Investigative Report | Present situation in Guangdong sheds light on future of China's beauty industry ——The investigation on Guangdong’s Cosmetic Store/ distributor ecosystem against the backdrop of the

On July 3, 2020, the China Cosmetic Store Conference 2020 Guangdong, with the theme of "Return of CS", was held through live streaming as scheduled. At the conference, Zhang Huiyuan, Chief Reporter at CBO, delivered a speech titled "Today in Guangdong sheds light on the future of China’s beauty industry: the investigation on Guangdong’s cosmetics Cosmetic Store/ distributor ecosystem against the backdrop of the ‘black swan’ event" to share her views on the post-epidemic situation of Guangdong.

Four reporters interviewed 30 distributors and 23 cosmetic store managers in Guangdong within 21 days. As the first-time market visit after the COVID-19 pandemic, the trip to Guangdong was impressive because of the “ongoing challenges” and “hunger for change” of the skin care practitioners in Guangdong.

We believe that the upheaval of the Guangdong cosmetics market after the pandemic actually offers a current snapshot of China's beauty industry; the changes catalyzed by the pandemic is providing a glimpse into the future of most domestic markets.

01

What is the current status of the Guangdong cosmetic market after the Covid-19 pandemic ‘black swan’ event?

As China's largest province in terms of net population inflow, many skin care professionals admitted that Guangdong was the province hit most heavily by the pandemic, except Hubei. The specific effects are as below:

1. A “cliff-like” drop in terminal user flow

In Q1 2020, 100% of the physical stores surveyed said that their business has seen a severe decline by about 70%. So far, the customer flow has recovered to 70% compared to the same period last year.

2. A sharp decrease in the distributors' payment collection

In Q1 2020, since the terminals were mainly focused on further reducing stock, Guangdong’s distributors surveyed generally suffered a decline in payment collection between 50-70%. A few distributors, who entered the new retail industry earlier, leveraged their online business or captured the opportunities brought about by disinfection and cleaning products to turn the tide in payment collection in the first quarter. At the same time, about 93% of distributors were pessimistic about the payment collection for traditional agency business over the course of 2020.

3. By taking multi-pronged approaches to offset the repercussions, everyone is being versatile.

It is precisely because the traditional, single cosmetics distribution sector has been hit hard by the pandemic that both distributors and stores put their own efforts in by adopting various types of business development and transformation to offset the repercussions. 74% of the stores surveyed considered enhancing experience and services to avoid price wars online; 62% expected to expand other fashion categories other than cosmetics to complement the sales; 37% have been engaged in social e-commerce. Distributors tried to recover from a bad performance by being brand distributors, Wechat merchants or logistics providers, and expanding category agency.

02

Lack of strength

Cosmetic Store in Guangdong underwent structural imbalance

The cosmetic store (CS) channel in Guangdong is dependent in a large part on the net population inflow of over 20 million migrant workers. In Guangzhou, Shenzhen, Dongguan, Foshan and other cities with a thriving manufacturing industry, a large number of outlet shops have emerged near the factories where these consumers work, developing a prosperous CS ecosystem in Guangdong.

But in terms of structure, Guangdong is characterized by the fact that leading chains have the capability to reach out to the rest of the country, there are no expanding chains, and underlying single shops are the mainstream.

At present, both the number of stores achieving over 100 million yuan in annual sales in Guangdong and the number of national chains reaching out to the rest of the country from Guangdong rank first in China. However, there is a fatal flaw that the expanding chain is not mature enough within Guangdong.

We have pointed out that there was a blank area in Guangdong – lack of the stores with sales from 100 million to 50 million yuan in the 2017 report. Three years later, in 2020, only one store has stood out with over 800 million yuan in annual sales. Let’s compare Guangdong with Jiangsu, another major cosmetics province. According to our return visit to Jiangsu in 2019, there were 7 stores at the above level, with 81.28 million yuan in annual sales on average, which means the unit sales were 2.54 million yuan per store if the figure was evenly distributed to 32 stores. Comparative to the lack of expanding stores, underlying single stores were in huge supply. According to statistics, among the nearly 10,000 stores in Guangdong Province, about 80% of single stores were mom-and-pop stores which directly caused the cosmetic stores in Guangdong to achieve the lowest unit sales in the country. 

03

A sharp drop in sales and profits

Distributor groups have difficulty surviving the post-epidemic era

Because of the large number of single stores and few large stores, the distributors in Guangdong have large channel expenses and generally lower profits.

The total sales of the top 10 CS distributors in Guangdong were 1.56 billion yuan according to statistics from the reporters in 2016. Three years later, in 2019, the figure was only 835 million yuan, a decrease of nearly half.

The sales of the top 10 distributors were shrinking, but those of the stores were on the rise. Which brands filled the gap in the sales of the stores?

