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After more than a de- cade of fast-paced growth， general merchandise retail industry started to show signs of waning in recent years. In 2014， the whole business went through a particularly rough time. Both sale revenue and profit margin have fallen by different degrees.
Parkson Retail Group released its earnings report for the first three quarters of 2014 on November 10. The company reported a net profit of 275 million yuan， down by 23.1% from last year. As a matter of fact， as sales fell， Parkson has been retreating from China since 2012 and closed 6 branch stores in 2 years.
As one of the first international emporiums in China， any move of the Parkson Retail could be a reflection of the whole industry. A looming industrial freeze is becoming the prevailing concern of insiders.
An earlier report said that general merchandise retail enterprises closed as many as 160 stores in the first half of this year and hit a new record high. Among all 160 stores， 12 of them were big shopping malls. The second half of the year hasn’t see improvement so far either. In July， Beijing Wangfu- jin Department Store Group closed its Zhanjiang branch in Guangdong Province. December 1， Beijing Huatang shopping mall closed its Xizhimen branch. Before this， Huatang already terminated the business of other two branches in Beijing.
Meanwhile， the e-business market of China， by contrast， is overflowing with vigor. The just-concluded 11.11 shopping festival， as the event is called now， helped e-commerce giant Alibaba hit a whopping daily sale record of 57.1 billion yuan. Other e-business companies such as Suning and Jingdong also saw impressive revenues.
Behind the national online shopping spree is the anxi ety of traditional retailers. Obviously the industry is seeking breakthrough by making a transition. Last year， some brick-and mortar department stores and supermarkets responded to 11.11event by boycotting. This year， 28 merchandise retail enterprises including Intime Group， Wangfujing Department Store Group and Guangbai Department Store Group became an active part of the festival by joining the O2O （Online to Offline） special unit on e-commerce platforms.
From boycotting to active participation， merchandise retailers went through a dramatic turn of events in a very short period of time， which indicates their eagerness to transition from another aspect.
Industry in the Plight
The market is getting tougher and tougher for traditional merchandise retail business.
Parkson Retail Department， for instance， reported a net profit of 275 million yuan for the first three quarters of 2014 in China， recording a 23.1% year-on-year decline， and a sales volume of 3.74 billion yuan， down by 0.9%. Net profit of the third quarter saw a depressing year-on-year decline of 32.6% to merely 22.6 million yuan.
Parkson Retail seemed to have reached its bottleneck in Chinese market in 2012. Last June， William Cheng， Chairman of Malaysia’s Lion Group and owner of the Parkson department store chain， came out of retirement and retook the post of executive director and chairman of Parkson. William Cheng is considered the pushing hand behind the termination of the 6 Parkson stores in China. Analysts believe it suggests Parkson is planning a transition into smaller-scale business.
Parkson is not alone in the plight. Local department stores are struggling too.
According to a report from Shenyinwanguo Security based on the performances of 20 A-share listed merchandise retail companies in the first half of this year， the total operating income of the 20 companies was 43.1 billion yuan， and each company saw a average decline of 7.09%. Among all 20 companies， only Xi’an Minsheng Group， Nanjing Xinjiekou Department Store Company and Chengshang Group saw earning growth in the first six months， and the rest 17 were found on the downturn.
Even if reading the statistics from a macro perspective， the situation was just as pessimistic.
According to a report released by UBS in early 2013， the customer traffic of China’s department stores started to see negative growth in 2012， owing to the rise of new-patterned shopping centers and urban complexes.
Another report co-compiled by China Chain-Store & Franchise Association （CCFA） and Deloitte & Touche shows that even though the sales volume of China’s top 100 retailers was up to over 2 trillion yuan in 2013， the growing rate fell back to single digit for the first time. Meanwhile， the proportion of it in China’s total retail sales of Consumer goods also fell to 8.7%， down from 10.8% in 2009.
When traditional department stores begin to weaken， ecommerce is booming on an upward trend.
