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Red Star Macalline Business Model Transformation

A STUDY ON BUSINESS MODEL TRANSFORMATION OF RED STAR MACALLINE

ABSTRACT

Red Star Macalline is the leading Chinese home furnishing and service brand and the largest national furniture retail chain in China. Founded in 1986, Red Star Macalline targets the rapidly growing middle class in China and offers furniture and home decoration materials such as flooring, bathroom and kitchen fixtures through its shopping malls. At the time of writing, the company started to implement new Strategy 1001 which is supposed to transform Red Star Macalline business model into omni-channel model where the combination of an online shopping platform and increased number of shopping malls in new provinces in China will allow the company to increase its business strength in the industry.

This thesis researches the market potential for Red Star Macalline in China to implement Strategy 1001 and further prepares the steps to overcome challenges that can be met while implementing this strategy. The following research questions were developed:

“Why should RSM adjust its original business model into a new one among many business models and new era of China Economics Situation?”

“How a retail business model of Red Star Macalline integrates its conventional business model to an internet business model?”

“What are the suggestions to overcome the possible problems during implementation of Strategy 1001?”

Through research findings and additional analysis, covering both external and internal company aspects, conducting interviews with different level managers of Red Star Macalline including top management, interesting information regarding both the Chinese market and the Chinese consumer was identified. The findings revealed information about current trends in furniture industry in China which were fundamental in the further strategic recommendations.

There is therefore an opportunity to return to the case at a later stage to explore more completely the shift to multichannel business model. Moreover, as the research is based on a single-case, transferability to other retail companies should be explored.

KEY WORDS: home improvement, furnishing industry, retail, business model transformation, strategy, omni-channel

Table of Contents

I Introduction

1.1 Research background

1.2 Research questions

1.3 Research methodology and data collection

II Literature review on Retail Business Model and its types

2.1 Retail Business Model

2.2 Digitalization in retail

2.3 Channel re-design challenges

III Qualitative analysis on Red Star Macalline

3.1. Introduction of Red Star Macalline

3.1.1 Brief company description

3.1.2 Generations of Shopping Malls

3.1.3 IPO Situation in HK Stock Market

3.2 Environment Analysis of Red Star Macalline

3.2.1 External Analysis PESTEL

3.2.2 Internal Analysis VRIO Model

3.2.3 SWOT analysis

3.2.4 Comparison with competitors

IV Red Star Macalline Business Model Transformation

4.1 Red Star Macalline Business Model summary

4.1.1 Red Star Macalline core capabilities

4.1.2 Boston Consulting Group-Matrix

4.1.3 GE Multifactor Portfolio Matrix

4.2 New Trends of Business Models in China

4.3 Today’s challenges of Red Star Macalline

V Evaluation of 1001 Strategy of Red Star Macalline

5.1 About 1001 Strategy

5.1.1 Main concept

5.1.2 Main content

5.2 The Pros and Cons of 1001 Strategy

5.2.1 Advantages

5.2.2 Disadvantages

5.3 Strategy Modifications

5.3.1 Supply chain Strategy Modification

5.3.2 Marketing Strategy Modification

5.3.3 Human Resources Strategy Modification

VI Conclusion

6.1 Findings

6.2 Theoretical and managerial implications

6.3 Limitations and suggestions for further research

References

List of Tables

List of Figures

Appendix

Acknowledgments

 

I Introduction

Drawing on existing literature on channel management and retailing, our research questions concern the challenges faced by the retail company when going omni-channel and the decisions they take to address these challenges.

1.1 Research background

The aim of this study is to analyze the transformation of Red Star Macalline business model to the omni-channel business model and to analyze how it can be modified according to the current conditions on the Chinese market.

The retail boom in China has brought along a massive influx of new retail outlets, leading to rapid and intense competition. For a larger extend, retail sales of consumer goods in China quadrupled within last 15 years. Meanwhile, the home improvement and furnishings industry in China had recorded sales revenue of RMB 3,704.1 billion in 2015. It was forecast to grow at a compound annual growth rate (CAGR) of 10 per cent over the next five years (Frost& Sullivan, 2015).

The boom in home ownership has led to demands for home goods and furniture. The huge market potential has given an opportunity for local players, same as attracted new foreign retail companies.

Demand for furniture and home decorations in China has grown at a fast pace in the past decade. It is predicted that in the next decade, both production and demand will continue to grow. The Chinese economy maintains a high-speed growth which has been stimulated by the consecutive increases of industrial output, imports and exports, consumer consumption and capital investment for over two decades.

Meanwhile, the growing number of Internet users makes retailers switch from traditional business models to the multichannel strategy. The retail landscape is set to be changed with e-commerce. In a situation of slowing economic growth in China and competition from online Red Star Macalline had to adjust its strategy accordingly.

1.2 Research questions

Given the limited number of studies about how cross-channel strategy affects the different aspects of retail business models and a very few studies on Chinese furniture retailer Red Star Macalline, we have chosen a case study method to gain in-depth understanding of the changes in a retail business model after the adoption of a multi-channel strategy that was recently announced by Red Star Macalline, while taking into account which outcomes this new strategy can bring and how retailer can overcome them. In our research, we will analyze retail business model in home retail sector, competitive landscape in China and suggest possible modifications for corporate strategy of Red Star Macalline.

With the number of research paper dedicated to the question of how to switch to multichannel strategy and adopt hybrid business model, we have chosen one of the most challengeable and interesting areas, home retail. We want to analyze the existing trends in home retail sector in China, factors that influence the shift from old brick-and-mortar business model to a new cross-channel strategy. Important fact is that the retailer we have chosen for our case study, Red Star Macalline, already announced its new Strategy 1001 which is based on the implementation of Internet 2.0, upgrading of physical stores, enhancing design recourses and shopping experience (information is taken from the interview with the Chairman Che of Red Star Macalline conducted in May 2016). We will take a single case study, but different data recourses which will enable us to be more objective and be capable to make suggestions on new strategy implementation.

Our research aims to identify the impacts of shifting to a newly announced Strategy 1001 of Red Star Macalline on each aspect of a retailer’s business model. The main question of the research can be announced as follows:

1. Why should Red Star Macalline adjust its original business model into a new one among many business models and new era of China Economics Situation?

2.  How a retail business model of Red Star Macalline integrates its conventional business model to an internet business model?

3.  What are the suggestions to overcome the possible problems during implementation of Strategy 1001?

Fist part of the research will be dedicated to the background information on Red Star Macalline business situation and home retail business models in China with new trends in the industry. Next, we will look closer at the new Strategy 1001, followed by our suggestions for the challenges that might come from its implementation. First research question will be investigated in chapter 3 “Qualitative Analysis on Red Star Macalline”, second question is described in chapters 4 and 5, “Red Star Macalline Business Model Transformation” and “Evaluation of 1001 Strategy of Red Star Macalline”, and the last research question is explained in chapter 5 “Strategy Modification”.

We will try to analyze how retailer will expand its business through new channels and how it will upgrade its existing shopping mall network in order to optimize the whole business to respond effectively on consumers’ expectations of a seamless shopping experience and not losing its competitiveness to face diverse competition. The framework can be shown as follows: Issue – Challenge – Modification (Table 8: Key challenges and solutions for Red Star Macalline during new strategy implementation). We will identify the major changes and suggestions in three aspects of the retail business model design: supply chain strategy modification, marketing strategy modification, human resources strategy modification.

1.3 Research methodology and data collection

This study will follow a case study approach. Case study approach is built on “How” question, and it helps to understand the process of changes present within single settings, collect unstructured data and do qualitative analysis of those data (Eisenhardt, 1989). A single-case study is particularly appropriate as it allows us to build an understanding of the phenomenon from an internal point of view thanks to full immersion and longitudinally embedded participant observation (Yin, 2013).

There is therefore an opportunity to return to the case at a later stage to explore more completely the shift to multichannel business model. Moreover, as the research is based on a single-case, transferability to other retail companies should be explored.

Data was collected from the Chinese government publications, Chinese language newspapers and magazines, industry associations, local governments’ industry bureaus, industry publications. Interviews were conducted with Chinese industry experts and producers in China. We will use a multi-method data gathering strategy combining primary internal data and secondary external data. More precisely, our data sources consist of: non-structured interviews with the Chairman and other executives of Red Star Macalline, primary internal data (reports, strategic plans, performance data), secondary data over a period of five years (press articles, websites, social media).

II Literature review on Retail Business Model and its types

To proceed to our research, we defined the literature review into 3 main groups: retail business model concept, digitalization in retail, challenges faced during the re-design of the channel strategy and how these challenges can be overcome.

2.1 Retail Business Model

Business Model concept became popular in the late 2000s, while most authors define business model as the way how an organization creates and delivers value to the customer (Osterwalder and Pigneur, 2010; Sorescu et al., 2011; Bock et al., 2011; Zott et al., 2011).

Accroding to Wirtz et al. (2016) in the research literature about business models there are three main focuses of the articles: technology oriented business models, strategy-oriented business models some organization-oriented models. Between the years 2000 and 2002, the technologically oriented business model articles have been very dominant. From 2002 on, more and more strategy-oriented articles have been published. These two currents in scientific discourse play more significant role than the organization-oriented models. During last years an increasingly converging view and conceptual understanding of the business models in the literature has been established, in can be seen from the views on classification of business models in the areas of processes and strategy and levels aggregated in the business model concept (Wirtz et al., 2016).

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Figure 1: Development of the three basic theories into the direction of a converging business model view[1]

As identified by the Boston consultancy group, a retail business model is built on two basic pillars of a business model: The Customer Value proposition and the Operating Model. A Retail Business Model integrates two distinct yet connected dimensions: 1) Customer value proposition, 2) Operating Model (Esquivias P. et. Al., BCG perspective, 2010).

In their work “From strategy to business models and onto tactics” Casadesus-Masanell and Ricart (2010) define the difference between business model, business strategy and business tactics as follows. The business model is the way the organization operates and how it creates value for stakeholders; the business strategy states for the choice of business model through which an organiation will compete; the business tactics which means the choices open for the organization in applying the business model. According to Casadesus-Masanell and Ricart (2010) “business model is a reflection of a firms realized strategy”.

As a point of view that combines two previous definitions, a business model enunciates how a retailer creates value for its customers and adopts value from the market according to Sorescu (2011). As a result, the value creation purpose of business activities aims to satisfy customer needs and values through the products and services provided by the organization (Burt et al., 2016). There are many definitions of a business model, the one we choose in our study says that a retail business model is “a well-specified system of inter-dependent structures, activities, and processes that serves as a firm’s organizing logic for value creation (for its customers) and value appropriation (for itself and its partners)”  (Sorescua et al., 2011).

While applying retail specification for the generic business model the main particularities of retail should be defined. According to Dawson and Mukoyama (2014) the place of transaction, which can be a physical store or a virtual place, is an extension of the established retail format. Burt and Davies (2010) suggest that the retail brand makes overall promises to customers about the retail format so is a fundamental part of a retailer’s value proposition.

Retailing Business Model is built under two key characteristics of retailing: 1) Retailers sell products manufactured by others and 2) Retailers engage in direct interactions with the end customers (Sorescu et al., 2011). A successful retail business model should not only focus on what retailers sell but also how they sell and how the retailer will enhance successful customer relationship.

2.2 Digitalization in retail

One of the most significant and influential driving forces of contemporary society is definitely digitalization, it influences many elements of business and our lives. In connection to the retail sector, digitalization can transform: retailing exchanges (various ways of exchange between the customer and retailer, including communications, transactions, distribution), retail offer (the term to express the actual retail offer, can be product or service, how it is priced), retail settings (i.e. place), the actors (i.e. retailers, consumers, etc.) (Hagberg, 2016).

As one part of this on-going transformation we can investigate changes of communication channels not only between the retailer and consumer, but also among the consumers (i.e. through social media). Digitalization involves the change of forms of distribution, of traditional settings, including intermixing of settings, extension of offerings, intermixing of humans and technologies (Hagberg, 2016).

Furthermore, new technologies implies that information through various aspects of the exchange becomes available and increases transparency for the flow of the products or services offered (Egels-Zanden et al., 2015).

The concept of multichannel, cross-channel and omni-channel is not new to the retail industry and the increasing importance of   new sales channels has given new relevance and topicality to issues concerning the impact of multichannel systems on retailers. When retailers use multiple channels as part of their distribution policy, they face the basic choice of combining or separating alternative channels (Schramm-Klein, H., 2006).

Based on the intensity of channel integration we can divide retailing as following: multi-, cross- and omni-channel retailing (Lewis et al. (2014); Cao and Li (2015)). Based on Verhoef et al., 2015 classification omni-channel retailing suggests four key differences in channel organization. First, it involves more channels. Second, it implies a broader perspective as it includes not only channels but also customer touch points. Third, it induces the disappearance of borders between channels. Fourth, the main differentiator of omni-channel retailing is the customer brand experience which is highly specific in this case. While multi- and cross-channel retailing focus on retail channels, the emphasis of omni-channel retailing is on the interplay between channels and brands. As such, shifting to an omni-channel strategy commits a brand to a process of optimizing customer experience and redesigning channels and touch points in the best way possible.

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Table 1: Different characteristics and channel articulation of multi-, cross- and omni-channel retailing[2]

2.3 Channel re-design challenges

In the research literature we can see that challenges faced during channel re-design were covered mostly for multi-channel and cross-channel re-design, while there were not yet so many managerial solutions proposed, including the fact that not yet so many empirical evidence was provided on how to effectively manage a channel re-design process (Picot-Coupey, 2016).

Concerning the strategic challenges, Cao (2014) provides evidence that shifting to a cross-channel strategy requires retailers to change their business model. In a cross-channel perspective, retailers need to de-compartmentalize the different structures within the organization (Cao and Li, 2015). Moreover, adding, integrating or blurring channels raises marketing challenges concerning the degree of coordination of the retail mix across channels (Van Baal, 2014; Verhoef et al., 2015).

Changing the channel strategy requires the support of senior managers, and impacts the staff in general (Lewis et al., 2014). Additionally, the technical staff could have a lot of work ahead of them as the sixth challenge is a technological – IS one, due to the need to integrate or merge databases, manage big data and re-design the supply chain (Lewis et al., 2014; Cao and Li, 2015). Among other changes, this fusion of IS is resource consuming and consequently leads to a financial challenge (Lewis et al., 2014). Finally, the challenge of performance tracking is reported as being delicate when channels are integrated (Lewis et al., 2014).

