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Note: The China Commerce Association of General Merchandise recently released a report on the development of China's general merchandise industry. The following are abstracts from the report.
Part One: Review of the development of China's general merchandise industry
1. Slow development period: 1900-89
China's first department store was set up in 1900 in northeast China's Harbin.
In the 1920s, several large department stores were established in Shanghai, making its general merchandise industry the most prosperous in the nation before 1949.
After the People's Republic of China was founded in 1949, department stores across the nation were making profits due to short supply in the market, the nation's planned economy and their monopoly in the market.
The general merchandise industry developed slowly, as there were less than 100 large department stores throughout China until 1989.
2. Rapid growth period: 1990-95
Stimulated by China's economic reform from planned to a market-oriented economy, the nation's retailing sector saw rapid growth.
According to the National Bureau of Statistics, the average year-on-year growth rate of the retailing volume for domestic consumption products reached 23.2 percent, higher than the gross domestic product (GDP) growth rate, which was 12 percent.
Profit margins at department stores also attained records at 10.11 percent and 9.71 percent in 1994 and 1995 respectively.
A large group of general merchandise enterprises emerged during the 1990-95 period, with the number of department stores in 1995 being six times higher than in 1990. In Beijing alone, more than 20 department stores with business floor space exceeding 10,000 square metres were set up from 1990 to 1995.
Because of large GDP growth, ever-increasing market supply and people's living standard improvements, a series of modern department stores newly established or renovated ones were built in China to meet increasing consumer demand.
3. Maturing period: 1996-2000
The blind expansion of the general merchandise sector resulted in slender profit margins for operators, and price wars became the key tool for operators to win market share.
The serious competition caused a group of department stores to go bankrupt. Only highly competitive stores survived.
In 1996, six large department stores were closed. That was the first time in the history of the People's Republic of China for such companies to be closed.
Another 18 stores stopped conducting business in 1997, and some famous ones, such as Beijing's Xin'an Department Store, also went bankrupt in the following years.
Having learnt lessons from these failures, the surviving general merchandise players strategized on how best to get the upper hand on the competition.
4. Adjustment period: 2000-present
Faced with harsh market conditions, department store operators carried out strategic adjustments and restructuring.
Many large department stores were changed into shopping centres, while most of the small and medium-size ones turned into speciality stores in fields such as household electric appliances, jewellery and furniture.
Some retail enterprises also entered the chain retailing sector.
However, the general condition of the industry was still not positive, as department store sales volumes and profits witnessed a sharp decline from 2000 to 2002.
According to statistics from the China Commerce Association, in 2001, 104 of China's top 500 department stores were in the red. And the sales volume of general merchandise enterprises only made up 50 percent of the total consumer retailing volume in 2002, down 30 percent from 2001.
Part Two: Analysis on business operations in China's general merchandise enterprises in 2003
1. Slight increase of sales scale
For the industry's overall structural adjustment, performance in 2003 was positive as sales and retailing volumes of China's 200 key retailing enterprises amounted to 216.7 billion yuan (US$26.11 billion) and 165.8 billion yuan (US$19.98 billion) respectively. That's an increase of 20.1 percent and 16.9 percent respectively over the previous year.
At the same time, large-scale department stores posted rapid growth figures. General merchandise operators among China's top 100 retail enterprises realized a 164 billion yuan (US$19.76 billion) sales volume in 2002, up 59.5 percent from 2001.
Among the nation's top 100 chain retailers, 11 were department stores whose combined sales volume reached 99.8 billion yuan (US$12.02 billion) last year, 23.5 percent higher than in 2002.
Although affected by the SARS (severe acute respiratory syndrome) outbreak in the first several months of last year, general merchandise enterprises did not lose much business thanks to the strong market rebound in the ensuing months.
2. Achievements and losses in economic efficiency
Bottoming out from the lacklustre performance in the 1990s, the sales scale of China's merchandise industry witnessed rapid development. However, profits declined due to the fierce price wars as price discounts became the key market promotion tool for various department stores.
