departmentstore

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DepartmentstoresinChina–merchandidirectsales

January2013

uction

Ingeneral,departmentstoreoperatorsinChinageneraterevenueprimarilyfrom

commissionsonconcessionairesales;othersourcesofincomeincludemerchandi

directsales,rentalincomefromstoretenants,agencyfeearnedbyrvingas

agentsaswellasmanagementfees,etc.

Nowadays,moreandmoreoperatorsrealizethedrawbacksoftheprofitmodelof

relyingoncommissions–lowprofitmargins,poordifferentiationofbrandsand

products,weakcustomerloyalty,enowtryingtoadoptadifferentiated

businessmodelbyengaginginmerchandidirectsalesandlaunchingprivatelabels.

HopingtoshedlightonthelatestdevelopmentsofmerchandidirectsalesinChina,

theFungBusinessIntelligenceCentre,togetherwiththeChinaChainStoreand

FranchiAssociation(CCFA),conductedasurveyinlate2012tounderstandthe

developmentsofmerchandidirectsalesinmajordepartmentstoresinChina.

Apartfromthesurvey,face-to-faceinterviewswithsomeofthemajordepartment

storeoperatorswereconducted.

e

detailsoftheChinereport,pleakindlyvisit

/?method=viewArticle&id=ff8080813bf657050

13c8a5415330284&publishcid=402881e91c59dbcb011c59e15ca90010.

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Merchandidirectsalesmodelrefersto…?

-Undermerchandidirectsalesarrangements,departmentstoreoperators

sourceandlltheirowndirectlypurchadmerchandiorprivate

labels/mentstoreoperatorsownthetitletothe

goods;themerchandiin

supermarkets,homeappliancesandelectronics,andcosmeticproductswith

highbrandrecognitionarecoveredbydirectsalesarrangements.

Whymerchandidirectsales?

-Mostofthedepartmentstoreoperatorsweinterviewedadmittedthat

merchandidirectsalescouldhelpthemenhancecorecompetencies,reap

higherprofitmargins,improvecustomerloyalty,offerdifferentiatedproductsto

customers,ensureproductqualityandlowertransactioncosts.(SeeExhibit1)

Exhibit1:Advantagesofmerchandidirectsalesmodel

Advantages

Rank

(Highestscore:5)

Enhancecorecompetencies4.4

Reaphigherprofitmargins3.9

Improvecustomerloyalty3.8

Offerdifferentiatedproductstocustomers3.7

Ensureproductquality3.5

Lowertransactioncosts3.3

Source:ChinaChainStoreandFranchiAssociationandFungBusiness

IntelligenceCentre

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ew

Merchandidirectsalesmodelisnotprevalent

Currently,departmentstoreoperatorsinChinageneratethebulkoftheirrevenue

fromcommissionsonconcessionairesales,whilethatfrommerchandidirectsales

ingtooursurveyandinterviews,revenuegeneratedfrom

merchandidirectsalesaccountedforonly7.0%ofthetotalrevenueamongthe

teworthythatthelargerscalethedepartment

store,thesmallercontributionofmerchandidirectsalestothetotalrevenue.

Theadoptionofdirectmerchandisalesvarieslargelybycategoryofproducts

Natureofproductsisoneofthefactorsaffectingwhetherthedepartmentstore

tance,departmentstore

operatorstendtodirectlypurchaproductswithlongerproductcyclesuchashome

appliancesandelectronics,rast,the

he

possiblereasonsmaybethattheoperatorslacktheknowledgetokeeppacewiththe

fashiontrends.

Regionaldepartmentstoreoperatorstendtoengagemoreinmerchandidirect

salesthanthenationalplayers

Oursurveyresultsshowthatregionaldepartmentstoreoperatorngagedmore

cas,the

proportionofmerchandidirectsalescanreachashighasalmost100%.Hebei

XinyulouDepartmentStoreisa

gingtheir

stronglocalnetworksand

long-standingrelationshipwith

suppliers,XinyulouDepartment

Storedirectlypurchadall

productsfromsupplierxcept

thecateringrvices.

Foroperatorswhoareengaging

inmerchandidirectsales,

over50%oftheirproductswere

directlysourcedfromregional

distributors

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Usually,departmentstoreoperatorsdirectlypurchaproductsfromthree

channels–1)brandownersormanufacturers;2)nationaldistributorsoragents;and

3)hesurveyeddepartmentstoreoperators

whohaveengagedinmerchandidirectsales,overhalfoftheirproductswere

directlypurchadfromregionaldistributorsoragents.

