What: China Department Stores Report 2020-2021 issued by the China Commerce Association for General Merchandise (CCAGM) and Fung Business Intelligence Centre (FBIC).

Why is it important: The report showed that, although some retailers like SKP in Beijing, outperform the sector, most of the surveyed department stores lack product appeal and competitiveness. They should transform and upgrade while focusing on digital and direct sales.

I. Overview of China’s retail market development

During the Chinese New Year period in 2021, key retail businesses saw dramatic growth across product categories. Sales of jewellery, apparel, communication equipment and home electronics increased 160.8%, 107.1%, 39% and 29.9% year-on-year, respectively. Some e-commerce platforms saw a 49% year-on-year increase in fitness equipment sales.

Department stores have been adding cultural and entertainment activities to their locations in recent years. They have introduced facilities for children’s entertainment, electronics and digital goods shops, cinemas, bookstores, karaoke, indoor basketball courts, etc.

The COVID-19 outbreak has further accelerated the shift to online shopping. In 2020, China’s online retail sales accounted for 24.9% of total retail sales of consumer goods, compared with 10.7% in 2015.

II. Key trends of the department store sector

2020 saw some impressive sales numbers for a number of high-end department store and mall operators. SKP (Shin Kong Place) in Beijing recorded CNY 17.7 billion (USD 2.7 billion) in sales revenue in 2020, maintaining its double-digit sales growth. Meanwhile, retail sales of Plaza 66 in Shanghai surged 60% compared to the previous year. These businesses sell a high proportion of luxury goods, benefiting from the rise in domestic luxury consumption.

Cosmetics consumption has been significantly upgraded over the past two years, with a considerable increase in demand for mid-to-high-end cosmetics. Young consumers aged 16-25, in particular, are becoming more interested in these categories.

From a digitalisation perspective, 89% of surveyed respondents have established an e-commerce business and among them, around 94.4% are selling via WeChat. Department stores have been selling online through live streaming (75%).

III. Key issues and challenges

Product appeal and product competitiveness are at the core of top-performing department stores such as Beijing SKP, Hanguang, and Hangzhou Tower. However, most of the surveyed department stores are lacking in product appeal and competitiveness, offering homogeneous products at unattractive prices. Factors contributing to the problem include brand image and brand positioning, product mix, management practices, relationships with brand owners, and price levels.

Transformation and upgrading are urgent needs. However, they are not without risks as they involve product repositioning, business optimization, renovation and reconstruction,

functional facility optimization, crossover operation. Despite the accelerated development of online business, the level of digitalization of the industry as a whole remains low.

The traditional concession model still dominates the operation of China’s department stores, and although direct sales have been identified as an important strategic direction for the sector, more than half of the surveyed department store operators stated that the proportion of direct sales business to their bottom line is less than 10%.

IV. Direction of development and transformation initiatives

Department stores will continue to revamp and upgrade. Meanwhile, omnichannel retailing and online-to-offline (O2O) integration will dominate the retail scene. 73.2% of the respondents cited “pursuing O2O integration” as the most important goal in the next 12 months, followed by “strengthening supply chain management” (58.5%). Developing on-demand delivery services will rise.

45.8% of surveyed department store operators said that they have added more experiential

elements in their stores compared to a year ago. Wangfujing Group has cooperated with international artists and creators to craft events, themed cultural curation and video content, combining technology and entertainment.

The survey reveals that 71.1% of respondents have already engaged in the direct sales business, higher than 67.1% from the previous year. Most surveyed department stores operate direct sales business in food & beverages (55.9%), cosmetics (54.2%) and apparel (45.8%). Also, around 36.1% of the respondents have launched their own private labels. Even if risky, another 26.5% plan to develop private labels in the future.

SKU management is a key area that both brands and department stores have been focusing on over the past year. They have been sharing data to identify best-selling products and target their marketing efforts towards those specific products, driving sales through the use of big data and consumer analytics.

Buying and selling on social media apps has become increasingly popular in China. Social commerce sales accounted for around 30% of the online retail market in 2020. WeChat and Douyin are the most used social platforms. Department stores have leveraged new technologies such as facial recognition, AI, robotics, and VR, to enhance the consumer experience as well as collect data for analysis to better understand customers’ needs.

China’s Department Stores Report 2020-2021