A Strategic Point Of View

Watsons Hits a Milestone with 500 Stores in China

By Colin Hession, Colin Hession Consulting | January 4, 2010

In November, Hong Kong-based Watsons Group opened a Watsons’ Your Personal Store in Shanghai, marking the chain's 500th location in mainland China. The company stated that the opening was a significant landmark in the group's two-year plan to have 1,000 stores in mainland China and more than 10,000 globally.

As 2010 starts, Watsons must surely be one of the world's most significant retail groups in the cosmetics and toiletries sector, and one which any manufacturer with aspirations of doing business internationally should spend time getting to know. We last showed a table of Watsons’ retail fascias five years ago (happi, November, 2004) when it had some 4,000 stores. By the close of last year, Watsons had doubled the number to more than 8,000 stores in 34 Asian and European markets (see table 1). Indeed, the group now boasts some 25 million customers a week.

"Despite the global economic recession, we have managed to maintain our growth momentum while keeping a tight control on costs," said Dominic Lai, Watsons’ group managing director at the opening of the Shanghai store. "In the first six months of 2009, we achieved a like-for-like sales growth of +4% in a market context which remains challenging, especially in some parts of Europe. Next year alone we will accelerate growth by opening 67% more new stores than in 2009. Our game plan is to deliver sales growth by focusing on building customer loyalty and growing basket size. We are investing significantly in building our customer relationship management platforms, and currently have 28 million customers in our database…and to drive differentiation, we will increase collaboration with strategic suppliers (our italics) to improve category management and bring more innovative products to our customers. Increasing our own brand product offer is also high on the agenda."

One often hears international VPs of mid-sized companies—who have not got subsidiaries in every country but who are still big enough to want to expand overseas—cite lack of resources as a reason for not achieving more internationally. We think Lai's statement about increasing collaboration with strategic suppliers ought to represent one great big heads up for all such VPs…need we say more? A plane ticket to Hong Kong could well pay for itself many times over and is a whole lot faster than umpteen trips to foreign distributors to “kick some arse.”

What about domestic U.S. locations, we hear you ask? Our regular readers will know that we have forecast Watsons’ entry into the U.S. beauty market for the past two years. Thus far we've got that call wrong, but we continue to believe that sooner or later the ubiquitous Watsons will buy its way into the States. Watch this space…

Marionnaud Increases Its Own Label

As if to underline their boss’ statement about increasing own label involvement, Watsons French-based prestige perfumery chain, Marionnaud, recently launched a 32- SKU private label bath range. Significantly, a Marionnaud spokesman was quoted as saying that the introduction was part of an effort to reposition the retailer as "more dynamic, younger and simpler;" i.e., Marionnaud is using its own label strategically, as well as in terms of value for money.

Beauty’s Second Prize

The two largest segments of the global cosmetics and toiletries market are skin care at 24% of the total and hair care at 20%. Each segment has one over-arching consumer issue. If "anti-age/wrinkles" in
Hair re-growth, the No. 2 prize in beauty.
skin care is beauty’s first prize, then "hair loss/regrowth" represents prize No. 2. While much has been published about anti-aging in skin care, relatively little is in the public domain about hair loss, where the size of the prize for R&D success remains considerable.

Thus it's always worth taking note of developments, however small. At the moment, apart from a few wild claims for some off-the-wall type ingredients— with nothing but hearsay to back them up—the only safe ingredient known to actually inhibit hair loss and encourage regrowth (in certain limited situations) is Minoxidil, the active ingredient in J&J’s Rogaine products. So it's interesting to see that private label and generic manufacturer, Perrigo, has filed an abbreviated new drug application for OTC Minoxidil topical aerosol foam 5%, a generic form of Rogaine foam. This formally initiates the process under the U.S. Hatch-Waxman Act, which is all about allowing generic manufacturers to bring products to market after a certain period without incurring patent infringement restrictions. While we don't think that a generic Rogaine foam will turn the world upside down, it does underline the fact that the "second prize in beauty," a safe product that really does help hair to re-grow, remains unclaimed.