According to the “Market Watch on China’s Online Retail 2013” released by China E-commerce Research Center，the proportion of online retail turnover in China’s total retail sales of Consumer goods was 7.9% in 2013， up by 1.6% from the year before. According to latest statistics from the State Statistical Bureau， China’s online retail trading volume for the first half year of 2014 reached nearly 1.14 trillion yuan， up by 48.3% on a year-on-year basis. On the day of “11.11” shopping festival， the sales volume of Alibaba recorded a stunning new high of 57.1 billion yuan， among which 24.3 billion yuan was from transaction on mobile terminals.
Who Is the Murderer？
Many believe that e-commerce is the cause of department stores’ death， since e-commerce thrives exactly in a time when traditional merchandise retail declines.
In online shopping， China exceeds the global average in all product categories， often by a large margin. Online stores keep on taking away customers from brick-and-mortar department stores. Many customers only walk into off-line stores to get the article numbers or to make sure what sizes they need， making offline stores “fitting rooms” for online stores.
“The deep penetration of smartphones and Internet， combined with the comprehensive buildup of shipping logistics infrastructure， are quickly transforming the shopping habits and mindset of Chinese consumers on e-commerce，” said Patrick Dodd， managing director of Nielsen China.
However， the recession of traditional department stores didn’t happen in one day. There were omens long time ago.
China’s history of traditional general merchandise can be traced back to a century ago， when wide range of goods， clearly marked prices and the open-to-everyone atmosphere tremendously improved customers’ shopping experiences. Since the end of 1970s， the industry had seen accelerated development driven by economic reform and urbanization. Department stores sprang up all over the country and reached to a relative maturity at the turn of the millennium.
After that， further urbanization brought another business mode into China’s retail market： shopping malls. Before long， e-commerce started to rise. As Wu Ruiling， deputy secretarygeneral of CCFA pointed out， shopping mall was the first one in line to squeeze the living space of department store， not ebusiness. Brick-and-mortar department stores are beset with troubles both internally and externally.
On one hand， e-commerce stores constantly take customers away from them with competitive prices. On the other hand， shopping malls are also nibbling away at department stores’ customer base by providing more superior services and diversified shopping experiences.
“Sublease mode” is another roadblock for China’s department stores. “Almost all domestic departments stores are sub-lessors， which means they don’t actually run the business. Instead they just rent out store units separately to different brands as the head lessee and profit by collecting rent and royalties. As a result， over 80% of the brands in domestic department stores totally overlap. And the rest 20%， to be honest， don’t make much of a difference.” Said Qiu Yujun， analyst from Planet Retail. Under the sub-leasing system， department stores don’t have to directly get involved in purchasing and retailing， which only cost them the ability of product research and development and sensibility to fashion and consuming behavior.
Moreover， surging land and property prices also challenge department stores’ profit model of subleasing. Urbanization has immensely driven up the costs on land， construction， property managing and decoration， which substantially pushed up the investment budget and rent expectation of retailers in consequence. However， rent level of department stores is subjected to its earning capacity that has been weakening in recent years. Altogether， rent sub-leasing bas become a burden on department stores， preventing them from sustainable development.
Not surprisingly， the rise of e-commerce brings department stores and shopping malls together. The former enemies now stand beside each other， trying to withstand the impact from online stores.
“The one who can provide the rights goods in the right time with more flexible and thoughtful services will win
the market， that is the rule for every upgrading of the retail industry.”Qiu Yujun concluded.
Inevitable Change
More and more brick-and-mortar department stores are now joining the e-business trend and setting up their own virtual stores. Some of the traditional general merchandise enterprises have not only establish their own platforms， but also expanded sales channels by settling down on other major ecommerce websites.
To build a new O2O platform obviously is a more resolute approach for traditional retailers. Tianhong Department Stores， Friendship & Apollo， Intime Group， Wangfujing Department Store Group and some other traditional retailer giants successively annluced their plans of entering the O2O sector.
