On March 19th, the The 9th Conference on China Cosmetics Trends, organized by CHAILEEDO and jointly supported by MeideDe, was held in Hangzhou. With the theme of “Offline Reconstruction,” the conference brought together the top ten domestic beauty companies in China, offline channel agents, CS channel stores, and beauty retail concept stores to discuss the new trends and opportunities brought about by the reconstruction of offline channels in the cosmetics industry. During the conference, Li Sheng, the founder of BeautyLink, delivered a keynote speech titled “Opportunities for Emerging Brands in CS Channels,” providing a comprehensive insight into the significant role of offline channels in the development of beauty brands.
Here is the transcript of the speech:
First of all, I would like to express my gratitude to the organizers of CHAILEEDO for inviting BeautyLink and giving us the opportunity to share with all of you today!
I believe many colleagues here are not familiar with BeautyLink, so before diving into the content of my speech, let me introduce BeautyLink. Our company’s main focus is on organizing nationwide tours in 25 provinces, targeting emerging and imported brands in the offline channels.
In mid-March, we held our first regional tour in Xi’an, which mainly served popular emerging brands that were actively sought by the market and channels. In each tour, we assist brands in identifying core agents and retail chains in each province, and we facilitate one-on-one connections through pairing sessions between retailers and agents. Additionally, we also provide a free pairing session during the entire tour event.
That concludes our introduction. Today, I have prepared two sections to discuss: 1. Why emerging brands have opportunities in offline channels, and 2. How brands can seize these opportunities. From last year until March of this year, our team visited a total of 212 brand owners, and our other team visited approximately 127 offline channels, including key agents and stores. Therefore, in this sharing session, we have compiled and will share the latest pain points concerning the collaboration between offline channels and emerging brands, taking into account the needs and requirements of both parties.
Why do emerging brands have opportunities?
- The industry has entered a mature market competition. After reaching a bottleneck in online traffic growth in 2023 and experiencing a significant decline in offline sales due to the three-year impact of the pandemic, we have come to realize that both online and offline markets may have reached a peak in growth simultaneously. Currently, it seems that 2024 will be a crucial turning point for channel and brand development, and it is expected that we will no longer see explosive growth in channels or brands as in the past. Therefore, our strategy will shift towards exploring the untapped potential of lower-tier markets, cultivating existing channels in-depth, and refining brands and product categories.
- Offline channels are the foundation of brands. We have discussed offline brands extensively, and the common feedback we received is that online traffic is expensive, and sales are highly unstable, with increasing costs. Regarding offline channels, when we visited stores in the lower-tier market of Shaanxi recently, we discovered brands that we thought had disappeared more than a decade ago, but they are still thriving. For brands, I believe this channel is an excellent opportunity for channel expansion.
- Brand fragmentation. Many store owners express their confusion about what products to sell in their stores. Based on our visits to over 70 stores in Shaanxi, the common problem now is that many of the top-tier brands they used to promote have shifted their focus online, with online channels accounting for an increasing share. This makes it increasingly difficult for stores to promote those brands. They are now searching for the next brands they should sell, and emerging brands entering offline lower-tier market stores are seen as a natural sales process. Since August 2020, well-known online traffic brands in the CS channel, including skincare and cosmetics, have emerged. However, brands that can quickly generate natural sales are relatively few at the moment. Therefore, during this period, we see a stage of brand fragmentation, and there are many opportunities for various brands, including home cleaning, personal care, cosmetics, and men’s products.
- Two-way opportunities. In the past, when we talked to online brands about offline channels, they were not very interested. However, since the third quarter of last year, many brands have approached us one after another, expressing their desire to enter the CS and offline channels and seeking guidance on team building, finding agents in these channels, or establishing direct partnerships with stores. At the same time, we have also received demands from the other end of the channel, where many agents, regional distributors, and store owners come to us and ask if we can introduce them to popular online brands. We have received many similar requests in the past two years, so it is an opportunity for everyone to engage in two-way collaboration.
- A new round of profit distribution negotiation. The percentage of profit distribution in the offline channels used to be mostly at discounted rates, such as 30-50% off or 50-50% split. Now, I believe we have entered a new round of negotiation between emerging brands and agents or retailers regarding profit distribution. Looking at it from the perspective of agents, previously in the CS channel, agents basically grew alongside brands. If a brand became successful, the agent would become prominent and lead the province. However, such brands may become fewer in the future, so the operational capabilities of agents and store sales skills will be increasingly in demand. As a result, agents and store owners will have more bargaining power, and I believe it is a new phase of negotiation and an opportunity for everyone.
