The First Franchise Cosmetics Companies Abandoning Business Model

The contract modification proposal put forward by LG H&H applies to its 406 franchise stores in Korea, including The Face Shop and Nature Collection stores.

Recently, LG Household & Health Care (LG H&H), the parent company of cosmetic brands The Face Shop and Whoo, is considering abandoning its franchise business, according to several Korean media reports.

In response to that, LG H&H said, “More and more people are shopping online and at beauty collection stores, and our franchise business strategy is in crisis.” An industry source commented on this, “Franchise business will also be the past.”

“Franchise business strategy is in crisis.”

According to media reports, LG H&H has sent a proposal to store owners who have a license to operate cosmetics stores, indicating that the contract structure for offline franchisees may change from a “franchise agreement” to a “product supply agreement”. Discussions are currently underway to finalize the arrangement.

It is understood that franchising is a business model for franchisees to expand their business and sell goods and services, but also an opportunity for franchisees to operate their companies using well-known brands, which is the most familiar way of authorizing business. In layman’s terms, franchising is a franchise and chain business model.

It is reported that the contract modification proposal put forward by LG H&H applies to its 406 franchise stores in Korea, including The Face Shop and Nature Collection stores. However, the company’s directly-managed stores will not be affected by this transition.

Regarding this restructuring of the store contract structure, LG H&H said that with the adoption of the supply agreement model, franchisees will be given greater flexibility to introduce not only products from The Face Shop and Nature Collection brand ranges, but also products from other company brands.

LG H&H added, “This change will give store owners the freedom to introduce popular products from low-risk brands, expanding their customer base beyond their existing customers and appealing to trend-sensitive young consumers in their mid-twenties.”

Regarding the strategic change, LG H&H attributed it mainly to changes in consumer behavior, “Our single-brand store strategy is in crisis as more and more people are shifting their shopping to online and beauty collection stores. Faced with numerous store owners who are considering closing or divesting, we recognize the urgency of the transition.”

Also according to Korea Fair Trade Commission, the number of cosmetics franchises in South Korea has dropped from 3,407 in 2018 to 1,588 in 2021, nearly halving the total number of stores。 While at the same time Olive Young, a beauty & wellness collection store owned by South Korea’s CJ Group, has continued to increase the number of brick-and-mortar stores, from 1,259 in 2020 to 1,298 in 2022.

“It may be an adjustment of business thinking, and it’s mainly a matter of cost control. The efficiency of multi-brand store is higher than single-brand store. The operating costs, operating pressure is under less pressure. But correspondingly, brand effect is also lower.” The person in charge of a Chinese beauty collection store told CHAILEEDO.

“Numerous store owners closing their stores or withdrawing their capital means that the operating conditions of special operation stores are not good.” Qian Qi, sales director of Hangzhou Meiyitian, said LG H&H franchise business model can no longer support the balance between special operators’ operating costs and profits today, forcing it to undergo transformation. In addition, in the era of “austerity”, consumers tighten the purse strings and they will certainly choose some of the more brand stores to buy the corresponding products.

Franchise business are not easy to operate

It is worth mentioning that this is not the first time that LG H&H has adjusted its stores.

Public information shows that since 2017, LG H&H has adjusted the positioning strategy of its offline stores, replacing some of its single-brand stores with branded comprehensive stores, and many of The Face Shop stores around the world have been changed into branded comprehensive stores Nature Collection, which sell the group’s popular line of skincare and daily chemical brands.

If the transformation is finalized, the stores will be able to sell products from other company brands, which will undoubtedly further enrich the product range.

Specifically for the Chinese market, The Face Shop once had more than 350 stores in mainland China at its peak. However, by 2018, The Face Shop mono-brand stores had been completely shut down. It is shown that Korean cosmetics have fallen off significantly in the Chinese market in recent years.

