Franklin Chu

Beauty collection stores are quickly growing in China — as Chinese consumers’ appetite for beauty products continues to evolve. Most people’s first thought may be Sephora, Watsons or Mannings, where customers can get access to a wide range of skin care, makeup and fragrance products. The biggest advantage these retailers have is their wide selection of brands, product categories and price ranges, with Sephora focusing more on high-end goods, and Watsons and Mannings offering mass market and daily use products, sourced both domestically and internationally. Consumers can buy all the products they need at once in a collection store, without having to go from one brand counter to another, and many are even located in residential areas that allow quick, unmanned access.

In China’s highly competitive cosmetics industry, some new models of off-line multibrand beauty stores have emerged one after another, boosting cosmetics consumption, and gradually eroding market share of the old, established players. According to data from iResearch, the market size of China’s multibrand beauty stores will be 41.9 billion yuan ($6.6 billion) in 2020. Among them, the new multibrand beauty store market share is expected to increase to 15.8% in 2023, and the market size is expected to reach 13 billion yuan ($2 billion). Feeling the squeeze of beauty collection stores as new market entrants, Watsons performance growth rate declined, and Mannings closed its stores extensively. The survival status of traditional beauty collection stores is not optimistic.

Understanding the growth of multibrand beauty stores

• Market demand — The change of new beauty collection stores.

The new multibrand beauty stores are more in line with the needs and shopping preferences of young consumers, from the product selection to scene layout (store design, scene experience). They focus on young consumers who pay attention to the shopping experience and cost effectiveness. In addition, the abundance of brands is an important reason for consumers to favor new multibrand beauty stores.

The consumption of beauty products by the new generation of users shows a trend of diversified categories and functional demands, and they are more willing to choose beauty products suitable for their own needs. The new multibrand beauty stores have a higher tolerance for emerging brands, and they cooperate with design and personality brands. Therefore, the new type of beauty collection stores, including many emerging brands, local and abroad, are gradually gaining more consumers’ favor. According to research data, 73.5% of consumers go to new multibrand beauty stores because they can buy brands and products that are not available in traditional beauty collection stores.

On the other hand, traditional multibrand beauty stores have professional consultants who interact with consumers and promote products to them. Compared with beauty associates (BA) following shopping in traditional beauty collection stores, the new beauty collection store adopts a light BA mode, which also creates free shopping space and a pleasant shopping experience for consumers.

• Consumer demand — The younger generation pays more attention to the shopping experience.

Compared with traditional beauty collection stores with relatively consistent in-store layout and design, the new multibrand beauty store bets heavily on the retail space design with big investments to attract young people to the store. The new beauty collection store provides a place for consumers to play, experience, buy, take photos and share on social media. According to research data, about 50% of consumers believe that a sharable visiting experience for real-time fun on social media is also one of the main reasons to visit and shop from new beauty collection stores.

Many customers have traditionally found it difficult to negotiate and bargain for product samples, so now they find new beauty collection stores very generous with distributing samples from high-end brands. Small samples can satisfy consumers’ curiosity and allow them to invest in lower trial costs when trying new brands or products and make purchase decisions more easily. The new beauty collection stores have captured the new generation of beauty users’ demand for small sample products, and selling the samples as stand-alone products in stores at much lower prices helps brands generate considerable popularity.

Top five beauty collection stores in China showcases

• The Colorist

The Colorist, run by KK Group (Guangdong Kuaike E-Commerce), opened its first store in October 2019, positioning itself as a go-to spot for both affordable and upscale beauty products. By June of 2021, The Colorist had expanded to over 300 stores in 20 cities nationwide.

The Colorist stores are designed with bright colors, such as pink, orange, light purple, etc., giving them a more youthful feel that appeals to younger Millennial consumers. Its rainbow-colored decor has become a selfie spot for consumers, who then post such photos on Weibo, WeChat or other Chinese social media platforms.

The Colorist, which only opened for business in 2019, has risen rapidly in popularity in just two years with a staggering 2,887.5% CAGR (compound annual growth rate) in total merchandise transactions, second only to Watsons and Sephora in market share. From 2018 to 2020, The net profit of KK Group was still negative, but The Colorist was always profitable. The Colorist has advantages not only in terms of capital, but also in terms of product category, service quality and supply chain.