- Vibrancy in lower-tier markets. After visiting various cities, from provincial capitals to second-tier, third-tier, and fourth-tier cities, and even rural areas, we noticed that the closer the stores are to the provincial capitals, the more their sales are affected. On the other hand, stores located farther from provincial capitals tend to perform better. In fact, during conversations with some chain store owners, we found that they own the properties and have opened around five stores, and the overall decline in sales is not as significant as people might imagine. People’s skills and capabilities play a significant role in this regard. Looking at the CS channel, we have experienced many years, and success or failure is closely related to practitioners because the industry is moving forward. We have also seen a shortage of talents in the industry, which is a challenge for offline channels.
- The operational logic of terminals is becoming more similar to online: digitization, traffic, private domain, and product selection capabilities. In each province, a new generation of young chain stores has emerged, and their operational models and product selection logic are similar to the previous operations of Taobao’s C-stores online. The fundamental professional skills of physical stores, such as people, products, and the environment, are slightly different from online operations, but overall, we have noticed significant changes in their digitalization, utilization of traffic, private domain operations, and product selection capabilities. For emerging online brands, there will be increasing common ground with offline physical chain stores2. How can emerging brands take advantage of these opportunities?
How to seize opportunities?
For offline channels, let’s discuss how to seize this new opportunity.
- Dive into the game. Diving into the game is something to communicate to the boss. We have visited many emerging brands and found that they have many common problems. One of them is the lack of a professional operator who has limited influence within the company. Since most emerging brands mainly operate online and have a high proportion of online sales, the majority of resources and decision-making power are in the hands of the online channel manager. However, in the offline channel, there are many responsibilities for the channel manager and operator, including price control, channel management, upstream supply chain, and even tasks such as distribution and display of samples in various locations. All these aspects require support from the company, and the decisions made in this regard have a significant impact, which is closely related to the boss’s involvement. Additionally, most bosses are not familiar with the CS (Consumer Service) channel as it may not be their background, so their understanding of expectations, requirements, and KPIs for professional managers in this field may be limited. Unlike online channels where sales can be easily calculated, achieving significant results in the offline channel, such as reaching one billion in sales within a year, requires a much longer timeframe.
- Manage expectations. We can deeply empathize with the common sentiment of achieving only tens of millions in sales after a year, especially considering the significant investment in building a large team. However, in the offline channel, each province has its own unique characteristics. For example, in our preliminary statistics, there are still around 4,000 network points left in Shaanxi Province. It takes a considerable amount of time to establish a complete network coverage within a province for a brand after they secure a deal with a distributor or salesperson. It’s because the available human resources and time are limited, and China is a vast country. Just in Shaanxi Province alone, the distance from Xi’an to northern Shaanxi spans eight to nine hundred kilometers, which takes more than eight hours by car. Typically, the time required for network deployment in the offline channel ranges between six to nine months. Therefore, for the offline channel, effective management of expectations, including planning for new displays, product turnover, and training, is crucial for brand success.
- Reasonable profit distribution mechanism. This is a topic that everyone discusses, and we have also been discussing it with brands, distributors, and chain stores currently involved in the CS channel. Currently, there are still many brands that have not implemented a well-defined and fair profit distribution mechanism. Additionally, there is often a lack of flexibility in these mechanisms, as many brands tend to apply the same logic used for online distribution to their relationships with CS channel distributors and stores. In reality, the cooperation between brands and distributors/stores in the CS channel cannot be directly compared to online distribution methods.
- Choose the right distributor. When it comes to selecting a distributor, we have found that many brands have encountered numerous challenges. For a brand, choosing the right distributor is the first and relatively crucial step. Frequent changes of distributors can greatly damage a brand and result in internal conflicts. Some brands immediately ask if we can introduce them to one of the top 100 distributors in a province or if they can collaborate with top chain stores. Every brand wants to work with leading distributors, but we tell them that it’s like looking for a handsome and wealthy boyfriend; not every top distributor is suitable for their brand. It’s essential to consider the role your brand will play within the distributor’s portfolio of brands, whether they will prioritize your brand, as their resources are limited. Furthermore, it’s important to assess the distributor’s main product categories, their expertise, and whether their team and management align with your brand’s values and goals.