The intensity of these challenges is reported to differ depending on the degree of integration (Lewis et al., 2014; Cao and Li, 2015). Lewis et al. (2014) identify three stages in going multi-channel: the early, middle and late implementation stages. Resource constraints and board level and senior management issues diminish along these stages, while cultural issues increase. Channel integration obstacles and staff support difficulties are highest in the middle implementation stage. In contrast, Cao and Li (2015) identified four different levels of integration (none, minimal, moderate and full), each with their own respective challenges. According to these authors, strategic issues such as the alignment of fundamentals and the transformation of the organization have only to be dealt with at the full-integration level, contrasting with Lewis et al. (2014) findings.

If the challenges induced by channel re-design have received attention, at least for multi-channel and cross-channel, the solutions to overcome them – the “how” questions – remain largely unexplored. We could find two very broad recommendations about what to do when addressing the challenges in the shift to omni-channel retailing: first, revamping the retail business model (Cao, 2014; Piotrowicz and Cuthbertson, 2014); and second, engaging in a change process (Verhoef et al., 2015).

Lewis et al. (2014) propose the involvement of store employees as technology users through equipment with mobile devices solutions as well as specific training of staff to promote technology in store as a means to bridge online and offline experience.

As far as marketing challenges are concerned, Cao (2014) suggests that shifting to cross-channel retail requires retailers to optimize the product assortment, price and communication policies across channels, rather than merge them. She also advocates reinforcing the strengths of the physical store, with a store layout focusing on the consumer experience rather than the products.

Cao and Li (2015) indicate that the merging of Information Systems (IS) concerns not only consumer-related information, in order to recognize the consumer at every touch point, but also marketing information, such as prices, product assortment and logistics, that need to be synchronized across channels.

Picot-Coupey (2016) observed five strategy-related challenges dominated by organizational, cultural, managerial and marketing issues, and three development-related challenges encompassing retailing mix, IS and CRM issues. As the convergence process between bricks and clicks takes place, an e-retail company faces various challenges of varied intensities in relation to all of its organization’s elements. Initially, the key challenge concerns the organizational culture and consists of developing a respective understanding of each person’s expertise as well as gaining staff engagement. In particular, various systems (logistics, information, sales, marketing, training, product management) have to be unified. Channel re-design from an omni-channel perspective is likely to prompt complete company re-design, and to connect previously unconnected parties.

The research paper “Channel design to enrich customers’ shopping experiences” (Picot-Coupey, 2016) emphasizes the importance of organizational learning and trial-and-error learning for channel re-design. We have mapped out a two-phase process in the strategic shift to omni-channel retailing: an explorative phase during which challenges to omni-channel retail are identified and solutions tested, followed by an exploitative phase during which these solutions are implemented.

III Qualitative analysis on Red Star Macalline

In the third chapter we will talk about background of the company, its history and core values. Later we will proceed with the external and internal analysis using common marketing tools like PESTEL, SWOT and VRIO model.

3.1. Introduction of Red Star Macalline

In this part we will investigate the company background, as its core values, history, financial situation and other important facts.

3.1.1 Brief company description

Red Star Macalline is the leading Chinese home furnishing and service brand and the largest national furniture retail chain in China. Founded in 1986, Red Star Macalline targets the rapidly growing middle class in China through the operation of malls that offer furniture and home decoration material such as flooring, bathroom and kitchen fixtures. By June 30, 2016, Red Star Macalline had 181 stores in 129 Chinese cities including Beijing, Shanghai, Tianjin, Nanjing, Changsha, Chongqing and Chengdu. The big-name brands include: QMq, Landbond, IREST, Natleer, Royal, Cityw, Beson, Hettthi, JiaHouse, Beking, Maiso.

“Home Furnishing Transforms Life, Creating the Beauty of Home” is the motto of Red Star Macalline[3]. The Company witnessed the development of the home furnishing industry during Chinese economic reform and opening up. In the meantime, the company has been influencing the lifestyle of Chinese people and has been improving consumers’ awareness of home furnishings design. Consequently, innovation and modern design are the core values of Red Star Macalline brand. Red Star Macalline says: “Customers are the basement of the corporation, Innovation is the core of the development” [4].

3.1.2 Generations of Shopping Malls

Red Star Macalline is a home chain store was founded in 1986. Being market-oriented Red Star Macalline divides its brands and puts them separately in the shopping malls to form the perfect combination of the layout design and the efficient management. Please, refer to the Table 1 for the timeline of nine generations of shopping malls of Red Star Macalline.

1993 The first generation: renting factory for furnishing business.
1994 The second generation: purchasing land for building malls.
1996 The third generation: market-oriented operation, shopping mall management system.
1998 The fourth generation: retail chain.
2000 The fifth generation: shopping mall fully responsible for all products sold.
2003 The sixth generation: Jiangnan garden-style and environmentally friendly furniture malls.
2005 The seventh generation: customer experience furniture mall.
2008 The eighth generation: park-style home furniture mall. http://www.shjy.com.cn/upfiles/user/cn_203.jpg

Table 2: 9 Generations of Red Star Macalline Shopping Malls[5]

By June 30, 2016 Red Star Macalline is the largest home improvement and furnishings shopping mall operator in China in terms of number of shopping malls (181), operating area (11,814,928 square meters) and geographical coverage (129 cities). By that time it had 17,086 full-time employees. Its tenants had their own employees only at the sales counters[6].

Regions Self-Operational Mandatory Administration Total Number Percentage
Beijing 4 1 5 2.8%
Shanghai 7 0 7 3.9%
Tianjin 4 1 5 2.8%
Chongqing 3 0 3 1.7%
North-East 8 8 16 8.8%
North-China 3 20 23 12.7%
East-China 13 69 82 45.3%
Central-China 7 9 16 8.8%
South-China 3 3 6 3.3%
North-West 1 8 9 5.0%
South-West 3 6 9 5.0%
In total 56 125 181 100%

Table 3: Number of Self-Operated and Mandatory Administration Shopping Malls[7]

The future development strategy will prioritize the self-operation malls in the tier 1 and tier 2 cities particularly in the heart of the cities. During the past two years, the growth rate of super-shopping mall specialized in the home furniture sales between 20% and 30% annually.

Figure 2: Number of Red Star Macalline shopping malls

 

Figure 3: Red Star Macalline Group revenue and net income (2013-2015)[8]

3.1.3 IPO Situation in HK Stock Market

According to the 2015 annual report, the company had generated the revenue of RMB 8.76 billion and the net profit of RMB 4.37 billion by the end of  2015. Compared to the previous year, the growth rate is 10.3%.

December 2015 (in million RMB) 2012 2013 2014 2015
Revenue from Portfolio Shopping Malls 

Revenue from Managed Shopping Malls

  • Initiation and Entrance Fees
  • Annual Management Fees
  • Construction Consultancy and Management Fees

Other Revenues

3,852 

527

719

154

2

4,199 

988

855

272

47

4,884 

1,014

1,093

679

265

5,260 

1410-

1268-

464-

354

Total Revenues 5,254 6,361 7,935 8,756
Cost of Sales and Service (1,452) (1,789) (2,054) (2,242)
Gross Profit 3,801 4,571 5,881 6,514
Other Income 

Changes in Fair Value of Investment

Other Gains and Losses

Selling and Distribution Expenses

Administrative Expenses

Other Expenses

Share of profits of Associates

Share of Results of Joint Ventures

Financial Costs

222 

1,112

(48)

(809)

(654)

(6)

45

(14)

(554)

192 

2,055

(30)

(922)

(771)

(27)

42

(10)

(631)

170 

2,415

(187)

(1,055)

(923)

(113)

14

4

(856)

194 

2,382

(206)

(1,197)

(882)

(121)

62

50

(854)

Profit Before Tax 3,095 4,469 5,350 5,942
Income tax (839) (1,200) (1,428) (1,573)
Net Profit 2,257 3,269 3,922 4,370

Table 4: Red Star Macalline, Income Statement[9]

Red Star Macalline has been listed on the H-Share market in 2015 mobilizing RMB 5.6 billion. In mid-2016, it announced an initial public offering (IPO) on the A-Share market to mobilize an additional RMB 3.95 billion. The company had set aside RMB 1.45 billion towards the construction of an exhibition mall, RMB 600 million for the construction of a unified logistics service system, and RMB 500 million for upgrading O2O platform projects[10].

Company decided to come back to A-share Market due to the following factors. The industry is facing difficulty in rental issues, including the high rental costs, the pressure from United States, inside and outside network, pressure from other electricity providers and Internet platforms for home decoration. Second, most of the Red Star Macalline projects are in developing stage and financial pressure is huge with large precipitation funds. However, in mid-to-short term, the company will benefit from the loosened property policies. Better property policies, demand in lower tier cities and will increase the demand for furniture and home decoration products (Asia Securities Company, 2015).

3.2 Environment Analysis of Red Star Macalline

In this section, we want to analyze the external and internal environment for Red Star Macalline with the help of useful marketing tools like PESTEL, SWOT and VRIO model, including comparison with the competitors.

3.2.1 External Analysis PESTEL

The PESTEL analysis contains political, economic, social, technological, environmental and legal factors. The PESTEL analysis is a macro-environmental framework used to analyze the industry, where a company operates or wants to operate in (Gillespie, 2007). The macro environment affects markets and industries where organizations operate that is why PESTEL analysis gives us an overlook over the factors in the market that Red Star Macalline has to take into consideration.

 

Policy and Legal Environment

In recent years, the Chinese government has introduced a number of policies which are closely related to pan-home industry.

New urbanization. New urbanization in China started to be promoted by the government from 2013. Differently from the previous times, the new urbanization concentrates on intensive, inventive, and environmental-friendly methods to help to move rural population into the cities. During this process, the second and the third industries gather towards cities and towns to enlarge the quantity, and to develop dividends for China economy due to social productivity development, science, and technology improvements, and industrial structure adjustment. From January 2015, a pilot program was issued to assign the tasks and procedures for authorities.

Formulating regulations for furniture industry in China. On March 5, 2015, Premier of the State Council Li Keqiang announced The Report on the work of the Government delivered at the Third Session of the Twelfth National People’s Congress, which has a number of contents closely related to pan-home industry[11].

The key points of the report include the following actions: encouraging local building materials and home industry companies to go global, prudent fiscal policy, stabilizing exports and increasing imports, vigorously developing energy-saving and environment protection industries, green tax legislation, continuing to prevent and control of atmospheric pollution, the importance of big data and e-commerce, transformation and upgrading of furniture manufacturing industry. From the key points of the government work report and the introduction of the new policy, it can be seen that the focus of China’s home industry in the future mainly includes the following aspects.

To sum up, the favorable policies for furniture industry mean that the future development of the home industry should comply with the newly introduced standards and pay attention to the requirements in environmental protection and safety. Moreover, the home industry players should also focus on technological progress and make use of the Internet, artificial intelligence and big data.

Economic Environment

GDP and income growth. The Chinese economy expanded for 6.9 percent in the first quarter of 2017, compared to a 6.8 percent growth in the fourth quarter of 2016 and slightly above market consensus of a 6.8 percent growth. (National Bureau of Statistics of China, 2017). It was the strongest expansion since the September quarter 2015, supported by faster rises in industrial output, retail sales and fixed-asset investment while fiscal spending surged. For 2017, the Chinese government expects the economy to grow by around 6.5 percent compared to a 6.7 percent expansion in 2016. However, it is the slowest growth during last 26 years. Economic and national income growth are the key drivers o consumption including expenditures on home improvement and furnishing products.

../china-gdp-growth-annual.png

 

Figure 4: China GDP Annual Growth Rate[12]

Rapid urbanization. The rate of urbanization in China was rising steadily. At 771 million, the urban population had exceeded the rural population of 603 million in 2015 (Frost & Sullivan, 2014) leading to demand for home improvement and furnishings products as migrants from the interior settled into their new urban locations.

Primary Chinese Cities GDP Figures (2015)
Rank City GDP (bln yuan) Growth rate (%) Population (mln)
1 Shanghai 2,530 6.8% 24.25
2 Beijing 2,300 6.7% 21.68
3 Guangzhou 1,810 8.3% 16.67
4 Shenzhen 1,750 8.9% 10.77
5 Tianjing 1,720 9.4% 15.16
6 Chongqing 1,610 11.0% 30.01
7 Suzhou 1,440 7.5% 10.60
8 Wuhan 1,100 8.8% 10.33
9 Chendu 1,080 8.0% 14.22
10 Hangzhou 1,010 11.0% 8.89

Table 5: Primary Chinese Cities GDP Figures (2015)[13]

Figure 5: Annual disposable income per capita distribution[14]

 

Figure 6: Number of high-income consumers[15]

Note: High-income consumers refer to individuals with a grey income-adjusted disposable income of above Rmb 200,000 per year at 2015 constant prices.

Annual expenditure on furniture. Urban per capita disposable incomes were rising in China. They are leading to a demand among individual families for larger and well-furnished living spaces. Per capita annual expenditure on furniture in China rose sharply over last five years at a CAGR of 16,3% and it is expected to grow at a CAGR of 11,2% in the next five years with per capita annual expenditure on furniture in China expected to reach RMB 1,944.8 million in 2020 (Frost & Sullivan, 2015. Overview of the office furniture market in China).

Figure 7: Per capita annual expenditure in China[16]

 

Social Environment

Change in generations. In recent years, the population growth in China has slowed. Meanwhile, the proportion of urban population is increasing every year. Now China’s population is olivary in structure, and the change of population structure has diversified impacts on pan-home industry. First, the proportion of  population between 40 and 50 years old is in its maximum and the improved decoration market arises. Second, the marriageable population is from 20 to 24 years old, so China will usher in the blowout period of housing and decoration in the next five years. Third, with the advent of aging population, the segmented house decoration market targeting at “seniors” merits attention. Fourth, the third generation of the “baby boom” arises, so the infants, children and home products become new demand point (Own representation based on National Bureau of Statistics of China, 2017).

Rising middle-class consumer. Upgrading needs fueled by growing lifestyle aspirations and focus on quality, innovation and environmental credentials. An important trend in the consumer profile of China is the growing weightage of the “mainstream” consumer (defined as having an annual income of between $16,000 and $34,000) accompanied by shrinking weightage of the “value consumer” (defined as having an annual income of between $6,000 and $16,000). The mainstream consumers would comprise 167 million households or close to 400 million people. They would be the trend setters for consumption (McKinsey, “Meet the 2020 Chinese Consumer”, 2012).