Compared with the double-digit increase in sales volume, the sales revenue growth rate was just 9.8 percent and the profit rate did not rise at all.
This performance can be attributed to the malignant price fight, poor cost management and enormous amounts of money pooled into business expansion.
The assets debt ratio of 371 general merchandise companies among China's 570 largest retailing firms exceeded 80 percent in 2002, while the average assets debt ratio for the nation's department stores was 66.1 percent. The high assets debt ratio not only brought high operation risks to those enterprises but also affected their economic efficiency.
3. Brand operation a key approach for profits
Rapid economic development and revenue growth changed consumer tastes and demands on the department stores.
Consumers, especially those with relatively high incomes, prefer to shop at branded department stores, that boast their own identities and can provide reliable commodities, convenient services and comfortable shopping environments for the customers.
Part Three: Analysis on the business expansion models of China's general merchandise enterprises
1. Primary stage of chain operation expansion
Between 2002 and 2003, some department stores opened some outlets successfully. As the number of chain stores increased steadily, their economic efficiency was enhanced and a united purchasing system was set up.
For example, Wangfujing Department Store Group has established 11 chain stores nationwide and the investment return ratio of its outlet in Guangzhou hit 100 percent.
In 2003, Parkson China Group's outlets reached 34, as 70 percent of the commodities on Parkson's counters were provided by its national purchasing centre.
In general, overseas-funded enterprises are more experienced in chain operation, as some of their domestic counterparts have not implemented united management inhuman resources and group purchasing.
2. Strong momentum on multi-style operation
Faced with an increasing number of supermarkets and convenience stores, a large group of general merchandise enterprises started to carry out multi-style expansion in other words, department store operators introduced supermarkets into their stores and opened chain convenience stores.
Among China's top 100 retailers for 2002, a little over 30 percent of general merchandise enterprises conducted multi-style operations; and among the top 20 retailers, 16 department stores had supermarket and convenience stores businesses.
In addition, 11 general merchandise companies were ranked in the list of 2003 China top 30 chain retailers, they all had supermarkets and convenience stores.
3. Capitalization expansion trials
Some general merchandise firms have also tried to realize rapid expansion through capitalization involving mergers, acquisitions and market fundraising.
A survey conducted by Shanghai Securities News revealed that, during 2001-02, key mergers usually happened among chain supermarket operators, while the focus was turned to department stores in 2003.
Those capitalization cases can be classified into three categories:
Regional consolidation
Supported by the Shanghai Municipal Government, Shanghai No 1 Department Store Co Ltd, Shanghai Hualian Co Ltd, Shanghai Friendship Co Ltd and Shanghai Materials and Logistics Co Ltd set up Shanghai Bailian Co Ltd, with combined assets of the joint venture reaching 40 billion yuan (US$4.82 billion).
So far, Bailian is the largest commercial group in China, not only in the general merchandise industry but also in the chain retailing sector.
Trans-regional acquisition
Dalian-based Dashang Co Ltd, the No 1 retailing operator in Northeast China, purchased some small- and medium-sized commercial enterprises in the area and extended into Beijing and East China.
Beijing's Wangfujing Department Store Group has set up outlets in Chengdu, Chongqing, Guangzhou, Wuhan, Baotou and Shijiazhuang via merger and leasing.
Raising funds in market
Some general merchandise firms, including Wangfujing Department Store Group, Changchun Department Store Co Ltd and Lanzhou Minbai Group tried to raise fund from the capital market. However, their performance in the market was lower than expected.
It was in 2003 that China's general merchandise industry began coming out of a difficult period. The industry turned stronger, especially after the challenges posed by the SARS epidemic.
However, faced with the liberalization of China's retailing market and the rapid development of new operation styles, China's general merchandise enterprises have to make more efforts in renovating the stores, improving management systems and, operation standardization as well as enhancing efficiency if they are to further develop.
(China Daily April 16, 2004)
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