THE END OF A RE­TAIL ICON

The im­pend­ing clo­sure of the Pa­cific Depart­ment Store on Huai­hai Road spells tough times ahead for sim­i­lar busi­ness, but in­dus­try ex­perts be­lieve brick-and-mor­tar oper­a­tions can still sur­vive and even thrive if they get their strat­egy right

China Daily (USA) - - SHANGHAI FOCUS - ByWANGYING in Shang­hai wang_y­ing@chi­nadaily.com.cn

While the Mi­dAu­tumn Fes­ti­val is a time of re­u­nion for Chi­nese fam­i­lies, it was un­for­tu­nately also the oc­ca­sion dur­ing which the Pa­cific Depart­ment Store con­firmed its im­mi­nent de­par­ture from Huai­hai Road, one of Shang­hai’s shop­ping hotspots.

The depart­ment stall has been around since 19 years ago when Tai­wan’s Far Eastern Group first in­tro­duced it to the main­land mar­ket. Once a well-loved and iconic shop­ping des­ti­na­tion among the lo­cals, the depart­ment store — it first opened in Septem­ber 1997 — has in the past decade suf­fered from the com­pe­ti­tion posed by e-com­merce com­peti­tors and the pro­lif­er­a­tion of shop­ping malls.

Ac­cord­ing to Wu Bin, a staff from the mar­ket­ing di­vi­sion of Pa­cific Depart­ment Store’s Shang­hai head of­fice, clear­ance sales fea­tur­ing sig­nif­i­cant dis­counts have al­ready be­gun and will last till mid-Oc­to­ber. Wu also re­vealed that the main rea­son for the store’s clo­sure is the soar­ing rental prices in the city.

“The new rental rate is about 30 times higher than what we paid two decades ago,” said Wu.

“The lease con­tract will ex­pire in 2017 and the store will be closed by the end of the year, or at the very lat­est, in early 2017. This clo­sure will not af­fect the oper­a­tions of our other two stores in Shang­hai.”

It is still un­clear what will hap­pen to the space va­cated by Pa­cific Depart­ment Store, though ru­mors have been rife that China Xin­tiandi, the prop­erty owner of the depart­ment store, is plan­ning to op­er­ate the re­tail space on their own.

Shi Lei, a sales­per­son of an Ital­ian footwear brand who di­vides her time be­tween the out­let at Pa­cific Depart­ment Store and the one at Park­son Depart­ment Store on Huai­hai Road, said that busi­ness at the lat­ter has ac­tu­ally been worse.

Fan Hongjuan, re­tail se­nior di­rec­tor of CBRE eastern China ad­vi­sory and trans­ac­tion ser­vices, said that Chi­nese depart­ment stores have en­tered “a win­ter sea­son in busi­ness”.

Based on the find­ings by the China Com­merce As­so­ci­a­tion for Gen­eral Mer­chan­dise, while China’s 80 ma­jor depart­ment stores ex­pe­ri­enced a 9.3 per­cent rise in rev­enue last year, their prof­its ac­tu­ally tum­bled 19.53 per­cent year-on-year.

Fur­ther­more, 114 depart­ment stores across the coun­try had shut­tered last year, in­clud­ing big-name brands such as Marks & Spencer, Park­son and Bei­jing Wang­fu­jing Depart­ment Store, ac­cord­ing to ThePaper.cn.

“Un­like the busi­ness mod­els of depart­ment stores in over­seas mar­kets, where the store it­self is a buyer and provider of a va­ri­ety of goods, China’s depart­ment stores op­er­ate like land­lords who rent their space to brand re­tail­ers. Each brand then op­er­ates its own busi­ness in­de­pen­dently, which means the in-store shop­ping ex­pe­ri­ence is greatly var­ied,” ex­plained Fan about the pos­si­ble fac­tors be­hind this phe­nom­e­non.

