2012 may mark the end of the department store era in China. Consider that at end-2009, freestanding department stores accounted for about half the retail stock in China’s top 20 markets. By end-2012, this had fallen to less than a third. Also, according to the China Commerce Association, total sales growth of 81 medium and large sized department stores slowed to 8.9% y-o-y in 2012, down from an average 16.5% y-o-y growth from 2006 to 2001. Today, in Beijing, Shanghai, and Chengdu, individual store level sales show only the top two or three department stores are still generating positive y-o-y sales growth; the rest were negative. Closures have started to happen in markets like Shanghai (No.1 Department Store), Beijing, and Wuxi (Grand Ocean Department Store). The shift from the “OEM” model to the “ODM” (original design manufacturer) in the fashion industry has gone hand in hand with stronger, more recognisable brands, who often have their own single-brand store network. The rising young consumer of today shops for strong brands in shopping malls, not in department stores. Many of today’s department stores are so undifferentiated that it is hard to tell one from another.

But that doesn’t mean all department stores are now obsolete. The future will almost certainly contain fewer department stores than we have today, but we see several trends which should prolong the life of the stronger players in the market and strengthen their positions:

1. Adding more leisure options to existing projects. In order to entice customers to linger longer and spend more, the F&B and entertainment space is expanded, and the clothing floor space reduced.

2. Finding a unique market positioning. Some department stores are adopting a special theme, such as Japanese clothing, or kid’s products, which are aimed at a specific market segment. Suzhou Izumiya and Shanghai’s Takashimaya are examples. These differ from traditional department stores which serve a broad, unfocused market. In the future we also see a role for department stores to focus on older, mature consumers, which have increasingly high spending power.

3. Moving from offline to online. Department stores are one of the most vulnerable retail categories to e-commerce, due to the heavy concentration of small apparel brands. Traditional operators Wangfujing and Intime have launched online stores to tap into the e-commerce boom.

4. Consumer loyalty programs. Membership cards managed by department store operators are able to increase the loyalty of the customers who purchase in same store or same chain of stores. For their loyalty, customers collect bonus points and special free offerings.

5. Introducing more merchandise direct sales and private labels. The China department store model is based on leasing concession space to the brands and the operator earns all income from rent. Meanwhile, merchandise direct sales are more common in Europe and the US and offer the opportunity for the DS operator to have control over pricing, and obtain better operating margins. However, increasing the amount sold via direct sale requires a professional buying team and is challenging to implement in the short term and remains rare in China except for operators like Lane Crawford.

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