Developmentofprivatelabelsisstillinitsnascentstage

Thoughanincreasingnumberofdepartmentstoreoperatorsareinterestedin

merchandidirectsalesandprivatelabels,thedevelopmentofprivatelabelsisstill

ingtothesurvey,privatelabelsaccountedforlessthan

2%oftherevenueofthesurveyeddepartmentstoreoperators,muchlowerthan

30-50%forretailersinthedevelopedmarkets.

Snapshot:Characteristicsofsuccessfuloperatorngaginginmerchandi

directsales

-Posssastrongteamofbuyers

Experiencedbuyerswithstrongbusinessnandprofound

understandingofthelatestmarketdevelopmentsarehiredtoensurethe

productspurchadsuitthetastesofthecustomers.

-Buyouttheproductsfrommanufacturersdirectly

Reductionofdistributioncostsisobrvedsincelayersofdistributorsare

differentiationofproductscanalsobeguaranteed.

-Developprivatelabels

Owningaprivatelabelallowsoperatorstoimproveprofitabilityand

nessandexclusivenessofproducts

canalsobeoffered.

-Providedifferentiatedrvices

fmerchandi,visual

merchandisingandotherrviceswillbeadjustedaccordingtothedata

ustomersareidentifiedandtailor-maderviceswillbe

offered.

Source:FungBusinessIntelligenceCentre

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nges

Inoursurvey,wealsoattempttofindoutthechallengesdepartmentstoreoperators

kedaboutthe

biggestchallengeforswitchingtomerchandidirectsalesmodel,mostsurveyed

eExhibit2formoredetails.

Exhibit2:Challengesfacingdepartmentstoreoperators

Challenges

Rank

(Highestscore:5)

Hugecapitaloutlayinvolved4.6

Lackofexperiencedin-houbuyers3.4

Inexperiencedmanagement2.8

Resistancefromleasingstaff2.8

Weakcontroloverdistributionchannels2.5

Source:ChinaChainStoreandFranchiAssociationandFungBusiness

IntelligenceCentre

Hugecapitaloutlayinvolved

Unlikechargingcommissionsonconcessionairesales,themerchandidirectsales

modelrequiresdepartmentstoreoperatorstobuyouttheproducts,whichinvolves

usingandlogisticsarrangementsfortheproductsalso

involvesubstantialcashexpenditures.

Lackofexperiencedin-houbuyers

Thelackofexperiencedin-houbuyerswithstrongbusinessnandprofound

understandingofthelatestmarketdevelopmentsisthecommonchallengefacing

ingtoindustrywatchers,ithastotakeat

leastthreeyearstonurtureaprofessionalbuyerwithpracticalexperienceand

knowledgeofatargetmarket.

Inexperiencedmanagement

Themanagementofmostdepartmentstoreshasbeenactinglikelandlordsunder

chandidirectsales

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ile,the

managementhastoacquireabetterunderstandingoftheretailmarketand

consumertastessoastotapthemarket.

Weakcontroloverdistributionchannels

T

brandowneritherhavetuptheirowndirect-operatedstoresorhavedeveloped

stablerela

departmentstoreoperatorshavelittlecontroloverthedistributionchannelsfor

fficultforthemtobuyoutproductsdirectly

fromthebrandowners.

Resistancefromleasing

staff

Theleasingstaffwillbe

affectediftheoperators

switchedfromthe

concessionairemodelto

themerchandidirect

he

merchandidirectsales

model,thedepartment

storeoperatorsusually

adoptcentralizedsourcing,

whichtheleasingstaffwill

ore,theymaynotbewillingto

embracethechange.

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k

Theproportionofmerchandidirectsalesixpectedtoincrea

Asmentionedbefore,agrowingnumberofdepartmentstoreoperatorsrealizethe

drawbacksoftheconcessionairemodelandhavetriedtoadoptadifferentiated

businessmodelbyengaginginmerchandidirectsalesandlaunchingprivatelabels.

Currently,onaverage,salesrevenuegeneratedfrommerchandidirectsales

accountedforonly7.0%ofthetotalrevenueamongthedepartmentstoreoperators

shtopushthenumberto15.0%by2015.

Certaincategoriesofproductsarelikelytotaketheleadinmerchandidirectsales

Amongthemajorproductcategoriessoldindepartmentstores,theoperators

foreethattheproportionofmerchandidirectsalesforhomeappliancesand

tailscanbe

foundinExhibit3.