Ben Caven­der, prin­ci­pal of China Mar­ket Re­search Group (CMR), said that depart­ment stores are no longer the choice shop­ping des­ti­na­tion be­cause Chi­nese con­sumers have be­come more dis­cern­ing with their pur­chases. He ex­plained that con­sumers to­day would rather­turn­toma­jore-com­merce sites which can of­fer great dis­counts and de­liv­ery ser­vices, or shop­ping malls where they can dine and be en­ter­tained in­stead of just shop, or even brand bou­tiques where the shop­ping ex­pe­ri­ence is per­ceived to be bet­ter and more per­son­al­ized.

Of the 10.5 tril­lion yuan ($1.57 tril­lion)worth of e-com­merce trad­ing in China that was recorded be­tween Jan­uary and June this year — a 37.6 per­cent Al­bert Lau, year-on-year in­crease — on­line re­tail chan­nels con­trib­uted to some 2.3 tril­lion yuan, ac­cord­ing to a re­port from China E-com­merce Re­search Cen­ter.

Qi Xiaozhai, di­rec­tor of the Shang­hai Com­mer­cial Eco­nomic Re­search Cen­ter, shared that back in the 1990s, the shops on Huai­hai Road where Pa­cific Depart­ment Store is lo­cated, only had to com­pete with those on Nan­jing Road, Sichuan Road and Yu Gar­den. To­day, com­peti­tors can be found along more than 50 re­tail streets, a dozen com­mer­cial cen­ters in dif­fer­ent dis­tricts, as well as over 20 com­mu­nity shop­ping des­ti­na­tions in the down­town area.

An­other rea­son for the demise of depart­ment stores, Qi said, is the slower an­nual eco­nomic growth in China which has eroded the spend­ing pow­ers of con­sumers.

The de­par­ture of the Pa­cific Depart­ment Store has also been deemed as a blow to Huai­hai Road’s rep­u­ta­tion as a shop­ping and fash­ion des­ti­na­tion in the city.

Huai­hai Road has three sec­tions — East Huai­hai Road, Mid­dle Huai­hai Road and West Huai­hai Road — and only the 2.2-kilo­me­ter cen­tral area is re­garded by lo­cals as the high-end shop­ping des­ti­na­tion that can ri­val Paris’ Les champs-El­y­sees or New York’s Fifth Av­enue.

“Huai­hai Road is cur­rently car­ry­ing out a slew of repo­si­tion­ing mea­sures to in­crease con­sumer traf­fic and cap­ture sales. For ex­am­ple, the Louis Vuit­ton store will be re­placed by Vic­to­ria’s Se­cret’s lingerie store in China. Other brands like Muji and Uniqlo have also taken over old-fash­ioned depart­ment stores with their flag­ship out­lets to woo young con­sumers,” said Fan.

The Cen­tral Plaza neigh­bor­ing the Pa­cific also closed re­cently. In a state­ment to China Daily, Cen­tral Plaza’s owner Sun Hung Kai Prop­er­ties said that the mall will be un­der­go­ing ren­o­va­tions in or­der to add fresh el­e­ments to en­tice shop­pers.

“We are con­stantly com­mu­ni­cat­ing with a va­ri­ety of brands and try­ing to bring new con­cepts and re­tail flag­ship stores into the his­toric build­ing, ac­cord­ing to the high qual­ity re­quire­ments of Huai­hai Road,” read the state­ment.

Among the ex­ist­ing forms of phys­i­cal re­tail choices, shop­ping malls that have a wide se­lec­tion of spe­cialty stores have proven to be the most pop­u­lar among Chi­nese con­sumers, ac­cord­ing to Yang Yuechen, di­rec­tor and head of re­search and con­sul­tancy at Knight Frank Shang­hai.

In re­sponse, some Chi­nese de­vel­op­ers that for­merly only fo­cused on the res­i­den­tial sec­tor have been join­ing hands with for­eign brands to de­velop shop­ping malls, with Wanda be­ing one of the most suc­cess­ful ex­am­ples. The group, which has adopted this ap­proach since 2002, now owns 159 shop­ping malls in 111 cities across the na­tion.

