Taiwan Today

When Taiwan’s first Pa­cific Sogo department store opened on November 11, 1987,on Taipei’s fashionable Chunghsiao East Road, the event drew an estimated crowd of three hundred thousand. Would-be shoppers lined up around the block waiting to get inside for a peek at the thirteen stories of gleaming display cases and racks of imported designer clothing. Sogo hired a cast of characters from Tokyo Disneyland to entertain the crowd, but the store was so packed that few got a glimpse of Goofy and friends.

The timing was good for the Japanese retail giant to enter Taiwan: per capita GNP had nearly tripled to US$7,900 over the previous decade, people were traveling abroad more and developing a taste for foreign goods, and import tariffs were being reduced. All this spelled new interest in personal consumption.

Sogo promised to deliver not just newly available merchandise such as top-name Japanese electronics, French cos­metics, and Italian shoes, but also a touch of glamour. The store also imported its Japanese-style service. Troupes of young, female elevator operators decked out in pleated skirts, felt hats, and white gloves greeted shoppers and sang out the attractions on each floor, and smartly dressed salesclerks lined up to bow to customers at the start and finish of each selling day. And Sogo brought the perks common in Japanese stores: an art gallery, a VIP room for Sogo credit card-holders, a simulated golf course, a baby room stocked with rental carts and other sup­plies, classes on flower arranging and microwave cooking, and most impor­tantly a number of in-store coffee shops and a basement-level food court that proved tremendously popular.

In 1987, shoppers had few other choices with Sogo’s upscale atmosphere and amenities. At the time, shoppers could either visit crowded and dirty out­door “night markets” or dingy department stores that tended to offer limited merchandise, a jumbled product display, high prices, and snobbish salesclerks.

The scene has changed greatly over the past eight years, with many new look­alike department stores opening up. But Sogo, a joint venture between Taiwan­based Pacific Construction Group and Japan’s Sogo Group—which operates twenty-seven stores in Japan and ten others throughout Asia, Europe, and North America—has reigned as Taiwan’s most profitable department store. In 1993, the Taipei store drew sales of US$296 million, giving it the third-largest reve­nues among Taiwan department store chains. Both of the top two chains operated many more stores. Far Eastern De­partment Stores’ twelve branches drew in US$538 million that year, President De­partment Stores’ eight branches brought sales of US$357 million. In 1988, Sogo garnered 18 percent of department store sales in Taipei. By 1994, after it expanded into a second annex near the original store, it claimed 20 percent.

The success of Sogo has brought about a rush of interest in the industry from both local and international firms. From 1988 to 1994, seven major depart­ment stores opened in Taipei alone. (Four closed during those years, most of them smaller, locally owned.) Of the twenty largest stores in the city, five are Japanese joint ventures. And among the locally owned stores, many have revamped to copy the formula that couples Japanese service and amenities with Western merchandise.

Despite the heightened competition, most Taiwan department stores are sitting pretty. Unlike their recession-beleaguered counterparts in the West, they are benefit­ing from a steady rise in consumer spend­ing. Total department store sales have grown by 13 percent annually during the past five years, to reach US$2.6 billion in 1993. Today, there are twenty-eight department stores serving the 5.9 million residents of greater Taipei, six in Kaohsiung, and fourteen in Taichung. Many in the department store business believe there is plenty of room for growth. A May 1994 report published by Barings Securities states that “there is little con­cern that market saturation will slow growth momentum—department store sales accounted for only 6 percent of total retailing sales in 1993, much lower than the 15-percent level common in developed countries.”

The primary reason for optimism is the steady increase in buying power among local shoppers. Barings reports that in recent years, consumer spending has averaged an annual compounded growth rate of 11.7 percent while the GNP has been rising by 10 percent per year, marking a tendency for consumers to spend a higher percentage of their earn­ings. The report also states that as Tai­wan’s per capita GNP rises, spending patterns should shift upscale from mom-and-pop neighborhood stores to de­partment stores, hypermarkets, and even­tually to high-end shopping malls. Researchers predict that consumers with an annual income above US$12,000­—near Taiwan’s current per capita GNP—could shop at upscale malls. Although there are not yet any large, U.S.-style shopping centers in Taiwan, predictions such as Barings’ have sparked interest among developers.