Technological Environment

E-commerce and the Internet of Things. According to McKinsey research “China’s iConsumer 2015: A Growing Appetite for Change” Chinese consumers enjoy the options and transparency available online, they are also becoming increasingly choosy. China’s online retail market was already the world’s largest, with e-commerce accounting for more than 13 percent of the country’s total retail sales of consumer goods. In top-tier cities, roughly 90 percent of Internet users and 70 to 80 percent of consumers in total were shopping online.

Furniture companies need to develop their products and give their products greater added value by raising the level of technology innovation in production process. Main directions in furniture industry upgrading process are advanced manufacturing and the application of information technology.

New materials. The future development direction is environmentally friendly manufacturing when the whole life cycle of products must be conducive to environmental protection and the reduction of energy consumption. Particularly, greater attention should be paid to the protection of the ecological environment, human health and home safety in the production process of the furniture industry.

Summary of Industry Environment

Overall, we can see that Red Star Macalline is facing the following advantages for its further expansion as huge room for industrial development, economic background, social change, technological progress as well as favorable governmental policies.

 

3.2.2 Internal Analysis VRIO Model

Identifying the core resources and capabilities that generate value to the customers provides a better understanding for the management about what customers value most about the company’s products.

The VRIO analysis is a four-step analysis of a company’s strategic capabilities: Value,

Rarity, Inimitable and Organizational aspect of resources and capabilities. These variables need to be measured to determine the competitive potential of a resource or capability (Barney and Hesterly, 2010).

To get a better understanding of Red Star Macalline valuable resources and capabilities it is necessary to make a distinction as who is regarded as the customer in this analysis. Red Star Macalline most valuable capability could be the value-chain providing reliability for the brands presented in their shopping malls. However, in the long run, it is the end customer who are the ones who create demand of the product and, in the long run, provide cash flow.

Value of strategic capabilities – Medium/high

The value of a capability is characterized by its creation of value to the customer. The level of value it creates determinates if it can be seen as a competitive advantage (Barney and Hesterly, 2010).

Red Star Macalline is focusing on providing the right customer experience. It is vital for Red Star Macalline to consider its marketing insights, internal expertise and knowledge as key competitive advantage generating value to its customers. As the most famous brand in market, Red Star Macalline attracts large number of consumers. Red Star Macalline has the direct access to the related consumers. Red Star Macalline proactively manage and control every session of the shopping experience to bring the customers the extraordinary experience through attractive shopping environment, wide choice range of products, exclusive service.

Red Star Macalline has been awarded many times. The efficient and strong marketing capability enable Red Star Macalline to receive many award in the industry. In 2013, Red Star Macalline was recognized by China Building Decoration Association as the “China famous brand in the building material”.

Rarity of strategic capabilities – Medium/high

It is necessary to evaluate the competitiveness of the capability in terms of how many of a company’s rivals possess the same capability, or in other words; the rarity of the capability. One of the distinguishing traits of Red Star Macalline is that they it has built aggregation, at the point of sale, of diverse product categories from diverse manufacturers.  The system had evolved in China because product manufacturers were finding it expensive to develop their own distribution channel or invest heavily in their own brands. They pooled their resources to build a one-stop shop, a mall in its own right, to attract foot traffic and generate sales volume that would justify large investments in marketing. As a result, the mall, rather than the company, was the brand.  Consumers recognized and trusted brand malls over individual product brands.

This way, the unique intangible competence behind these high variety of products and strong brand image represents the valuable competitive advantage.

Inimitable strategic capabilities – High

Inimitable strategic capabilities are hard to imitate, they also represent a competitive advantage. The business model of Red Star Macalline was built upon a combination of Portfolio Shopping Malls and Managed Shopping Malls. This hybrid expansion model has created high barriers to entry. It is difficult to replicate, so for Red Star Macalline competitors, present or potential, it harder to source new opportunities in the market. Success with the hybrid model has led to a virtuous growth cycle for Red Star Macalline in general and for its customers.

Organizational Embedding

To fully realize its potential, company must be organized to exploit these resources and capabilities. The internally optimistic and proactive approach represents an organizational strength that will be beneficial in this process. The new strategy is regarded as something top-management wants to push forward and make a top priority, and thus it is evident that it is embedded throughout the management.

On the physical front, Red Star Macalline had shown evidence that it could deliver. In 2002, for example, it had set a target of opening 200 malls by 2020. Having already built a total of 181 malls by mid-2016, Red Star Macalline opened 200th mall at the end of 2016.Now, the company had set a new target of building 1,000 malls.

On the digital front, Red Star Macalline had already designed an app for its malls in Shanghai and a peer-to-peer platform for furniture buyers, commercial tenants and factories partnered with the malls. The way ahead would involve replicating it enterprise-wide.

Conclusion

Red Star Macalline possesses internal capabilities regarding hybrid expansion model, high level of expertise and the development of a strong brand. These capabilities represent important capabilities and experience that could be useful in further Red Star Macalline expansion.

 

3.2.3 SWOT analysis

In this section, we will describe some of Red Star Macalline most important strengths, weaknesses, opportunities and threats. SWOT analysis is commonly used as a key component of the marketing planning process. The SWOT matrix depicts the marketing strategy process through bringing together the external and internal evaluation of the organization’s situation (Kotler and Keller, 2009).

Strengths

1. Scale Production

Scale production is the important action for the development of the business. Generally speaking, retail industry is limited on acquiring the resources. After the competitive advantage is obtained by one company, the following companies have to consider the advantages of the competitor and the market size. For example, after the opening of one supermarket in a residential area, the other competitors will lag behind. The nature attractiveness of occupying the market has driven the retail chain company to expand their business from time to time until the completion of scale production. Since the establishment of Red Star Macalline in 1986, it developed from a small company into a hyper shopping mall specialized on home furniture. Finally, the scale production was achieved. Even the financial crisis occurred in 2008, the company survived, moreover, it was a new opportunity to accelerate the scale production. The benefits of scale production are obvious, and Red Star Macalline has obtained its competitive advantage. It was beneficial for the integration of industry resource.

2. Perfect combination of tangible and intangible services

Red Star Macalline created a platform which is different from the other business models in the industry. It seems attractive for the small size furniture brands. Red Star Macalline is ready to introduce the design resources and facilitate the design for the brands. Through the cooperation with different brands presented at Red Star Macalline shopping malls, not only the close relations has been strengthened, but their mutual interest has been binding through the agreements they signed, consequently, the alliance is achieved.

3. Clear customer positioning

The positioning of Red Star Macalline is to build a shopping mall platform according to USA experience. Red Star Macalline attracts the factories and distributors to complete the direct sales. The home furniture brands are the first class with good reputation in China and abroad, they position themselves as brands for the middle-income customers. Red Star Macalline offers the “Standard marketing, Standard after sales service and Standard training” for the suppliers and makes profit through renting the properties. This business model is different from the traditional relations between the retailer and suppliers.

4. Multiple income model

Red Star Macalline adopts the mode of pure leasing, store leasing, promotion, marketing, public property management, etc. Meanwhile, it also has its own properties, designs, and construction sites. This “workshop-style development strategy” ensures the steady growth of the company’s estates. Red Star Macalline starts with retailing and culminating in capital management, amplifying the assets of the company. The source of income for Red Star Macalline comes mainly from three sources: a. comprehensive services (mainly leasing, property management fees), b. income from investment (not dependent on enterprises’ income), and c. other incomes.

5. Strong dynamic power

The dynamic power of an enterprise is primarily determined by the soundness of its internal systems and of its team. The soundness of the system is evaluated by whether an enterprise is qualified to become a tenet, the condition of its graduation, and the procedures of its services. The soundness of the team is evaluated by whether it is adequately staffed and by the learning abilities of its staff members. The brands which are presented in Red Star Macalline shopping malls mean that it is not merely a business circulation manager but more importantly its role lies in spreading a culture and leading a high-quality life philosophy and lifestyle for the mass-market. Red Star Macalline is devoted to creating enterprises with learning potentials, and to major developments in common vision, teamwork, and systematic thinking.

6. After-sale marketing

Red Star Macalline ensures the quality customer service. It has realized the inevitable trends of future development: the psychology of customers, the class and status of the mall, including situational exhibition and experiential shopping environment. Home experiential shops have diversified the modes of marketing. Not only will it not affect traditional marketing, it also presents a richer and deeper marketing mode.

7. Leading brand through CCTV

The brand Red Star Macalline is oriented to “serve thousands of homes, promoting home-style culture and home-style art, even creating home-style art, and enhancing home-style taste.” This high brand orientation needs to be matched by the platform of a strong quality media as only the happy marriage between enterprise and media can effectively promote the former’s image as a brand. Among the many TV media, CCTV brags the most influential and powerful in China because of its unique position. Red Star Macalline started cooperating with CCTV from 2008. Hiring XuXiyuan and XuXidi as its representatives on TV, Red Star launched its home-style advertisement during the golden hours of the day. Red Star name reached many houses all over China and established a reputation as a renowned home-style chain store brand among the customers. This has changed its old public image as only a local brand.

8. Low price quality products

The Chinese market is highly sensitive to prices and a low price forever draws attention of customers. That is why many enterprises in China are constantly engaged in price wars. Compared to international brands, Red Star Macalline offers a slightly lower price for the same products. As a matter of fact, Red Star Macalline has made a promise in many cities: for the same brand, same type, same size and same class product, we promise the lowest price in the city and guarantee a double refund if the product is found for a lower price elsewhere. Red Star Macalline is able to keep the costs, and therefore the price, low through lower land prices, reduction of transitional procedures etc.

Weaknesses

1. Bottlenecks on human resources

The scale expansion of retail chain business looks like cell division: one divides into two and two divide into four. The more businesses there are, the higher requirements to talents will be. On the one hand, companies need time to cultivate talents; on the other hand, it is utmost urgent for companies to use human resources. Therefore, we witness the phenomenon that companies hire employees without selection, and that employees have to be at important posts after a short-time training. Various training methods (such as rotation, transfer, training, practice, and etc.) have to compromise to scale expansion. The bottlenecks on human resources will be constantly accumulated with the scale expansion. Companies will be lacking talents and can sometimes choose a wrong person for the job.

2. Expanding the business blindly and being caught in his own trap

The boom in the real estate industry offered the great opportunity for the business expansion of Red Star Macalline. The expansion of its shopping mall experienced dramatic booming since 2009 from only 20 stores to 181 stores. The fast growth rate planted hidden danger of its own business. The embarrassing situation now Red Star Macalline is confronting now is the worse business revenue and the increasing operational cost. Due to the bad business results, the revenue generated is decreasing significantly. Even the trend is small but the result is fatal. If this situation will continue in the future, the revenue chain will deteriorated and may result in a dilemma for the company.

3. The oversupply of commercial market

As a result of the mismanagement, lack of objective and accurate investment information, scientific evidence, consequently, some investors from China and abroad expanded the business blindly without the careful consideration on the sufficient information of the local investment environment and project development. The bubble in the industry is obvious in terms of markets size and scale.

Opportunities

In this section, we will analyze the Red Star Macalline opportunities under the influence of economic globalization. First, the property market will show a turnaround in the trading volume with the gradual recovery of the economy. Ending the downturn of property market in China, home industry will pass through the recession and eventually develop into a blooming industry. At the same time, as home retail chain get listed in China, Red Star Macalline will standardize corporate governance and strengthen business model in preparation for embracing various opportunities after listing. Red Star Macalline will draw on its successful transition, consolidate the leading edge and move towards.

Threats

First of all, under the influence of economic globalization, foreign home retail chain will compete with Red Star Macalline in China’s market or even in the global market. With the sudden emergence of new domestic home industry chain, Red Star Macalline got hindered in promotion, and thus the company has to confront bottlenecks. Moreover, the cost of home industry will rise dramatically due to the gradual reduction of resources and poor forest.

Figure 8: Red Star Macalline SWOT analysis

3.2.4 Comparison with competitors

China’s home and furnishings retail market is dominated by mall operators and is highly segmented. As compared to domestic industry participants foreign players using DIY (Do-it-yourself model) only occupy a small portion of the market share (Frost & Sullivan, 2014). In 2015 the top five home improvement and furnishing retailers, including Red Star Macalline, Easyhome, Jinsheng Group, Yuexing Furniture and Wuhan Ouyada contributed a total retail turnover of RMB 126.8 billion accounting for 9,2 % of total market share (Frost & Sullivan, 2014). Red Star Macalline leads the chain retail format with a market share of 10,8% by retail turnover (Frost & Sullivan, 2014).

Retail channel Home improvement products (textiles, decoration, small storages, etc.) Home furniture (sofa, tables, beds, chairs, tables, ets)
Speciality stores including manufacturers gallery stores and concession counters in department malls Beyond, Fuanna, Mercury, Luolai, Mendale, Sunvim, Kaisheng, Violet, Sewboffin, Jalice, Veken, Heng Yuan Xiang Quanyou, Huafeng Furniture, Red Apple Furniture, Qumei, Huari, Royale Furniture, M&Z, Landbond, Markor
Furniture marts IKEA, Hola, Joyhere, llinoi, Francfranc, B&Q, Home Depot
Mono-brand furniture malls Red Star Macalline, Easyhome, HOBA, Yuexing furniture, AYD, Kinhom, JSWB
Online platforms China Home Products city (www.zgjjc.com), Meilele (www.meilele.com), Taobao Mall-Home Furnishing Gallery (jia.tmall.com), 360buy (www.360buy.com), Dangdang (category.dangdang.com), Paipai (life.paipai.com), Yihaodian, mybugu, Yokowoo, TG,

Table 6: Major retail channels for home products in China[17]

The following table illustrates the operation size of the top five home improvement and furnishing retailers in China in 2014.

Total number of malls (2014) Total Operating Areas (2014 in millions of m2)
RSM 158 10.77
Easyhome 106 6.97
Jeshing 15 1.95
Yuexing Group 16 1.36
Ayd 20 1.53

Table 7: Operation size of the top five home improvement and furnishing retailers[18]

Retailers are also having to deal with the booming online shopping trend. TMall, the B2C platform added to Taobao’s initial C2C marketplace, and focusing on quality-brand name goods in China. We can see that there is a trend on the furniture market: e-commerce website is gradually emerging to be another sales channel (Hong Kong Trade Development Council, 2016).

3.2.4.1 Easyhome

Easyhome was founded in 1999. The stores of Easyhome include almost all premium brands and products, and integrated with furniture, construction material, construction, decorating accessories, hardware, and painting.

