Upscale department stores, offering the cachet of luxury brand goods and superb customer service, are shutting their doors one after another in China, despite an eye-popping growth in consumption in the world's second largest economy.
Rapid economic growth prompted a glut of department store openings, which ushered in both cutthroat competition and skyrocketing costs. In addition, the spread of malls and online retailing are threatening to replace department stores as principal venues of shopping, even before the latter have had time to win a loyal customer base.
An outlet of New-Mart, a major Chinese department store chain, closed on Aug. 1 in Shenyang, the largest city in northeast China. The news shocked local residents, because Isetan, a Japanese competitor, had only just withdrawn from an adjacent building two months earlier.
On May 31, Isetan Shenyang was filled for the last time with shoppers eager to grab half-price goods in a closing sale.
"I like the atmosphere here, and I have been here many times," said a twenty-something who was visiting with his girlfriend. "The closing is sad news, but there are a bunch of other stores to go to."
About 10 department stores pack the area where Isetan Shenyang was located.
"We were confident about the services we offered, but we fell behind our rivals in lowering prices after competition intensified," said a female salesclerk.
The floor space of department stores and other outlets, including those under construction, totals about 4 million square meters in Shenyang, home to about 8 million people. That is more than quadruple the total floor space of major department stores in Tokyo. Experts have warned about a surfeit of shops in Shenyang, where Isetan was booking annual deficits.
Department stores have closed in many major cities across China, such as Shanghai, Beijing and Chengdu. A headline in the Caixin Century Weekly magazine in July lamented: "Winter comes to department stores."
Takashimaya Co., another major Japanese department store chain, opened its first Chinese outlet in Shanghai in December, but customers were scarce on many of its floors, with the exception of the basement food market.
Takashimaya President Koji Suzuki referred to the anti-Japanese sentiment that was raging in China when the Shanghai store opened over a territorial dispute over the Senkaku Islands.
"We have to be patient and take our time," Suzuki said.
With Shanghai Takashimaya's location outside the city center, it could fail to meet a sales target of 8 billion yen ($83 million) for its first year in operation, down about 40 percent from the initial goal, unless it comes up with sales promotions to attract more customers.
In addition to fierce competition, rising rents and other costs are also hitting department store operators hard. Chinese Commerce Ministry figures said rents for large outlets rose 21 percent on average in 2012.
In July, a major department store in Chengdu was forced to close after facing a quintuple rise in rent.
"Department stores in China are facing the challenges of homogenization and rising expenses," said Hong Tao, an economy professor at the Beijing Technology and Business University.
Developers vie to attract department stores in hopes of raising the value of their properties in urban areas. A department store may line its shelves with flamboyant designer items, but a rival next door will do exactly the same. The result is a price war, which, alongside skyrocketing rents, takes its toll on retailers.
According to figures of the China Commerce Association for General Merchandise, the department store industry posted a year-on-year sales increase of 8.9 percent overall in 2012, but that figure was only about half the corresponding levels over the previous five-year period. Overall profits dropped 6.1 percent.
That slowing in sales growth immediately eroded profits and prompted an exodus of excess stores.
The online retailing industry, one of the main drivers of the bountiful year-on-year growth of 14.3 percent in overall consumption in China in 2012, is also blamed for taking customers from department stores.
Internet shopping in China gained momentum during an outbreak of severe acute respiratory syndrome in 2003. The spread of the new type of pneumonia prompted people to stay home and shop online. A decade later, China is expected to become the world's largest online retailing market in 2013.
Online retailers, which do not need brick-and-mortar stores, can keep their prices low even as rents and labor costs continue to rise. Home delivery services are also rapidly winning the hearts of consumers with their low prices and convenience.
Experts say Internet shopping is particularly popular in the clothing sector, a traditional pillar of department stores.
"People are beginning to feel that department stores offer expensive prices," said the head of a major Chinese apparel firm. "People nowadays go there only to examine items, which they will purchase online anyway."
Major retailers are moving to slash floor space for clothing and assign more store areas to movie theaters, restaurant floors and child education facilities. They are hoping to counter the rise of online retailing by moving out of department stores, whose main function is to sell goods, and switching instead to malls, which offer more of a fun experience to shoppers.
Experts say department stores in China entered their "golden age" only in the 1990s or in later years, when the country's reform and open door policy were firmly on track. Clients have yet to appreciate the virtues of department stores, such as excellence in customer service, but the new business models, which trade on low prices and convenience, are already emerging as tough rivals.
"It's like as if we were going directly from the 19th century to the 21st century," said Hiroshi Onishi, president of Isetan Mitsukoshi Holdings Ltd.
(This article was written by Tokuhiko Saito in Beijing and Emi Hirai in Tokyo.)
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