Key to Success for Chinese National Cosmetic Brands in Department Store Channel

Gong Shuhui

Guangzhou Huoquan International Trade Co., Ltd., China

Since the beginning of 2018, a number of domestic brands claim their ambition to enter the department store channel. Yet without enough preparation of understanding the feature and cruel fact of Chinese department store channel, it is liable to cause many national cosmetic brands to fail.Chinese national brands need to prepare in terms of both thinking and resource in order to succeed in expanding the department store channel in China.

Significance of department store to domestic cosmetic brands

Department store serves as the new engine driving forward the Chinese national cosmetic development

No matter how severe the impact on department store from shopping center and e-commerce channel,China's department store enjoys great status concerning China's cosmetics sector; department store accounts for 20% of the market share among China's numerous distribution channels of cosmetic brands and is still one of the key distribution channels in China; department store channel is a new growth point for sales of all domestic cosmetics brands; and the multi-channel operation of brands could better improve the antirisk capability of brands; those brands succeeding in department store channel enjoys a long lifespan while brands in CS channel are always the passersby in market.

Catalyst of brand premium and image improvement

Built on favorable shopping environment and after-sale service, department store attract consumers to be the loyal fans who stress taste and quality;department store bears the responsibility to promote the image and value of national cosmetic brands;national cosmetic brands have accumulated their brand effect and brand premium, which are conducive to facilitating the rest channels of China's national cosmetic brands.

Standard of measuring the overall success of brands

Chinese department stores are incubators of domestic and international successful brands; every domestic and international brand could only be truly recognized as the domestic or international successful brand after it has gained some brand popularity and reputation in department stores. For example, L'Oreal is the KA brand in Europe and Olay is also the KA brand in America, but both of them target at department store first after entering into Chinese market. Over years of market operation,L'Oreal and Olay have been shaped into successful international brands and then sunk into KA and CS channel; DHC is the e-commerce brand in Japan and after it achieved good perform in China's department store channel, it was recognized as the third class international brand; as a single franchise store brand in the Republic of Korea, Mamonde failed in the daily use channel in China first. Then it shifted the strategy and focused on China's department store channel. It was due to its great performance in this channel that it gained the recognition as the third class international cosmetic brand; Herborist, after its success in China's department store channel, it was accepted as the representative of successful Chinese national cosmetic brand and accessed to European market smoothly; China's national cosmetic brands are able to gain a foothold in department store channel, which is the embodiment of their quality,image and capability; Chando is recognized as the national brand among China's national cosmetic brands thanks to its success in department store channel.

Necessary path for brand internationalization

The majority of international brands or century-old brands are those sold in department stores. Chinese national cosmetics brands must first perform well in the Chinese market before realizing their vision of becoming the “world-class cosmetics enterprises” and China's department store channel is the only way for national brands to seek internationalization. China's department store channel has been the home to the most well-known and powerful cosmetic brands from China and beyond. Chinese national cosmetic brands could only become the leaders in domestic cosmetics market by beating their rivals in the fierce competition in China's department store channel.Then they are in the position to pursue international development. During the tour or stay in China,foreign friends favor department stores and shopping centers most among the shopping venues, yet they almost pay zero attention to China's boutique shops.

Fierce competition in department store channel

Among various sale channels of Chinese cosmetics, those cosmetic brands made in China in daily use channel, KA channel, e-commerce channel and TV shopping channel have emerged as the leaders; but the overall performance of the national brands in department store channel is far from satisfactory. In 2017, only Chando and Herborist reaped an amount of retail sales worth of over 1.5 billion yuan. In fact, such two brands entered the department store channel over one decade ago and they have gained some success till today.Conversely, the foreign-owned first-tier brands and joint venture brands could achieve an annual retail sale amounting to 3 or 4 billion yuan. It is because that the department store channel is dominated by foreign-owned and joint-venture cosmetic brands.Since Aupres opened the first counter in 1994 to date, the department store channel has become the main battlefield of foreign-owned and jointventure cosmetic brands, which formulated the rules governing the cosmetic brands in department store channel. These rules include high commission fee to shopping mall, expensive cost of counter making,salary standard for employees in department stores higher than that of CS channel and standard of business trip. These high cost standards have become the barriers for national cosmetics brands to enter the department store channel, and the cost of breaking the barrier is expensive. In 2010, Chando hired a pool of talents in the department store channel in scale via headhunters so as to gain a foothold in department store channel rapidly. In so doing, Chando paid a large sum of fees to headhunters and also offered a similar salary to these employees comparing with the foreign standard. In order to attract and retain such talents, Chando elevated the business trip standard for all marketing staff. It took eight years for Chando to break even.

Feature of the cosmetics sale in department store channel

Limited number.The standard Chinese department stores total up to 1,500, a very small portion comparing with an approximately 160 thousand daily use boutiques across China. Besides, there exists a period of adjustment in terms of the shopping malls, normally one small adjustment per year and a big adjustment every two years. No matter how those shopping malls adjust, only 4-6 domestic cosmetic brands could station at the shopping mall, which makes it impossible for the department store channel to open stores on a large scale quickly. Chando enjoys the fastest store opening between 2010 and 2011 when there were a mere over 200 newly added department stores.