Meanwhile, we suspect considerable R&D work is flying below the radar to try and crack the problem. With this in mind, it's interesting to read the website of Icelandic biotech company, ORF Genetics (www.orf.is). The company’s biohazard-free growth factors and cytokines apparently offer “significant opportunities of product development for both skin and hair applications.” Signs of things to come, maybe?

A Win for Private Equity

Who said private equity was dead? Well, they may have been having a hard time funding some deals, in some markets, post the credit crunch, but not everywhere it seems. In Sweden, where the government has been selling off most of its state-owned Apoteket pharmacy chain, in a $862 million auction, private equity groups have triumphed over some of the most hotly tipped industry buyers. For example, Alliance Boots, Europe's largest pharmacy group, was among those who lost out as financial investors clinched almost two thirds of the available stores. Celesio, the German pharmaceutical trading group, and ICA, Sweden's largest grocery chain, both opted out of the auction and plan to start their own pharmacy chains from scratch. Given that private equity firms usually only hold their investments for between 3-5 years, we can probably expect a second round of buying and selling in Sweden around 2015. The strategic point here, as we have noted in the past, is the unstoppable advance of chain pharmacy in continental Europe. One might wonder how long it will be before the German government capitulates, and Germany's largest drugstore chain, Schlecher, ends up with a pharmacy on every street corner?

Tesco Tests Beauty Format

Tesco watchers in the U.S. may be interested to know that the store group is testing two new beauty formats in the UK. The first involves a special “capsule” beauty shop-in-shop in its Chesterfield store. The retailer apparently decided to test the concept following research that showed that many women miss out on buying HBA on a busy grocery-shopping trip.

Tesco tests new beauty formats.
"The women we spoke to told us they are often too busy to shop specifically for HBA items, but will not compromise on quality, price or trend," a Tesco spokesman commented. "For many women, shopping for their beauty products whilst on a general shopping trip is the ultimate in convenience, as well as ensuring that they buy their must-have items at the best possible price."

In addition to the beauty shop trial, Tesco has also launched stand-alone fragrance counters in all 192 of Tesco Extra stores in the UK, supported by specially trained consultants to advise on fragrance purchase. A Tesco spokesman said they anticipated that the fragrance counters would change on a seasonal basis to reflect different occasions and customer needs.

Strategic point: Another mass encroachment into what has traditionally been prestige territory.

Shell Tests Grocery Products

Another retail development which caught our eye recently was the announcement that giant oil company Shell, with more than 900 gasoline forecourts in the UK, has announced a product supply test with one of the UK's upscale grocery chains, Waitrose. The latter will apparently supply a range of grocery items ranging from bread and pasta to ready meals and toiletries (italics ours). Although the test is only small-scale, involving just a few outlets around Birmingham, we think it could be strategic in that gasoline forecourts potentially offer a useful additional point of sale for impulse/convenience purchase of toiletries.

Fabre Fights the Internet

Only in France? French dermo-cosmetic company, Pierre Fabre, has been given permission to continue to prohibit its authorized retailers from selling products over the internet. Retailers will not be able to sell Fabre products on the net, while the Parisian Court of Appeal waits for a response from the European Court of Justice.

Meanwhile, the idiosyncratic Fabre company maintains that its products should only be sold by a qualified pharmacist who can properly advise customers. The company claims that internet sales not only cut out the personal advice available to consumers, but they also favor counterfeit goods and prevent the company from tracing its products and ensuring quality and safety. In 2008, France's competition authorities accused the company of anti-competitive activity and imposed a fine. Fabre promptly took the decision to the Paris Court of Appeal, which in turn has decided to call on the European Court of Justice for its opinion.

It puts one in mind of something one learned in school about an old king named Canute, who sat on a special throne installed on the shore at low tide and commanded the tide not to come in!

About the Author
Colin Hession is managing director of Colin Hession Consulting, a specialist consultancy that focuses exclusively on personal care in Europe, in terms of commercial & marketing development. Tel: (44) 1202-710377•Fax: (44) 1202-710399. E-mail:ch@hessioncosmetics.com. Website: www.hessioncosmetics.com