- Price control. Price control is one of the most challenging aspects for brands operating across all channels. In our conversations with many brands, we have discovered that some of them intend to enter the offline channel by cutting off distribution, whether through Taobao or other platforms, in order to have more control over pricing. In the process of profit distribution, brands are also considering that their previous pricing may not have allowed sufficient profit margins, which adds to the complexity of the issue. We have also had discussions with brands that have over 10 billion yuan in online sales. They expressed their desire to enter the offline market, but they find it challenging because once they establish a distribution network, it becomes difficult to engage in the CS channel. For many brands, careful planning and strategizing for a comprehensive and integrated channel approach are crucial in the early stages.
- Provide good service. Offline channels actually place a strong emphasis on service. We have seen an online traffic cosmetics brand entering offline channels and communicating with distributors. The distributors complained to us that the responsible person for offline channels of this brand stated that once the goods leave the warehouse, they have no responsibility, they do not bear the logistics costs, and there are no exchanges. For distributors, even though your cosmetics product barcodes are currently limited, if we distribute your products throughout the province and they don’t sell and become stagnant, the store will directly return them to the distributor. All the risks lie with the distributor, so the distributor definitely doesn’t want to deal with your brand. Additionally, the newly established distributors don’t have a long history, so they have many new brands in their hands. If it’s done in this way, the distributors definitely won’t be willing to work with you. This is a small point. Furthermore, we see the display of basic skincare products. Most online brands have not done any displays and don’t know how to do displays in stores. Previously, in the CS channel, we saw many skincare or cosmetics brands with back cabinets and front displays. Now, most stores don’t have back cabinets and front displays. All skincare brands will select the core SKUs of this brand and place them together.
After placing them together, it’s difficult for me to figure out which brand is which when the colors and styles are similar. Currently, many brands even struggle to provide basic small display shelves or small promotional materials to stores. This creates a major obstacle for sales. This includes comprehensive training and implementing sales plans for each major holiday in the stores. Currently, these aspects are not properly implemented in the stores, and it’s very important. Finding distributors, having distributors expand the network, and distributing goods to stores are just the first three steps. The most important thing is sales conversion and allowing the products to form a positive and sustainable cycle in the stores. Only then can the brand truly establish itself in the offline market. If you only display the goods in the stores without sales conversion, the brand won’t last long.
- Provide a sense of security. During discussions with many distributors and chain stores, the term “sense of security” is mentioned frequently. Many distributors and employees of chain stores are hesitant to directly mention this term to brands. The “sense of security” refers to the concerns that people have. They feel that online brands have a relatively short lifespan, and their overall traffic stability is not good. However, offline, once they take on a brand, they have to establish network points, help with sales conversion, sales, and provide a series of services. This may take half a year or even a year, and it’s only next year that the distributors can see some returns. They don’t want to finish all these tasks and then find out that the brand is gone. This lack of sense of security is not good for distributors. Additionally, many new and emerging brands frequently change distributors. The KPIs they set don’t have high returns in the first year. The KPIs for network establishment are set within a relatively short time frame. Many team leaders have high expectations, and some have high return requirements, especially for new and emerging brands with financing, as they face greater performance pressure. At this time, it’s easy for the entire team to put pressure on various channels, especially the newly established offline channels.
- Sales conversion is the key. Our initial establishment is only the first three steps, and the most important thing is sales conversion, which involves a series of activities during the entire sales process. Many online traffic brands are particularly good at online content modules, but in fourth- and fifth-tier cities, your content establishment and reach are not sufficient. Most brands only focus on first- to third-tier cities, which is not enough in the lower-tier markets. Regarding natural sales in the sales module, after visiting many stores in county towns, we discussed a common problem. Many online brands may think that their brand has already reached 1.5 billion and they definitely have enough traffic, so they will have natural sales. However, after asking many store owners, in reality, there won’t be many natural sales, especially in fourth- and fifth-tier cities. This part still requires the brand, distributors, and stores to work together to generate sales and provide complete sales services to increase sales volume. At this point, brand planning is crucial and it’s a very important aspect.
- Collaborate with BeautyLink. If emerging brands are interested in offline channels, they can collaborate with our company, BeautyLink. Currently, the brands we serve generally have very good online traffic, and there are also some imported brands that are either about to enter China or have just entered China with excellent quality. If you are interested, you can add my partner Qing Lan on WeChat, and feel free to contact him if you have any questions.
Thank you, everyone!