According to some distributors, unlike the inland stores that could easily hit one million yuan in annual sales, many of their customers were small and medium-sized chain stores with a small sales volume. For local stores in Guangdong, if the gross profit did not reach more than 50%, it would be difficult for them to cover rent, utility bills, and labor. Because of this, at the customers’ request, starting from 2017, 45% of distributors in Guangdong have gradually increased the proportion of high-efficiency and high-margin product categories to leverage big brands to consolidate their position in the market, and small brands to ensure their customer retention and profit.

04

Brand shuffle

Who can help the Guangdong market with post-epidemic recovery?

At the same time, local brands in Guangdong presented the following characteristics: First, the traditional brand landscape has been impacted. In the past, some well-known domestic brands had an overwhelming advantage in Guangdong, while it was hard for small and medium-sized brands to cut through the clutter. However, the dominance of these brands was threatened during the pandemic. Even so, some brands, such as MARUBI and Carslan, were praised by many distributors and stores for their better price maintenance during the pandemic.

Secondly, in Cosmetic Stores, imported products were presented with their trending products because the concept of "import" was not popular. Even some shop owners bluntly said that the concepts of "import" and "domestic" will be integrated just as "online" and "offline" channels did in the future.

Some distributors interviewed believed that consumers value the story, significance and quality created by the brand. But the stores still need to retain profit margins. After the pandemic the prices of domestic products was beaten by the online channel. The imported products with a stable pricing structure may see a breakthrough. Second, the combination of functional and experiential products was popular. About 68% of the stores indicated that they would introduce value-added products that can Improve the number of per customer transactions and also improve customer retention.

05

Self-help initiative

The methodologies of focusing on "new" and "speedy" are popular in Guangdong

The Covid-19 pandemic is a catalyst pushing every part of the cosmetics chain to expose pre-existing problems quickly. In terms of impact, the pandemic had a profound impact on Guangdong; but from the perspective of the transformation of the market itself, Guangdong is likely to be the first to revive after the pandemic and have a lasting impact on the whole country with its methodologies of focusing on “new” and “speedy”.

1. From cosmetic store→full-featured store; from cosmetic distributor→multi-category distributor

Nowadays, there are too many channels. Compared to clothing, shoes, hats and other categories, the price and profit margin of cosmetics is too transparentboth online and offline. To provide beauty to the customers, why don’t stores introduce products from other categories? In the interview samples, many stores and distributors have updated more categories related to “beauty” and “fashion” to add profits. Therefore, some stores are keeping the ratio of 30%-50% for cosmetics, and the rest can be supplemented with the products related to "beauty", such as scarves, hats, necklets, toys, and clothes.

2. Stores connect with the community to explore the business opportunities in the community-based economics

At present, the area of properties under management in the communities in China has exceeded 17.5 billion square meters, and the value of the community-based economics has hit 9 trillion yuan. On the one hand, the community-based economics boasts a stable user base and there is no need to worry about traffic. On the other hand, although the mobility (e.g. shared bicycles) and grocery (MISSFRESH) sectors have been quite a success, the form of the community-based economics that focuses on beauty products and daily cosmetics has not yet been born.Cosmetic stores are closest to this concept.

In Guangdong, a number of stores have begun to claim a market share in the sector. Using CORANM as an example, starting from the second half of 2019, CORANM has integrated its logistics, e-commerce platform, factory, and warehouse resources to build a well-established and powerful supply chain system, exploring the combination of stores and community-based businesses.

Meanwhile, there were other ways of business transformation such as enhancing their own value and actively switching to live streaming.

3. From a price war to a value war

Some distributors believed that the Beauty Industry 1.0 era was centered on products, the 2.0 on consumers, and the latest generation is on values. 

In fact, since the distributors and stores in Guangdong have been at the forefront of the trend, they realized early that if the entity fights against the online platform for prices, it will be a forever loser.

For stores, the only core method of retaining consumers offline is to let consumers feel the value of offline stores. For distributors, their first function is to make payments to manufacturers and bear financial pressure. The second is to take on the roles of undertaking logistics and market development, and as the autonomy of stores increases, the value of distributors should also be transformed into empowering stores. Therefore, strengthening experience and service is also what the stores in Guangdong are making efforts to do.

We learned that many distributors in Guangdong have begun to independently create function-oriented products, with a focus on creating services and experiences to improve customer retention; at the same time, quite a few stores have also begun to increase the proportion of beauty salons, introducing medical beauty, tattoos, problematic skin conditioning, and other in-depth service items.

Take YISICA as an example. Since it has always adhered to the model of “selling cosmetics at stores and providing beauty service in beauty salons”, at the moment when the customer flow is declining and street shops are generally having trouble surviving, YISICA still performs strongly after the pandemic. It is reported that YISICA's performance saw a 70% recovery in April and May, and was close to the level of the same period last year in June, which once again reflected the high retention of the model of “selling cosmetics at stores and providing beauty service in beauty salons”.

It should be noted that on June 29 the basic cosmetic law was comprehensively revised for the first time in 30 years, with more stringent supervision and more severe punishment. When operating such services, REMEMBER not to cross the legal red line.