China’s current retail market can be characterized by gradual recovery, digital innovation and changing consumer preferences. Consumption growth is driven by middle-class spending, strong demand for experiential and premium goods, and a rising focus on domestic brands.
However, traditional retail spaces such as department stores must contend with evolving consumer trends, the encroachment of e-commerce and live-streaming, and intensified competition due to poor product differentiation.
In light of these developments, the HKUST Li & Fung Supply Chain Institute and the China Commerce Association for General Merchandise recently published the China’s Department Stores Report 2024-2025. As part of the primary research, the two parties surveyed key department store operators, revealing major industry trends and key challenges.
Department store sales have declined over the past five years due to overall weak consumption and the growth of e-commerce channels. Only 24% of department store operators expect their sales to grow in 2025, a significant decrease from 66% in 2024. Recent forecasts by the Institute predict that China’s gross domestic product and total retail sales of consumer goods will grow by 4% and 5%, respectively, in 2025.
Industry Challenges
The department store sector struggled with weak consumption, reflected in low store traffic, which became a catalyst for rising costs and declining profits – 98% of surveyed department store operators viewed insufficient purchasing power and consumption downgrades as their biggest challenges. As a result of structural adjustments in the consumer market, department store operators are facing unprecedented pressure to transform their businesses.
There has been an enduring lack of differentiation among department stores, which tend to offer similar brands, displays and prices. Furthermore, e-commerce platforms continue to divert customers from physical retail with broader offerings and better deals, putting department stores at a disadvantage. The growing proportion of Gen-Z consumers also prefers more personalized, social experiences over shopping guides and membership systems offered by traditional department stores. As a result, department store enterprises are struggling to pivot their services to meet these demands efficiently.
Trends and Developments
A significant majority, 82%, of surveyed department store operators believe that department stores will shift their operational focus to enhance product competitiveness. As consumer demand becomes increasingly diverse and personalized, transformation and upgrade of department stores require optimizing product structure, strengthening supply chain management, enhancing product innovation and establishing close partnerships with brands, rather than low-level changes such as physical renovations, adjusting brand tiers or expanding the brand portfolio.
Of the department store enterprises polled, 63% consider accelerating transformation and upgrades to be the primary development trend for the industry in the next three years. Transformation and upgrades of traditional retail businesses can include their physical spaces, business formats, product categories and strategic positioning. In 2024, department stores and shopping centres underwent scenario-based transformations to fulfil consumers’ changing needs. The goal is to offer comprehensive and immersive shopping experiences through carefully crafted spatial layouts and store atmospheres.
Furthermore, many department store operators have achieved notable progress in digital transformation and AI applications; 82% of surveyed enterprises reported that AI will have a transformative impact on the digital development of the retail industry. Growing digitalization and AI applications will advance innovative practices in operational efficiency and cost control. Large Language Models (LLMs) such as DeepSeek allow businesses to utilize AI tools to monitor and analyze consumer preferences and sales data in real time. These tools can also refine management and marketing strategies, thus improving operational efficiency and profitability.
Government Policies
In late 2024, the Ministry of Commerce and six other departments jointly issued the “Implementation Plan for Retail Industry Innovation and Upgrade,” which outlines five main tasks: promoting scenario-based transformation, quality supply, digital empowerment, diversified innovation and supply chain improvement. The plan aims to establish a modern retail system by 2029, characterized by abundant supply, balanced distribution, multi-channels, quality service, smart technology and convenience, and green and low-carbon practices.
Regarding broader consumption subsidies, the national government has renewed its consumer goods trade-in program in 2025, doubling funding to RMB 300 billion and expanding its coverage to include more electronics and home appliances such as dishwashers, smartphones and tablets. This will create new opportunities for department stores to expand their consumer electronics offerings and related services to attract more consumers.
The China-U.S. Trade War
The tariffs on Chinese goods in the United States significantly impact Chinese exporters, especially small manufacturers of consumer goods. In response, some Chinese retail giants and e-commerce platforms offer support schemes for exporting businesses to transition into selling domestically. This may create opportunities for China’s department store sector, as this will offer a broader range of brands and products for department stores to expand their offerings and increase product differentiation.
While the full economic impact of the tariff war remains unclear, knock-on effects on the supply chain, changing consumer behaviours and economic slowdown are likely to impact the entire retail sector. Overall, department store operators must remain flexible and responsive in the face of rapid changes, capitalizing on emerging opportunities to ensure long-term success.
The ‘China’s Department Stores Report 2024-2025’ is available in Chinese and English on the HKUST Li & Fung Supply Chain Institute website: ustlfsci.hkust.edu.hk
Helen Chin, Head (Research), HKUST Li & Fung Supply Chain Institute