Strengths

The implementation of business model, where many furniture brands have unified management, allows Easyhome to have a clear customer positioning and unified procurement, marketing and settlement for the brands. The store is a theme shopping center for furnishing products, it was integrated with stalls, brand specialty stores, and material supermarkets, consumers can find all products through the one-stop experience. This integration differs from the general furniture stores with stall system, or some construction material supermarkets.

Easyhome is targeting high-end income group, offering customized purchasing experience with premium furnishing products. Easyhome has strict controlling mechanism on the in-store shops to protect the unified store image. At present, Easyhome has introduced imported brands, national chain brands, and regional brands. On the service side, Easyhome offered commitments about post-service, shipping, product guarantee, and environment protection to satisfy customers. Moreover, Easyhome is using a rich in content service help, like “compensation in advance”, “zero delay in delivery and installation”, “return without reason due to non-quality problem”, have built up a good reputation of the company allowing its further expansion and development, as well as upgrading management and service level of furniture industry.

Weaknesses

Due to the chosen business model Easyhome has weak dynamic capability and value chain, also a single income model. Both with relatively scarce network of resources it makes it more difficult to provide additional services besides the sales of home products.

Opportunities

Easyhome has developed the website Juran.cn and wants to add the online shopping experience to offline stores. It targets consumers who like the brand but wish to select products online. Meanwhile, Easyhome plans to establish ten to fifteen stores every year. By the end of 2015 it has launched in total 125 stores in large- and medium-sized cities of China.

Threats

More sophisticated consumers in China, especially those who Easyhome is targeting, are becoming more willing to find something unique and showing their lifestyle. It is clear that it is harder to compete without paying more attention to the design of the furniture, while competitors, including Red Star Macalline, or like foreign brand IKEA, are collaborating with foreign designers. In terms of business model, it can be harder to compete with single income model as before. Furniture enterprises need to upgrade their products and give their products greater added value by raising the level of technology innovation to achieve the aim of “low cost, high quality and high efficiency”.

3.2.4.2 Yuexing Furniture

Yuexing has hospitality and residential furniture business, owing 100 furnishing malls, 10 large-scale Urban Complexes and insurance company. Yuexing is also the only Top 500 Chinese Enterprise in the furnishings industry.

Strengths

The business model of Yuexing Furniture is based on leasing the booths for furniture brand manufacturers, while having cooperative relationships with the stores, which means that stores and furniture manufacturers share the risks and costs with the company. In order to bring extra profits, this business model uses financial capital to home industry, therefore forces the investments in stores and well-known manufacturers. This business model also includes supporting services like after-sales service, catering and leisure.

Yuexing is focusing on the domestic business, and is working to raise its image by improving design. They have different brands targeted at different customers. For youth-oriented and creative lines, they cooperate with Western designers, for traditional styles they use their own designers.

The professional and internationalized management team as well as high-quality technical talents owned by Yuexing strongly guarantees Yuexing to straightly face the market competition and keep on developing at a high speed.

Weaknesses

However, the business model gives the above-mentioned advantages, it is harder to have a clearer customer positioning and target the right customer. Moreover, Yuexing has a lower shopping mall penetration that Red Star Macalline or Easyhome.

Opportunities

Yuexing Furniture has established an O2O service platform, which provides navigation in the offline store in 3D format to enhance customer experience.

Previously, Yuexing group had plans for going abroad. By 2009 Yuexing Group has a partnership with the Spanish furniture company Antico. The two firms have created a high-end series called “Empire Craftsman.” This furniture line, which is aimed at the Chinese middle class, is also sold in some Antico stores overseas, such as in Japan. There were also plans to enter the U.S. market either through partnership with local companies or open own stores. However, China’s furniture market till has vast room for expansion.

Threats

Commercial property development is picking up in the face of the argument that brick-and-mortar retailers are being squeezed by online shopping taking market share from them.

3.2.4.3 IKEA

Up to the third quarter of 2015, global furniture retail giant IKEA had opened 18 stores in China (HKTDC, 2016). Thanks to its brand reputation and premium quality IKEA in China led sales in home furnishings with a 2% value share in 2015 (Frost & Sullivan, 2015. Overview of the office furniture market in China). Its expansion from tier 1 cities to tier 2 and tier 3 cities helped it to gain access to potential customers in low-tier cities.

The company intends to expedite its pace of expansion in China to take the number of stores in the country to 34 by 2020.

IKEA is a privately held Swedish company. This company is the world’s largest furniture retailer founded in 1943. It is known for its modern architectural designs on various types of appliance and furniture, often related with a simplified and eco-friendly style. The first retail store of Ikea was opened in Shanghai in 1998. And another one was opened in Beijing next year. It is the first chain furniture retailer in China.

IKEA has set up its furniture production bases in Dalian, Tianjin, Shanghai and Chengdu. Dalian IKEA Furniture Manufacturing Co., Ltd is IKEA’s largest furniture manufacturing base in China, mainly producing tables and chairs which will be exported to international market. IKEA has 370 suppliers in China and it is predicted that IKEA purchasing volume in China will take up 20% of its global total. China has been IKEA’s largest supply base in the world.

Strengths

The business idea of IKEA is to offer various, beautiful and easy-to-use home products that anyone can buy. This idea is different from those developed by domestic players. IKEA has positioned its business offering away from high-quality and high price, and also a way from low quality, low price. It is in a very enviable position.

IKEA is able to develop design requirements based on functionality, price, shape, moreover, it has an efficient supply-chain through using out-contacting model and selecting appropriate supplier.

Moreover, the core values of brand allowed it to build strong brand image providing a stronger brand loyalty. IKEA likes satisfied customers. The business manages to score highly in customer satisfaction surveys. Many marketing research companies rank IKEA in their top 10 companies for customer satisfaction. They managed to enhance their brand association with such great results.

Weaknesses

IKEA’s flagship stores are not located in city center, more often they are out-of-town stores. Their customers have to not only cost their travelling expenses, but they also have to collect large packages and take them home. Currently, the business is experiencing problems in one or two home markets.

Opportunities

IKEA is traditionally famous for its diversification strategies. For example, in the past they have sold food products and opened restaurants in their stores. The online opportunity through highly advanced e-commerce technologies is an option for IKEA. This can help the business to overcome problems with out-of-town stores.

Another opportunity lies within the low-cost manufacturing in China and India. Costs can be reduced and margins possibly increased by reducing labor costs.

Today, furniture brands in China are no longer fighting for first-tier cities but are gradually shifting their focus to the furniture market in second- and third-tier cities. While the economic and consumption scale is smaller in second- and third-tier cities, the market offers more room for development. So, tapping into the medium- and low-end market will become a key marketing strategy.

Threats

IKEA can struggle against the larger portfolio suppliers. For example, Tesco’s sells not only groceries, but TV sets and mobile phones, so it is only a matter of time before the business diversifies into a range of bedroom furniture or kitchens. The changing economic environment will also impact and influence IKEA’s furniture business.

Brands Strengths Weaknesses
Easyhome Clear customer positioning 

Unified procurement, marketing and settlement for the brands

Effective control mechanism

One-stop experience and rich service formats

Weak dynamic capability and value chain 

Single income model

Relatively scarce network of resources

Difficult to provide additional services besides the sales of home products

Yuexing Group Human capital resources 

Business model with shared risks

Possibility to force investment

Services and design

Not clear customer positioning 

Lower shopping mall penetration than RSM or Easyhome

IKEA Customer satisfaction 

Brand loyalty

Efficient supply-chain

Functional design at low price

Stores not in the city center 

Problems in home market

DIY model

Brands Opportunities Threats
Easyhome Online platform 

Expansion to smaller cities in China

More sophisticated customers 

Harder to compete with single income model

Yuexing Group Online platform with 3D modeling 

Grow domestically

Go international

Online retailers
IKEA Diversification strategies 

E-commerce

Low-cost manufacturing

Medium- and low-end market

Larger portfolio suppliers 

Changing economic environment

Regulation in China

Table 8: Competitors SWOT analysis

 

IV Red Star Macalline Business Model Transformation

The fourth chapter will introduce the Red Star Macalline business model, its core capabilities, also it describes the new trends in the furniture industry continuing with the challenges Red Star Macalline can face at this period of time.

4.1 Red Star Macalline Business Model summary

Red Star Macalline provides unified marketing, unified service, unified training and other services, and makes profit through rent. This incubator model makes the relationship between brands and Macalline different from manufacturers model where is mostly suppliers relationship.

4.1.1 Red Star Macalline core capabilities

1) Tangible and Intangible Services Combination

During the development of the company, the western style of business model, the supermarket and mall, were introduced. This is how Red Star Macalline was able to gather and arrange the diverse products from different brands under one roof, moreover, it adopted product bundling strategy in sales. The firm clarifies its responsibility as selecting the brands, controlling the product quality as well as providing the whole range of services, such as distribution and after-sales marketing. Now the leading furniture chain retailer offers new creative shopping concepts. For instance, it constructs the in-house metro train inside one shopping mall instead of the elevator. Another example is developing interior design with trees and water landscapes whhic was claimed to China‘s first park-style shopping complex.

The product portfolio includes home furniture, kitchen tools, bathroom accessories, construction materials as well as office furniture and so on. The products in the shopping mall cover nearly a hundred of renowned national and international brands.

Macalline mainly plays the role of a platform, unlike other chain supermarket model where brand manufacturers sell products themselves. This model is very attractive for the small revenue brand manufacturers. After the brand manufacturers are settled, Macalline will help them to find  a designer to help design the booth and exhibition hall. Through this collaboration between brand manufacturers and Macalline it can achieve win-win sustainable profit model.

2) Clear customer positioning

In shopping malls in cities like Beijing, Red Star Macalline imports the high-class furniture from Italy and Spain as alternative options to national products. They intend to make the product portfolio more comprehensive and diversified. According to their analysis, customers in such metropolitans present the demand for high-class product, mostly, globally renowned brands.

Senior manager in Red Star Macalline, Mr. Shen comments they were the first company which considers attracting this group of people and gaining their consumption loyalty. Together with the majority middle-class products, thus, customers in different income range can choose the goods both preferable and affordable.

3) Strong Brand

Macalline is a Lifestyle brand, it created brand chain stores, not just a simple commercial distribution of property. Macalline vigorously creates a learning-oriented enterprise to actively carry out self-mastery, shared vision, team learning and systems thinking and enhances the brand’s reputation and corporate image. Red Star Macalline, focusing on customer psychology, provided an integrated service of experiencing shopping.

4) Operation

The company operates Portfolio Shopping Malls and Managed Shopping Malls. It provides comprehensive services in Portfolio Shopping Malls and charge a fixed monthly rent, other management fees. Many Portfolio Shopping Malls are located in the first and second tier cities and contribute to the biggest part of the company’s revenue. By June 30, 2016, Red Star Macalline had 56 Portfolio Shopping Malls and 125 Managed Shopping Malls. The former were spread over a total area of 4,457,050 square meters at an average occupancy rate of 95.4 per cent. The latter were spread over a total area of 7,357,877 square meters, at an average occupancy rate of 92.2 per cent[19].

Most of the Portfolio Shopping Malls were located in Tier I and II Cities, providing recurring and predictable operating income through rent and management fees. Most of the Managed Shopping Malls were located in Tier III and other cities. They were asset-light. This kind of Commercial Real Estate Business Model has advantages in low initial store opening costs (leasing) and low operational costs. Revenue model is based on buying or leasing a property and renting it out to suppliers, where is assets appreciation. An intact hybrid business model of owning malls and managing malls that it does not own enables Red Star Macalline to expand with little capital outlay and minimum investment risk. Red Star Macalline builds shopping malls on its self-owned land and rents stores out to its selected tenants, who are famous for their domestic or foreign brands. Red Star Macalline, as the owner of the mall, manages administrative task in the daily business and provides the premises for the tenants. All the tenants are involved in an intra-organizational coopetition, in which the cooperative side of the coopetition is passively led by the landlord, Red Star Macalline.

Profit Model

Red Star Macalline adopts a new form of profit model named “pure lease”, including shops leasing, marketing fees, public property management and other expenses. Moreover, it has its own proprietary rights – self-built property – independent design construction – investment. This “workshop mode” has driven its real estate property value continually. Red Star Macalline began with retail trade, then finished by structurally adjusting its capital operation, and enlarging wealth management entities.

Red Star Macalline main source of its cash flow is consisted of three main parts:

1) Rental income: mainly based on the rent and property income.

2) Service income: mainly charged through the designers services for brand manufactures and value-added services to customers.

3) Other income: mainly investment. From the above analysis, Red Star Macalline is based on commercial sales, but meanwhile diversifies its business by providing different services for the brand manufacturers, then gains revenue or cash flow to support the sustainable development of the enterprise. This is a business development model that the home retail industry can learn from.

4.1.2 Boston Consulting Group-Matrix

BCG matrix classifies a firm’s products to its cash usage and its cash generation, using market growth and relative market share to categorize them in form of a box matrix. This is an important tool in order to evaluate the company’s preparedness for the future strategic changes. There are two variables: market growth and relative market share in the reference market, and thus it can enlighten the effect Red Star Macalline’s relative market share has on its further growth capability.

A star is a product, which have high market share, and operates within a market characterized by high market growth. Cash cows have a high market share and operate in a market with low growth. The dog is characterized with low market share and is present in a market with low growth. Question marks have high market growth but suffer from low market share. The BCG matrix indicates that Red Star Macalline’s products either have not reached its dominant market position and thus a high cash flow, or perhaps it once had such a position but has slipped back. The market growth is also high, and therefore, the investments need to be great to turn the trend around and in the future become a star.

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Figure 9: the BCG Matrix

4.1.3 GE Multifactor Portfolio Matrix

GE Multifactor Portfolio Matrix uses multiple measures to assess business strength and industry attractiveness of the company. Each of these two dimensions are a composite of a variety of factors that each firm must determine for itself given its own unique situation.

Low       Market attractiveness      High

Selective Expansion

Invest in Expansion

Defend position

Select for profit orientation

Selective Expansion

Expand and Harvest Expansion

Defend position and reorientate

Profit orientation

Divest

Low                                       Market Share                                           High

Figure 10: GE Multifactor Portfolio Matrix

Industry attractiveness can be determined as follows:

1) Number of Competitors in Industry. There is huge number of competitors in the furniture industry in China, all with different formats and business model. However, we can see that there is no clear benchmark in the industry.