Al­bert Lau, CEO of Sav­ills China, said that re­tail busi­nesses to­day need to es­tab­lish a clear po­si­tion­ing in or­der to sur­vive and thrive.

“The chang­ing mar­ket con­di­tions re­quire re­tail­ers to adapt quickly. Depart­ment stores, for ex­am­ple, should up­grade their brand man­age­ment, of­fer an in­te­grated and seam­less shop­ping ser­vice and chan­nel more fo­cus to pro­vid­ing good in-store ex­pe­ri­ences,” added Lau.

Other ex­perts said that for­eign re­tail­ers such as Uniqlo, H&M, Zara and Muji have done a good job in cre­at­ing dis­tinct brand iden­ti­ties through their prod­uct de­signs and the speed at which they it­er­ate new prod­ucts.

Caven­der pointed to how Uniqlo has cre­ated flag­ship re­tail stores that are com­fort­able to shop in and show­case new prod­ucts that con­sumers could choose to pur­chase on­line. He also praised Muji and Zara for of­fer­ing home fur­nish­ing op­tions that ap­peal to young white col­lar con­sumers look­ing to dec­o­rate their first homes.

Given the high rental prices in Shang­hai and the preva­lence of on­line shop­ping, a num­ber of for­eign brands have cho­sen the con­ser­va­tive ap­proach of first set­ting up an on­line pres­ence in China in­stead of hav­ing a brickand-mor­tar store.

Fan said that this is a much more ef­fec­tive way to test the wa­ters and get a clear pic­ture of con­sumer sen­ti­ments in China, while Caven­der noted that phys­i­cal stores will none­the­less have a place in the in­dus­try, though re­tail­ers will need to be able to fit them into a broader re­tail strat­egy that in­cludes e-com­merce.

With re­gard to the con­sump­tion po­ten­tial of the 1.3 bil­lion peo­ple in China, ex­perts agree that China’s re­tail mar­ket is still full of pos­si­bil­i­ties and play­ers can achieve much suc­cess if they learn how to adapt to the mar­ket quickly.

“We ap­plaud the many in­no­va­tive at­tempts to in­clude things such as a Fer­ries wheel, a large slide and art ex­hi­bi­tions in shop­ping malls as these ef­forts show that busi­nesses can in­clude el­e­ments of fun and cul­ture into their oper­a­tions,” said Qi.

Qi was re­fer­ring to the Fer­ris wheel atop Joy City Shop­ping Mall in Shang­hai’s Zhabei district, the five-story-high tubu­lar slide at the Shang­hai-Hong Kong New World Depart­ment Store on Pu­jian Road and malls like K11 which has branded it­self as a hub for con­tem­po­rary art.

Lau added that it is im­per­a­tive that Chi­nese re­tail­ers pay more at­ten­tion to qual­ity, pack­ag­ing, mar­ket­ing and brand­ing, as well as make lo­cal con­sumers their pri­or­ity, es­pe­cially when for­eign brands are at­tempt­ing to en­ter the world’s sec­ond largest econ­omy and win over some mar­ket share.

“Con­sumers are not against buy­ing Chi­nese brands, but in the past Chi­nese brands have strug­gled to cre­ate very clear brand iden­ti­ties and have in­stead fo­cused on sell­ing what they think is pop­u­lar, based on what for­eign brands are do­ing,” said Caven­der.

“This is start­ing to change now and I think we will see some very strong do­mes­tic re­tail­ers in the years ahead.”

The chang­ing mar­ket con­di­tions re­quire re­tail­ers to adapt quickly. Depart­ment stores, for ex­am­ple, should up­grade their brand man­age­ment, of­fer an in­te­grated and seam­less shop­ping ser­vice and chan­nel more fo­cus to pro­vid­ing good in­store ex­pe­ri­ences.” CEO of Sav­ills China

PHO­TOS BY GAO ERQIANG / CHINA DAILY

The Pa­cific Depart­ment Store on Huai­hai Road will close down as early as the end of this year and the clear­ance sale will last till mid-Oc­to­ber.

The Cen­tral Plaza also closed re­cently and will soon be ren­o­vated.

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