Retailers agree that the trick to riding this wave of spending power is to stay on top of rapidly changing consumer tastes. To do this, department stores are focused on meeting new demands for customer services and an improved shopping atmosphere, making the most of emerging customer groups such as working women and teenagers, and counteract­ing the impact of hypermarkets and other new retail channels.

Taiwan’s de­partment store stand­ards have largely been set by the successful joint venture stores from Japan. One important difference between local stores and their counterparts in the West is that Taiwan, like Japan, uses a vendor system in which department stores rent most of their space to individual merchandisers such as Christian Dior or Panasonic in return for a commission of 20 percent or so on sales. Thus the stores alleviate the risks of pur­chasing merchandise themselves, and simply replace vendors who are not sell­ing well.

According to Jiro Amano, president of the three-store Shin Kong Mitsukoshi chain, the single most important feature in Japanese-style stores is service. Amano believes Taiwanese and Japanese cultures are similar enough that local shoppers appreciate the Japanese stress on formality and customer respect. In fact, he says local shoppers give even more weight to customer service and a store’s overall atmosphere than to the products for sale. “Of course the merchandise is very important, but the most important two things we have are culture and service,” he says. “In Taiwan, the merchandise at various stores is not so different because there are very few suppliers. And the price is almost the same from store to store. So in establishing our image, the merchandise is not such an important element—the service is.” Amano says Mitsukoshi banks on its three-hundred-year tradition as Japan’s oldest department store, and on extras provided by the store’s art exhibitions, fashion shows, home delivery services, and in-store babysitters.

Japanese-style service was one of the qualities that Chung Yo Department Store in Taichung sought to offer when it opened Taiwan’s largest department store in April 1992. Although entirely locally owned, Chung Yo hired a Japanese department store, Matsuya, as a consultant in developing its service operations and employee training. “The Japanese style has become the model,” says Chris Liu (劉志成), sub-general manager of Chung Yo. “We believe customers have gotten used to this. If we don’t do this, they won’t be satisfied.”

One crucial aspect of good service is treating customers with respect. Marta Lou (劉麗珠), general manager of The Mall, an upscale Taipei shopping center owned by Far Eastern Department Stores, explains why nearly every store in Taiwan offers customers a VIP card. “It’s Chinese culture—we do care about face,” she says. Although customers may be drawn by the discounts offered by the cards, Lou explains that the idea of receiving special benefits as a VIP can be just as attractive as the money saved. “It represents a kind of respect,” she says. “That’s Chinese mentality: you give me face, you treat me special.”

Because service is so vital, staff train­ing is one of the most important elements to a department store’s success. But it is also one of the most challenging. In Taiwan’s booming economy, young people tend to jump from job to job. Six months of work experience with Shin Kong Mitsukoshi or Chung Yo easily translates into a higher paying job elsewhere.

Shin Kong Mitsukoshi learned this the hard way. In preparing for the open­ing of its first Taiwan store in October 1991, it sent about one hundred newly hired personnel to the main Mitsukoshi store in Tokyo for training. But the com­pany soon learned that Taiwan employ­ees do not share the sense of company loyalty common in Japan. “Unfortunately, after they came back to Taiwan, almost all of them left the company,” Amano says. Today, turnover remains a significant problem, but Shin Kong Mitsukoshi has cut costs by training all local employees in Taiwan. Among the company’s 1,200 Taiwan-based employ­ees, only sixteen upper-level managers are Japanese, making the management 65 percent local.

Chung Yo developed a strategy for securing qualified salesclerks even before the department store opened. The store has formed an arrangement with the nearby National Taichung Institute of Commerce in which it hires fifty to sixty students each year to work part-time in return for tuition and a stipend. These students at­tend class for two hours in the morning, then work at the store. “We knew man­power supply would be a difficult problem and it proved to be true,” says Chris Liu. “With the economic growth, many young kids don’t take work seriously.”