This August， China’s leading property developer Wanda Group， together with Tencent and Baidu， two of China’s top internet companies， announced a plan for cooperation in O2O e-business. Reportedly the three companies are about to set up a joint venture which is said to be named “Wanda E-commerce Company”. The investment will be as much as 5 billion yuan， according to a source close to the matter， and Wanda will hold 70 percent of the venture while Tencent and Baidu share the remaining 30 percent equally.
Although it is unclear what the structure and activity of the joint venture will be， the three companies all have a strong intent to march into the booming e-commerce industry， and they are keen to join a sector that is changing the entire market landscape， said Zhang Zhouping， a senior analyst at China E-Commerce Research Center. According to research released by CCFA， among China’s top 50 department store campanies， 36 have launched online retail business and most of them have their own platforms.
However， the strategies of traditional retailers so far have achieved little. Either the customer flow or sales volume of their own platforms are comparable to those of Alibaba or Jingdong. It seems more effort is still needed.
The Only Exit
“It a indisputable that traditional retailers are placed in an awkward position. Department stores need to abandon the old strategy of sub-leasing， enhance the information update on fashions and consuming behaviors， adopt membership system and delivery network. They have the advantage in providing field shopping experiences， and they just need to know how to use it. ” Said Geng Banghao， analyst of Pingan Security.
Macy’ Department Store of New York， the world’s largest department store and one of the most famous ever built， may have some experiences to share for that matter.
As one of the oldest department stores of America， Macy’s had its first branch， the “fancy dry goods” store， in 1858 on New York’s 6th Avenue. In May 2013， Macy’s reported a quarterly profit of 217 million dollars， up by 20% on a yearon-year basis.
The strategy of Macy’s was to turn the brick-and-mortar stores into distribution centers while lead the customer flow to its online platform. By this way， Macy’s successfully expanded the range of online goods and reduced the pressure on storage. For example， under this system， an article of unsalable coat in Boston could be transferred to New York where it is needed.
A recently released report from CCFA and Oracle also gives some advices on the transition of traditional department stores. “Moving all the products from offline to online does not constitute a transition. It is the overall business model that needs to be reformed. Traditional department stores must upgrade their product and service management which is the key of retail technology.”
Parkson Retail Group released its earnings report for the first three quarters of 2014 on November 10. The company reported a net profit of 275 million yuan， down by 23.1% from last year. As a matter of fact， as sales fell， Parkson has been retreating from China since 2012 and closed 6 branch stores in 2 years.
As one of the first international emporiums in China， any move of the Parkson Retail could be a reflection of the whole industry. A looming industrial freeze is becoming the prevailing concern of insiders.
An earlier report said that general merchandise retail enterprises closed as many as 160 stores in the first half of this year and hit a new record high. Among all 160 stores， 12 of them were big shopping malls. The second half of the year hasn’t see improvement so far either. In July， Beijing Wangfu- jin Department Store Group closed its Zhanjiang branch in Guangdong Province. December 1， Beijing Huatang shopping mall closed its Xizhimen branch. Before this， Huatang already terminated the business of other two branches in Beijing.
Meanwhile， the e-business market of China， by contrast， is overflowing with vigor. The just-concluded 11.11 shopping festival， as the event is called now， helped e-commerce giant Alibaba hit a whopping daily sale record of 57.1 billion yuan. Other e-business companies such as Suning and Jingdong also saw impressive revenues.
Behind the national online shopping spree is the anxi ety of traditional retailers. Obviously the industry is seeking breakthrough by making a transition. Last year， some brick-and mortar department stores and supermarkets responded to 11.11event by boycotting. This year， 28 merchandise retail enterprises including Intime Group， Wangfujing Department Store Group and Guangbai Department Store Group became an active part of the festival by joining the O2O （Online to Offline） special unit on e-commerce platforms.
From boycotting to active participation， merchandise retailers went through a dramatic turn of events in a very short period of time， which indicates their eagerness to transition from another aspect.
Industry in the Plight
The market is getting tougher and tougher for traditional merchandise retail business.
