Watsons, falling from the altar of retail channels?

Sales in the Chinese market only recorded HK$17.579 billion (approximately RMB 15.44 billion), the lowest in nearly eight years;

At the same time, a number of data, including sales, EBITDA (earnings before interest, tax, depreciation and amortization), and the number of stores, all fell sharply year-on-year.

Last month, the 2022 financial report released by Watsons parent company Cheung Kong Hutchison caused an uproar in the industry.

According to public reports, Watsons, which has been enclosing land in the mainland market, has also suspended its expansion since last year, closing a rare 343 stores, almost "closing one store every day".

This can be called the biggest Waterloo since Watson entered China. But in fact, cracks appeared as early as 2015.

That year, Watson's profit margin hit a new high of 14%, but the year-on-year store sales showed negative growth for the first time.

Taking this as a starting point, in the following years, the negative indicators on Watson's performance report gradually increased, and it is even more shocking now.

At the end of the last century, Watsons entered the Chinese market and experienced the glorious period of traditional beauty collection stores. And when new channels and new formats are constantly changing, Watsons seems to have gradually entered the twilight of history along with the previous era.

Part 01: "Close a store every day", Watsons stepped down from the "altar"?

There are still those who remember the heights Watson climbed. It was 2005, the sixteenth year that Watsons entered China. Li Ka-shing, at the helm, was determined to shift the focus of its development to the Chinese mainland market, thus starting the "golden decade" of Watsons' development.

In those years, Watsons entered a period of rapid expansion, joining forces with Wanda Group and COFCO Real Estate, two major commercial real estate giants, creating an average of 200 new stores per year. "Watson's Speed" attracted the attention of the entire Chinese retail market. While expanding its stores, Watsons has also copied its standardized display, operation, procurement, and services to stores across the country, gradually becoming the "world's largest cosmetics retailer".

By 2015, Watsons China had already stood at the peak, and its sales in that year increased by 6% year-on-year to HK$21.713 billion.

EBITDA increased by 14% year-on-year to HK$4.756 billion, and the gross profit margin also reached 14%.

However, in the second year, the rapid growth of Watsons suddenly reversed, and the downward trend has continued intermittently to this day. This has left concrete evidence in past financial data.

First, there have been three significant declines in performance, and sales in 2022 will be the lowest in nearly eight years.

Judging from the financial report released by Changjiang Hutchison, from 2015 to 2022, there are three years of performance worthy of attention.

The first one is in 2016, Watsons sales and EBITDA were 20.914 billion Hong Kong dollars and 4.556 billion Hong Kong dollars respectively, a year-on-year decrease of 4 percentage points.

This is the first time that Watsons has recorded negative growth in the past 8 years. In the same year, its gross profit rate was -5%, and it was also the only negative gross profit rate during the statistical period.

The second is 2020. After several years of slow growth, Watsons entered the second trough of performance in that year.

Sales fell 19% year-on-year to HK$19.984 billion, and EBITDA recorded only HK$2.759 billion, down 39% from the same period last year.

The third trough will appear in 2022, with sales of HK$17.579 billion, a year-on-year decrease of 23%.

This data is not only lower than 2020, which was the most severely affected by the epidemic, but even HK$ 4.134 billion lower than 2015.

At the same time, Watsons EBITDA recorded HK$1.09 billion, a year-on-year decrease of 59%, which was about 4.4 times smaller than that in 2015.Gross profit margin has also dropped from 17% in 2017 to 1%.

In this regard, the founder of a cosmetics chain publicly stated that Watsons has an absolute advantage in terms of rent bargaining power with large supermarkets and purchasing bargaining power with brands. Therefore, its comprehensive cost is much lower than that of its peers. Considering this factor, Watsons' performance last year was not satisfactory.

Second, the number of stores/sales of a single store has declined. Last year, "almost one store was closed every day".

Rapid store expansion was once an important means for Watsons to achieve performance growth. From 2015 to 2018, the number of Watsons stores increased from 2,483 to 3,608, and the annual growth rate maintained double digits.

Starting in 2019, the growth rate of its stores began to slow down. It is reported that this is not unrelated to Watsons China's strategy of "slowing down the speed of opening stores and increasing sales per store".

However, judging from the financial report data of the past 8 years, the sales performance of Watsons' single store is not stable, and the overall trend is declining.

Among them, in 2020 and 2022, year-on-year store sales will decline by 21.80% and 18.30% respectively.

