Can Watsons Still Win Over the Young Generation?
Caught between the onslaught of online e-commerce and the rise of new offline brands, regaining the favor of young consumers and telling a compelling beauty retail story has become a key to revitalizing Watsons' presence in the Chinese market.
The century-old retail giant Watsons is reportedly planning a relaunch of its IPO.
Recently, the Deputy Chief Executive Officer of Temasek, a Singaporean sovereign wealth fund, revealed that Watsons Group (hereinafter referred to as "Watsons") still has plans for an IPO, but the timing, location, and fundraising amount will ultimately be decided by the Watsons board of directors and management.
He emphasized that Watsons' overall business performance continues to be strong.
Temasek is the second-largest shareholder of Watsons, currently holding about 25% of the shares.
Watsons is no stranger to the public.
Operating 16,491 stores across 28 markets, it is one of the retail businesses under Cheung Kong and Hutchison Whampoa Limited (0001.HK, hereinafter referred to as "CK Hutchison").
It is worth mentioning that a decade ago, Watsons was rumored to be planning an IPO, intending to go public in both Hong Kong and London.
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However, in the same year, CK Hutchison sold a 25% stake in Watsons to Temasek for 44 billion Hong Kong dollars, and the IPO plan was shelved.
For Chinese consumers, in the era before the rise of e-commerce platforms, Watsons was the pioneer of beauty retail stores.
As the online beauty market surged, Watsons' offline stores lost their presence among young domestic customers.
Financial data also confirms the current situation.
In 2023, Watsons' global revenue rebounded to 183.344 billion Hong Kong dollars, a year-on-year increase of 8%, accounting for 40% of CK Hutchison's total revenue.
However, the Chinese market is an exception compared to other markets.
During the same period, Watsons' sales in China were 16.453 billion Hong Kong dollars, a year-on-year decrease of 6%, marking the lowest in nearly nine years.
In fact, although Watsons is a Chinese company, it has long been globalized.
Through a series of mergers and acquisitions, Watsons' main markets have shifted to Europe.
In 2023, the European market contributed 60% of the revenue, with a year-on-year increase of 15%.
In Watsons' global layout, the Chinese market has become a challenge it must face.
This year, CK Hutchison has sought change by replacing its leadership.
Watsons' senior management has undergone a major overhaul, with five changes in just three months.
The new president, Winnie Ni, is the first female CEO appointed in Watsons' 43-year history and is a key driver of Watsons' "O+O" (online and offline integration) reform.
Ni revealed that Watsons plans to open over 1,200 new stores from 2023 to 2024 and invest in upgrading about 4,800 stores, with 75% of Asian stores making their debut in a new look, providing customers with a fresh shopping experience.
With the renewal and upgrade, can Watsons China turn the tide?
"In the e-commerce era, Watsons' brand is relatively old, and it is difficult to tell a new wealth story.
In addition, taking the Hong Kong stock market as an example, the recent financing situation for consumer retail companies is not ideal, such as the case of Chabaodao, which broke issue on the first day of listing," an investor told Caijing.
The history of Watsons can be traced back 200 years.
At that time, a British man named A.S. Watson opened a Western medicine shop in Guangzhou and moved to Hong Kong in 1841, renaming it "Hong Kong Pharmacy."
The business gradually expanded into cosmetics and general merchandise, which was the predecessor of Watsons.
In 1903, Watsons created its own brand of distilled water and also obtained the distribution rights for Coca-Cola in China.
The biggest turning point in the company's development history came from the acquisition by Li Ka-shing.
In 1981, Watsons was bought by Li Ka-shing and incorporated into CK Hutchison, which also marked the beginning of its global expansion.
In 1987, Watsons expanded to Singapore, Malaysia, and Thailand.
In 1989, Watsons opened its first store in Beijing, targeting female consumers aged 18-35 and positioning itself as a "personal care expert."
