DALIAN, China -- Chinese private property developer Dalian Wanda Group plans to undergo restructuring of its unprofitable businesses. It will likely close nearly half of its department stores, responding to the slump in high-end items affected by the country's slowing economy and President Xi Jinping's campaign to cut luxury spending.
It also said it will exit the karaoke business. The group will then shift its resources to more promising industries such as tourism and sports.
Wanda Commercial Properties operates the group's retail businesses, including the Wanda Plaza shopping malls in 119 locations. In addition to cinemas, department stores have been the core components of the malls, but the operator says it will shut down a significant portion of the 90 stores. It has already closed a store in Jinan, Shandong province, and recently started a closure sale at another one in Guangdong province.
Wanda Group has not specified the number of its planned store closures yet, but it will likely be as many as 40, local media reported, some of which have only been operating for less than a year. Some 10 outlets, such as in Shenyang, Liaoning province, and in Wenzhou, Zhejiang province, are said to have accumulated losses.
The operator said it will replace the vacant space with tenants that fit consumer demand, for example restaurants and gyms. It is also considering opening separate shops within the malls to sell jewelry, cosmetics, shoes and other items that are currently sold at its department stores.
It also unveiled a plan to close entire chains of its Superstar karaoke parlors. It has agreed to sell 10 locations to a Beijing-based competitor. The remaining sites will be sold to other operators or converted into other types of entertainment outlets.
Karaoke parlors, known as KTV lounges in China, are popular among young Chinese and families. Any number of customers can stay for hours just by paying a room charge. If they do not order meals and drinks, it costs very little. So while the customers can enjoy the entertainment cheaply, the operators can only earn thin profits.
The group said in a statement that the KTV business is "not very suitable for a big enterprise like Wanda," and will focus on those with higher profitability.
Shopping centers, meanwhile, have continued to be a stable source of revenues of the group. Thanks to the popularity of Hollywood movies, film theaters are also doing well. By reshaping its business portfolio, the group intends to eliminate unprofitable sectors and boost new businesses while maintaining the profitability of existing lines.
Even with its weakening economy, China's retail sector has continued its double-digit growth. According to the country's National Bureau of Statistics, total retail sales for the first seven months of this year increased 10.4% from the year earlier, to about 16.6 trillion yuan ($2.59 trillion).
On the other hand, gaps between businesses are widening; while online sales have driven most of the growth, revenues at conventional businesses, other than convenience stores and furniture outlets, were stagnant. Department stores have struggled with sales slump of luxury imported items, discouraged by the strong yuan against major currencies and the Chinese version of a value-added tax on imports.
The growth rate for department store business, which had previously showed double-digit growth, shrank to 2.7% in 2014. Following the recent drop of the Shanghai stock market, the number is projected to turn negative this year.
Xi's efforts to cut extravagant spending, as well as the expansion of online shopping, will continue to negatively affect sales of department stores. Operators will be compelled to consider closing or converting their businesses.