2) Rate of Industry Growth. The home improvement and furnishings industry in China had recorded sales revenue of RMB 3,704.1 billion in 2015. In 2015 home improvement and furnishings industry in China had recorded sales revenue at the range of RMB 3,704 billion (Frost& Sullivan, 2015). According to factors mentioned above, we can assume that the industry will continue to grow.

3) Weakness of Competitors in the Industry. According to our SWOT analysis of competitors we can see that competitors can have weaker dynamic capability and value chain, single income model, relatively scarce network of resources, less clear customer positioning or lower shopping mall penetration in comparison with Red Star Macalline.

Therefore, we can say that industry attractiveness is High.

Business Strengths might be determined by such factors as:

1) Company’s Financial Solid Position. Red Star Macalline’s revenue in December 2015 stated as RMB 8.76 billion and net profit of RMB 4.37 billion[20]. Company had been listed on the H-Share market in 2015, and in mid-2016, it announced an initial public offering (IPO) on the A-Share market, which allows to get investment for future expansion.

2) Competitive advantage of Red Star Macalline. Hybrid expansion model of Red Star Macalline which consists of Portfolio Shopping Malls and Managed Shopping Malls has created high barriers to entry, it is difficult for the competitors to replicate it. Moreover, the company was also getting into three non-core sectors which are aimed to reinforce its core offerings.

3) Brand Strength. Through its long history Red Star Macalline has built a strong brand with a strong network of shopping malls. By June 2016 it the largest home improvement and furnishings shopping mall operator in China in terms of: number of shopping malls (181); operating area (11,814,928 square meters), and geographical coverage (129 cities)[21].

Thus, we can say that Business Strength is Medium.

GE Multifactor Portfolio Matrix determines that Red Star Macalline stands in the “Invest in Expansion” cell. Therefore, the desired outcome is to shift to Strong Business Strength position to save its competitive advantage and get a position of “Expand or Harvest”.

Low

Medium

High

Market  attractiveness

N

High

Medium

Low

E

D

Market Share

Figure 11: GE Multifactor Portfolio Matrix for Red Star Macalline

N – current situation

D – Desired outcome after new Strategy

E – Expected outcome if no change

 

4.2New Trends of Business Models in China

 

Green Marketing

With the high demand from consumers for better living conditions, companies will invest in developing  more healthy, green and functional products (Hong Kong Trade Development Council, 2016). For instance, home textiles will can be developed with health care or protection functions, such as including antibiosis, anti-mite magnet therapy, aromatherapy, etc. The end product is a functional furnishing item with a high added value.

Medium and low-end market

Targeting the medium- and low-end market can become a key marketing strategy for further expansion. While China aims to increase the proportion of affordable housing during the 12th Five-Year Plan period, we can see the emergence of home markets in second- and third-tier cities. Moreover, the market for furniture markets and brands is almost saturated in first-tier cities. Overall, it prepares a vast room for further development. Today, furniture brands are shifting their focus to the furniture market in second- and third-tier cities.

Mass Customization

Custom-made furniture is becoming more popular together with the growing demand for personalized home products. Furniture makers now can produce tailor-made products according to their customers’ needs. Nowadays a great number of large bespoke furniture manufacturers is developing rapidly (Hong Kong Trade Development Council, 2016).

Omni-channel

E-commerce is gradually changing the retail landscape. In Omni-channel retailing, a customer could switch channels – buy online and pick up in-store, or use mobile in-store to research or make a purchase, or buy in-store and make a return online. The retailer also could get a 360-degree view of a customer’s purchases across all channels. Two capabilities were thus crucial, on the part of a retailer, to the success of Omni-channel retailing – enabling the customer to order online and pick up in-store; and to buy in-store and return online. It was in building those capabilities that technology came into play. As a result, companies are transiting from retailers to solution and service providers.

 

 

 

4.3Today’s challenges of Red Star Macalline

Previous Online Platform

In 2012 Red Star Macalline launched online shopping platform with online to offline functions. This platform had individual consumers as a target, thus, it enabled them to order and pay for goods online and get delivery at the nearest store, offline. In 2015, Red Star Macalline launched an upgraded version of online platform with selected number of shopping malls. It was targeted at business customers with the same process.

However, there were two specific problems in both formats. The online service was not always consistent with the offline service. Also, the prices displayed online were often different from those displayed offline.

Competitors

Many home improvement and furnishings retailers in China are moving to launch its online shopping platform.  However, still for the majority of the industry products, physical factors like touch are important at the point of sale.  Retailers are struggling with providing the right customer experience.

Changing consumer’s trends

Growing number of mainstream consumers would be among the most dedicated, but at the same time most sophisticated of online shoppers. Some of the shopping conveniences they would be seeking would be easier price comparisons, unique assortments of products, freshness of goods, quality of service, and a social networking experience. It will be harder to compete in customer experience demand.

Omni-channel

Red Star Macalline could move to Omni-channel model which provides an environment where customers can shop through a variety of channels and switch easily between them. Building this kind of system through the whole company is crucial to stay ahead of competitors.

Besides more convenient shopping experience for the customer, new business ecosystem will provide the furniture brands with an additional point of contact with potential customers. It will enhance customer stickiness and increase their conversion rate, resulting in higher gross sales at our shopping malls. The first-hand consumer data collected through the Omni-channel platform can further improve data pool for analysis and research of customer tastes and industry trends.

First mover advantage

There are about 2,500 Tier III and other downstream cities across China and they present an attractive market opportunity. Red Star Macalline would have a first mover advantage on the strength of its asset-light strategy that could generate rapid growth and high returns on capital without straining the company’s cash flow. Red Star Macalline had already shortlisted the cities it planned to expand into in the next three years based on size, population, disposable income of its inhabitants and local market competition. The company is working on launching a “mini mall” format of 15,000 to 30,000 square meters in some of those cities.

Unrelated industries

Red Star Macalline could extending its reach to five interrelated industries, residential real estate, home decoration, home commodities (like appliances, vases, and curtains), finance and service. As a result, it can reposition itself as a “home-centered” enterprise. Meanhwhile, the company was also getting into three non-core sectors aimed at reinforcing its core offerings: consumer and vendor financing, logistics and fulfillment services, home design services.

 

 

 

 

Evaluation of 1001 Strategy of Red Star Macalline

In this part, we will introduce the 1001 Strategy and what activities Red Star Macalline plans to execute. Before describing the advantages and disadvantages of the new strategy we will also analyze the existing situation at Red Star Macalline by using BCG and GE Matrix.

5.1 About 1001 Strategy

In this paragraph, we will describe the main concept and the main driving forces of the “1001 Strategy” like internet platform and physical stores integration which will result in the service loop and full customization for the end-user[22].

5.1.1 Main concept

On June 18th 2016 when Red Star Macalline held the celebration of its 30th anniversary in Shanghai World Expo Center named “Design for China”, it was officially announced that the “1001 Strategy” is going to be implemented.

1001 Strategy means new 1000 shopping malls with 1 online shop. During last 30 years Red Star Macalline main value were middle-class Chinese families whom it provided home furniture in the retail shops. The new strategy proposes that, Red Star Macalline will make the enterprise intelligent by using the technology and create an Internet platform which will facilitate expansion of 1000 shopping malls in many cities in China. Moreover, it will also extend the range of businesses it has with the core value as “family” such as real estate transactions, home decoration platform, commodity trading, service platform, financial platform. The Internet platform will leverage the concept of design aesthetic in new lifestyle through the entire consumption industry chain

The goal, in the short term, is to convert Red Star Macalline into a technology-driven enterprise that leverages real-time data. In the long term, the strategic intent is to make Red Star Macalline an O2O leader in China. As a result, it will be easier for the customers and vendors to transact with each other and easier for Red Star Macalline’s employees to facilitate the transactions.

Figure 12: Five major businesses of “1001 Strategy”

5.1.2 Main content

Internet platform

Under the historical background of “Internet +”, the traditional industry shall come close to the internet, to set up their own internet platform. Depending the internet +2.0 model depending on both the online and offline integrated empowerment, Red Star Macalline shall unite the rim of home furniture industry to create one business life community mutually.

Red Star Macalline will create an internet platform and conduct the cross-boundary extension between five major businesses such as real estate transactions, home decoration platform, commodity trading, service platform and financial platform.

Shifting from the product manufacturing to the service business mode Macalline can become more competitive and profitable through locking-in their customers. Internet can bring the opportunities of big data and facilitate operations for the home furniture enterprises, such as getting insights on consumption behavior, social network communication, cloud technologies to keep the information.

The most important thing for the implementation of O2O model is consistence between online and offline services. “1001 Strategy” is going to be an omni-channel model with the highest level of integration between the channels. According to the development of the tools for execution of “1001 Strategy” Red Star Macalline will fulfill the intelligence capability of its physical stores, improve the efficiency of the supply chain and expand. Moreover, brands that cooperate with Red Star Macalline can enhance their brand value through the opportunities of the sharing economy.

Jianxin Che said that “the quality of the physical store plus internet efficiency will drive the supply chain reform and guide the structural changes upgrading the home furniture consumption”. The main driving forces of the transformation as “platform + content”, “retail + service” will let the customer to create his ideal home design and create more value for him.

Red Star Macalline also recruited a team of 200 professionals from top Internet companies such as Google and Microsoft for executing the strategy. Bin Li (Lao Li) as the new President of the company will lead the change. Previously, he had earlier worked with Suning Commerce Group Co Ltd., a large home appliances retailer in China, as Executive President heading its O2O project.

Integration

Era of Quality consumption

Figure 13: Operating model of “1001 Strategy”

1000 shopping malls

The core idea of the “1001 Strategy” is to empower the Internet through the experience in the physical stores. Furthermore, Red Star Macalline is planning to reach the tier 3 and tier 4 cities after having built up the retail chain in tier 1 and tier 2 cities. Red Star Macalline will use self-management and entrusted management methods to create 1000 furniture pan-home malls in different cities. Red Star Macalline stores will be operating as customer experience and service centers by implementing the big data which will allow to get user’s feedback and promote integration between online and offline channels. According to the scarcity of resources the shopping mall based on the data collected from the consumers Red Star Macalline will decide what kind of brand should be presented in the store. This is how Red Star Macalline can fulfill the demand of the Chinese middle class and provide the full range of services in pan-home industry becoming a service retailer. As a result, through both channels, internet platform and shopping malls, Red Star Macalline can operate on the scale of thousand billion of RMB. Digital integration of the channels will also allow the intelligence integration making the shopping malls smarter. More intuitive, diversified and customized service can bring benefits not only for Red Star Macalline but also bring benefits for the society and economy.

Figure 14: Main content of “1001 Strategy”

Service loop

Meanwhile with the online internet platform Red Star Macalline will develop a design platform. It will provide the following services: property design, decoration and spatial design, home products design, soft furniture design. That way Red Star Macalline will help to promote new Chinese designers and create China’s biggest online home design platform. This will help to rebuild the décor standards, raise well-trained employees, solve the misfit problem between the users and designers design. Red Star Macalline is going to develop pan-home consumption through building unified standards, data integration and full customization.

Figure 15: Design platform of “1001 Strategy”

As next step, Red Star Macalline planned to become an independent property consultant to solve the problem of asymmetric information and build trust between the buyer and seller of the property. After collecting the data on geographical position, style, surrounding environments and etc. Red Star Macalline can give customized recommendations for its users.

Service loop will allow to build an integrated community and let different forces to collaborate more efficient: users, media, investors, manufacturers of furniture and building materials, designers, home decoration companies, service providers and real estate owners.

Expansion and empowerment in other fields

Convenience and participation

Figure 16: Service close loop of “1001 Strategy”

Executing the 1001 Strategy would also be an opportunity for Red Star Macalline to take a fresh look at what its core competitiveness should be. Lao Li saw the emerging competitive advantage it in terms of three components: Red Star Macalline as a brand, RSM as a repository of Omni-channel talent and Red Star Macalline as a digital enterprise.

5.2 The Pros and Cons of 1001 Strategy

In this section, we will talk about the consequences of the implementation of “1001 Strategy” at Red Star Macalline based on our analysis and the conducted interviews with the store managers and top management.

5.2.1 Advantages

Right timing

According to the external analysis of the industry, SWOT analysis, furniture and home industry have vast space for expansion, where Red Macalline’s plans for moving into 3 tier and 4 tier cities seems to be the appropriate decision. Growing middle-class, urbanization, appealing government policy and more sophisticated customer tastes create a perfect environment for the announced strategy.

First mover advantage

While other competitors also hesitate or still struggle to build omni-channel business model Red Star Macalline can build up its unbeatable competitive advantage. As a result, company can acquire brand loyalty in previously untouched cities.

Value for the customer

The Internet platform will allow to create more customized services for the end-user, big data will not only make the supply chain more efficient, but will also bring more satisfaction for the customers. Moreover, it the new strategy can allow for Red Star Macalline to be more transparent, which means more trust with the customers.

Improving the industry standards

At the moment there is no yet the perfect benchmark in the industry, as well as for the business model, as well as for the quality standards. Red Star Macalline could build more trust with the customers through its design platform and bringing the best for its end-user. Moreover, Red Star Macalline can achieve another first mover advantage by setting up the industry standards that other brands will have to follow and shape whole industry according to its own preferences.

More efficiency through the digitalization and big data

The Internet of Things is already here, therefore Red Star Macalline can take the best of it and improve its processes and operations.

5.2.2 Disadvantages

Higher pressure on the brands

As we got to know from our interviews with the brands cooperating with Red Star Macalline they are afraid of higher pressure on them in terms of the higher rental fee, also in terms of high payment for the online platform. Taking into account that the slow-down in economy also decreased the profits of the brands, it is scary for them to devote big amount of initial investments while not having visible results because new strategy has just started. Moreover, brands are also scared of becoming less flexible. They will have to be more transparent for the customer, to unify their prices in online and offline, be more efficient to get better customer feedback. Also, it is hard to predict how it will work with the less established brands, while more popular brands already achieved the high level of services, the smaller brands can have less opportunities to compete with them even though Red Star Macalline is helping to unify the standards for all its brands.

Higher investments and higher risks

Opening of 1000 shopping malls is a very huge plan, which gives a competitive advantage as well as vanishes the flexibility of the company. It will be hard to keep the balance between all the assets, Red Star Macalline will have to be sure that the profit that will be acquired from this strategy will be enough and will guarantee constant growth before the end of strategy implementation. This is not easy in the era of economical unstableness.

Downsides of the first mover strategy

There is no yet defined omni-channel strategy in the furniture industry. Thus, Red Star Macalline can risk by making mistakes or taking actions with unknown consequences. Meanwhile, the competitors can copy the best and learn from the failures of Red Star Macalline. That is why it is important for the company to protect itself from the competition.

