A visitor to Beijing in the 1970s would have had only one choice for higher-end shopping – the Beijing Friendship Store. For years it was the mainstay for those looking for international goods in the capital. Catering to overseas residents and tourists, it was the only place where foreign food and wine could be found. Ordinary Chinese were kept out.
The Friendship Store still lumbers on today, albeit in a slightly more modernised form. But such is the competition between department stores that Shanghai Securities News says the industry “has entered the era of Warring States,” referring to a bloody period in Chinese history when rival regions fought to absorb their neighbours.
There were further signs of the consolidation trend last week, when store operator Beijing Wangfujing International Commercial Development launched a takeover bid to acquire rival store owner PCD Stores. The acquirer plans to buy a 39.53% stake in the Hong Kong-listed target for HK$1.99 billion ($257.49 million), which could then trigger a general offer for the stock, Reuters reports.
The bid was good news for shareholders in PCD, with the company’s stock jumping more than 9% after the deal was announced. The retailer listed in late 2010 has since lost nearly half of its value.
Wangfujing, named after the famous shopping street in Beijing, is the parent company of the department stores that bear the same name. It also has the biggest network in the capital, with around 30 stores in total across the country. By buying PCD, it will add another 18 upmarket stores to its portfolio.
Despite the continued growth in Chinese consumer spending, many department store operators are struggling. No one company currently has the scale to build a dominant platform across China, leaving smaller players to battle it out in crowded markets.
PCD typifies the weakness in the sector. Last month, it issued a profit warning, saying that its net income would “record a notable decrease” due to rising employment costs and increased expenses from opening new stores. Intime, another department store chain (see WiC69), announced last month that profit for 2012 was set to fall 40%.
In the current environment the more successful and financially strong operators are in a better position to take over their weaker rivals. For instance, last year the Hong Kong Economic Times reported that New World Department Store, which has 18 stores in China, had announced plans to expand through acquisitions. It made a start by buying a Shanghai shopping mall from private equity firm Blackstone Group.
The need for scale has become more pressing as more shoppers turn to the internet to meet their spending fix. “If traditional department stores do not make any changes to their business models, they will face a survival crisis within five years,” Chen Songhong, head of DTZ’s retail services in China, told the Global Times.
Chen said that some stores are also looking to combine their bricks-and-mortar operations with online shopping, copying models that have worked in the US in which customers order online but come to the shop to pick up their goods.
The other source of competition comes not from within China but from abroad, as middle-class shoppers make overseas shopping trips in increasingly large numbers. The cost of a trip to Hong Kong or London can easily be offset by the saving made on luxury goods not subject to import taxes similar to China’s.
Just after Christmas, British newspaper the Daily Mail reported on one such example: a 59 year-old university lecturer from Sichuan who had just bought a Prada ‘man bag’ in central London.
His reasons for visiting the UK were exactly what department stores in Beijing won’t want to hear.
“These quality brand and luxury goods are cheaper here in the UK than they are at home, and the choice is much better.”
© ChinTell Ltd. All rights reserved.
Sponsored by HSBC.
The Week in China website and the weekly magazine publications are owned and maintained by ChinTell Limited, Hong Kong. Neither HSBC nor any member of the HSBC group of companies ("HSBC") endorses the contents and/or is involved in selecting, creating or editing the contents of the Week in China website or the Week in China magazine. The views expressed in these publications are solely the views of ChinTell Limited and do not necessarily reflect the views or investment ideas of HSBC. No responsibility will therefore be assumed by HSBC for the contents of these publications or for the errors or omissions therein.