Why Aren’t More Chinese Department Stores Going Bankrupt?
While consolidation continues in China’s department store sector, the pandemic hasn’t dramatically hastened store closures and bankruptcies the way it has in the US. What’s their secret?
SHANGHAI, China — It’s been a tough year for retailers of all kinds, but the pandemic’s acceleration of existing trends has hit the department store sector particularly hard.
In the US, store closures and an accelerated shift to spending online have already pushed Neiman Marcus, J.C. Penney and Lord & Taylor into bankruptcy. Meanwhile, in China, a report released last month which collected financial data from 103 domestic department store operators paints a decidedly rosier picture for the segment here. But there’s more to it than meets the eye.
The joint report by Fung Business Intelligence Group (FBIC) and the China Commerce Association for General Merchandise (CCAGM) showed that, unsurprisingly, the growth of China’s department store sector slowed down over the survey period from the end of November 2019 to the end of May 2020 (which includes the worst of China’s coronavirus outbreak). Somewhat more surprisingly, corporate gross and net profit margins and customer unit prices had all increased, compared to a year earlier.
The sector’s long-term outlook remains “positive,” according to the authors of the report. Citing double-digit growth recorded by some department stores in the second quarter of 2020, they concluded that “the pandemic has compelled [Chinese] department stores to pursue more rigorous transformation and seize upcoming opportunities in a post-pandemic world. Department store players from abroad may have something to learn from their mainland Chinese counterparts.”
The rebound appears so definitive, in fact, that Cushman & Wakefield’s head of retail for East China, Jenny Wei, now describes the department store sector as “fundamentally recovered.”
“The business has come back to more than 90 percent of what it was before the pandemic… but future performance will depend on whether they can continue to follow the changing market,” she said.
Hong Kong-based Lane Crawford Joyce Group, which operates Lane Crawford department stores on the mainland in Beijing, Shanghai and Chengdu, says between May and August, it has seen both overall sales and “exceptional purchases” (transactions in excess of one million yuan, or $145,000) rise compared to the same period last year.
Though Andrew Keith, Lane Crawford’s president, said the recovery has been good, it hasn’t been uniform, with some stores recovering more strongly than others.
“Shanghai is particularly strong [and] we’re seeing great growth in our fashion and home and lifestyle businesses, and in beauty online,” Keith said. “Many of our customers have told us they’re making up for the fact that they can’t travel by shopping at home.”
While anecdotal reports such as these seem positive, the full picture is a little more complicated. China’s two-speed recovery, which has seen wealthy consumers emerge virtually unscathed by the economic fallout of the Covid-19 pandemic, certainly favours luxury department stores, such as Lane Crawford, which cater to them. For more large-scale Chinese department stores across the country with a greater assortment of products and price points, however, serious challenges are approaching — or have already arrived.
The Struggle is Real
Dig a little deeper into CCAGM’s 2019 data and a more mixed picture emerges of growth in the department store sector.
Around 80 percent of the operators surveyed by CCAGM are actually engaged in multiple retail formats, including not only department stores but a mix of shopping malls, convenience stores, supermarkets, outlets and e-commerce businesses. The diversified format mix of their portfolios is what helped push the collective figure for Chinese department store operator revenue growth to 2.8 percent in 2019. However, when broken down by segment, the department store businesses of all operators surveyed grew only 1 percent last year.
The truth is that department stores in China face many of the same challenges as their counterparts in the West. They are the vestiges of an old era of retail, one in which people didn’t have the option of shopping online or the lure of newly-constructed shopping malls with an even greater assortment and places to park cars and things to do — including restaurants, cinemas, gyms and kids’ entertainment.
“Departments stores [in China]… were already drastically declining over the past five years. Covid-19 helped accelerate the phenomenon,” explained Zino Helmlinger, head of detail for CBRE Eastern China.
Though there haven't been mass closures or bankruptcies of department stores in China since the pandemic, there have been a few, notably the Paris Spring Department store in Shanghai, which closed its Hongkou branch, as well as Parkson Group, one of the longest-running foreign operators in China, deciding not to renew the lease on its second property in Kunming, the capital of China’s southwest Yunnan Province.
In fact, according to JLL data, among the 28 Chinese retail markets it tracks, approximately 597,000 square-metres of department store space has quietly closed each year since 2016, a trend tipped to continue into the foreseeable future.
A Unique Ecosystem That Helps and Hinders
One reason that even more department stores haven’t gone under is that department stores are a much more recent phenomenon in China than in the West. Another is that the sector’s origins and continued operations in China are closely intertwined with government money.
Though there are examples of privately-owned department store operators, as well as international players (first Japanese and Korean players, but more recently also western entrants like French chain Galeries Lafayette), the vast majority of department stores in China are either state-owned or partially state-owned enterprises. To a certain extent, this creates a dynamic whereby provincial and central governments are motivated to prop up their own business interests — especially now when all levels of government are tasked with shoring up China’s economy with domestic spending.
For instance, in recent months, local governments have released a slew of measures to stimulate spending in their own cities and provinces. Shanghai’s municipal government, for example, introduced a two-month shopping festival on May 5 and, as a result, Shanghai New World Daimaru Department Store and Shanghai First Yaohan Department Store reported monthly sales rebounds of 45 percent and 18 percent, respectively, for the month of May.
