"Being moved to the department store business has really hit me hard in the wallet," says Wang Po-ming, a 20-year veteran with President Chain Store Corp. who was appointed in May to head the company's latest venture, Uni-President Hanyku Department Store in Taipei's Xinyi commercial district.

His outfit explains why. He is wearing a crisp suit, with a Montblanc pen clipped neatly to his shirt pocket, and sporting fashionable dress shoes worth more than NT$10,000. Wang, whose background is in legal affairs, admits that before taking the job, he had little knowledge of department store brands, and he believed the best way to quickly build familiarity was to buy branded goods and try them himself.

"Your attention to aesthetics really does change," acknowledges Wang, who absorbed a hefty blow to his personal finances by getting rid of all of his old shoes and filling his closet with new suits.

Once a backroom legal adviser and then the CEO of the National Center for Traditional Arts outside Yilan City, a BOT project run by Uni-President, Wang was abruptly thrust into the role of department store general manager. Since Oct. 7, when Uni-President Hankyu Department Store opened for the first time, he can now be seen every morning bowing repeatedly to visitors as they enter the doors.

The huge steps taken by Wang during his career with the company are symbolic of President Chain Store's leap from the world of convenience stores to that of department stores.

The company's first push into the unfamiliar industry ended in failure in July 2008, when its partner, Marks & Spencer, announced that it was shutting down its three stores in Taiwan. It then joined with the biggest department store operator in Japan's Kansai region, Hankyu Hanshin Department Stores Inc., to open an outlet in Kaohsiung's Dream Mall that to this day remains a money-losing venture. For this street-corner convenience store giant, moving into Taiwan's crowded department store market has been anything but easy. 

Will the Hankyu Department Store be the Uni-President Group's final department store battle? Its biggest challenge will be to fight the battle in a way that differentiates it from its rivals in a very crowded market.

Taiwan's First ‘Store-within-a-Store' Department Store

The new department store has generated a buzz in Taiwan's retail market because of its new approach – the introduction of Japanese casual wear brand Uniqlo as a "store-within-a-store." The strategy signifies that the country's department store retailers are following Japan's footsteps as closely as possible in offering fashion described as "affordable luxury."

Hsu Yin-Chieh, a professor in National Kaohsiung First University of Science and Technology's Department of Marketing and Distribution Management, says that Japanese and American department store operators have often used the "store-within-a-store" model to create hype for their businesses in recent years. The model integrates the brand recognition of exclusive stores with the ability to generate high customer traffic. 

For example, Hsu says, the most popular fast fashion brands, such as H&M, Zara, and Uniqlo, have become prized catches for department stores, because their quick response to changing fashion trends and constant turnover of new items have proved to be consumer magnets.

Uni-President Hankyu Department Store has devoted its entire B1 floor, covering an area of 1,454 square meters, to a Uniqlo outlet, becoming the first department store in Taiwan to boast the "store-within-a-store" concept.

Allwell Chou, vice president of Fubon Multimedia Technology Inc., which opened its own Momo Department Store on Oct. 6 and plans to move into Lot A10 of the Xinyi commercial district in three years, says that department stores are taking their cue from the general consumer market and moving toward two extremes. At one end will be Shin Kong Mitsukoshi and Sogo, steeped in high-end merchandise and cosmetics, while new entrants at the other extreme will emphasize "affordable luxury."  

"Japan's Omotesando no longer only has luxury boutiques. The flagship stores of Zara, H&M, Forever 21, Nike, and Apple are also there," Chou says, stressing that even the upmarket shopping avenue known as Tokyo's Champs-Elysees, along with Tokyo's venerable Ginza district, have been unable to resist the change. 

Vicky Lee, vice president of CK Watch & Jewelry Taiwan, who recently returned from a business trip to the United States, also has sensed a changed environment.

"The financial crisis turned affordable luxury into a global trend," says Lee. It is a trend that she feels has been fortified by the strong individual points of view on fashion expressed by the younger generation.

The rise of the fast fashion brands, however, could also have a downside for Taiwan's big retailers.

"How many brands will one Uniqlo squeeze out of existence? That is the dilemma department store operators face when they introduce a brand like that," contends Pacific Sogo Department Stores president K.J. Lee. 

Sogo's Lee admits, however, that the trend of Taiwanese department stores becoming more like their Japanese counterparts is irreversible. Once Taiwan imports more clothing from China under the ECFA (economic cooperation framework agreement) signed in June, the country's fashion prices will move toward a more rational level. That, along with the growing sophistication of local consumers' fashion sense, could draw shoppers away from their blind allegiance to expensive brands, Lee explains.

According to Lee, the formula for calculating a department store's revenue is the number of customers times the purchase rate times per-customer spending. Upscale department stores rely on high per-customer spending to drive up their numbers, but Uniqlo's average transaction price is low, necessitating a different operating model.

For Uni-President Hankyu Department Store, located at the busy Taipei City Hall Bus Station in the Xinyi commercial district, generating traffic should not be a problem. Its main challenge will be how to increase average spending and its customers' purchase rate.

