China’s department stores in transition

June 10, 2019 / By  

Department stores are representative of urban spaces in which we can observe wider trends in a city’s business development. As a traditional retail format, China’s department stores have entered a transition period amid fierce competition from modern shopping malls and booming e-commerce, which have left the sector facing headwinds. The share of department store operators with annual sales over RMB 2 billion dropped from 44% in 2016, to about 24% in 2018. Additionally, among the 28 Chinese retail markets tracked by JLL research, approximately 597,000 sqm of department store space closed each year over the 2016-2018 period, and we expect the closure trend to continue in 2019. That said, other department stores are finding ways to survive and transform by taking advantage of the retail landscape’s trend towards big data applications and experience-oriented offerings.

Source: JLL Research

Currently, there are two major scenarios for department stores in transition: remain operating as department stores, or transform to other retail formats such as shopping malls.

Initial results have been encouraging for the first scenario, which involves repositioning of the project and optimizing operation efficiency without changing the asset format. Operators are deploying the following measures to differentiate their projects:

Digitalization of brick-and-mortar department stores. For example, Intime Department Store has partnered with Alibaba to explore online/offline integration. This collaboration has introduced online supermarkets and a mobile shopping app to all of Intime’s physical stores, realizing the extension of multi-channel retail.

In-store technology applications. Through the end of 2018, about 88% of department stores in China have established free in-store Wi-Fi. However, no more than 40% of them are applying other technologies such as iBeacon footfall analysis and digital shopping guide, which can be effective in optimizing operational efficiency and boosting overall sales.  This indicates that department store operators have more opportunities to integrate technologies with further transitions.

Source: China Commerce Association for General Merchandise;
Fung Business Intelligence, 2018; JLL Research

Introduction of experiential elements. Adding experiential elements in department stores is a typical initiative to implement project repositioning. For instance, multiple New World Department Stores in Shanghai and Beijing have brought in museum exhibitions, art events and IP-themed zones to revitalize their traditional shopping environments.

As for the other alternative of transforming to other formats, although we’ve observed that some malls have converted to co-working spaces, this trend hasn’t extended to department stores, which tend to focus on converting to other types of retail formats like shopping malls. A recent case is Shanghai Shimao Festival City on East Nanjing Road. By reconfiguring circulation, creating new public open space and introducing differentiated tenants such as flagship stores, O2O tenants and branded dine-in restaurants, the project has become a new curated destination for both local residents and visitors to Shanghai.

China’s prevailing trend of urban renewal and its ever-changing retail environment are forcing department stores to evolve. No matter which alternative they choose, operators should consider how to avoid the dilemma of being more than a department store while less than a shopping mall, and perform careful risk assessment in terms of refurbishment feasibility, cost estimation, technology adoption and tenant repositioning.

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