Even so, Watsons still maintains a certain rhythm of opening stores, and it has not stopped during the epidemic. As of 2021, Watsons will have 4,179 stores in the Chinese market, a slight increase of 2% year-on-year.

In 2022, Watsons suddenly stopped its expansion that had been maintained for several years and closed a rare 343 stores. Many reports claimed that it "closed a store almost a day".

This move is regarded as a "cutting the wrist and self-help" in order to improve the performance of a single store, but the effect is not significant.

The financial report shows that Watsons’ single-store sales last year still only recorded HK$4.58 million (approximately RMB 4.01 million), a decrease of 15.96% from 2021.

Part 02: "Why only Watsons has no consumers?"

All the signs seem to indicate that Watsons is going downhill irretrievably. The "internal troubles" and "foreign troubles" are important reasons for accelerating the decline of this former retail giant.

1. Management negligence, 80 administrative penalties within 16 months

Judging from the feedback of many consumers on social platforms today, the "close-fitting" BA model is finally no longer the main reason why Watsons is complained about, but the consumer's experience of entering the store does not seem to have improved.

A few days ago, reporter Yimeishang visited Watsons in a shopping mall in Wuhan. At around 7 pm on weekdays, there were only a few BAs in the store and almost no customers. A consumer entered the store without any communication at first. After he needed to find a certain product and actively sought help, BA greeted him and tried his best to promote a certain item to the consumer.

In addition, there are still situations where salespeople are caught in a crisis of public opinion. A typical example is in early 2022, Watsons’ online “1 cent mask” promotion event accident, its anchor even insulted consumers in the live broadcast room,

Afterwards, Watsons stated in a statement that the anchor was a third-party staff member, but consumers did not accept this "argument".

In recent years, Watsons has also been fined for "fancy". According to the data from Qichacha, since 2022, Watsons across the country has received a total of 80 administrative penalties.

The reasons for the punishment include the compulsory charging of packaging fees for "Lightning Delivery", false promotions, selling expired cosmetics and food, publishing false medical device advertisements, etc., all of which show the negligence in the management of this retail "big tree".

2. The entry threshold is getting higher and higher, and the brand is pushed further and further away.

Watsons' strict entry requirements and long billing period have also pushed many brands further and further away.

An industry person close to Watsons once disclosed publicly that "Watsons' entry fee was once as high as 20%, the gross profit rate of the front desk was 30%, and the gross profit rate of skin care products was 40%". In addition to the entry fee, in order to officially enter Watsons, brands also need to pay various miscellaneous fees such as listing fees and stacking fees. The ultra-long account period of 90-160 days has also become an unbearable burden for many brands.

3. Traditional retail groups are declining, and new species are chasing after them.

In addition to "internal troubles", Watsons is also facing more and more "foreign troubles".

On the one hand, the overall retail environment is down. According to statistics from the Bureau of Statistics, the total retail sales of cosmetics last year saw negative growth for 8 months, making it the absolute trough in 10 years.

The domestic beauty retail environment is sluggish, and Watsons, which is deep in it, is in a difficult situation. Traditional beauty stores in the same camp are also experiencing collective turmoil.

At the beginning of the year, Bonjour, the former Hong Kong beauty chain giant, was liquidated due to debt problems; Sasa International’s financial report shows that in the six months ended September 30, 2022, its turnover fell by 2.9% year-on-year to HK$133 million;

Sephora, which is backed by the LVMH group, achieved "the strongest year ever" in sales and profits in 2022, but the group's financial report stated that due to the impact of the epidemic in China, Sephora's revenue in Asia still declined.

On the other hand, Watsons gradually lost its right to speak as "new species" chased and intercepted it. Starting from 2020, a number of new beauty collection stores have sprung up like mushrooms after rain. HARMAY, THE COLORIST, etc. hold high the banner of "reconstructing the people's goods market", setting off a storm in the local beauty retail market.

On the whole, this batch of "new species" has several significant differences: light BA, "traffic" as the selection standard, stationed in core business districts, and emphasizing the "appearance" of stores. These advantages have drawn a gap between the new and old beauty collection stores, bringing consumers a new experience, and at the same time giving traditional retailers such as Watsons a heavy blow.

According to a report released by Qianzhan Industry Research Institute, the market size of new domestic beauty collection stores in 2020 will be 1.41 billion yuan, accounting for 2.9% of the overall beauty collection store market. It is estimated that by 2026, the market size of new beauty collection stores will reach 44.22 billion yuan.

