McKinsey x Huang Tao from Lily&Beauty Special Interview: Holy Grail for Brands under State of New Me

When the era of “data dividend ” is going away, how can brands, especially those in beauty industry, grasp new opportunities and embrace new challenges? Recently, Dr. Xia Chen’an, McKinsey’s Global Managing Partner and Head of High Tech and Internet Practice in China Dr. Xia Chen’an , had a conversation with Mr. Huang Tao, Chairman and General Manager of Lily&Beauty. And the following profound insights are provided by them.

The annual “Double 11” Chinese Shopping Carnival officially kicked off this week. As early as late October this year, the e-commerce industry has been preparing for the exciting carnival. The “Double 11” carnival, with a history of 12 years, is a great annual event for e-commerce, and it has witnessed the rise and transformation of industry giants. It gave hopes to and facilitated the growth of many merchants and embodied unforgettable memories of a generation of consumers.

When the era of “data dividend ” is going away, how can brands, especially those in beauty industry, grasp new opportunities and embrace new challenges? Recently, Dr. Xia Chen’an, McKinsey’s Global Managing Partner and Head of High Tech and Internet Practice in China Dr. Xia Chen’an , had a conversation with Mr. Huang Tao, Chairman and General Manager of Lily&Beauty. And the following profound insights are provided by them.

  • New channels keep emerging. Without brand equity, no answer could one get in any channel.
  • Identical products provide the prerequisite for everything.
  • Channel dividend, media dividend are sometimes a curse. When the dividend in your hand begins to fade away, you would try to maintain its scale and the profits making from it in desperation rather than concentrating on product itself.
  • When the market changes dramatically, a brand should not only have distinct product identity, but also possess a instant iteration mechanism.
  • If one side, no matter it is the supply-chain, the brand or the selling side, could make the cake bigger, then all the three sides would tend to divide the work; if no, it will be easy for them to fall into involution.

This article presents the full content of the interview in text format.

Part 1: Upholding long-termism in the era of revolution

Xia Chen’an: From last year on, significant changes were seen in the platforms, the brands and even the whole industry. As a senior e-merchant that has been operating in the industry for many years, could you share your observation with us?

Huang Tao: In general, everyone can feel that operating a business is getting harder and harder and various comments from the operators gave proofs to that. We should figure out what is the driven-force behind it.

Firstly, China’s demographic structure has reached an inflection point. After the generation Y and generation Z, it is estimated that there would be no drastic increase in the number of purchasers buying online. That is to say, the demographic dividend has peaked.

Secondly, after years of increasing of consumers’ consuming capability, the total amount of money consumers currently spends online, or the consumption level of people, is not likely to bear any significant growth.

Influenced by these two factors, some products are in consumption upgrading and some in degrading when consumers are buying them. Thus, it would trigger a shuffle in the whole online shopping market.

Xia Chen’an: When such changes happen to the customers, or in other words, when the so-called “data dividend” goes away, the brands must feel anxious. what effort do you think that can help them overcome their anxiety?

Huang Tao: I think the key issue is the “data dividend”. In our company, we would avoid using this word intentionally. Because the large volume of data are actually specific, livid consumers in our eyes. In the process of shopping, a consumer will do some comparison and filtration to find their desired product. Thus, a flow of data is generated. But the final destination of consumers is to find what they want. So the brands and the merchants are supposed to recommend their goods to targeted consumers.

Here are two questions: Is it easy for consumers to find what they want? Will it be easier for brands to get customers if they have good merchandise? From both of these perspectives, the industry holds huge potential for improvement.

Xia Chen’an: Two buzzwords emerged in the brand side these days: omni-channel and D2C (Direct to consumer). What’s your comments?

Huang Tao: Since reform and opening up, our shopping channels have always been changing. For example, when I was a child, we bought things from the open markets, the supply and marketing cooperatives, or the convenient stores. Later, we got supermarkets, department stores, shopping malls and various hypermarkets. Also, people once created TV shopping, tele-shopping and mail shopping. Different new shopping channels emerge all the time.

There are a great variety of merchandises: from luxury to massive consumer goods, from rigid-demand goods to nonrigid-demand ones, from active to passive consumption goods. In the field of cosmetics, there are two main sub-fields: skin caring and making up. To put it in a more detailed way, it includes categories like personal care products, perfume, and hair dyes. With so many commodities, there is bound to be a problem: some channels are suitable for sales and some are not.

In fact, any time when there is a new communication way, there would be a new shopping channel. In a country like China where the Internet is particularly developed, several new forms of communication tend to appear every year. For example, more and more shopping channels would come with applications like Jinri Toutiao, Xiaohongshu, TikTok, and Kwai. In the new media environment, brands need to reconsider the following question: by which channel can they achieve a larger scale of sales with the least cost. Without taking this point into consideration, it is actually very unwise of the brands if they assure that they are certain to sell more products with one more channel.