At the same time, Watsons cooperated with Wanda Group and other commercial real estate giants, frequently opening stores in major shopping centers.
In 2000, Watsons began to expand into the European market, acquiring the UK's second-largest beauty and health product retailer Superdrug, the well-known health and beauty chain Savers, and the perfume chain group Merchant Retail.
While establishing a foothold in the UK, Watsons also extended its reach to other European countries, incorporating the Dutch Kruidvat Group, the Latvian DROGAS company, and the French perfume retail giant Marionnaud.
At the end of 2013, CK Hutchison revealed its intention to spin off Watsons and seek dual listings in Hong Kong and the UK.
In February of the following year, at the CK Hutchison performance meeting, Li Ka-shing revealed that Watsons "will go public in two places, with a considerable market value, but Hong Kong will definitely be one of them."
At that time, an analysis by J.P. Morgan's research report valued Watsons at about 170 billion Hong Kong dollars.
Unexpectedly, in March 2014, CK Hutchison suddenly announced a change in the spin-off IPO plan for Watsons, selling a 24.95% stake in Watsons to Temasek for 44 billion Hong Kong dollars.
By the end of 2014, the number of Watsons stores worldwide had reached 11,400.
However, with the rise of e-commerce, Chinese consumers' shopping habits have changed, and traditional retail has been impacted, with the advantages of offline Watsons being lost.
In 2015, same-store sales in Watsons China decreased by 5.1%, marking the first time in history.
Watsons seemed not to have noticed the changes in the market and continued to expand its offline stores.
From 2015 to 2018, the increase in the number of Watsons stores in China was always in double digits, at 19%, 18%, 12%, and 10%, respectively.
By 2021, the number of stores in China exceeded 4,000.
However, store expansion failed to continue driving sales growth.
From 2015 to 2018, the year-on-year increase in store sales in Watsons China was -5.1%, -10.1%, -4.3%, and -1.6%, respectively.
In 2019, it reversed to 2%, but in 2020, affected by the epidemic, the decline expanded to 21.8%.
Now, the new information revealed by Temasek's senior executives has brought Watsons' previously shelved IPO plan back into the public eye.
"Watsons' re-mention of the IPO should be partly due to the cashing pressure from behind-the-scenes investment institutions," an investor told Caijing.
How is Watsons' performance now with the resumption of the IPO plan?
In March this year, Watsons' parent company CK Hutchison released its financial report for 2023.
The data shows that Watsons' global revenue has rebounded, with global revenue reaching the highest in five years at 183.344 billion Hong Kong dollars, a year-on-year increase of 8%; EBITDA (earnings before interest, taxes, depreciation, and amortization) was 16.226 billion Hong Kong dollars, a year-on-year increase of 13%.
In terms of regional distribution, Europe is the largest market.
In 2023, the region's health and beauty product revenue reached 108.529 billion Hong Kong dollars, a year-on-year increase of 15%, contributing 60% of the revenue and 70% of EBITDA.
In 2023, the year-on-year store sales growth in the European market was 9.9%, exceeding the global market's 6.9%.
Watsons has the most stores in Europe, with 8,301 stores, accounting for half of the total number of stores.
Watsons' second-largest market is the Asian region excluding China.
In 2023, the region contributed 35.235 billion Hong Kong dollars in health and beauty product revenue, a year-on-year increase of 15%, accounting for 20% of total revenue; it has 3,947 stores, accounting for 24%; the year-on-year store sales growth was 16.3%, leading all regions.
The Chinese market is particularly special for Watsons.
As of the end of 2023, Watsons has 3,840 stores here, comparable to the total number of stores in other Asian regions, but the revenue contributed is the lowest among all regions.
In 2023, Watsons China's operating income and EBITDA were the lowest in nearly nine years, with health and beauty product revenue of 16.453 billion Hong Kong dollars, a year-on-year decrease of 6%, and EBITDA of 1.042 billion Hong Kong dollars, a year-on-year decrease of 4%.