According to the Korea Cosmetic Industry Institute and General Administration of Customs of the People’s Republic of China, the growth rate of Korean cosmetics exports to China from 2013 to 2016 was as high as 66%, and the occasion was no longer there after 2017. As of 2022, imports of “essential oils, balms, fragrance ingredients and cosmetics and toiletries” from South Korea totaled 18.22 billion yuan ($2.5 billion), a year-on-year decrease of 32.7%.

For the operation of the franchise business, the above Chinese beauty collection store responsible person said, “It mainly depends on the scale. If a single brand franchise business is large enough, it can support the single brand store operating costs.”

Qian Qi said, “In general, the operating area of the franchise business under the beauty group is about 300-500 square feet, and the operating cost is higher. With Etude House, Innisfree and other brands have withdrawn from the Chinese market, it has been shown that the survival of single-brand store pressure. And among the Chinese brands, the number of franchise single-brand stores under a brand has shrunk from more than 260 to less than half, which further reflects the difficulty of operating single-brand stores.”

In fact, many beauty brands have tried single-brand franchise stores, but the success of the case is relatively small. Among Chinese brands, some of offline stores such as Fanwenhua, Dr. Plant, Forest Cabin business remain bright. Among them, Fanwenhua Chinese store number has exceeded 5,000. Dr. Plant in Japan, China, Hong Kong and other countries and regions has nearly 4,500 stores and the number of members over 20 million.

However, with Korean cosmetics, Japanese cosmetics only with marketing attributes of the brand is different, these brands often also include skin management and other service business. Such as Fanwenhua this year upgraded the new “combination of Chinese and Western” new facial care model, with products + techniques to further enhance the effect of the product, thus driving product sales. Forest Cabin also opened the “Forest Cabin skincare” program to focus on creating consumer experience offline skincare scene.

From South Korea, as well as the Chinese market, single-brand franchise stores operating well has been rare. Only transformation or innovation may win the way out.

“It’s the end of a natural life cycle”

Looking back at the history of the development of single-brand franchise stores, it was once considered a dose of good medicine to help channel and brand transformation.

In the 1990s, South Korea’s cosmetics market is fully open to import and retail and international beauty brands have flooded in. At the same time, the Asian financial crisis broke out in 1997, low-end cosmetic stores were severely impacted. Against this backdrop, LG H&H took the lead in implementing a franchise business model, selling products directly to consumers and readjusting prices.

By 2003 the single-brand franchise store in South Korea took shape, Fishy Shop, Mystique, etc. have joined the single-brand store development sequence, at that time, the ratio of multi-brand store and single-brand store is 92:8, after 10 years of competition and development, there is a dramatic change, in 2013, South Korea’s multi-brand store and single-brand store ratio of 8:92. (For more details, see the Green Eye article “The Revolutionary History of the Single-Brand Store”)

Specifically in the Chinese market, the continued popularity of the “Korean Wave” culture has led to the blossoming of Korean beauty monobrand stores in the Chinese market.

As we all know, MISSHA, The Face Shop, and Innisfree have all achieved great success in the Chinese market. Around in 2008, China’s cosmetic franchise store channel and local brands spent a few years of rapid growth together. Among them, there are many conflicts of interest between the channel and the brand, such as the increase in the voice of large chains, squeezing the profits of small and medium-sized brands. The increase in the voice of large brands, squeezing the profits of small and medium-sized chain channels. In the game, Fanwenhua, Dr. Plant and other representatives of the local single-brand franchise stores began to sprout, and later developed and expanded.

In recent years, a number of Korean single-brand store announced the withdrawal of China’s offline market, part of the local single-brand store also left the one after another. An imported beauty agent believes that “this is the end of a natural life cycle.” “Innovation, growth, maturity, decline,” as summarized by the retail life cycle theory, the single-brand store model is also bound to go through development and change.

Ten years a cycle, franchise stores today’s decline has been the general trend. For beauty franchise stores, only according to the changing trends of consumers, as well as the development of the times, continuous development and change, in order to win the market.




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