Chinese department store chains, challenges and the future

• Performance of department stores in China
• Preference of the Chinese consumers
• Steps taken to enhance customer experience

A department store is a one-stop shop for buying different categories of items ranging from appliances and furniture to apparels and cosmetics. Moreover, with an increase in consumerism department store trend also saw an uplift, especially in the last few decades.

In the present blog, Televisory analysed department store chains operating in China. The nation as known to the world is the most populous and currently has a population of around 1.4 billion. Though the populace rose at a relatively small CAGR of 0.5% (past 8 years), the personal disposable income grew at a higher CAGR of 10.4% from CNY 13,786 (2007) to 33,616 (2016). 

Addedly, of the 10 major department store chains in China, Dashang had the highest reach with 92 stores. It also operates supermarkets and shopping malls. It is also regarded as a multiline retail giant of China. Parkson Retail Group is at the second position with 59 stores and is followed by Maoye International Holdings with 41 stores.

There is a high competition among department store players in the country. Additionally, few firms reached the saturation and did not increase the number of stores (past 3 years). On the contrary, Yi Hua Holdings was the only company that increased its number of stores (after 2014). This exception was due to the initial growth stage of the company. 

The revenue of most of the companies was between CNY 1 to 6 billion, the below charts shows the revenue for these companies (last 5 years). The retail giant Dashang had a remarkably high revenue of CNY 21 billion (2015). Yi Hua Holdings, which is in its initial stages of growth recorded a revenue of nearly CNY 0.3 billion. The revenue was more or less stable for most of the companies (last 5 years) with occasional high and dipping points. Further, these points did not occur concurrently for all the firms. This indicates the existence of a high competition. Hence, a company which performed well and grabbed a part of the market share from its competitors in a specific year, lost this market share to a competitor in a subsequent year. Furthermore, several of the big players including Dashang saw its revenue declining (2015) in comparison to the preceding year. Yi Hua also witnessed a decline in its revenue (2014-15) despite opening two new stores mostly owing to the intense competition. The major reason for decline in revenue (2015) was the changing preferences of consumers as they switched from department stores to supermarkets, shopping malls and standalone stores.

Furthermore, Golden Eagle, Shirble and Intime witnessed a growth in their revenue (after 2014).

However, this was accompanied by an erosion of the gross profit margin as shown below. This meant that these companies had to reduce their prices in order to increase the sales volume. The gross profit margin of most companies except Dashang and Yi Hua decreased (subsequent to 2014) and this points towards the presence of a pricing war among the players. The gross profit margin has always been as high as 60 to 80 percent for Golden Eagle, Intime, Maoye and Parkson. On the other hand, it has always been below 20% for Dashang. The gross profit margin was the highest for the Intime retail group (2016).

The inventory turnover days were very low for Dashang and Beijing Cuiwei. This was medium for Beijing Jingkelong and Springland as shown beneath. The inventory turnover days were the highest for Golden Eagle. Likewise, other companies had comparable inventory turnover days. In addition, among the three companies that recorded the growth in revenue (2015), Shirble and Intime demonstrated an improvement in the inventory turnover days. Hence, the price reduction strategy resulted in higher sales volume. Golden Eagle rather saw a growth in the inventory turnover days (2015). This may have been due to the change in their purchasing pattern owing to an anticipation of an increased demand.

The EBITDA per square foot and EBITDA margin was low for all the companies (2015) as these incurred higher selling, general and administrative expenses to improve customer experience. Thus, as a result of faster moving inventory, Dashang always witnessed the highest EBITDA per square foot and it remained the same even in 2015. The company can be considered operationally efficient as a result of its strong inventory management practices.

In conclusion, the companies operating department stores are now trying to leverage their current positions for other retail formats such as shopping malls, convenience stores, specialty stores and factory outlets owing to the changing preferences of Chinese consumers. These firms launched enhanced customer experience initiatives like:

1. Golden Eagle started comprehensive lifestyle centers in its department stores offering facilities such as salons, dining, entertainment and aquariums.
2. Parkson retail initiated dining facilities, coffee and sandwich shops.
3. Maoye allocated more than 20% of its retail space for lifestyle services.

 
There is a view that all the above schemes may bring instability as far as results of the companies are concerned with the adoption of these initiatives. But this is yet to be experienced in real terms.