5.3 Strategy Modifications

Business-Model Transformation in moving to omni-channel retail strategy usually consists of three main challenges: redefinition of target clients, a new proposition for shopping value and redesign of the value chain. More precise it can talk about transformation of logistics and supply chain, changes in marketing strategy and trainings for the employees to provide the best customer experience.

To ensure it provides the value of a seamless shopping experience to target clients, the retailer should integrate and optimize its whole value chain and create a new value proposition by integrating all the channels together.

To encourage and enhance its target clients’ cross-channel behavior, the retailer should make the same information (product details, order fulfillment options and price) available regardless of the channel. To do that, the retailer should work on its retail concept from different aspects, such as optimizing the store network; developing new products and services; improving the store environment; and synchronizing the merchandizing across channels.

Issue Challenge Modifications
Shift in corporate culture Connect people responsible for online and in-store sales 

Knowledge sharing

Online and offline workers should be located in one place 

Inter-divisional mindset

Upgrade corporate culture

Bring new talents Incentives for online and offline sales persons 

Redetermine core competences of Red Star Macalline

Reporting system Complicated reporting system for the omni-channel strategy Less layers and more flexibility for store managers in decision making
Issue Challenge Modifications
Delivery Competition from pure e-commerce rivals 

Omni-channel integration

Leave for the customer an option to choose the channels

Build in-store or approved outsource delivery system 

Integrate IT system across channels

Retargeting target customers Be more appealing for mass-market Improve brand portfolio, not only high-end brands
Retain loyal customers Consistent shopping experience through all the channels Exploring data through channels 

Tailored service

Loyalty programs for each channel

Transparency through the channels

Table 9: Key challenges and solutions for Red Star Macalline during strategy implementation

 

5.3.1Supply chain Strategy Modification

The operation of E-businesses has to deal with a lot of technical issues, including equipment standardization, opening of system source, cost optimization, highly reliable architecture, extensible scale and deployable resources. Yet, a company in traditional modes differs from an E-business in many aspects because it has to cope with several large-scale promotions each year as well as daily transactions in both online and offline stores. This situation poses a greater challenge to Red Star Macalline. Realizing that online platform has grown to the major part of E-business, Red Star Macalline has to look for more compatible partners while keep improving itself at a very fast pace.

The big challenge for the implementation of an omni-channel strategy is to manage the flows of goods, services, information and cash, which involve many people on many levels and across channels. Some recommended practices for omni-channel retailers emerged from this study: integration of the information system; centralization of procurement; optimization of the logistics network; diversifying of sources of finance. The study also looked at how retailers can adopt new technologies and introduce suppliers to new systems to enable the rapid updating of huge amounts of data.

With omni-channel selling comes a major focus on retail distribution, and how to get from ship to shore to store or to the consumer’s door as quickly and efficiently as possible. Traditional retailers must support the delivery of merchandise and manage both online and offline inventories and shipments at a frenetic pace against intense

competition from pure e-commerce rivals. They must choose whether to handle express delivery themselves or outsource it. In-store, special spaces and special members of staff should be appointed to this service. The physical stores should also made logistics hubs, in charge of collecting and dispatching the parcels.

Development from multichannel logistics with separate channels for direct-to-customer and store deliveries, to omni-channel logistics, requires integration and expansion efforts. Inventories and picking, organizational units and IT systems need to be integrated across channels, while the range of products available online at warehouses, as well as delivery and return modes,  must  be  expanded  to  include the  various  options.  The purpose of integration is to create synergies across all channels, especially in inventory availability. Expansion enhances the service options for customers so that they can choose the most convenient one (Hübner A. et al., 2016).

Leveraging logistics and fulfillment options for customer and order steering include influencing the channel choice, the mode of delivery and returns. Mutual awareness of customers preferences and retailers offers are necessary. Cross-channel IT systems allow retailers to steer customers into the store by providing an online availability check of store inventory. The same is possible in the other direction when online inventory is checkable in-store. By recommending substitution products when a product is unavailable customers can also be guided to other channels. The customer is offered transparency between channels, help with product search and provided with faster, more convenient or free modes of delivery and return. Thus, cross-channel steering options will not only result in benefits for the retailer, but also for the customer.

5.3.2Marketing Strategy Modification

The core product in Red Star Macalline is the diversified and clustering furnishing product while the peripheral product is the high-standard service and shopping environment. Red Star Macalline initiated the conversion from furniture retail stores toward shopping malls in China in order to provide a customer friendly shopping experience. Customer can easily find what they need in specific floor with clear instruction and guiding service. In each floor of their stores, the products are arranged according to styles, function and price (Chen, Hao, 2012).

The market of Red Star Macalline, the same as other furniture retailers, is segmented by income level and age. The target customers are the consumers with middle and high salary. Since opening its first shopping mall in 1997, the company has attracted more and more customers with higher salary thanks to the increasing brand reputation and high-end product portfolio. However, low income groups can also be involved in Red Star Macalline as the company opened its cafeteria with cheap food in attempt to lure those customers to start walking into the stores.  In Red Star Macalline, though brand vendors could not differentiate themselves from after-sale and delivery service, their competitive behaviors are presented in various products design and marketing activities.

Red Star Macalline‘s bundled brands business model offers a fair competitive platform for all the brands settled in the shopping mall‖, said Cici Feng, the brand development specialist in Red Star Macalline‘s Shanghai headquarter. Brand vendors compete via their products diversity and service qualities as well as images. For example, the luxury foreign brands, Ralph Lauren, Versace, NATUZZI in Red Star Macalline‘s shopping mall have their own focused furnishing categories such as sofa, chair or table cloth. Actually, their brands differentiate them from each other, so price competition tends to be rather weak. In addition, Red Star Macalline encourages the competition among brand vendors, for instance, every month, it praises the best performed vendors and salesmen. Under Red Star Macalline‘s administration, all the brands can take part in the united sales promotion activities. It is not a compulsive activity, however, most vendors would like to join. The competition among different brands becomes fiercer during promotion periods (Chen, Hao, 2012).

The omni-channel retailer addresses target clients who are already clients of the company’s physical or web stores and are seeking the cross-channel shopping experience. They enjoy shopping online, but they also love to touch and see the items they are about to buy. If they cannot get a consistent shopping experience across the different channels of one retailer, they are likely to buy from its competitor.

Quite often e-commerce players adopt a low-price strategy because they do not need to pay for the rental charge and other operational costs of the physical stores. Red Star Macalline can benefit from intensive network of stores as their clients can easily try out the products in Red Star Macalline physical stores but then buy the products online with them while setting a higher price for the same product in its physical than in its web stores.

Exploring data across channels can help the retailer to create a complete picture of consumer behavior, buying patterns and trends so that it can provide them with a tailored service. The loyalty program is essential to recruiting and keeping customers. The retailer can boost the promotion of loyalty programs to the benefit of each channel.

5.3.3Human Resources Strategy Modification

In an omni-channel age, integration and optimization between online and offline business units present tremendous organizational challenges. The omni-channel retailer should work on various organizational aspects, such as a shift in the corporate culture, restructuring the organization, knowledge sharing, redesign of incentive systems and recruitment and training in new skills.

Managers responsible for e-commerce and in-store sales need to be physically located in the same place in order to work together to share best practices and industry contacts and develop a collaborative relationship.

Red Star Macalline can also consider changes in organizational incentives. Managers who are responsible for e-commerce or physical stores should get credit for both the online and offline sales resulting from their efforts. In order to boost local online sales and to promote the web store brand and boost sales in local markets these kind of rewarding can be used for area managers.

The issue of a lack of digital marketers and digital media vendors for Red Star Macalline as a traditional physical store-based retailer can be solved by poaching people from other e-retailers. More than that, Red Star Macalline can invest in personal training for graduate students from famous Chinese universities who have double skill profiles: retailing and e-commerce.

To avoid conflicts between channels, the omni-channel retailer should design a new incentive system to encourage the managers and employees to serve the consumers regardless of their final choices of channel.

Red Star Macalline could create joint corporate organization. A joint corporate organization across all sales channels which could be shaped top down builds the foundation for seamless omni channel activities and is a prerequisite for cross-channel business. Through the integration of sales channels, the inter-divisional mind-set, and coordination of an organization becomes more important.

VI Conclusion

In the last chapter of the thesis we will talk about our research findings, main conclusions and theoretical and managerial implications. Finally, we will describe further research in the future.

6.1 Findings

According to our External and Internal Analysis, we can see that both social and economic environment are suggesting new trends in retail business models. As well as rapid urbanization, fast furniture and pan-home industry growth suggest switching to an omni-channel business model.

We also tried to describe the new changes coming after 1001 Strategy implementation. As we got to understand from the interviews with the top management and store managers of Red Star Macalline, the implementation already started and there is a big room for work. The main idea behind new strategy is to leverage online store through physical stores and by using big data opportunities.

As a result, Red Star Macalline is facing a problem of optimization, centralization and integration of its sales channels and of the whole business model. Moreover, Red Star Macalline can gain a fist mover advantage by getting the main share on the furniture market, building new standards and becoming a benchmark.

Our final recommendation would be to build up an inter-divisional mindset and corporate culture among all the layers of the company. With this mindset company can build an integrated IT system along all the sales channels, tailored services for its clients, which can lead to more transparency thus more brand loyal customers.

 

Research question Analysis Results
Why should Red Star Macalline adjust its original business model into a new one among many business models in a new era of China Economic Situation? PESTEL 

SWOT

VRIO model

According to the gathered information, this is the right timing for the Red Star Macalline to change its business model according to the social, economic, political and technology environment.
How a retail business model of Red Star Macalline integrates its conventional business model to an internet business model? 1001 Strategy Evaluation Through the new strategy Red Star Macalline can build an omni-channel business model which is based on the integration of the Internet platform and many shopping malls across China through big data collection. As a result, services can become more customized, thus leveraging the brand loyalty and increasing the market share after coming to the 3 and 4 tier cities in China.
What are the suggestions to overcome the possible problems during implementation of Strategy 1001? Supply Chain Strategy 

Marketing Strategy

HR Strategy Modifications

Inter-divisional mindset 

Centralization, integration through channels

More transparency

Integrated IT system

Table 10: Research questions, tools and outcomes

 

 

 

6.2 Theoretical and managerial implications

With the big interest for retail industry in China, there are not many research papers that can be found on furniture retail business models, although the market is growing rapidly, acquiring both domestic and international players. Taking into account, that the economic situation in China, at the same time its growth potential in tier 2 and 3 cities, both with changing consumers’ attitudes towards more quality products and sophisticated design expectations (Hong Kong Trade Development Council, 2016), shift to more environmentally friendly materials (Minli, W., Jiao, C., & Toppinen, A., 2015) and growing opportunities for child furniture and vivid competition in the sector, we think that a study on a business model transformation of Red Star Macalline can be of the big value for future managerial implementations. The interesting fact about this research is that it will be conducted meanwhile with the adopting of a new Internet platform and changes that started in the company.

6.3 Limitations and suggestions for further research

There is scarce empirical evidence as to how channel re-design is undertaken by e-commerce retailers. Empirical research intends to address these gaps through an in-depth longitudinal case study.

These contributions point to some limitations of this research. The inherent limits of a single-case study methodology are acknowledged in the literature (Yin, 2013). There is therefore an opportunity to return to the case at a later stage to explore more completely the shift to omni-channel retailing. Moreover, as the research is based on a single-case, transferability to other retail companies should be explored (Miles et al., 2013). Additional work examining omni-channel implementation and follow-up studies will lead to a deeper understanding of how to synchronize brick with clicks in an omni-channel strategy.

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List of Tables

 

Table 1: Different characteristics and channel articulation of multi-, cross- and omni-channel retailing               11

Table 2: 9 Generations of Red Star Macalline Shopping Malls  16

Table 3: Number of Self-Operated and Mandatory Administration Shopping Malls              17

Table 4: Red Star Macalline, Income Statement  19

Table 5: Primary Chinese Cities GDP Figures (2015) 23

Table 6: Major retail channels for home products in China  36

Table 7: Operation size of the top five furnishing retailers  36

Table 8: Competitors SWOT analysis  43

Table 9: Key challenges and solutions for RSM during strategy implementation 63

Table 10: Research questions, tools and outcomes 69

List of Figures

Figure 1: Development of the three basic theories into the direction of a converging business model view              8

Figure 2: Number of Red Star Macalline shopping malls 18

Figure 3: Red Star Macalline Group revenue and net income (2013-2015) 18

Figure 4: China GDP Annual Growth Rate 22

Figure 5: Annual disposable income per capita distribution 24

Figure 6: Number of high-income consumers 25

Figure 7: Per capita annual expenditure in China 26

Figure 8: Red Star Macalline SWOT analysis 35

Figure 9: the BCG Matrix 47

Figure 10: GE Multifactor Portfolio Matrix 48

Figure 11: GE Multifactor Portfolio Matrix for Red Star Macalline 50

Figure 12: Five major businesses of “1001 Strategy” 55

Figure 13: Operating model of “1001 Strategy” 56

Figure 14: Main content of “1001 Strategy” 57

Figure 15: Design platform of “1001 Strategy” 58

Figure 16: Service close loop of “1001 Strategy” 59

 

 

 

 

 

Appendix

 

Interview of Li Bin, President of Red Star Macalline

Date: November 1, 2016

Venue: 25F, Headquarter Building of Red Star Macalline, Shanghai

Figures: Li Bin, President of Red Star Macalline and Professor Li Jie from Shanghai Jiaotong University.

1. Understandings of RSM by the newly inaugurated president Li Bin 

He thinks, in the past three decades, RSM has not completely enjoyed the benefits brought by rapid development due to opening and reform policy because RSM founder, Mr. Che Jianxin was initially a carpenter who raised extremely high requirements for precision, and has focused on quality, pursed craftsmanship and insisted on middle and high-end lines from the very beginning, thereby having not followed the social trend of extensive style development during such three decades.

There are two major reasons for Li Bin to join in RSM:

1. Respect for chairman Che Jianxin (amiable, simple, fast decision making, and listening ability which is specially needed in this age). Story: In an internal Internet Strategy Seminar held in November, 2015 lasting from 9:00 AM to 6:00 PM, Che Jianxin listened the speeches patiently, rarely giving comments. After the seminar, he invited Li Bin to serve as president directly.

