News Analysis: Shrinking profit pushes China's department stores for changes

Chinese general merchandise firms suffered shrinking profits last year and are shutting down their physical stores due to rising costs and impacts from the growing e-commerce market.

The total profit of 80 major Chinese department stores fell by 12.05 percent in 2015, according to a report jointly released recently by China Commerce Association for General Merchandise, and Hong Kong retailer Fung Group.

About half suffered drops in sales and 150 Chinese chain store companies closed 100 outlets in 2015, double the number shut down in 2014. Chinese general merchandise giant Wanda closed 56 outlets last year.

Rising rent and labor costs narrowed profit margins and investment on business transformation also added to the financial pressure, the report pointed out.

Meanwhile, the growing e-commerce market is grabbing the opportunities left by the departure of brick-and-mortar stores as more customers go online to buy food, clothes and home appliances.

Analysts from information service provider Anbound Group said that customers' demand for retail products did not shrink -- as evidenced by record overseas consumption last year.

"The top challenge for Chinese department stores is not how to deal with the impact from e-commerce platforms, but how to keep domestic consumption demand within China," according to a report released by Anbound.

The previous approach, an over reliance on price adjustments instead of improving service and customer experience, has contributed to department stores' woes, said Du Baoxiang, vice president with Wangfujing Group.

In addition, most department stores focus on selling products produced by other companies rather than developing their own brands or introducing brands exclusively, Du said.

Chinese department stores are looking to transform, after all, they must. About 70.2 percent of the surveyed firms have made forays into other fields such as supermarkets, restaurants and KTV, and about 85.5 percent introduced interactive elements to improve the customer experience, according to the report.

Moving their products and service online is also a common choice. About 55 percent of the surveyed companies have started e-commerce endeavors to integrate resources and improve efficiency, the report added.

The Internet alone, however, will not address the challenges, cautioned Song Hua, business school professor with Renmin University of China, adding that only the combination of a sound supply chain and insightful consumer data can bring real value and profit. Endi