Under this program, Chung Yo’s an­nual staff turnover is about 20 percent, which Liu says is better than most other stores. Since the store can guarantee that most students will stay at least through their three years of schooling, they can afford to invest more in training than can other stores. Basic classes for salesclerks include English lessons and a workshop on makeup and fashion, and those who operate the loudspeakers take lessons on broadcast skills. But much of Chung Yo’s basic training focuses on instilling customer respect. “The toughest thing is stressing customer satisfaction,” Liu says. A poor attitude from store personnel is the most common complaint at Chung Yo’s service center and hotline, and is the most difficult problem to overcome among employees. “In the end, our success depends on whether we have repeat customers or not,” Liu says. “If we don’t, we don’t have a business.”

Another change spurred by the influx of Japanese department stores can be seen in the physical appearance of local stores. Alice Hsu (徐荷芳), president of Tai­wan’s largest department store chain, the twelve-unit Far Eastern Department Stores, says the Japanese stores have pressed older stores to offer roomier, more aesthetically pleasing interiors and amenities such as art galleries and parking lots. Last year, Far Eastern undertook a US$5.8 million remodelling of its Taoyuan store to gear up for competition from a new Japanese-owned Yaohan de­partment store, and spent US$3.8 million revamping the merchandising mix and upgrading its Taipei store on Jenai Road to provide large display areas and a brighter, slicker atmosphere.

Another part of keeping customers satisfied is knowing exactly who they are—a task that has become increasingly challenging because shopper profiles are changing. Women’s fashions still bring in the largest percentage of revenues at most stores, but the profile of female shoppers has changed significantly since the early 1980s. “Over the past five or six years, every time we plan to renovate a store, we usually lower the target age group,” says Alice Hsu. “About fifteen years ago, I would say the average customer at department stores was thirty­-five to fifty-five, mostly housewives. But starting eight years ago, we realized that the main group coming to shop are office ladies.” In response, stores hurried to increase their merchandise for young working women.

Today, another consumer group is emerging—high school and junior high students. Hsu points out that these teen­agers have money to spend, either from their parents or through part-time jobs. Also, since school regulations on appear­ance loosened in the late 1980s, youngsters have become more fashion con­scious. “Today, the target age for us is twenty-two to forty-five, but we are also expanding merchandise for those fifteen to twenty-two,” Hsu says.

Marta Lou of The Mall also targets young shoppers. “The younger customer group, those in their twenties, are the ones really supporting the fashion trends,” she says. “They pick up the trends very fast, not a day behind Hong Kong. It used to be that our customers were maybe one sea­son behind, because it’s also a risk to be a trend setter. But this has changed.”

At Chung Yo, the store tracks customer trends through a computerized point-of-sale system that monitors sales in each department. Twice a year, the company uses this information to determine which of its vendors stay and which go. Last year, the company made its big­gest changes to date: increasing the young men’s clothing department and expanding the young ladies selling space from one to two full floors. Young shop­pers, Chris Liu says, are now the store’s largest customer group. “They’re young, they’re energetic, they’re not concerned about job pressures,” he says. “These young customers, they are our favorites. They come to the store before tests, dur­ing tests, during vacations, during the school day.” Much like U.S. shopping malls, local department stores are fast becoming teen hangouts. With this in mind, Chung Yo includes snack bars and coffee shops on nearly every floor and features a video arcade and karaoke club.

One factor expected to shake up Taiwan’s department store industry is the sudden explosion in popularity of other retail channels, especially hyper­markets, and the competition from shop­ping centers and brand name factory outlets.

The first hypermarket opened in Tai­wan in 1988, and today there are twenty-two of these warehouse wholesalers across the island. The two largest chains, Makro and Carrefour, are joint ventures with Eu­ropean companies, but local firms are rush­ing to join in this rapidly growing business.

“Hypermarkets will be a very, very booming business in Taiwan,” says Edward Chi (紀關福), senior vice presi­dent of Far Eastern Group. The company is so sure of the potential for these stores that it has opened two of its own hyper­markets in Taipei, and has opened a third in Tainan through a joint venture with the French retail firm Promodes. Using the popularity of hypermarkets in France as a model and adopting this to Taiwan demographics, he calculates that the island could absorb five hundred hypermarkets. Such a boom, he believes, will have a significant influence on department stores. “Department stores will have two ways to compete with the mass sales channels,” he says. “They will move some portion of their business either downscale or upscale to create new opportunities.”