Xia Chen’an: Brands have also been thinking about this question: if a new channel is created, do I need to pre-empt it or just wait and see for a few days and then move into it when it matures?

Huang Tao: It depends on the brand’s own positioning. Because the channel in turn will also affect the brand. For example, some brands may definitely not enter into what is usually considered a lower-end channel. When a brand enters a channel especially in the cosmetics industry, it is actually more important to consider selling products to different consumers through different channels. It has an impact on the brand’s self-positioning and long-term development.

In our company, we also often have been asked by brands that should they enter into a certain channel or should they follow a certain format. Now there are even multiple forms of sales within a single channel. For example, there are various ways facilitating selling like live streaming, shopcasting, opening blue V membership service, or setting shopping carts in TikTok. These various forms are in the same channel but the underlying logic behind is completely different.

When we observe channels, or discuss with brands about which channel and form to choose and which to avoid, we are actually supposed to come down to the brand equity itself: by carrying out certain practices in a new channel, is my brand equity increasing or decreasing. If divorced from the brand equity, talking about channels is meaningless, or, there would be no right answer.

Xia Chen’an: If a brand upholds to be a long-termism especially in the beauty industry, what do you think are the most core elements?

Huang Tao: The most core point is to remain reverence for the product. Our company has a three-round strict screening mechanism for products. In the first round, we will do efficacy review directly at the benchmarking products. After the review, we will discuss with one or two hundred KOLs about whether such new products will be welcomed in the market. Living through the above two rounds, we will carry out a sale test involving several thousand sellers to gain feedbacks from consumers. We attach special attention to consumer’s comments and the repurchase rates. How can you build up a brand if your item is a one-shot deal for every consumer? As a good product, it can make consumers desire to buy again and again. Only under such circumstance could a brand gain long-term development.

Based on this, we focus on the product first and foremost. Providing products with actual strength is a prerequisite for everything. Another element is whether the product is urgent and irreplaceable for the consumers. Only by fully considering these two factors can we have the potential to build a brand.

Xia Chen’an: From the overall channel side especially the online channel, traditional open and shelf e-commerce is still occupying a relatively large market share in the whole cosmetic industry especially in the beauty industry. But there are many new prominent channels that have emerged in recent years. What’s your opinion on the changes in the online channels in the whole beauty industry?

Huang Tao: The emergence of online channels including online new media, has brought about something called channel dividend or media dividend, which would bring about a special kind of “brand” . As traditional brands or those brands with a long history respond relatively slow to new channels and new media, some other brands may hold the view that they could seize the channel dividend or media dividend to gain a round of profit through the new channel and new media ignoring their disadvantages to traditional brand in the traditional channel.

But I think this format is sometimes a curse. Because every time you grab a dividend, it’s like you are holding a barbell up unsettlingly. Because when the dividend fades away, you would be exhausted in desperate attempts to maintain scales and profits which will distract you away from the research and concentration on the product itself.

Because of the presence of such kind of brands, everyone many have ephemeral misjudgment when it comes to new media and new channels. Many brands could be tempted and develop such ideas: it’s more important to grasp channel dividend or media dividend or even sell products personally than focusing on the quality of products. I think that is trying to attend to trifles to the neglect of essentials. In the long run, if you are not able to resist the temptation of new media and new channels that are constantly emerging in the particular environment in China, it will be difficult for you to make good products and good brands.

Part II: Produce better products and make the cake bigger

Xia Chen’an: In the past few years, we have seen an obvious trend that the market share of foreign brands has been occupied by our domestic brands or “new Chinese-style products”. In your opinion, what is the driven-force behind it and will it last for a long time in the future?

Huang Tao: I think the fundamental reason is that Chinese people are more confident about Chinese culture than ever before. National cultural confidence can always affect the market share of brands. In the early years, Chinese people prefer to buy foreign goods due to their distrust of domestic products. Nowadays, China is getting stronger and stronger. Youths after the 1980s, 1990s and 2000s were born in a prosperous and powerful country in which some metropolis are even more advanced than those abroad. Under such circumstance, Chinese people enjoy strong national self-confidence.

Triggered by the self-confidence, people will certainly feel that foreign goods are of little advantage to domestic products, what’s more, the later can better match Chinese people’s habits. That has showed a huge opportunity for our beauty industry. But I think there is also a trap existing behind such a beautiful opportunity. Affected by this sentiment, consumers will certainly prefer to buy domestic products of some certain categories. Thus, some sellers would manage to make profits by taking short-cuts.