2. He thinks RSM still has huge development potentials:

1) image of high and middle-end brand;

2) spirit of focusing on quality;

3) At that time, RSM had over 180 shopping malls with 80,000 m2 each. RSM still got a net profits of over 2 billion RMB with low efficiency, so there is a large space for development.

2. Red Star Macalline Group promotes happy culture” including three meanings, namely, happy learning, learn happily, work happily, live happily.

3. Blueprint of Red Star Macalline: 1001 strategy, e.g., 1000 household furniture malls +1 Internet platform.

4. Corporate values cherished by Li Bin

Regard start as end: work with great diligence and serious attitude (if a project fails, start means the ending).

Regard end as start: awe (each ending is a new start, forming a spiral development route). The closing of one sale for retailing enterprise does not mean ending, but “a new rounded start”. Li Bin often encourages colleagues with such words. Explanations of this western painting by professor Li: “developing a new story about it”.

Bottom logic for “1001” strategy:

The first layer meaning: 1 and 0 are both used in programming, “1001 strategy” emphasizes applications of technologies and intends to build internal engineer culture.

Internet means water and power for further enterprise development.

Cultivation of management talents based on modernized technologies.

From “technology-driven business” into “business- driven technology”.

The second layer meaning: “extreme simplicity” spirit (1 and 0 are both the simplest figures).

1) Extremely simple user terminal. All the complicated work should be finished in back-stage and an extremely simple user interface shall be offered. Customer would not like to know the logic hidden in background, but focuses on self-feeling. So, we are not supposed to bother users with excessive thinking, therefore bottom logic must be clear.

2) Extremely simple internal management.

As for structure layers, from president to common employee, there are only four layers (about 17 to 18 layers may be available in traditional enterprises): President→Person in charge of BU→Person in Charger of Department→Common employee.

As for communications, employees in RSM call “Che-Che” and “Elder Li” instead of chairman Che Jianxin and President Li Bin.

3) In order to achieve extreme simplicity, professional spirit is required, and quality is required. Extreme simplicity does not exist without the help of professional spirit.

第三层含义:设计美学的彰显(1001是对称)

The third layer meaning: Manifestation of design aesthetics (1001 is symmetrical in form).

Design aesthetics concept is penetrated into business chains of real estate, household decoration, household furniture, retailing, service and finance.

5. Core assets of RSM in the future

First: brand asset (Communication pattern has been greatly changed. Brand popularity is increasingly more easily obtained while brand loyalty and brand reputation are hard to be maintained).

Second: talent asset (four kinds of core talents).

(1) existing talents: 18,000 offline elites

(2) technical talents (IT talents oriented for internal smartness construction and oriented for end users)

(3) Internet talents (Internet talents understanding e-commerce)

(4) other industrial talents (finance, real estate, household decoration and service, etc.)

Third: digital asset (technological application, data value and industrial trend).

Technological application

Data values: big data strategy, most enterprises have no idea about strategy, data storage and data application.

Industrial trend: “applied data”.

Data offers sustainable productivity for enterprises.

6. Enterprise development had better make itself and employees under a kind of acceptable uncomfortable state (gentle pressure).

7. Values of RSM: Li Bin has systematically expressed corporate values after inauguration.

Only with the same values could diversified talents be gathered.

First: core is user comes first.

Focus on publicity by word of mouth.

Delegation of power. By assignment of powers to the employees closest to users, higher level focuses on development of enterprise strategy.

Second: initial dream: focus on quality (low quality products shall not be sold while only “high quality product with high cost performance ratio” are made).

Third: behavior: innovative and down to earth (we are curious and welcome changes while doing anything down to earth).

Fourth: attitude: sharing and altruistic.

Shopping mall space, human resource and supplier resource should be used to the maximum degree. Sharing is a good approach to understand users and improve efficiency.

Professional talents offer services for more customers, which can further improve their skills. In the future, professional talents are more and more valued while general talents are increasingly less valued.

Fifth: responsibility: do not be evil, do not cheat (repeat the simple work).

Counter determination: RSM and JSWB bear joint liability.

Jinjiang Group has the similar concept of “focus on repeated errors repeatedly”.

8. Previous personal experience and leadership style of President Li Bin.

First: 11 years of experience in Suning company, and guided the foundation and development of suning.com.

Second: success = firm belief + diligent efforts + persistence.

Third: insisting on the right direction and maintain your decision. Hardships and challenges are all precious treasures.

Fourth: good mental state, anything has two side. We should see the positive side and keep optimistic.

Fifth: Professional Entrepreneurship, means a mental state and conduct mode different from that of “professional manager”.

9. Asynchronous sate in enterprise developmenthow to settle potential conflicts among four different talents?

First: values should be united and blended.

Internet team’s work office is arranged at the middle floor (25th floor).

Second: an opening mind embracing Internet.

Third: altruism.

Traditional enterprises are possible to make transformation and will enjoy a stronger vitality after such transformation:

“Conflicts are not necessarily from bottom layer, sometimes, from high or middle layers. Mutual benefit and mutual understanding should be used to deal with conflicts among base layer while high and middle layers need the supports of top management”.

10. 13 RSM shopping malls located in Shanghai, Nanjing, Suzhou and Changsha have been selected as the pilots for APP application.

 

11.  Strategic Vision of RSM

First: Mission: Aimed to promote Chinese people’s household taste

Second: Satisfy each user’s imagination for home.

From low frequency to high frequency–an entire industrial chain with home as core; The discovery channel in the APP is intended to guide decisions of consumers.

Third: values on all the enterprises in home-wide industrial chain:  pushing Internet upgrading of all the enterprises. One enterprise cannot last long if it only makes profits for the purchase of itself.

Interview Questions for Chairman Che of Red Star Macalline

(2016-05-27, 16:00-17:00)

By Prof. Jie Li and Prof. Jean-Louis Schaan

1. RSM is a chain furniture mall that evolved from a humble beginning.

What are, in your view, the main factors that explain RSMs remarkable growth from one generation to the next and over nine generations?

Twenty years ago, home furnishing malls in China were messy, disorderly mass markets that appear on street sides with little rules or regulations on the products they sell. RSM sensed the opportunity to grow its business through this loop hole in mass market, where good quality with direct sales and counterfeit commercial goods co-existed. We started to act in accordance with the metaphoric slogan states that for good products selections, it is like the process of oil refining, where you keep the good quality and sieve out the lesser qualified part. Thus, we started to select qualified brands only, and allowed them to enter our mall. In 1997, we launched our first generation mall, employing market–oriented operation and mall-oriented management style. After the second generation mall, we’ve been working continuously to elevate the experiential shopping experience for consumers and scenic set-ups in malls, at the same time enhancing the exterior decorations, and improving our malls’ spacious appearance. Scenic setup in the malls provided consumers with unique home furnishing ideas, inspired them to design homes with more sophisticated taste. Many consumers like to design with materials that contain gold and silver elements, in an effort to show off their new rich. We provide tasteful home furnishing, with the ultimate goal of improving consumers’ home living quality. Our corporate mission is to improve Chinese consumers’ home furnishing taste, and to act as a guide for them towards high quality living. Thus, with this vision in mind, we’ve developed ourselves in line with this goal from the first generation to the ninth.

2. What are some of the core values your company still holds dearly today?

What do you perceive as your mission as a giant in the Chinese furniture industry?

Our core value: Observe consumer’s need through displaying hall and exhibitions to guide them with their selections. Display halls could guide consumers to their purchase. Normally, consumers are not familiar with home furnishing. In this case, RSM acts as an expert through training our staffs to be specialists in home furnishing, in order to help consumers with their selections and interior designs for their final selection.

3. What are come of the challenges/constraints that fast growth have created for RSM? How have you addressed them?

One of our challenges has been: in 1997 we’ve opened 20 more stores nationwide, and for every 2000 to 3000 square meter shopping malls, due to slow reaction towards market demands, closed down one after another. This has been a setback to our corporate management. Many SMEs encountered problems and shut down, how do we deal with this?

We are good at innovation. From the first generation to the ninth, we continuously aim to create a unique RSM commercial model. For example, we are the first on the market to have a home furnishing chain store; first to purchase land to build malls; first to be fully responsible for products sold to consumers (through perfecting our after-sale service). Through every transforming, an element of innovation has been witnessed. Currently, to keep up with the trend, we are working in the e-commerce area to bring in new innovation into our corporation. Details will be announced on June 18th’s annual meeting.

4. Specifically how do you ensure that you have the organization structure, systems and processes to align with the demands of your strategy? What about talent? How do you ensure you have the right people at the right place at the right time?

Our company operation system is:

First: We are a learning company. Every employees and managers keep studying through many opportunities offered by the company such as company training activities, continuing learning through school, company visits, overseas business visit, etc. Learn from leaders, from each other, and learn with questions. “Study in what we are lacking, and in what we need”.

Second: Competitive system. Our company’s organization structure strongly emphasizes and encourages competition. For example, we have three development departments, and they compete regularly with each other. We also have four Operation Divisions that compete regularly with each other.

The essence of our company’s culture is to be a ‘learning company’.

How do you treat talents? What are some of your incentives?

We employ the “encouragement rather than punishment” rule.

All good performances are of course rewarded; Under performed ones will be eliminated in rounds. This systems also covers the district managers and mall managers.

Among your 177 malls, is the management style unitary for both all self-managed malls and delegated malls managed by agents? How do you ensure the final quality? Self-managed malls and delegated malls perform according to the same evaluation system and management policy. We execute a unified management system to ensure that provisions, measurements and policies for management are the same to guarantee a valid result.

5. As we know, in May 2015, RSM went public in the Hong Kong Stock Exchange. What are some of the reasons that triggered the initiation of an IPO? What are the implications?What would you hope to gain through such an action?And then to A share?What is your vision for your company after it goes public?

Last year, we initiated our IPO mainly to cooperate with the American fund. Since they have invested us for eight years. For one thing, the final terms of the contract will be overdue, American investor requesting for liquidating their shares and withdrawn from the investment. Their hold 15% of the share as the initial investment. Therefore, they recommended RSM to get listed in the HK Stock Exchange due to the simplicity and efficiency of the listing procedures.

Currently, American investor haven’t liquidated their shares and they will not invest in the A stock market which based in China, Mainland. RSM achieved the IPO both in Hong Kong and Shanghai stock markets. This is what we called the dual model “A plus H”.

On the one hand, to cooperate the American investor for the completion of IPO and liquidation since they have invested us for eight years, on the other hand, the market initiate in Hong Kong is beneficial for the branding as well as the process of internationalization and financing.

What are your development goals?

We will announce on June 18th.

6. What are some of the most significant trends impacting your company? Regulatory? Customer? Technology (platforms, social media)?  Competitive? We heard about the potential acquisition of JSWB. What was the thinking behind this attempt? What happened? What are the implications?

We will announce on June 18th.

What thoughts can you share on the development patterns and economic trends for the Chinese economy?

Chinese economy is moving along towards a better stage. For example, the May 1st Labor Day sales increased 56% year-on-year, showing the Chinese economy is reviving very fast. However, developments in the third and fourth tier cities still needs improvements. The destocking process started from the year of 2014,this year is the third year, after it finishes, third and fourth tier cities will have high market growth potential.

After the size of the company increased, there will be M&A. About your previous considerations of acquiring JSWB, would you please briefly introduce to us about it?

In the beginning we wanted to acquire JSWB, but in the end due to various reasons, we decide to drop it. According to both party’s negotiation we’ve come to an agreement: RSM has exclusive right to use JSWB’s brand along with JSWB. However, there’s a clause to this, which is that in this brand sharing deal, RSM enjoys priority. There are maximum 10 brands that join this deal every year.

Why in the beginning would you consider JSWB?

JSWB has been performing very well in the Guangdong market, contrary to RSM’s performance. In addition, JSWB has home furnishing village in Guangdong province, we could very well complement each other.

Why would you describe your detailed feelings towards your father in your book? Is it because your father had an important influence on you? Maybe chairmans moral has influenced closely with the companys development?

I define myself to be only the second generation entrepreneur in the family. Although my father hadn’t directly involved with the process, but he had had an undoubtedly strong influence on this business, and of course, it influenced me. This spirit could be summarized into six characters: “honesty, frugal, diligent”. These values were passed onto me. Coincidentally, these values are encouraged by the period of Reform and Opening Up in China, helped us to persist through hardships and achieve fruition on our efforts.  A family business needs several generations to establish.

My parents are very diligent, they love to think of new ideas.

For example, when I was little, my mother would go to the fields to harvest rice. Every time before she leaves, she would habitually bring some tradable pig manure with her for trading, making her trip more efficient.

My dad was a tiler. He would create a new groove on our kitchen hearth, to put water in there, allowing the heat in the hearth to boil the water.  Although he didn’t start his own business, but he conveyed the entrepreneurial spirit.

7. What are the implications for the brand? What is the RSM brand? Is the current positioning sustainable? Threats? Opportunities? Please brief us your perspective to the RSM brand positioning? Looking forward, how important is innovation for RSM Brand?

RSM has some very important credendum:

Our brand’s most important essence: Confucian ideology: kindness, justice, etiquette, wisdom and faith;

Buddhist culture (respect for elders; loyalty and filial piety); filial piety is an important aspect for family culture, and it has a significant effect on home furnishing. This is part of the reason why the home furnishing market in China is doing well.

Buddhist culture’s influence.  Buddhist temples always have majestic sculptures because normally they are not constructed according to the ratio of 1:1, commonly it’s 1:5 or 1:10. This type of scale of construction brings a broad feeling and create shocking visual effect. We are under the influence of Buddhist culture, thus, RSM’s malls designs are also very visually shocking, mostly they are square and upright. Because the malls look majestic, they allow consumers to look upward, unconsciously creating credibility.

8. What are some of the innovative procedures/practices your company is engaging in to ensure the sustainability and prosperity of RSM? How do you measure them? (What are the results? How do these practices effectively improve, or change what you already have?)

Innovation connects closely with Confucian culture. Kindness, justice, etiquette, wisdom and faith. Etiquette culture pursues beauty, we are inspired to elevate perception of beauty through innovation process every time.

How do you measure innovation? What is the benchmark?

 

To align closely with the society. Innovation can’t come too extremely. We want to be a pioneer, but not a martyr. We hope that with every innovation, we would exceed consumer’s expectation by 30%, to guide spending.  But if we exceeded 50%, consumers would not appreciate it.

What are some of the examples of innovation?

We have had some stores, they were positioned too high-ended. For example, through decorating the entrance hall to change the impression that it looked too empty. We just put some sofas in there.

