Li & Fung Research Centre 11/F, LiFung Tower 868 Cheung Sha Wan Road, Kowloon, Hong Kong Tel: (852) 2300 2399 Fax: (852) 2635 1598 E-mail: [email protected]http://www.lifunggroup.com IN THIS ISSUE: Department stores in China, 2011 Overview The total sales value of department stores in China was 249.8 billion yuan in 2009; sales of select member enterprises of the China Commerce Association for General Merchandise registered 17.5% growth in 2010. Operation modes of department stores in China Department stores operators in China generate revenue from (1) commissions on concessionaire sales, (2) merchandise direct sales, (3) rental income from store tenants, (4) agency fee earned by serving as agents and (5) management fee etc. Commissions on concessionaire sales are the predominant source of income. Competitive landscape Compared with many mature markets, China’s department store sector is very fragmented. Domestic department store operators tend to focus on regional markets, while leading foreign department store operators have wider footprints. A growing number of department store operators look for opportunities in lower-tier cities. Challenges Many department stores in China are poorly differentiated. Reliance on commissions from concessionaire sales is a major reason behind. Heavy initial capital outlays, lack of expertise in merchandising and long nurturing period for new brands are some common concerns for operators to try out new operating models. Department stores are facing Increasing challenges from other retail formats such as shopping malls, professional stores, discount outlets and online retail stores. Recent developments Some department store operators have refined their market positioning strategies to cater to specific customer demographics. Department store operators pay growing attention to transform purchasing practices; the development of private labels and proprietary brands is drawing attention. A number of department store operators explore opportunities online. Department store operators try to incorporate more elements of shopping experiences. Department store operators seek M&A opportunities; a number of department store operators have sought public listings in recent years. Impact of new prepaid card restrictions on department store operators remains to be seen.
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Li & Fung Research Centre Member of the Li & Fung Group
The total sales value of department stores in China was 249.8 billion
yuan in 2009; sales of select member enterprises of the China Commerce Association for General Merchandise registered 17.5% growth in 2010.
Operation modes of department stores in China
Department stores operators in China generate revenue from (1) commissions on concessionaire sales, (2) merchandise direct sales, (3) rental income from store tenants, (4) agency fee earned by serving as agents and (5) management fee etc.
Commissions on concessionaire sales are the predominant source of income.
Competitive landscape
Compared with many mature markets, China’s department store sector is very fragmented.
Domestic department store operators tend to focus on regional markets, while leading foreign department store operators have wider footprints.
A growing number of department store operators look for opportunities in lower-tier cities.
Challenges
Many department stores in China are poorly differentiated. Reliance on commissions from concessionaire sales is a major reason behind.
Heavy initial capital outlays, lack of expertise in merchandising and long nurturing period for new brands are some common concerns for operators to try out new operating models.
Department stores are facing Increasing challenges from other retail formats such as shopping malls, professional stores, discount outlets and online retail stores.
Recent developments
Some department store operators have refined their market positioning strategies to cater to specific customer demographics.
Department store operators pay growing attention to transform purchasing practices; the development of private labels and proprietary brands is drawing attention.
A number of department store operators explore opportunities online.
Department store operators try to incorporate more elements of shopping experiences.
Department store operators seek M&A opportunities; a number of department store operators have sought public listings in recent years.
Impact of new prepaid card restrictions on department store operators remains to be seen.
Li & Fung Research Centre Member of the Li & Fung Group
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China Distribution & Trading Issue 89 August 2011
Department stores in China, 2011
Department stores1 have long been one of the major retailing channels in China. It is the chief distribution channel for
branded apparel, cosmetics, jewelry and watches, etc, targeting mid-to-high income consumers. In the past decades,
many consumer companies have viewed department stores as their top-of-choice retail channel to build brand
recognition in China. That said, there is growing concern over department stores gradually losing appeal to Chinese
consumers due to poor differentiation. Department stores operators are also facing increasing challenges from other
format retailers such as shopping malls, internet retailers, outlets, etc. They are taking steps to improve operations.
I. Overview
1. The total sales value of department stores in China was 249.8 billion yuan in 2009; sales of select member
enterprises of the China Commerce Association for General Merchandise registered 17.5% growth in 2010
According to the National Bureau of Statistics of China (NBS), the total sales value of department stores was 249.8
billion in 2009 (Exhibit 1).
Exhibit 1: Total sales value of department stores, 2003-2009
59.7
93.0
127.5148.2
162.5
211.0
249.8
0
50
100
150
200
250
300
2003 2004 2005 2006 2007 2008 2009
Sa
les v
alu
e (
billio
n y
ua
n)
Source: National Bureau of Statistics of China
1 Department stores are stores with sales area between 6,000 and 20,000 m
2, usually multi-storey, selling wide range of merchandises with emphasis
on clothing and accessories, footwear, household items and home appliances etc. Special concessionaire counters and open shelves are the chief sales formats.
Li & Fung Research Centre Member of the Li & Fung Group
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China Distribution & Trading Issue 89 August 2011
According to the China Commerce Association for General Merchandise (CCAGM), sales revenue of its 66 member
department store operators climbed by 17.5% yoy in 2010 (see Exhibit 2). Most of the surveyed enterprises are leading
department store operators in China.
Exhibit 2: Performance of the member enterprises by CCAGM, 2005-2010
October 2010 Intime Department Store (Group) Co., Ltd.