The department store hopes to use service to differentiate itself from its competitors. "We hope that the other 303 brands at the department store will not be overwhelmed by Uniqlo," Wang says.

People in the industry believe that Uniqlo's ability to bring in customers will be a major selling point for Uni-President Hankyu Department Store. But in the future, Uniqlo will almost inevitably set up other locations, as will other Japanese brands that President Chain Store is introducing to Taiwan through the influence of its Japanese partner. They will have to expand their presence, because if they don't, their volumes will not be big enough to allow them to survive in Taiwan.

If these signature brands do branch out, then how will Uni-President Hankyu Department Store continue to be "special"?

"The next two to three years will be a key period for observation" to see whether its service can differentiate the store from other retailers, Sogo's Lee says.

President Chain Store must rely on Uni-President Hankyu Department Store to reverse its fortunes in the industry, but the significance of the success or failure of the store will go beyond that. It will determine if President Chain Store becomes Taiwan's dominant distribution giant, with interests in more sectors – convenience stores, big box retailers, malls and department stores, restaurants, and virtual distribution – than anybody else.

President Chain Store's incursion into the department store market has been brewing for a long time. Wang says the company recognized early on that relying exclusively on convenience stores was too limited in scope to support commercial developments. That led to its interest in developing shopping malls, and its shopping venue business group quickly undertook projects at the Dongshan Service Area on National Freeway No. 3, Cingjing Farm in Nantou County and the National Center for Traditional Arts in Yilan County to gain experience in recruiting vendors.

The ability to recruit vendors is the lifeblood of any department store. President Chain Store itself represents roughly a dozen brands in Taiwan, from Starbucks Coffee to Muji household products, and it can achieve synergies simply by adjusting its brand lineup at any time to cater to the needs of different malls. Of the 303 counters in Uni-President Hankyu Department Store, for example, seven, including Muji, Mister Donut, Starbucks and a new outlet of the Japanese restaurant chain Sato, are President Chain Store's own brands, providing a solid base for the retail outlet.

Quietly Emerging as Taiwan's Biggest Food & Beverage Group

"President Chain Store has a cosmetics chain and has come in contact with cosmetics vendors. Through its Internet interests, it has contact with apparel vendors," says Professor Hsu in pointing to a big difference between the company and its rivals. President Chain Store's internal purchasing capability and ability to attract brands contrast markedly with more traditional department store operators that began as manufacturers or property developers, and more closely resembles department stores in Europe, the United States and Japan.

But this comprehensive distribution group's biggest asset is its huge and densely interwoven shared platform.

Many people do not realize that with the help of the Starbucks, Mr. Donut and Afternoon Tea franchises in both Taiwan and China, President Chain Store expects its revenues this year to exceed NT$10 billion, clearly setting it apart as Taiwan's biggest food & beverage group.

The company's closest pursuer, Comestibles Master Co. and its flagship brand 85 Degrees Bakery Cafe, had sales of NT$6.28 billion in 2009, and the next biggest, Wowprime Group and its Wang Steak brand, had sales of NT$5.29 billion. Louis Chang-Jen, President Chain Store's senior vice president responsible for the food and beverage business, says that in the future new brands will be brought in more quickly because of the maturation of the shared platform early this year.

The shared platform integrates 10 common functions – public relations, human resources, general administration, marketing and advertising, finance, information systems, equipment rooms, retail store projects, material supply chains, and logistics – of the nearly 50 companies under the President Chain Store banner. Only business and planning personnel are distinctive to each affiliate. The integrated operation and its stable of foreign brands has helped it rapidly lower the threshold of establishing new businesses in the local market. 

For example, their new brand Sato, a restaurant chain serving Japanese cuisine, has only four dedicated employees, one-sixth the number such a business would have had in the past. When Uni-President Hankyu Department Store was preparing for its grand opening, it could count on personnel from the shared platform for everything from interior decoration to public relations.

Chang-Jen says the secret of success to the shared platform is that "costs are out in the open." Each one of the platform services has set fees. In one case, President Chain Store's legal department, much like a law firm, submits timesheets on which it calculates and charges hourly fees. The public relations department charges on a per-project basis, but it must quote as would an outside public relations firm to justify the expenses charged. "We can't go overboard and charge for every single thing, but we still have to charge for services," Chang-Jen says.

So what kind of impact will the crucial Uni-President Hankyu Department Store battle ultimately have on the industry? Opinions are mixed. The more optimistic Chou Pao-wen, manager of ShinKong Mitsokoshi's sales promotion department, believes that from the end of last year, Xinyi commercial district department stores have seen many customers coming from outside Taipei and Taiwan, an indication of a growing number of customer sources.

"In the future, every department store in the Xinyi commercial district will have its own operating style," CK Watch & Jewelry's Lee also says optimistically, believing it will not be a zero-sum game.

But Sogo's Lee thinks the department store market is already near saturation, and small- and medium-sized new entrants will have a difficult time sustaining their operations.

The ultimate question, then, is: Will this new Japanese-style department store rewrite the rules of the game? Everybody is eager to find out.

Translated from the Chinese by Luke Sabatier