The change in year-on-year store sales improved from -18.3% in 2022 to 1.8%.
In 2022, Watsons China closed 343 stores and only achieved revenue of 17.579 billion Hong Kong dollars, a figure even lower than the level at the beginning of the epidemic in 2020, with a year-on-year decrease of 23%, and EBITDA also fell by 59% year-on-year.
If we look at the longer term, over the past five years (from 2019 to 2023), Watsons China's health and beauty product revenue has decreased by 33%, while the European market has grown by 27%.
The Chinese market has become a challenge that Watsons must face.
From a macro perspective, weak sales remain a difficult problem for the beauty retail industry.
According to data from the National Bureau of Statistics, the total retail sales of cosmetics in 2023 were 414.2 billion yuan, a year-on-year increase of 5.1%, failing to outpace the 7.25% increase in the total retail sales of consumer goods.
In response to market changes, Watsons China has also tried to start digital transformation, launching the "online + offline" "O+O" model, where consumers can place orders on the mini-program, and offline stores can deliver.
The financial report shows that in the first half of 2022, Watsons China's "O+O" sales participation rate increased by 20% year-on-year, and online sales increased by 30% year-on-year.
Even so, compared with other online beauty brands, Watsons China's online transformation is still lackluster.
With the rise of e-commerce and social media, beauty sales have shifted online, and e-commerce platforms, short videos, live broadcast shopping, and content communities have become important channels for beauty marketing and sales.According to the "2023 China Cosmetics Yearbook" produced by Qingyan Intelligence, the overall scale of China's cosmetics industry in 2023 was 797.2 billion yuan, a year-on-year increase of 5.2%.
Among them, online channels, driven by the rapid growth of Douyin and Kuaishou, reached a market size of 404.59 billion yuan, surpassing offline channels.
Additionally, the "O+O" model has also brought some issues to Watsons' offline stores.
For example, due to coupons and discounts in mini-programs, online discounts are larger, making consumers more inclined to place orders online, which makes offline stores even more neglected.
The original intention of the "O+O" model was to form a digital new retail method that combines online and offline, but the reality is not as satisfactory as expected.
Moreover, on social media platforms, some customers have reflected that the "close-fitting shopping guide" model of Watsons' store clerks is uncomfortable.
This year, Watsons has made many significant moves, with five senior changes in just three months.
Ni Wenling stated that in the next two years, the company will invest $250 million to open and upgrade stores in 15 markets, that is, to open 1,200 new stores in 2023 and 2024, and invest in upgrading about 4,800 stores.
Watsons also announced that it will carry out personalized transformations of stores, providing customers with an immersive shopping experience by changing the store layout, introducing interactive entertainment devices, adding trendy beauty makeup areas, and other methods.
From a series of statements by Watsons, it can be seen that it still intends to boost offline stores.
However, in this era of fierce competition in online platforms and booming live e-commerce, the development prospects of offline retail are not optimistic.
If only considering the offline beauty retail market, Watsons' positioning is becoming increasingly awkward.
For example, as a cosmetics retail collection store, Sephora, which is backed by the world's top luxury group LVMH, is more high-end and international.
In addition, a new generation of trendy beauty retail stores represented by THE COLORIST, Miniso's WOW COLOUR, HAYDON Black Hole, and KKV have emerged, attracting the attention of young people with their cool decoration style and high cost-performance products.
"Watsons also has its own strategic misjudgment, and it appears to be lagging in brand introduction.
More than half of the products on the shelves are its own brands with high profits, and most of the cooperative brands are domestic brands positioned in the mid-to-low-end market, which have a certain sense of age, lack of international big brands, and some new brands that young people like have not been able to enter, and the market competitiveness and influence are no longer what they used to be."
An analyst told Caijing.
For Watsons, under the dual pressure of online e-commerce and emerging offline brands, how to regain the favor of young consumers and tell a new beauty retail story is a key to revitalizing the Chinese market.
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