銀泰百貨(集團)有
限公司
Lufthansa Friendship Shopping Center Ltd.
燕莎友誼商場有限
公司
Intime Department Store Group acquired 100% equity interest of Sin Cheng Holdings PTE Ltd., which held 50% of equity stake of Lufthansa Friendship Shopping Center Ltd
November 2010 Intime Department Store (Group) Co., Ltd. 銀泰百貨(集團)有
限公司
Hubei New Century Shopping
Centre 湖北隨州新
世紀購物中心
Acquired 84.5% equity interest in Hubei New Century Shopping Centre
Source: China Commerce Association for General Merchandise, company annual reports
Li & Fung Research Centre Member of the Li & Fung Group
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China Distribution & Trading Issue 89 August 2011
Besides, riding the waves of investors’ interests in mainland consumption-related themes, a number of department store
operators have sought public listings in recent years. Exhibit 10 lists some examples of initial public offerings (IPOs) of
department stores operators in China in 2010.
Exhibit 10: Select IPOs of department stores operators in China, 2010
Company Date of listing Place
Shirble Department Store Holdings (China) Ltd.
歲寶百貨有限公司
2010/11/17 Hong Kong
Springland International Holdings Limited
華地國際控股有限公司
2010/10/21 Hong Kong
Rainbow Department Store Co., Ltd.
天虹商場股份有限公司
2010/06/01 Shenzhen
Renrenle Commercial Group Co., Ltd.
人人樂連鎖商業集團股份有限公司
2010/01/13 Shenzhen
Source: China Venture
6. Impact of new prepaid card restrictions on department store operators remains to be seen
As mentioned, department store gift cards is a popular gifting item in China – a big number of consumers make their
purchases using gift cards in department stores. Corporations are the major buyers of prepaid gift cards. The prepaid
cards, which usually carry a wide range of face values, are used as incentives for employees and as gifts for business
partners. For operators such as Golden Eagle, gift cards can account for over 20% of total sales proceeds. Exhibit 11
lists the share of gift card sales to total sales proceeds of some department store operators.
Li & Fung Research Centre Member of the Li & Fung Group
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China Distribution & Trading Issue 89 August 2011
Exhibit 11: Gift card sales to total sales proceeds, 2010
Department store operators Gift card sales to total sales proceeds
Golden Eagle Retail Group Ltd.
金鷹商貿集團有限公司
25% of total sale proceeds. Majority of cards issued to
corporate customers.
Parkson Retail Group Ltd.
百盛商業集團有限公司
About 16% of total sale proceeds. Majority of cards
issued to corporate customers.
New World Department Store
新世界百貨中國有限公司
10% of total sale proceeds. Mainly issued to retail
customers.
Intime Department Store (Group)
Co., Ltd.
銀泰百貨(集團)有限公司
Less than 10% of total sale proceeds. Mainly issued to
retail customers.
Maoye International Holdings
Ltd.
茂業國際控股有限公司
Less than 5% of total sale proceeds. Mainly issued to
retail customers.
Source: Citibank, company annual reports
However, the widespread use of gift cards can easily slip into problems such as money laundering, illegal cash
withdrawals, tax evasion and bribery. In view of this, the State Council and other relevant ministries have jointly issued
the “Opinions on the Issuance of Prepaid Cards by Non-Financial Institutes” (關於規範商業預付卡管理的意見) in May
2011, aiming to strengthen the government’s ability to monitor and regulate the issuance of prepaid cards.
Financial and non-financial institutes will not be allowed to issue multi-purpose prepaid cards without the approval from
the People’s Bank of China. A commercial enterprise may issue single-function pre-paid cards for itself subject to certain
requirements: (1) companies or individuals with purchases of prepaid cards with value over 10,000 yuan in a single
purchase will need to register their names with the prepaid card issuers; (2) companies with single purchase of gift cards
over 5,000 yuan or individuals with single purchase of gift cards over 50,000 yuan must pay by remittance through bank
wire transfer instead of cash (3) anonymous commercial pre-paid cards cannot exceed 1,000 yuan in value per card.
Registered prepaid cards cannot exceed 5,000 yuan in value per card; (4) the issuer shall provide invoices for sales of
pre-paid cards according to relevant laws and regulations; and (5) there is no restriction on the term of validity of
registered commercial pre-paid cards, while the term of validity of non-registered commercial pre-paid card shall be no
less than three years.
Li & Fung Research Centre Member of the Li & Fung Group
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China Distribution & Trading Issue 89 August 2011
The restrictions place new hurdles on the use of prepaid cards. However, some industry insiders say that there are ways
to get around with the new requirements, say issuing gift cards with smaller face values. That said, industry watchers
also caution that the new restrictions may pose new challenges for department store operators, as prepaid cards have
become an important source of financing for many. Some department store operators reflected that their sales were not
affected by the restrictions. The true impact of the tightened restrictions is yet to be seen.
Though Li & Fung Research Centre endeavours to have information presented in this document as accurate and updated as possible, it accepts no responsibility for any error, omission or misrepresentation. Li & Fung Research Centre and/or its associates accept no responsibility for any direct, indirect or consequential loss that may arise from the use of information contained in this document. Reproduction or redistribution of this material without Li & Fung Research Centre’s prior written consent is prohibited.