Shop­pers drop­ping depart­ment stores

China Daily (Hong Kong) - - BUSINESS COMPANIES - By WU YIYAO in Shang­hai wuyiyao@chi­

Depart­ment stores in China’s big cities likely will face in­creas­ing pres­sure to be prof­itable in 2014 due to mount­ing con­sumer pref­er­ence for other re­tail for­mats, ris­ing rents and a shift­ing of growth to lower-tier cities, an­a­lysts and mar­ket in­sid­ers said.

A re­port by Fitch Rat­ings put China’s depart­ment store out­look in 2014 as “neg­a­tive” de­spite an an­tic­i­pated mild ac­cel­er­a­tion in sales growth, as stiff com­pe­ti­tion and cus­tomers drawn to other sales chan­nels will con­tinue to chal­lenge the sec­tor’s re­cov­ery.

2013 has been a chal­leng­ing year for depart­ment store op­er­a­tors, with weaker-thanex­pected rev­enue growth com­pounded by higher op­er­at­ing ex­penses, which hurt earn­ings of most op­er­a­tors and pushed back delever­ag­ing.

But depart­ment store op­er­a­tors have been ac­tively repo­si­tion­ing them­selves, redi­rect­ing their ex­pan­sion to shop­ping mall for­mats, en­hanc­ing prod­uct mixes, re­view­ing store net­works and rolling out e-com­merce plat­forms.

“In gen­eral, op­er­a­tors with less ma­ture store net­works, strong re­gional mar­ket po­si­tions and big­ger ex­po­sure to lower-tier cities will likely fare bet­ter over the next 12 to 18 months,” said Michelle Leong, an an­a­lyst with Fitch Rat­ings.

Depart­ment stores’ credit qual­ity will con­tinue to di­verge over the next few years as rents rise and com­pe­ti­tion from In­ter­net re­tail­ers and shop­ping malls in­creases, said Alan Gao, vice-pres­i­dent and se­nior an­a­lyst of Cor­po­rate Fi­nance Group, Moody’s In­vestors Ser­vice Hong Kong Ltd.

“Re­tail­ers that own a large per­cent­age of their stores are bet­ter po­si­tioned to main­tain their prof­itabil­ity, mar­ket share and fund­ing ac­cess than those that lease their space. Fur­ther­more, com­pa­nies’ ex­pan­sion strate­gies and their abil­ity to gen­er­ate prof­its at new stores will also af­fect their credit qual­ity,” Gao said in a re­search note.

He added that fast-grow­ing In­ter­net re­tail­ers and a shop­ping mall con­struc­tion boom are draw­ing traf­fic from depart­ment stores, par­tic­u­larly in large cities.

The to­tal gross mer­chan­dise vol­ume achieved by and Taobao Mar­ket­place on Nov 11, or “Dou­ble Eleven”, the world’s largest shop­ping fes­ti­val, hit a daily record 35.01 bil­lion yuan ($5.75 bil­lion), which topped the 19.1 bil­lion yuan record made Nov 11, 2012, and the 5.3 bil­lion yuan made Nov 11, 2011.

To stay com­pet­i­tive, depart­ment stores are shift­ing their fo­cus to the mid- and high-end mar­ket seg­ments, and in­creas­ing their ser­vice of­fer­ings and store sizes, ac­cord­ing to Gao.

Al­fred Zhou, gen­eral man­ager of GfK China, a mar­ket re­search agency, said depart­ment stores can thrive by of­fer­ing a bet­ter shop­ping ex­pe­ri­ence.

With con­ve­nience stores fea­tur­ing handy ser­vices, and online shops ad­vanc­ing lower prices, depart­ment stores must ex­cel in “on-site” feel­ings and “have it right now” val­ues, said Zhou.

“If depart­ment stores re­main as they are to­day, they may have a very low chance of sur­viv­ing the huge im­pact of other sales chan­nels,” he said.

“Changes must be made. Depart­ment stores need to have themes, move to be­come high-end and lux­u­ri­ous shop­ping spa­ces, and pro­vide some­thing that can’t be found any­where else, some­thing peo­ple can’t achieve by click­ing a mouse or touch­ing the screen of a smart­phone,” Zhou added.

Zhang Chun­jie, a 32-year-old Shang­hai res­i­dent, said depart­ment stores with pres­ti­gious lo­ca­tions and high ser­vice qual­i­ties are still at­trac­tive.

“Shop­ping online may help peo­ple save money, but some trans­ac­tions can only be com­pleted in brick- and- mor­tar stores, and prefer­ably a nice depart­ment store. You can have a late lunch in a restau­rant, get your hair done, buy some books and do gro­cery shop­ping within the same af­ter­noon in the same depart­ment store, but you can­not do all th­ese by shop­ping online,” said Zhang.

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