Parkson Retail Department， for instance， reported a net profit of 275 million yuan for the first three quarters of 2014 in China， recording a 23.1% year-on-year decline， and a sales volume of 3.74 billion yuan， down by 0.9%. Net profit of the third quarter saw a depressing year-on-year decline of 32.6% to merely 22.6 million yuan.
Parkson Retail seemed to have reached its bottleneck in Chinese market in 2012. Last June， William Cheng， Chairman of Malaysia’s Lion Group and owner of the Parkson department store chain， came out of retirement and retook the post of executive director and chairman of Parkson. William Cheng is considered the pushing hand behind the termination of the 6 Parkson stores in China. Analysts believe it suggests Parkson is planning a transition into smaller-scale business.
Parkson is not alone in the plight. Local department stores are struggling too.
According to a report from Shenyinwanguo Security based on the performances of 20 A-share listed merchandise retail companies in the first half of this year， the total operating income of the 20 companies was 43.1 billion yuan， and each company saw a average decline of 7.09%. Among all 20 companies， only Xi’an Minsheng Group， Nanjing Xinjiekou Department Store Company and Chengshang Group saw earning growth in the first six months， and the rest 17 were found on the downturn.
Even if reading the statistics from a macro perspective， the situation was just as pessimistic.
According to a report released by UBS in early 2013， the customer traffic of China’s department stores started to see negative growth in 2012， owing to the rise of new-patterned shopping centers and urban complexes.
Another report co-compiled by China Chain-Store & Franchise Association （CCFA） and Deloitte & Touche shows that even though the sales volume of China’s top 100 retailers was up to over 2 trillion yuan in 2013， the growing rate fell back to single digit for the first time. Meanwhile， the proportion of it in China’s total retail sales of Consumer goods also fell to 8.7%， down from 10.8% in 2009.
When traditional department stores begin to weaken， ecommerce is booming on an upward trend.
According to the “Market Watch on China’s Online Retail 2013” released by China E-commerce Research Center，the proportion of online retail turnover in China’s total retail sales of Consumer goods was 7.9% in 2013， up by 1.6% from the year before. According to latest statistics from the State Statistical Bureau， China’s online retail trading volume for the first half year of 2014 reached nearly 1.14 trillion yuan， up by 48.3% on a year-on-year basis. On the day of “11.11” shopping festival， the sales volume of Alibaba recorded a stunning new high of 57.1 billion yuan， among which 24.3 billion yuan was from transaction on mobile terminals.
Who Is the Murderer？
Many believe that e-commerce is the cause of department stores’ death， since e-commerce thrives exactly in a time when traditional merchandise retail declines.
In online shopping， China exceeds the global average in all product categories， often by a large margin. Online stores keep on taking away customers from brick-and-mortar department stores. Many customers only walk into off-line stores to get the article numbers or to make sure what sizes they need， making offline stores “fitting rooms” for online stores.
“The deep penetration of smartphones and Internet， combined with the comprehensive buildup of shipping logistics infrastructure， are quickly transforming the shopping habits and mindset of Chinese consumers on e-commerce，” said Patrick Dodd， managing director of Nielsen China.
However， the recession of traditional department stores didn’t happen in one day. There were omens long time ago.
China’s history of traditional general merchandise can be traced back to a century ago， when wide range of goods， clearly marked prices and the open-to-everyone atmosphere tremendously improved customers’ shopping experiences. Since the end of 1970s， the industry had seen accelerated development driven by economic reform and urbanization. Department stores sprang up all over the country and reached to a relative maturity at the turn of the millennium.
After that， further urbanization brought another business mode into China’s retail market： shopping malls. Before long， e-commerce started to rise. As Wu Ruiling， deputy secretarygeneral of CCFA pointed out， shopping mall was the first one in line to squeeze the living space of department store， not ebusiness. Brick-and-mortar department stores are beset with troubles both internally and externally.
On one hand， e-commerce stores constantly take customers away from them with competitive prices. On the other hand， shopping malls are also nibbling away at department stores’ customer base by providing more superior services and diversified shopping experiences.
