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China's New Year for Shopping

February 15th, 2013

by Sherwood Zhang

of Matthews Asia

This week’s Lunar New Year celebration, also known as the Spring Festival in China, is not only a time of tradition for families during which they reunite over a feast, it is also one of the busiest shopping seasons of the year. As with Christmas in the West, the Spring Festival is a time of gift giving for friends and relatives. Children receive money in red envelopes as part of the tradition and stores often hold large-scale holiday sales to attract shoppers. As a child in Shanghai, I used to have to wade through large department store crowds to spend my New Year’s money at my favorite toy counter.

While these holiday traditions have not changed, what has been changing is the competitive landscape for China’s department store operators as more modern shopping malls emerge. Since department stores were introduced in China in the early 20th century, they have been the dominant retail format for items such as apparel, footwear and accessories. In fact, for many years they were typically the only venue for certain “luxury” items as cosmetics and home appliances. Unlike western department stores, Chinese department stores operate on a mostly concessionary model, taking commissions from sales generated by each counter or mini store within its space. Counter operators are responsible for merchandizing and inventory management, which enables the department store operator to have strong cash flow with little inventory risk, and function more like a landlord than a retailer. Not surprisingly, until recently department stores were considered stock market darlings as they were supported by a rapid rise in discretionary spending.

Now, however, more spacious shopping centers have been luring some shoppers away from these traditional standalone department stores. As with malls elsewhere, they tend to have more services such as dining facilities and movie theaters. Shoppers can also go directly to the branded stores they prefer, and multinational brands tend to want to open their own specialty stores in shopping centers as a way of expanding in the country, rather than sharing space among local brands within a department store.

Despite the stronger competition, China’s department stores still enjoy some unique advantages over malls. First, they issue pre-paid gift cards, which tend to generate significant cash flow. Mall operators, on the other hand, effectively function as commercial real estate managers and cannot issue such cards, which are reserved for retailers. In addition, most department stores maintain loyalty programs with millions of members and years of shopping data history that they are starting to mine as a database for consumer behavior. Lastly, some department store operators, particularly those that own their properties, have adapted to incorporate some of the appealing attributes of malls such as redesigning their top floors to become food courts and entertainment venues.

There are of course some shoppers who still prefer the format of a department store. When I called my mother in Shanghai to wish her well for the Chinese New Year, she told me that she had just returned from holiday shopping at some department stores she typically frequents. She did not visit the newly built shopping center closer to home.

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