Almost all provinces have state-owned retail operations that run the department stores in their respective major cities, usually in plum downtown locations. This makes them particularly important for luxury brands looking to target consumers outside top tier cities. Apart from fast fashion giants like Zara and Uniqlo, very few international fashion brands are independently expanding into China’s third tier cities, of which there are around 70, each with a population in the many millions. The rest rely on retail partners like department stores for distribution.
Though e-commerce is increasingly helping brands from Coach to Cartier reach more deeply into China’s lower tier cities — urban markets that are growing more quickly than the market overall — online sales last year still only accounted for 10 percent of sales of luxury.
For wealthy residents in Huzhou, Hohhot, Handan or Huai’an, third tier cities where there has not yet been an influx of luxury shopping mall options, their local department stores remain trusted go-to places to buy high-quality branded goods, making them important channels to nurture.
The fragmented nature of China’s department store sector means global brands need to work harder to do this. Rather than a few strong national department store names, the majority are regional or provincial players, dominating their local markets (although there are exceptions like Shanghai-headquartered Bailian Group which has a retail footprint across the country, as does Shenzhen’s Rainbow).
In fact, according to data published by CCAGM, many of the most profitable department store operators in China hail from the regions. Nanjing Xinbai tops the list, followed by Maoye Commercial (from Chengdu), while Hubei’s Ewushang, Chongqing Department Stores, Shenzhen’s Rainbow and Liaoning’s Dashang Group all join Shanghai heavy-hitters Bailian and Yongan Groups, along with Beijing’s Wangfujing in the top ten.
Make no mistake, the state finance that backs many of China’s department store operators is a help, but it can also be a hindrance, with privately-owned enterprises — for example Alibaba-backed Intime Department Store chain — showing a greater level of adaptability in recent years.
“It’s a systemic issue. [State-owned department stores] have the ability to [change] but the system restrains them from making these changes [quickly]. The burden of their long history [of doing business in a traditional way] is quite heavy,” Cushman & Wakefield’s Wei explained.
In spite of the challenges, there remains a sense of optimism here that department stores can still transform into "new retail" (to use local parlance) players that meet the needs of modern-day consumers. Many of the biggest players have already made moves to do just that as the sector declined over the past five years.
How Chinese Department Stores are Adapting
China’s first-tier cities were both the first to receive an influx of new shopping malls, and the first to realise the need to reimagine their traditional department stores.
In 2017, Bailian Group chairman Ye Yongming signed a co-operation agreement between China’s largest retailer by sales revenue and tech giant Alibaba to utilise technology to deliver enhanced customer service. It then set about transforming some of its department stores into shopping malls, undertaking large-scale renovations on others and introducing its own multi-brand store, The Balancing, which allowed it to diversify and differentiate its brand mix to incorporate names like Jil Sander, Brunello Cucinelli, and local independent labels like Shushu/Tong.
SKP Beijing, with general manager Luo Zhiwei at the helm, has also introduced its own distinct multi-brand offering, SKP Select, as part of the process it began in 2013 to remake itself from a shopping mall into a department store (albeit the opposite approach to the dominant trend).
Key to SKP Beijing’s success (last year it was named the world’s second-most productive department stores after Harrods in a report by GlobalData and Sybarite) is its focus on experience — cutting-edge art installations are a major draw — as well as its targeted curation and exclusivity of brands and product offerings.
The hybridisation of shopping malls, department stores and e-commerce operations that is currently taking place in China is just a taste of how the sector will continue to develop moving forward, according to James Macdonald, head of Savills China Research.
“The definitions and distinctions between different platforms are becoming blurred, with operators having to spread themselves over multiple channels,” he said
These changes are not yet being felt as much in tier three cities, where there is less retail competition, but a reckoning will eventually come there too.
Boundless Digitalisation at Breakneck Speed
Partnering with domestic tech giants has provided a pathway to accelerated omnichannel adaption and success for groups like Bailian.
Another example is Intime, which was taken private by Alibaba in 2017. The former’s Miaojie app not only promises two-hour delivery for local consumers, it also tracks stock on shelves and in storage in real time, allowing merchants to adjust supply and pricing swiftly.
According to Intime Chief Executive Chen Xiaodong, this e-commerce arm, combined with the integration of thousands of Intime sales people as livestreamers, helped its sales in May recover to the same levels seen last year, even as footfall remained 30 percent lower.
Intime was joined by other department store chains, Wangfujing, Rainbow, New World and Golden Eagle in embracing livestreaming, with each launching their own channels this year to interact with consumers and promote sales. What’s more, a full 70 percent of department stores surveyed for the FBIC and CCAGM report are now selling via official WeChat accounts, demonstrating that Alibaba isn’t the only tech player contributing to the transformation of the sector.
The seamless integration of technology, rapid transformation of physical layouts and bold experiments around experience are three obvious factors helping to keep Chinese department stores out of bankruptcy — alongside their links to state finance — but there is something else that sets them apart.
If there is a single lesson peers elsewhere could learn from China, it is this: being able to delight consumers is still an essential mission for department stores but only if it is matched by a shopping journey that is extraordinarily convenient, flexible and entirely customer-centric.