The Colorist prefers to select emerging brands, niche brands and popular brands. And according to the consumption data, the stores maintain impressive speed and efficiency with their product updates to fuel in-store traffic and sales. The wide variety of products is one of the reasons why The Colorist is popular. According to the official data of The Colorist, its stores cover 400+ global popular beauty brands with over 5,000 individual products. The assortment includes both familiar products, such as UNNY, Canmake and big cosmetics brands, such as La Mer, Farman, Chanel, Armani and Dior.

• Harmay

Harmay, founded in 2008, is known for its architecturally designed stores and niche brand offering. In January 2022, Harmay secured $200 million in series C and D rounds of financing.

Harmay mainly sells mid- to high-end brands, attracting traffic and improving full-size product conversion through big brand samples. The price of many international products in the Harmay store is also very attractive. Many products are discounted from the counter price, and some popular items like lipsticks may be out of stock at the traditional counter but they can be found at Harmay.

Harmay is different from other beauty collection stores in the market. Harmay does not have many off-line stores, nor does it sell many domestic products in the store; it mainly sells foreign brands. At present, 50% of the SKUs in Harmay’s off-line stores are overseas niche beauty brands. Harmay has introduced a series of overseas niche brands through exclusive agency and capital operations, aiming to enhance brand differentiation and increase store repurchase rates.

In addition to its off-line stores, Harmay also operates a mini-program store, WeChat public account and Taobao store online. In addition to increasing sales, Harmay attracts traffic to its off-line stores by promoting new product launches, special events and new store openings. The off-line stores will also guide consumers to register members in the checkout process, realizing the closed loop marketing.

It is reported that the impact of the pandemic on Harmay’s off-line stores will not exceed 20%, and members play an extremely important role. In terms of the construction of the membership system, Harmay tried to explore paid membership cards, which sold out as soon as they launched. The paid membership system can effectively bind high-quality members with strong stickiness, so that middle-tier and high-end users can enjoy differentiated membership services during the shopping process, thereby enhancing membership stickiness.

• H.E.A.T

H.E.A.T, run by Guangzhou Yiran Daily Necessities, opened their first store in Guangzhou city in July 2020, and then went on to expand further to 10 stores within a mere six months. Their stores are spacious and clean, with picture-perfect interior designs for eye-catching social media posts.

H.E.A.T’s target demographic is post-95s (or those born from 1995 onwards). They handle over 300 brands and over 4,000 SKUs worth of items and mainly focus on new Chinese brands, such as Perfect Diary, and niche brands from overseas.

As the majority of new cosmetics brands mostly sell online, H.E.A.T stores are becoming invaluable places for trying out products firsthand before making a purchase. Along with a spacious testing corner, its stores also have full body mirrors that allow visitors to select cosmetics to match their overall fashion. Meanwhile, the company is also running an e-commerce business, having set up an online store as a WeChat mini program in November 2020. The aim is to improve user loyalty.

• HAYDON

HAYDON means black hole, and this idea has been employed to define the brand as well as its retail spaces, resulting in a style that seeks to replicate the collision, distortion and free tension of a black hole’s gravity through flowing lines and distinctive circulations in a place. HAYDON was established in November 2020, and the first HAYDON store was opened in Wuhan on December 31, 2020. Since then, HAYDON has been steadily and rapidly expanding to broaden its retail footprint. HAYDON sees the opportunity for consumption upgrade in high-tier cities. In HAYDON’s view, the market has a high retention of relatively low-end collection stores, but high-end beauty collection store players are fewer, which is the reason for capital investment in high-end beauty collection stores like HAYDON. HAYDON carries a variety of well-known and niche international brands, such as Guerlain, Sulwhasoo, Mao Geping, Borghese, 3CE and Gucci. HAYDON’s retail expansion is picking up momentum, with a new flagship set to open in Shanghai soon.

HAYDON leverages the retail concept of “art + technology + experience” to create an off-line high-end beauty retail experience environment for branding. HAYDON gathers international high-end skin care, European and American professional color cosmetics, domestic reputation boutique and niche lifestyle products, and selects 350+ brands with over 5,000 SKUs using “buyer + big data” selection logic, with the number of products still growing, intending to provide consumers with the most comprehensive and appropriate choices.