9. What are some of the improvements in RSMs operations and the RSMs value chain activities? How does it impact the financial and market performance of RSM?

Last year after the IPO listing, HK stock market was sliding, and this was the main reason. The stock value is worth roughly 200 billion, and company worth roughly 400 billion. This is illogical, and we think it was mainly because consumers were not familiar with RSM.

To promote the appreciation in the H stock market by the development in the A stock market. The June 18th conference(30th Anniversary for RSM) is a strategic action, it is good for our stock value.

Currently, many Chinese SMEs went bankrupt, how do you perceive the market challenge? What do you think is RSMs biggest challenge?

RSM wants to be “century-old store, brand of a millennium”. Currently it has been 30 years, we need to pay attention to succession. It is not yet decided for sure that we’ll pass it down to our children, we might employ professional managers, give him shares. Thus, we want to be “century-old store, brand of a millennium”.

Value chain model?

To be announced on June 18th.

10. Whats the roadmap for RSM from a strong Chinese native brand to become a global brand worldwide?

Firstly, China has the fastest growth in the world; secondly, China’s urbanization rate is accelerating, this has an impact not only in the cities, but also in towns. According to government’s planning and development requirements, urbanization rate could reach up to 70%. There is huge potential for growth in the next 10 years for the home furnishing market in China. Potential for towns are immeasurable, in the future there will be more than 2000 stores opening, the future looks promising. We want to establish ourselves firmly on the Chinese soil, and reap well. Thus, due to the high growth of the Chinese GDP, and the accelerating urbanization rate, RSM will still mostly operate in China. Moreover, RSM is a mall store chain, not a product, so currently, we are not interested in international markets, nor markets in HK, Macao and Taiwan.

As the entrepreneur of your company leading RSM to success, how do you understand a leader’s leadership abilities?

1. Promote a learning organization.

2. Employ internal competition and reward systems.

3. Performance KPI; sufficient and adequate rewards.

4. Promote honest company culture.

Team culture is at the heart of RSM’s success.

Besides, individuals always have a strong impact on the bottom line: always be a learning example for others, never ate promises, be responsible for conducts, and finally, give encouragement/rewards rather than punishment.

 

 

 

 

 

 

 

 

 

 

 

 

Ding Guo Ping, CEO, Oppein

23 of February, 2017, Shanghai

1) How long have you been cooperating with RSM already? In how many RSM shopping malls and in which cities you display your products?

We are working with RSM from 2002, about 15 years already. We have at least 1-2 booth at every RSM shopping mall in every city.

2) Do you display your products in any other shopping mall in China?

We also cooperate with local strong brands. For example, in Chendu we have our booth in Fu Xin Mei which just got stock listed. In Shanghai, we cooperate with Hao Shi Jia.

3) What are the main advantages of RSM hybrid management system?

There are two obvious advantages. First, RSM is a modern brand with a professional standard which can be offered to its clients. Second, RSM can offer best service to the end customer, guarantee high level of quality control, as well as warranty for the end customer if the client will have some problems.

4) If you would be able to improve something with cooperation with RSM, what would it be?

RSM provides a platform to bring together its clients (sellers) and end customers (buyers). That is why RSM could improve two things. Attract more people and more opportunities to attrack to new customers. Meanwhile, enhance customer experience at RSM to entertain old customers. For example, organize some events with famous cake makers.

5) Do you display your goods through RSM online shop? Do you display your goods on other online platforms?

I have a bit conservative point of view about this issue. RSM provides Sky Dragon platform to distribute our products online. But I am still confused which model its? It looks more like JD.com with vertical retail system, not like Taobao or Alibaba. We have also built our own online shop, besides that our products are presented on other online platforms. So far we had real sales only through our website and through Tmall.

6) What do you think are the perspectives of RSM 1001 Strategy?

This is a huge plan, there is a long way to go. Moreover, to implement this plan RSM can struggle more than other companies who went O2O recently. For example, Suning or Guomei. RSm has many categories, so they need a big shopping mall on a city level. But what can happen in smaller cities? Suning can open shops in small cities. Can RSM do it? I hesitate saying that it is a good idea.

7) What would you call the main trends of pan-home industry in 2017? How pan-home retailers should adapt to these new trends?

I just came back from the headquarter in Guangzhou where we were discussing our new pan-home customized service. Our company can create any furniture you want based on your request. This is how we moved from a pan-house concept to pan-home strategy. We can divide our life in 6 phases: single, married, with 1 kid, with 2 kids, achievement, old age. This is how we can design home with accordance to each phase requirements.

 

 

Lei Min, J&Home International

23 of February, 2017, Shanghai

 

1) How long have you been cooperating with RSM already? In how many RSM shopping malls and in which cities you display your products?

We are cooperating with RSM for 12 years already and we have 22 booths only in Shanghai.

2) Do you display your products in any other shopping mall in China?

We also cooperate with JSWB, Yue Xing and Shi Tong.

3) What are the main advantages of RSM hybrid management system?

RSM can provide mutual learning which can be helpful for smaller brands because RSM has high standard and through it they can improve themselves, RSM request from them higher standard capability. Secondly, it is also mutual learning. RSM can get some useful data and insights through experiment in retail industry.

4) If you would be able to improve something with cooperation with RSM, what would it be?

RSM is a learning organization. They can not only lease the booths to its customers but also provide a learning environment on equal basis so that sellers could make progress simultaneously. They can help the staff to improve and through it guarantee a stronger competition.

5) Do you display your goods through RSM online shop? Do you display your goods on other online platforms?

To get into this online platform each shop needs to pay 3 000 RMB, no matter how small or big shop is. I am strongly unsatisfied with this system. This is not market oriented compulsory payment system. Moreover, it is not guarantee based. We need to pay in advance without knowing which kind of service is that.

Our products are not presented at any other online system.

6) What do you think are the perspectives of RSM 1001 Strategy?

I think it is a good strategy. They have power to do that. China is huge there a lot of Tier 1, Tier 2, Tier 3 cities. I look optimistically at this plan.

7) What would you call the main trends of pan-home industry in 2017? How pan-home retailers should adapt to these new trends?

Pan-home is a good concept since GDP in China improves gradually and quickly. Chinese consumers are shifting to another stage of consumption which stays for better taste, requirement for more comfortable and more good-looking design. This trend is going to bloom further. If the retailer won’t adapt, it will be adapted or will go bankrupt. You should adapt.

CEO of Urban Vineyard at RSM shopping mall

15 of March 2017

1) How long have you been cooperating with RSM already? In how many RSM shopping malls and in which cities do you have your booth?

Four years ago, we have opened our wine shop at Wu Zhong lu RSM shopping mall. Wu Zhong lu shopping mall is targeting high-end customers that was the reason why we have chosen this shopping mall for our cafe and wine selling. Actually our wine boutique is a part of Australian logistics company. We started as a small partner, wine provider, we have a small chateaux in Australia, but finally grew up to stage of the wine boutique including other brands to our cart: wines from New World and Old World. Later we also added coffee and western style food for our services.

2) Do you manage Urban Vineyard at any other shopping mall in China?

No, we don’t have any other partners now. But we plan to open one more wine shop in the same format at Chengdu in another shopping mall, not in RSM

3) What do you think are the advantages and disadvantages of cooperation between wine provider and furniture shopping mall?

RSM helped us to prepare different events in order to get new customers. The problem is that the positioning of Wu Zhong lu shopping mall is very high-end, may be lower positioning, middle class, would be better. That is why we don’t have many customers, at the moment. During last 3 years we can keep the same profit at the point of break-even. Sales revenue are lower than expected, almost no margin.

 

4) How are you going to use these advantages and face the disadvantages of this cooperation?

There is still room for improvement. We will work on to improve our professionalism and also our wine and coffee products. May be we will change our target customers group in Chendu. A for RSM, right now there is a new building, where the second floor will be reset for the luxury overseas brands, but the first floor will be given for middle class products. Wu Zhong lu RSM shopping mall is planning to get new products with lower price.

RSM is going to increase the rental fee. Sales revenue can’t improve because of economy slow-down. However, the pressure from RSM is growing.

5) Do you display your products in RSM online store? Do you display your goods on any other online platforms?

Online business promotion requires lots of investment. Usually, online stores are only for looking for products, but not buying.

 

 

 

 

 

 

 

Interview with General Store Manager of RSM

Date: March 29, 2017

Venue: Linyu Rd, 518, Red Star Macalline Shopping Mall, Shanghai

Figures: Wan Guofu, general Manager of Linyu Red Star Macalline shopping mall, Professor Li Jie from Shanghai Jiaotong University, Liudmila Pape, MIB student from Shanghai Jiaotong University.

  1. How is different the positioning of your shopping mall compared to other RSM shopping malls?

Ogloria shopping mall (RSM at Wuzhong lu, Wan Guofu previously was a general manager at Ogloria) is situated in the west of Shanghai, while this shopping mall (RSM at Linyu) is located at the south. Ogloria is more hign-end shopping mall, more customized, with clear customer positioning. In turn, RSM at Linyu is targeting middle to high-end customers, mainly middle class. This difference you can feel even on stuff level, the number of emloyees, working space. RSM at Wuzhoung is 430 m2, while Linyu is 1 500 m2. We have 166 employees at Linyu, while only 83 at Wuzhoung. Employees at Linyu are more used to work in a team, while employees at Wuzhong can work more independently. As for the staff functions, employees at Wuzhong lu are more multi-task oriented, can be capable to handle many things in different aspects. Employees at Linyu lu have a strong division on functions and are more taught to work together as a team, they work for mass market. As for the managers, they also have different administrative roles depending on the shopping mall marketing positioning. Sales revenue is also tripled. Wuzhong lu sales revenue is 500 mln RMB, while Linyu lu is 1 500 mln RMB.

  1. What you think about perspectives of 1001 Strategy?

My personal understanding of Strategy 1001 states as that building up 1000 shopping malls all around China with the online platform is basically right. There is a big amount of work to be done. Though Internet economy is full of obstacles, there were so many internet companies that died at the early stage. That is why RSM can leverage its success through the big amount of physical shops.

  1. How the data will be integrated among different channels?

Internet can bring lots of new opportunities to RSM, like more beneficial information, effective standards for the shopping experience, customized furniture. All together it can improve the real shopping experience. It will take some time to develop this strategy, there will be ups and downs on the road to success, but RSM will need a lot of efforts to succeed finally.

  1. What are the key Challenges to start to operate as a multichannel, especially through online and offline?

Internet can provide information quickly. However, sometimes online picture is better than the reality. That is why it is useful for the client to come to the store and check. Internet can improve brand experience, but can’t give the full scale of it. There are standard products that don’t need to be checked or don’t require checking before being bought. As for the furniture, customers would prefer to feel and touch the sofa before the purchase. Moreover, Internet can help you to develop your vision of home décor, but it can’t do more. Real store in turn can help to fulfill your imagined picture into reality.

  1. How did your shopping mall adapted to the new omni-channel strategy?

RSM has annually based agreements with the brands. At the moment, some brands don’t support 1001 strategy, they need to pay more for the agreement renewal. But as from our experience Chairman Che was always good at making the right decisions. For example, there was a new store at Wenshui lu. We didn’t support that idea, but finally this shopping mall became successful and has big profit. That is why we assume that Chairman’s decision will lead us to the right path

Interview with General Store Managers of RSM

Date: March 29, 2017

Venue: Linyu Rd, 518, Red Star Macalline Shopping Mall, Shanghai

Figures: Zou, General Manager of Jinshan Red Star Macalline shopping mall, Professor Li Jie from Shanghai Jiaotong University, Liudmila Pape, MIB student from Shanghai Jiaotong University.

  1. What you think about perspectives of 1001 Strategy?

1001 Strategy will increase the transparency between the brands and the customers. Of course, at the start brands can be against it, but finally this new strategy is for the better.

  1. How does the organization structure changes while adopting 1001 Strategy?

We need to start from the mindset, change ourselves to adapt for the new society. At the moment, we have 4-layers reporting system, which is adjusted according to each shopping mall situation: store manager – regional manager – big region manager – Chairman.

  1. What do you think are the main advantages of RSM business model? And what could you call as its weaknesses?

Basically, store managers can undertake different actions, but make complementary asset for the whole system which can be a good benchmark for the managers. Furniture industry in China doesn’t have unified standards, there is no unique business model. Since there is no exact benchmark, we should try ourselves. RSM doesn’t have unified management system. We try to combine elements of SME’s, private companies’ and even communist party management practices. It is hard to say what benchmark is more suitable for RSM.

  1. How did you change logistics, supply chain?

RSM delivers products through common channel. Before the purchase RSM would still suggest for the client to come to the real store to avoid future dissatisfaction. Online shop will allow to build more centralized system, right now RSM is working on a software which will allow to gather local information for the store about the real estate and number of purchases in that area. All together it will help to build more efficient distribution system for each store though processing of the first-hand information.

  1. Will there be the delivery of online orders? If yes, how? In-store, centralized warehouses, or automated delivery centers?

Moreover, RSM has opened an independent logistics department. RSM will create its own stock warehouses for their brands. Which means that RSM will guarantee the product quality as well as delivery. If some item will get broken RSM will pay the amount for the reparation. Right now, there are common warehouses in Wuxi, Nanjing, Chansha. Overall, it will take around 3 years to build the system and see visible results.


[1] Source: Wirtz et al., 2016

[2] Souce: Picot-Coupey, 2016

[3] Source: Red Star Macalline website

[4] Source: Red Star Macalline website

[5] Source: Red Star Macalline website

[6] Source: based on Red Star Macalline internal documents and results of the interviews

[7]  Source: Red Star Macalline Annual Report, 2015

[8] Source: Red Star Macalline Annual Report, 2015

[9] Source: Company Audited Financial Report

[10] Source: Frost & Sullivan, 2015. Red Star Macalline Initial Public Offering (IPO) prospectus.

[11] Source: translated version of the report by Wall Street Journal

[12] Source: www.tradingeconomics.com, 2017

[13] Source: National Bureau of Statistics of China, 2016

[14] Source: The Economist Intelligence Unit

[15] Source: The Economist Intelligence Unit

[16] Frost & Sullivan, 2015. Overview of the office furniture market in China.

[17] Source: Li & Fung Research Centre, 2011

[18] Source: Frost & Suillivan, 2014

[19] Source: Red Star Macalline internal documents

[20] Source: Red Star Macalline Income Statement

[21] Source: Red Star Macalline internal documents and results of interviews

[22] Own interpretation of internal documents of the company and interviews



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