Chris Liu of Chung Yo believes most department stores will react by shifting to the higher-end of the market. He stresses that stores will have to differentiate their merchandise from hypermarkets to avoid competing on price, then focus on offer­ing customers new perks and amenities. “There are lots of advantages department stores can add on,” he says. “We have to study this.”

Growing interest in shopping malls and shopping centers is also expected to have an impact on department stores. Tai­wan’s first shopping mall, The Mall in Taipei, opened in spring 1994. It poses a threat to high-end department stores by giving customers an upscale mix of one hundred designer fashion boutiques in an ultra-slick, marble-and-glass setting com­plete with a huge fountain at the entrance. Meanwhile, half-a-dozen larger shopping centers are now in various stages of plan­ning, most located in suburban areas.

Because land acquisition is such a serious problem, only the island’s biggest companies are attempting such large­-scale projects. One is Far Eastern Depart­ment Stores. Backed by its mother company, Far Eastern Group, one of Tai­wan’s three largest conglomerates, the company can simply transfer land from other corporate holdings. It is now developing a shopping mall in Kaohsiung, scheduled to open in 1998. A handful of other large conglomerates have sent applications for shopping mall designs to the Ministry of Economic Affairs. These will pose new threats to existing department stores, but also create opportunities for the stores that open branches within them.

One type of retail channel not yet seen in Taiwan, but anticipated by some in the fashion business, is factory outlets that sell over-stocked or off-season brand­name merchandise at discount prices. Edward Chi of Far Eastern argues that Taiwan department stores already operate as factory outlets because the vendors that rent space have periodic sales to clear off­-season merchandise. “In Taiwan, many department stores provide opportunities for factories to sell goods at very, very low prices after season,” he says. “So I don’t think [discounters] will boom in Taiwan.”

But Jean-Pierre Plard, general man­ager of Printemps Taipei, which became Taiwan’s first European department store when it opened in March, believes it is inevitable that these stores will arrive on the island, given their widespread popularity in the United States and Europe. “It’s clear that there is an international trend toward discount stores, and it will come here,” Plard says. “It went through Europe. It is already in Japan, where discount stores are very successful with brand-name merchandise. It is already at the doorstep of Taipei. We have to go with the trend.”

With this in mind, the Taipei Printemps, which is a franchise operated by Taiwan-based Teh Jieh Enterprises, was designed to present a less formal set­ting than other local stores, and much of the merchandise is priced at mid-range levels. “We are open to the young popula­tion,” Plard says. “We don’t want to be too sophisticated.”

While this is quite a diversion from the ritzy, Japanese-style stores that have proven so successful, Plard believes Tai­wan is ready for a more casual Western­-style department store. “Taipei is very upmarket,” he says. “Even the clothing sold by street vendors is expensive.” He points out that jackets and dresses sold on the sidewalk may go for as much as US$400. He believes that the public tends to equate a high price tag with quality, whether or not the product is well made. “Consumers are rather naive—they have to be educated,” he says. “We have to try to show them what is the normal market price for merchandise.” He believes that through overseas travel, local consumers will quickly come to demand discount retail channels.

To face the rising competition from other department stores and other retailing channels, existing stores will likely need greater and greater sophistication in their purchasing, distribution, and market­ing. Alice Hsu of Far Eastern says that in­dividual stores that do not enjoy the economies of scale offered by the larger chains will most likely be caught short. “In the future, success will depend on the strength of the backup system for a de­partment store,” she says. “That means how department stores train their professionals, how they structure their financial picture, how they acquire resources like land, how large they are, their growth strategy, and how they position them­ selves.” The days when customers lined up around the block just for a peek at a new department store are long gone. De­partment stores now depend on market re­search, behind-the-scenes cost cutting, accurate customer profiles, and an arsenal of services and attractions to draw customers inside their doors and away from a growing number of competitors.