In this context, Watson's traffic has been greatly divided. Many consumers said on social platforms: "There are so many people in the mall, why is there no one in Watsons?"

Part 03: The tenth generation storefront, "Watsons is still an existence that cannot be ignored offline"

It should be noted that although the data has continued to decline in recent years, in the eyes of many industry insiders, Watsons is still irreplaceable in the short term.

"Watsons is still an existence that cannot be ignored in the entire Chinese cosmetics offline channel, and it still occupies a leading position in all aspects." Qian Qi, general manager of Hangzhou Colorful Brand Management Company, told us.

In his view, the role of Watsons is not necessarily reflected in sales. "It is a window for brand display, with both communication and sales functions." Qian Qi said,

"Nowadays, many cutting-edge brands that have taken capital still squeeze their heads to enter Watsons," because capital only recognizes stores like Watsons. "

Tian Liming, vice president of Hemai Heda Group, also believes that if all beauty retail stores are willing to publish real data, then "Watson's performance should be considered as an upper-middle level." In other words, the so-called "stepping down from the altar" is just a comparison between Watsons and its own peak, but looking at the current beauty retail market, Watsons' position is still unshakable.

"In the past few years, Watsons' performance has been unsatisfactory, due to the accidental impact of the epidemic, the inevitable trend of shifting from offline to online consumption, and the end of the store after the expansion of stores.

The performance fluctuates, and it cannot be said that there are irreversible business problems in Watsons' operation. It can be regarded as a posture adjustment in the movement. "Tian Liming added.

This posture adjustment is mainly reflected in the "O+O retail" model.

In 2016, Watsons' revenue fell by 4 percentage points year-on-year.

In April of the following year, Gao Hongda took up the post of CEO of Watsons China, and began drastic reforms, focusing on digital operations through "O+O retail", launching services such as "self-pick-up in store" and "lightning delivery", and then with Cainiao. , Eleme, JD Daojia, etc. cooperate to develop food delivery business,

In order to further promote retail upgrades, it also joined hands with Tencent and Yonghui to introduce big data and mobile payment.

"O+O retail" plays a significant role. From 2017 to 2019, Watsons' revenue has grown for three consecutive years, and its gross profit margin has also remained at double digits.

According to public reports, even in those years deeply affected by the epidemic, the consumption frequency and consumption amount of users brought by its O+O operations were 3.1 times that of pure offline users.

As Tian Liming said, "Watsons' online business today is very mature, and it is connected with the home-to-home business of various platforms, so the proportion of online sales is close to 50%, which can be regarded as the completion of Watsons' online and offline channel conversion. Get in touch."

In addition, Watsons is also constantly iterating the store style, and adjusting and upgrading the brand matrix and BA service level in the store to enhance the consumption experience.

According to public reports, Watsons' new tenth-generation store (G10 store) and Colorlab makeup experience space version 2.0 have recently opened in Shanghai Qingpu Wuyue Plaza and Jiangsu Changzhou Wujin Wuyue Plaza respectively.

Among them, the former is centered on the concept of Watsons skin care community. The store is equipped with a full set of professional skin testing equipment and senior skin consultants to provide customers with skin care solutions;

The latter creates a fashionable and trendy space style, classic black, white and gray design, and a transparent Watsons green experience cabin is specially set up in the store to maximize the advantages of offline retail experience.

However, Qian Qi also said bluntly, "Although compared with a few years ago, the decision-making efficiency of Watsons in mainland China has been greatly improved.

However, judging from the eight-generation and nine-generation store layout of Watsons today, they are still looking for a model and method that can be suitable for operation in mainland China. "

According to industry insiders, Watsons plans to open more than 300 new stores this year, and at the same time will continue to close some stores that are not doing well, and the site selection will expand to more third- and fourth-tier cities.

In this regard, the above-mentioned industry analysts pointed out that Watsons, which will continue to attack the sinking market in the future, may also learn from the traditional beauty retail stores rooted in various cities in China.

For example, take root in the local market to conduct refined operations, while establishing a foothold offline and exploring online.

"In the post-epidemic era, physical retail that allows consumers to 'what you see is what you get' will usher in new growth,"

As the best platform for direct contact with consumers, traditional beauty retail stores represented by Watsons still have great potential in the future.