Up to September 2021, HAYDON had a member turnover rate of 95%, member repurchase rate of 19.3%, a private domain WeCom group’s new customer acquisition rate of 57% and a monthly average customer flow of more than 120,000. Members ages 22 to 28 make up the majority of customers, accounting for 46%, although members ages 28 to 35 have the highest average customer unit price, reaching RMB 481.3.

HAYDON will adhere to the strategy of “thousands of people with thousands of faces”; in the next two years, HAYDON will create more core landmark stores, and will enter the overseas market at the right time. HAYDON’s profit mode is both online and off-line; off-line is primarily experience-based, while online is primarily e-commerce.

• WOW COLOUR

Since its establishment in January 2020, WOW COLOUR has seized the first opportunity of the rising track, which is a new beauty collection store that brings together domestic makeup, international skin care and overseas niche brands, and debuts the concept of “new-generation beauty paradise.” With the immersive shopping experience, cool and distinctive store image and light BA intimate and personal services, WOW COLOUR has become popular among young consumers in first- and second-tier cities.

With WOW COLOUR’s new features and advantages in positioning, product selection, channels and operations, WOW COLOUR is planning to expand into the lower-tier market, providing a new beauty consumption scenario for consumers in tier two to tier five cities and exploring new market opportunities.

According to WOW COLOUR’s merchant convention 2022, the company plans to debut 200 new stores across the country. With the existing off-line stores nationwide, in the next three years 1,000-plus WOW COLOUR off-line beauty collection stores will be laid out at the speed of “one store a day,” engaging beauty consumers all over the country.

On the one hand, unlike traditional beauty collection stores such as Sephora and Watsons, WOW COLOUR focuses on the affordable and high-value beauty niche market. On the product side, this track has directly given birth to a large number of beauty national trend brands such as Perfect Diary, Judydoll and Colorkey, which have been capturing customer attention in recent years.

On the channel side, WOW COLOUR has seized this huge business opportunity to attract young white-collar workers and Gen Z people who are pursuing cost performance with high-value and high-CAGR brands at home and abroad.

Looking ahead at the multibrand beauty store in China

Although e-commerce channels have become the main sales channels in China’s beauty market, the experience attribute of off-line channels can provide more comprehensive services for beauty consumers, and the off-line consumption demand is irreplaceable.

But the increase of new entrants has led to fierce market competition. How to avoid homogenization, how to break out from the ultimate competition and how to improve customer loyalty are the key points that multibrand beauty collection stores need to pay attention to.

Traditional collection store brands are also seeking changes. Watsons is scaling back the number of domestic brands and its own brands, and introducing Korean beauty brands such as LUNA, the SAEM and I’M MEME. They are increasing the number of pop-up products to increase sales and gain greater profit margins. Secondly, Watsons has adopted more trendy makeup elements to decorate its stores. Watsons’ traditional blue and white stores are gradually being replaced and are now decorated with more trendy makeup elements, attracting young people to take photos. In addition, Watsons has reshaped the image of its store BA guides through training to improve their service level and drive sales.

In addition to Watsons, Sephora is also actively explored digitalization. Sephora leveraged the WeChat official mini-program store to connect online and off-line sales channels, accumulate and operate on private domain customers to provide an omnichannel shopping experience. Also, Sephora launched the Smart BA project. Through this project beauty advisors can continuously communicate with consumers on WeChat and provide them with personalized services, such as reminding consumers who “placed an order yesterday but did not pay” to complete their orders and reduce churn.

The system also provides real-time transaction data billboards, which can calculate online related sales into actual performance, effectively motivating beauty advisors to achieve their performance targets.

According to the survey data, one of the main reasons why 42.2% of consumers choose to shop in new beauty collection stores is that product prices are cheaper than traditional beauty counters and online official stores. However, peak session shopping festivals and China’s duty-free market have also had an impact on the price advantage of new beauty collection stores. In comparison, the price advantage is not obvious, and it is difficult to attract price-sensitive consumers over the long term.

Moreover, the digital operation of new beauty collection stores within the user life cycle is mostly in the stage of guiding member registration and attracting traffic to online channels. In the future, it needs to be further strengthened as a membership mechanism through user refinement management, the value of private domain traffic and other best practices.

Franklin Chu, managing director of Azoya USA, is an expert in China cross-border e-commerce, where beauty and cosmetics are among the leading categories. Chu also serves as president of Sage Capital Group Inc., a private equity and global investment management firm. He can be contacted at [email protected].