Minimum guarantee.At present, most standardized malls have minimum guarantee requirement for domestic brands to enter the venues. A lot of outstanding malls introduce quarterly guarantee and half-year guarantee. If brands cannot meet the minimum guarantee threshold,partial fees would be deducted from agencies or brand owners' loan. For brands which could not meet this goal within a half year or one year, they would be directly phased out; so in order to complete the minimum guarantee for each newly opened mall,brand owner and agency would devote more time and material on that. Before the minimum sale has been achieved, stores could not be opened immediately;otherwise, the more the stores are opened, the faster they would close. If they are phased out by the mall after half-year or one-year due to the failure to meet the minimum guarantee requirement, they are difficult to enter the venues again. Hence, it is a taboo for department store channel to do business with an exclusive shop approach. Quality should be prioritized followed by quantity. Or at least the parallel importance should be attached to quality and quantity instead of prioritizing quantity then quality.

VIP member management.The customer flow in department store channel is relatively limited in comparison with that of the cosmetic store. So the complete VIP member system is a must to underpin the development of brands in department store channel for such valuable member sources in pursuing high transaction ratio and high per customer transaction.Without a good member system, it is basically hardly for brands in department store channel to flourish but only to grow on a small scale.

Re fined management.Due to the features owned by the department store channel, it is worthy of noting that the management must be re fined. We must utilize limited resources to obtain maximum output and the output of every single store, along with the infinite maximum number of transaction and the per customer transaction; also, the image building and display need to be arranged well with retail management-oriented approach (namely focusing on daily retail while accommodating promotion). Promotion management shouldn't be the orientation. It also needs to offer value-added services to members via experience marketing and thorough after-sale service; training,data analysis and re fined management should also be emphasized.

Talent storage.In fact, department store channel is dominated by foreign-invested brands and jointventure brands, so most talents in department store channel gather in these companies. In recent years, some elites from foreign-invested company start to shift to national brands, but they fail to get accustomed to the enterprises' style and culture and only a selected few survive; so company needs to recruit and train the department store operation team in advance while letting them know each other in a cooperative way. It takes at least one year or more to be able to combat in market. In general, a professional team is the foundation for success.

Overall system building.As the features of department store are refined while complex, brands with favorable supply chain system and management system are required to underpin the department store channel. Counter image building, promotion tool design, marketing expansion, member management and budget management are all important links in early system building. Only when it performs well can it enter the department store channel. Truly,someone may say that it can develop while solving problems, but it would make it difficult to progress and may not necessarily obtain the support and recognition from the mall.

The department store channel is the highland among all channels of Chinese national cosmetic brand sales and is the most difficult one to deal with among all of them. Department store channel is the battle field where Chinese cosmetic brands fight with the foreign-invested and joint venture brands. Up to now, among domestic brands, only Herborist and Chando can compete with foreign-vested and jointventure cosmetics brands in small and medium cities.In the eyes of the author of this paper, department store channel is the fortress and highland that must be conquered in realizing the internationalization of Chinese national brands and becoming the national brands. At the same time, department store channel is very costly. Hardly can success be gained without the long-term and substantial input by brand owners yet only banking on the investment from agencies.Besides, it is suggested that brands should stop entering the department store channel at the moment if enterprise leaders lack enough awareness towards the above questions.

In spite of the crises lurking in the market right now, there are opportunities among them. Difficult as it seems, but the spring of the department store channel is on the way.

Over years of the successful and demonstration by Chando and Herborist, the misunderstanding towards domestic cosmetic brands from merchants in the department store channel has been changed. It is found that the quality and image of domestic brands are posing a huge threat to international and joint venture brands. After 10-20 years of development in department store channel, foreign-invested brands and joint venture brands represented by Olay, L'Oreal and Aupres are faced with the risk of brand aging.That's why new, fashionable and young brands made in Korea suddenly emerge typified by Innisfree in deep sense. Therefore, malls are weeding out some old brands instead of beginning to introduce special domestic cosmetic brands which are also new to consumers in department store channel.

Advantages of domestic brands

The existing domestic brands entering the department store channel all start from daily used products channel. They have years of accumulation and strong advertising. So as in entering into the department store channel, they can naturally bring customers into the stores; when domestic brands enter the mall, they do not enjoy the same condition compared with the foreign-invested brands while the commission fee and cost are much higher than that of foreign-invested and joint-venture brands. But domestic cosmetic brands can rely on lower marketing fee and staff salary to offset the disadvantages which could in turn bring more effectiveness and pro fits. In addition, they are capable of attracting more customers so they can receive more opportunities with the olive branches extended by malls. With the improvement of domestic brands'marketing and innovation ability, they have achieved good growth through innovation in department store channel.

Strategic layout of domestic brands

At present, the large and medium cities are dominated by foreign-invested and joint-venture cosmetic brands. But domestic cosmetic brands still have space for further development in small and medium cities. We can temporarily give up the markets in metropolises like Beijing, Shanghai and provincial capitals (at most we can open a few counters as brand image). Taking advantage of the key to success of CS in China which is encircling the city from the countryside, we can take the small and medium cities as the main battlefield for domestic brands which are not highlighted by the foreigninvested and joint venture brands in large and medium cities in the world. For domestic brands, it is better to choose their bases and invest with key resources in order to gain the overwhelming advantage in local markets. They should refrain from the development across the country but put limited resources into the key markets and establish bases in small and medium cities before connecting them to a large liberated area. Those small and medium cities will become their own granaries and profit sources, and then they can gradually march forward into the more developed cities. Step by step, when they achieve some performance in larger cities, national cosmetic brands will be strong enough. Then it is time for them to enter the most developed city which could not cost too much or even fire employees. That's how China's national brands can succeed in the department store channel in the end.

The question is, will such process and way be accepted by some brands which long for quick success?