China’s department store market is a relatively fragmented industry with several large department stores operating alongside other retail outlets such as hypermarkets, boutique and specialty stores. According to the National Bureau of Statistics, total sales revenue of department store operators amounted to RMB323 billion in 2011.
These store operators tend to focus on a region, which allow them to have a better understanding toward consumer behavior and needs. In addition, regional department stores allow themselves to build a stronger local network which gives these store operators higher bargaining power within their own region. One example is that store operators are able to build long-standing relationship with suppliers.
Golden Eagle Retail Group Limited (GER) (HKSE: 3308) is one of China’s larger department store operator with a revenue of RMB3.66 billion in 2013. With its first store opened in 1996, Golden Eagle now operates an extensive network of 26 mid-to-high end department stores located across four provinces one municipality. Most of the stores are concentrated in Jiangsu province with a total of 17 stores.
What Are The Challenges Faced By GER?
GER works on a concessionaire sales model which leases a designated store space to manufacturers, suppliers or licensed importers which carry their own brands. The Group does not buy out the inventory and only earns a commission when products are sold in their stores. Operating leverage is not only high but there is a lack of scope in product differentiation.
As such, there is very strong competition within China’s retail sector where department stores are losing ground to specialty stores and hypermarkets. Hypermarket operators tend to have better bargaining power over their supplier given their economies of scale, providing a wider range of products at lower pricing. Specialty stores tend to have better control over their product range, pricing, advertising & promotion and store designs as compared to GER.
In addition, the e-commerce business has been growing at a rapid rate over the past years where consumers are turning to online shopping. Companies such as Ali Baba Group and Tencent offer consumers the comfort and diversity of shopping online in their homes. Moreover, purchases are delivered quickly and carry very low transport charges (sometimes the sellers absorb these costs). This increases the online shopping experience for consumers.
Value In Action
Golden Eagle Retail’s revenue has been growing at a CAGR of 18.2% yoy between 2005 to 2013. The Group is trying to diversify its business model into online platform in order to compete with their online competitors. Moreover, the Group is also actively promoting its VIP loyalty services to a more innovative and value-added quality services for its VIP customers. However, the challenges faced by department store operators including Golden Eagle could potentially disrupt these operators’ business model.
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All views and opinions articulated in the article were expressed in Willie’s personal capacity and do not in any way represent those of his employer and other related entities. Willie does not own any shares in the companies mentioned above.