Buy or Die, The future of Chinese Department Stores

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Xidan Department Store, One of Beijing's Oldest Destinations for Fashion Shopping

Over the last three decades of reform, China’s fashion economy has undergone a dramatic albeit uneven transformation. While the industrial fashion sector was quick to mature under competition that forced innovation amongst manufacturers, other sectors such as department stores have seen little change in the last 20 years. Chinese department stores still account for a major share of retail sales but are rapidly loosing share to the modern day shopping malls emerging en masse throughout the country. With this in mind, today The Maosuit takes a look at the reasons department stores are struggling and what they must do to confront the changing market place.

For the fashion business to survive in any country there must be an effective sales network and retailing platform and for the last 30 years the traditional place for this in China has been the department stores. In the 80s, 90s and even early 2000s there was still little focus put on fashion and self-image in China, but that has all changed in the last few years. Now Chinese want to be trendy, wear well-known brands and stand out. In the last few years as foreign designer labels and brands pour into China and open store after store, consumers are beginning to shift their spending habits away from the department stores to modern shopping malls.

The main reason for this shift is that the department stores lack differentiation and offer nothing special in terms of merchandise. So, unless this issue is addressed the department stores will continue to lose customers and eventually become obsolete. In analyzing causes of this issue a systematic flaw in the Chinese fashion retailing business becomes evident.

Whereas in the USA, Europe and other mature fashion markets each department store will have their own target customers and buyers to choose merchandise accordingly, in China this concept has never existed.  Up until now department stores have tried to cater to ‘The Masses’ which was the correct and only politically responsible way to do the retail business during the socialist era, but is far outdated today.

In mature fashion markets brands will design a collection, make samples and organize a fashion or trade show and then upon receiving orders from department store buyers they will outsource production.  In China many brand owners are busy trying to be manufacturers, merchandisers and retailers all at the same time. Immediately after designs are done full runs will be produced (in house) before anyone outside the brand has seen or approved, let alone ordered the collections. This is where the China’s manufacturing prowess has gotten in the way of developing a mature and sophisticated retail environment. It has created the reverse system to the rest of the world, where instead of department stores acting as buyers, the brand owners take on the responsibility of choosing what merchandise to produce and then sell it in the department store space they are renting.

With no defined target consumer or buyers editing each season’s collections, Chinese department stores end up with a hotchpotch of brands, which continually resort to discounting to undercut the competition and keep up sales. By discounting too often the brands end up diluting their brand value and over a few years often run their market position into the ground.  Often, after losing market position, a brand owner/manufacturer will simply launch another brand and start the whole cycle again.

Overall China’s convoluted production to sales cycle requires the brands to spend large amounts of energy on retailing and creates a monotonous oversupply of brands that ensures department store A has the same merchandise as department store B and C.  Consumers have become well accustomed to this and now given the choice of shopping at new malls full of international brands they are shying away from department stores.

Monotonous and Unatractive Merchandise in a Chinese Department Store

So only now with the rise of shopping malls is China’s retail sector starting to see the kind of competition that will force department stores to adapt in order to survive. Fundamentally Chinese department stores need to change the way they do business, and to solve their impending problems they need to become buyers and not just renters of retail space. This will enable them to find their own uniqueness in the market place and hopefully enable them to retain customers.

In looking at China’s current retail landscape some companies such as Lane Crawford, IT and Joyce Group (all Hong Kong based retailers operating in the Mainland) are starting this trend. They all have clearly defined target customers and professional buyers for their multiband stores and are setting the example for Chinese department stores to follow.

Even though some Mainland Chinese department stores are beginning to recognize the need for change it will take them time. In comparing China’s two most international cities (Beijing and Shanghai) it can be seen that things in Shanghai are better.  The department stores in Shanghai know they can’t stand out on low price alone and some are beginning to cater to specific demographics and identify with certain types of consumers.  Beijing is much larger and the retail areas much more spread out. Therefore each department store caters specifically for the surrounding neighborhoods, which across the whole city just results in the same monotonous brands being stocked over and over again.  For department stores in second or third tier cities it may take another ten years to rectify these issues, and although many may be losing money to the shopping malls the are mostly state owned enterprises and so will be propped up by the Government.

Overall Chinese department stores need to be innovative and find ways to become unique and draw targeted consumers instead of trying to lure everybody. For Chinese department stores who just don’t have the experience as being buyers or sophisticated merchandisers it may prove helpful to look overseas and hire foreign experts until they can copy and catch up (something Chinese do very well) with the rest of the world.

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6 Comments

  1. I recall wandering through a quiet, high-end mall in Beijing’s so-called “financial district” about a year ago and wondering how long the place would last. That general area is populated by a variety of squat, unimaginative office buildings that house some of the biggest and most visible companies and banks in China, and I hate to go there because it takes forever to get from point A to point B. Then there’s this mall, which houses high-end places like Lane Crawford and Bose, which is practically deserted. (Maybe things are better now. I haven’t been back.) Your analysis backs up mine, which is that the whole area was part of a government plan along the lines of, “Beijing must create a financial district! Let’s put some buildings here and keep the place clean.” Yes, the place is clean, but that’s about its only attractive feature.

    • Thanks for the comment. The Mall you are talking about is called Seasons Place. When it was conceived there was no luxury brand mall on the west side of Beijing, so building one amongst all the international bank HQs full of white collar workers seemed to make sense. Many government bureaus are also based in West Beijing and the brands expected a windfall of government related customers buying (business) gifts etc. None of these predictions managed to come true and the mall has struggled with customers ever since opening. International employees of the banks travel enough that they can buy goods cheaper outside China and government people prefer to buy ‘gifts’ as far away from their offices as possible so they wont be seen. The mall also lacks any significant outside branding and advertising (which is regulated by the government) to attract would be passers by.

  2. An insightful one! This is especially helpful to those who are interested in the fashion inductry.

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