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Sa Sa Cosmetics: A Cautionary Tale on the Dangers of Not Adapting in China

  •   29 Nov 2019
  •    Ye Chen
  •  169
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    Takehome:
    After ten years of impressive growth, “Sa Sa," Hong Kong's most notable homegrown cosmetics retail firm, is in the throes of the business equivalent of a midlife crisis, occasioned by dismal sales and rapidly declining profitability. The Sa Sa case study is a cautionary tale underscoring the dangers in over-reliance on a single market, and the consequences of failing to address emerging opportunities in mainland China’s digital economy.

    Established in 1978, Sa Sa is a leading cosmetics retailing group in Asia. It has over 250 retail stores in Asia, covering Hong Kong and Macau SARs, China, Mainland China, Singapore, and Malaysia. It sells over 700 brands of skincare, fragrance, make-up and hair care, body care products, health and beauty supplements including own-brands and exclusive products.

    On November 21, Sa Sa International Holdings Limited ("Sa Sa International") released its interim results report (six months ended on September 30, 2019). The report shows Sa Sa's turnover was HK $ 3.494 billion (about $446.4 million). This turnover represents a decrease of 15.7%, down from turnover of HK $ 4.147 billion (about $529.8 million) in the previous year. Sa Sa lost HK $ 36.5 million (about $4.6623 million dollars) during the first six months of fiscal year 2019, a massive downturn compared to a profit of HK $ 203 million (about $25.9352 million) recorded during the same period in 2018. The total turnover of Sa Sa's Mainland China business increased slightly by 0.2% to HK $ 132 million (about $16.8643 million), while same-store sales increased by 9.4%. As the same-store sales growth improved, the store level contribution increased by 39.8% year-on-year. As a result, the total loss of the Mainland China segment narrowed by 18.8% to HK $ 12.9 million (about $1.6481 million). [1]

    The data shows this cosmetic retail giant is suffering because of a rapid sales decline in usually dependable markets, especially in Hong Kong. Sales in mainland China have been poor but in comparison to other markets, offer some cause for optimism. Therefore, Sa Sa now regards the mainland market as their lifeline and has decided to accelerate its expansion into mainland China, particularly Southern China.

    Is it the right decision? Maybe it’s too late.

    First, Sa Sa has been losing money in mainland China for a long time. Here is a graph to show its loss from 2009 to 2018.

    P1

    Second, the slight increase in the mainland market may be only a transient phenomenon attributable to consumers that used to buy products in Hong Kong now turning to mainland stores to purchase. However, it doesn’t mean that mainland consumers have more recognition of this brand. Using e-commerce sales data as a surrogate marker for brand recognition in China, we can see that turnover was 170 million Hong Kong dollars (about $21.7191 million), representing a year-on-year decrease of 8.2%. The loss was HK $ 16.6 million (about $2.1208 million) [1]. In short, Chinese consumers don’t really care about the brand and are actively looking for other options.

    Reasons behind Sa Sa’s loss in the mainland market

    • A late adopter of e-commerce

    In the fast-changing Chinese market, a company’s market response speed often determines everything, but Sasa, who likes to write "cautious" in its financial report, is obviously over-cautious, which has to lead it to miss major opportunities in China’s digital ecosystem. Sa Sa's e-commerce revenue stream has given it little cause for optimism thus far. Its e-commerce business lost HK $ 26.5 million (about $3.3856 million) in 2019 [2].

    In 2000, Sasa launched sasa.com, and since then, the company has always relied solely on this website as its main e-commerce channel. Chinese consumers like to do their online shopping on multiple e-commerce platforms, like Taobao, JD, Tmall, Red, Pinduoduo, Sunning, Kaola. Having a single platform was a huge mistake. After entering the mainland market in 2005, Sa Sa devoted almost all its energy to the adjustment of offline stores but ignored the rapid development of online channels.

    Its rival, Watsons, who also started in Hong Kong, opened its flagship store in Tmall (Taobao Mall) as early as 2011 and launched the online shop APP in 2012. It launched the Watsons’ official online mall, JD flagship store, and Amazon flagship store in 2013. In 2017, the Watsons’ "Lettuce" APP was launched and offered services such as store pick-up and lightning delivery.

    In contrast, Sa Sa did not update its shopping website sasa.com to add a mainland China page until the tenth anniversary of its entry into the mainland China market in 2015. In 2017, Sa Sa finally began to embrace the digitalization of its business and signed contracts to open a flagship store in Tmall Global, launched a mobile app, and reached a strategic cooperation with Kaola.

    What’s next? Sa Sa will upgrade sasa.com by the end of 2020 and plans to launch a WeChat mini-program during the fiscal year 2020 (March 31, 2019-March 31, 2020), while promoting cooperation with domestic social content platforms. Still, it is going to be a year or more before these plans are implemented, and by then, Sa Sa's fate may be sealed. 

    • Lack of influential brands

    In the past ten years, Sa Sa's exclusive brands have expanded in scope but have failed to produce any flagship products with mass appeal.

    Sa Sa’s exclusive distributorship brands, from Financial Report 2018-2019

    We can hardly find any popular brands in the above picture. Consumers in China now prefer famous international brands and well marketed domestic brands. Sa Sa’s exclusive distributorship brands are not in either group. While Sa Sa does sell brands like Lancome and Estee Lauder, it is generally not competitive in these areas as it lacks the reach of more established e-commerce powerhouses that can attract customers with discounts but still remain profitable based on sheer scale and volume of sales.

    In addition, although the number of Sa Sa's exclusive brands has been increasing and the structure is constantly being adjusted, its sales have been shrinking in recent years, which means that the exclusive brands that could buffer Sasha's profits in the past are now not sufficient to support Sa Sa's gross margin.

    Sa Sa, as a representative of the Hong Kong retail industry, has experienced its golden years. Now the 41-year old brand is going through a bit of a midlife crisis, hit by a rapid decrease in the profitability of its dependable markets and also the consequences of missing opportunities to be an early adopter of ecommerce in China. Sa Sa’s story is one full of important lessons for international stakeholders and cosmetic companies, and more importantly a warning to all on the dangers of failing to stay abreast of China’s rapidly evolving market environment and failing to respond to rapidly shifting changes in consumer preference.

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    ABOUT THE AUTHOR

    ChemLinked Editor

    Ye Chen is a cosmetic editor in the ChemLinked team, whose major job is to interpret, track and analyze the latest cosmetic regulatory and marketing changes in China and the rest of the Asia Pacific area. Her main focus is in mainland China, Taiwan (district) and Australia.

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