Reference no: EM132247291

Sa Sa International, founded in 1978 by Lleanor and Simon Kwok, is the largest cosmetic retailer in Asia. Based in Hong Kong, it markets, distributes, and sells more than 600 brands covering skincare, fragrance, make up, and body care products, and health and beauty supplements. The brands it carries include Elizabeth Arden, Estee Lauder, Lancome, and Crabtree & Elelyn, as well as private brands such as Suissse Programs.

Sa Sa works on the basis of selling cosmetics at a discount, believing that more sales will result despite the decrease in profits. To offer low prices, Sa Sa stores stock merchandise available through parallel imports. If also enjoys cost savings by buying in large quantities. Instead of buying from the brands themselves, Sa Sa deals with agents who market products for manufacturers like L’Oreal. Hence, by purchasing these products from an agent, say in Malaysia, selling L’Oreal products. Sa Sa is able to offer a lower price than those found in Hong Kong’s L”Oreal counters.

It has over 280 stores, spread across China, Hong Kong, Macau, Malaysia, Singapore, and Taiwan. All its stores are solely owned and operated by Sa Sa; there is no franchising.

Its sales across its 107 Hong Kong and Macau stores have been phenomenal. In 2014, it experienced an 8 percent profit margin on a six-month turnover of HKD4.2 billion. Estimates suggest that about 65 to 70 percent of its Hong Kong sales are from mainland Chinese tourists, who have been crossing into Hong Kong in large and increasing numbers. Chinese tourists make up three times the city’s population. Spurred by inflation in China and the strengthening of the Chinese currency, renminbi, Chinese spending in Hong Kong has increased.

Market research has shown that female consumers in China look for bargains and a selection of brands that they cannot find in their country. Sa Sa fits the bill. With a wish list in hand, a Chinese woman can find her brand among the 17,000 different items and 600 brands that each Sa Sa outlet carries. Brands in Sa Sa Hong Kong also cost some 30 percent cheaper than in China, in part due to collective buying power and no tariffs in Hong Kong. And hence, banking on its reputation with mainland shoppers, Sa Sa hoped to replicate its success in China. Its foray into China began in 2005 with a store in Shanghai. With its flourishing sales in Hong Kong, it had set the huge mainland Chinese market as its primary target for fast expansion.

However, after 10 years and over 60 stores in China, Sa Sa is still facing obstacles that it did not anticipate. Though sales in the mainland market has been registering growth rate, it is mainly due to aggressive expansion rather than improving same-store sales. Operating losses remain high. Estimates suggest that the mainland market makes up about 5 percent of its turnover even though China makes up 62 of its 281 stores.

Several factors account for its dismal performance in China. It has trouble attracting brands to be carried in its China stores. While in its Hong Kong outlets, shoppers can buy big brand names, its mainland outlets were carrying more of the less well known house brands that Chinese consumers are not familiar with. Competitor, Sephora, is perceived to carry more attractive brands. Sephora does not adopt the same low-price strategy as Sa Sa. The prices of its products are nearly the same as those sold in department stores. Although the prices are not low, Sephora focuses on brand building and rapid market entry.

Additionally, China imposes huge taxes on cosmetics. It levies a 15 percent import tax and a 17 tariff on imports of cosmetics. Therefore, the price advantage that Chinese tourists enjoyed in Hong Kong cannot be had in China. Instead, the prices are some 20 to 30 percent more expensive in China than in Hong Kong. Discount promotions, which Chinese consumers find appealing, are also limited given the higher cost of operations.

Sa Sa also faces competition from the numerous local and Korean cosmetic brans that are priced much cheaper. There are at least 3,500 domestic cosmetics companies in China. Most of these are small-scale retailers, dominating lower-tier cities that are characterized by fragmented distribution networks. Knock-off shops selling brand name cosmetics are also encroaching on Sa Sa’s market.

The huge sales that Sa Sa saw among Chinese tourists in Hong Kong may also be due to a more adventuresome spending spirit when one is away in a foreign land. Back home, mainland customers do not seem as interested in trying new brands as they were in Hong Kong. Hence, they were less willing to try the less familiar brands that Sa Sa carries in China.

Another challenge is upgrading its mainland service level to be on par with that in Hong Kong. Selling specialized cosmetics requires that the sales staff be knowledgeable and personable. In order to speed things up for its expansion, especially to northern China, Sa Sa moved its training sessions away from its head office to the stores. Without the head office operational support, this may have affected the quality of its sales staff.

The rise of online purchases has also affected Sa Sa’s sales. Younger, Chinese consumers are avid online shoppers. While Sa Sa has an official store on Chinese Website, Taobao, as well as on other Websites such as 360Buy, Paipai, and Easybuy, online shopping offers consumers a much wider array of choices than on a physical shopping landscape.

Simon Kwok recognizes the challenges ahead of Sa Sa’s China market. But the huge market size beckons Sa Sa to press on.

What retail strategy would you recommend to Sa Sa when entering China?