Exhibit3:Proportionofmerchandidirectsalesbycategoryby2015

CategoryProportionin2012Proportionby2015

Apparelandaccessories1.9%8.0%

Cosmeticproducts11.6%18.0%

Homeappliances&electronics15.3%20.0%

Homeproducts3.1%10.3%

Stationery3.8%12.0%

Source:ChinaChainStoreandFranchiAssociationandFungBusinessIntelligence

Centre

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Ittakestimetoeimpressiveprogressinlaunchingprivatelabels

Manydepartmentstoreoperatorxpresdinterestsindevelopingprivatelabels.

Havingsaidthat,theyunderstandthatittakestimetodeveloptheirownlabelsdue

tance,atleastthreetofiveyears

mayberequiredtonurtureastrongteamofin-houbuyers.

Concessionairemodelstillprevailsinthenearfuture;whilemerchandidirect

salesmodelisgainingpopularity

Sincethecurrentconcessionairemodelhasbeenestablishedforovertwodecades

andthatittakestimeforthedepartmentstoreoperatorstodevelopthe

merchandidirectsalesmodel,itixpectedthatconcessionairesaleswillcontinue

ame

time,themerchandidirectsalesmodelwillgraduallygainmarketsharefromthe

concessionairemodel.

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endations

Topromotethedevelopmentofmerchandidirectsales,thegovernmentshould

considerprovidingdesignatedfundssuchassubsidiesforrearchanddevelopment

nnovativemeansoffinancing,suchas

issuingcorporatebonds,shouldbeconsideredasmerchandidirectsalesinvolve

ile,taxreductionsandstrengtheningtheprovisionof

trainingfortalentswillsurelybewelcomedbytheenterpris.

Asfortheoperators,toengageinmerchandidirectsales,theyshouldconsider

acquiringabetterunderstandingofcustomers’tastes,developinguniquemarket

positioning,launchingprivatelabelsonatrialbasisand,lastbutnotleast,nurturing

in-houbuyers.

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AbouttheOrganizations

TheChinaChainStoreandFranchiAssociation

Foundedin1997,theChinaChainStore&FranchiAssociation(CCFA)isanofficial

tly,thereare1,000

enterprimemberswith200,000outlets,includingdomesticandoverasretailers,

franchirs,suppliers,alsalesofChina’s“Top100

retailchainoperators”,whicharepartofthemembersoftheCCFA,amountedtoabout

RMB1.7trillionin2011,withmorethan57,000storesintotal.

CCFAparticipatesinpolicymakingandcoordination,safeguardstheinterestsofindustry

andmembers,providesariesofprofessionaltrainingandindustryinformationand

dataforitsmembersandestablishesplatformsforexchangeandcooperation.

TheFungGroup

TheFungGroupisaprivatelyheldmultinationalgroupofcompaniesheadquarteredin

HongKongwhocorebusinessaretrading,logistics,

FungGroupemploysover41,000peopleacross40economiesworldwide,generating

totalrevenueofmorethanUS$ldings(1937)Limited,a

privatelyheldbusinesntityheadquarteredinHongKong,isthemajorshareholderof

theFunggroupofcompanies.

TheFungBusinessIntelligenceCentre

Throughexceptionalrelationshipsanddeepnetworks,theFungBusinessIntelligence

Centre(formerlyknownastheLi&FungRearchCentre)collectsandanalysmarket

dataonChina'conomy,withspecialreferencetosourcing,supplychains,distribution

producesreportsonsourcingandtradinginotherAsiancountries.

ServingasaknowledgebankfortheFungGroup,theCentremakesitsmarketdataand

analysisavailabletobusiness,

becomeanimpartialthoughtleaderonissuesshapingthefutureofmanufacturing,

distribution,logisticsandretailinginChina,andregularlyprovidesadviceand

consultancyrvicestointernalandexternalclients.

©Copyright2013TheFungBusinessIntelligenceCentreandtheChinaChainStoreandFranchiAssociation(CCFA).Allrightsrerved.

ThoughtheFungBusinessIntelligenceCentreandCCFAendeavourtoensuretheinformationprovidedinthispublicationisaccurateand

updated,uctionorredistributionofthismaterialwithoutpriorwritten

conntoftheFungBusinessIntelligenceCentreandCCFAisprohibited.