“Sublease mode” is another roadblock for China’s department stores. “Almost all domestic departments stores are sub-lessors， which means they don’t actually run the business. Instead they just rent out store units separately to different brands as the head lessee and profit by collecting rent and royalties. As a result， over 80% of the brands in domestic department stores totally overlap. And the rest 20%， to be honest， don’t make much of a difference.” Said Qiu Yujun， analyst from Planet Retail. Under the sub-leasing system， department stores don’t have to directly get involved in purchasing and retailing， which only cost them the ability of product research and development and sensibility to fashion and consuming behavior.
Moreover， surging land and property prices also challenge department stores’ profit model of subleasing. Urbanization has immensely driven up the costs on land， construction， property managing and decoration， which substantially pushed up the investment budget and rent expectation of retailers in consequence. However， rent level of department stores is subjected to its earning capacity that has been weakening in recent years. Altogether， rent sub-leasing bas become a burden on department stores， preventing them from sustainable development.
Not surprisingly， the rise of e-commerce brings department stores and shopping malls together. The former enemies now stand beside each other， trying to withstand the impact from online stores.
“The one who can provide the rights goods in the right time with more flexible and thoughtful services will win
the market， that is the rule for every upgrading of the retail industry.”Qiu Yujun concluded.
Inevitable Change
More and more brick-and-mortar department stores are now joining the e-business trend and setting up their own virtual stores. Some of the traditional general merchandise enterprises have not only establish their own platforms， but also expanded sales channels by settling down on other major ecommerce websites.
To build a new O2O platform obviously is a more resolute approach for traditional retailers. Tianhong Department Stores， Friendship & Apollo， Intime Group， Wangfujing Department Store Group and some other traditional retailer giants successively annluced their plans of entering the O2O sector.
This August， China’s leading property developer Wanda Group， together with Tencent and Baidu， two of China’s top internet companies， announced a plan for cooperation in O2O e-business. Reportedly the three companies are about to set up a joint venture which is said to be named “Wanda E-commerce Company”. The investment will be as much as 5 billion yuan， according to a source close to the matter， and Wanda will hold 70 percent of the venture while Tencent and Baidu share the remaining 30 percent equally.
Although it is unclear what the structure and activity of the joint venture will be， the three companies all have a strong intent to march into the booming e-commerce industry， and they are keen to join a sector that is changing the entire market landscape， said Zhang Zhouping， a senior analyst at China E-Commerce Research Center. According to research released by CCFA， among China’s top 50 department store campanies， 36 have launched online retail business and most of them have their own platforms.
However， the strategies of traditional retailers so far have achieved little. Either the customer flow or sales volume of their own platforms are comparable to those of Alibaba or Jingdong. It seems more effort is still needed.
The Only Exit
“It a indisputable that traditional retailers are placed in an awkward position. Department stores need to abandon the old strategy of sub-leasing， enhance the information update on fashions and consuming behaviors， adopt membership system and delivery network. They have the advantage in providing field shopping experiences， and they just need to know how to use it. ” Said Geng Banghao， analyst of Pingan Security.
Macy’ Department Store of New York， the world’s largest department store and one of the most famous ever built， may have some experiences to share for that matter.
As one of the oldest department stores of America， Macy’s had its first branch， the “fancy dry goods” store， in 1858 on New York’s 6th Avenue. In May 2013， Macy’s reported a quarterly profit of 217 million dollars， up by 20% on a yearon-year basis.
The strategy of Macy’s was to turn the brick-and-mortar stores into distribution centers while lead the customer flow to its online platform. By this way， Macy’s successfully expanded the range of online goods and reduced the pressure on storage. For example， under this system， an article of unsalable coat in Boston could be transferred to New York where it is needed.
A recently released report from CCFA and Oracle also gives some advices on the transition of traditional department stores. “Moving all the products from offline to online does not constitute a transition. It is the overall business model that needs to be reformed. Traditional department stores must upgrade their product and service management which is the key of retail technology.”