We might have noticed that: the one who extends the fastest would actually fall in the shortest time. That is because consumers will ultimately assess the value of product itself, whether it is practical value, emotional value, or additional value. In the end, products with good quality can live longer. So we can observe some real examples: in the field of the so-called domestic products or new national products, there are some brands gaining profits by exploring and expanding new markets. But soon, they would quickly fall down due to their poor product quality, weak product identity, and low repurchase rate of products, leaving a huge blank in that market. At such points, some foreign brands with particularly strong core competitiveness will gradually fill the market. In fact, it is a pity. If more domestic brands could control their extending pace, focusing on building a better product identity while branching out, they could gradually gain more recognition and love consumers and finally make the repurchase rate of products higher and higher. In this way, I think the market share of domestic products will eventually be a bit more.

In the face of the great transformation in recent years, what should the mature brands do? Could you give them some advice?

Any mature brand that boasts certain scale has to make certain choices. Because the more identification functions a brand has, the less likely it is to meet all people’s appetites. But for brands with strong functional and general-priced features or even those low-end ones, they might gain massive preference because consumers’ attention for these products doesn’t lie in the identity.

From consumers’ perspective, they don’t care whether you are a mature or a new brand. What they actually concern the most is the reliability and credibility of a brand.

Xia Chen’an: So, a brand should never forget its original aspiration. It should improve its product identity and think about what benefit can it bring to their customers. Just uphold long-termism and keep moving on. For a brand, can there be some strategies to respond to all changes in the face of these challenges?

Huang Tao: The market can be changed by following factors: better products with strong identity features created by dedicated efforts of brands, cheaper products with better performance made by companies with strong technical R&D ability, or more user-friendly products. And every time a brand doing the above affairs, they are actually trying to allow consumers a better life or attempt to give them simple choice. This is something brands always need to consider.

On the other hand, an instant iteration mechanism is critical for the brand to undergo the dramatic market changes. The market is changing all the time. But if you have enough technical formulas and swift reflexes, you will never have to fuss over.

How can one possess excellent reflexes? Our company has also been improving our reflexes over the past decade or so. We outsourced many non-core business segments including customer service, warehousing and logistics, and even photography and video recording. By doing so, we have allowed the entire company to focus on marketing and brand building. Thus, the company’s efficiency and reflexes have both increased dramatically.

I think brands have to think about similar question: which segment should a brand attach great importance to for the improvement of its reflexes? Making sure that no matter how fast the market changes, a brand can always get ahead of peers with faster reflexes and iterations. In that case, the rapid changes in the market are acceptable.

Xia Chen’an: Since e-commerce has entered into our life, a series of different branding service companies have showed up with various business models. From the perspective of branding service companies, they would reflect on what models have done well in the past and with what kind of models can they serve brands better in the future.

Huang Tao: It is important to define the difference between branding service and branding operation. Generally, when we talk about service, it means I am paid to provide certain service but I am not accountable for the result. This is a so-called service company. Another type is operation company which buy goods and bear any loss or consequences. In our company, we pay for and buy the goods. Thus, the brands have already gained profits. If the products doesn’t sold well, we will take the risk, not the brand.

Many people may think that a branding service company just need a few employees without any need to stock, thus, a large amount of capital is also not needed. So the company wouldn’t take any loss if they fail to sell products, which seems to be the best business in the world. But I think that this model is not good because the risk taken by two parties is not equal.

Xia Chen’an: What kind of additional value can branding operations provide beyond branding services? How can we all achieve a win-win situation?

Huang Tao: It depends on the number of segments of a brand. Design is actually a part of the product. The strong point of the brand companies is that they have a wealth of experience in product development and they are more capable of making a product that meets the consumers’ needs. They have a good command of the “know-how” in this aspect.

Once a good product is created, we will soon figure out its targeted audience and proper price by reviewing or evaluating through big data. This is our company’s know-how.

That is only one of our know-hows. Our know-how also covers the supply chain in front-end. In the supply chain of cosmetic, some ingredients can only be get from certain raw material suppliers, some processes can only be realized by certain OEMs, and some special-shaped cosmetic bottles can only be done by unique suppliers. The entire value chain of the cosmetic industry is brand-centered with the supply chain upwards and operators or channel operators downwards. Each of them plays a distinctive role.

Our company believe that the brands we work with tend to enjoy particularly core strengths and they are concentrated on and driven forward by R&D. They seek to make products that no one else is able to create. In this case, they may abandon the supply chain and sales section to focus on making better products.

So it turns to the three sides on the value chain again- the supply chain side, the brand side and the selling side. When one side manages to make the cake bigger, everyone tends to divide the work. If everyone thinks that there is no way to make it bigger, then it’s easy for them to fall into malign competition. Companies may strive to keep its own interests as much as they can without sharing with other sides.



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