Watsons' profit margins what Amazon could only dream of

A Watsons store in the Causeway Bay district of Hong Kong. The operator of the health and beauty stores and Superdrug chain plans to open 1,400 outlets globally this year, more than a third of which will be in China. Watsons China's earnings reached
A Watsons store in the Causeway Bay district of Hong Kong. The operator of the health and beauty stores and Superdrug chain plans to open 1,400 outlets globally this year, more than a third of which will be in China. Watsons China's earnings reached 22 per cent of sales last year, the highest among all the markets the group has stores in.PHOTO: BLOOMBERG

HONG KONG • Who says bricks-and-mortar retail is dead?

Billionaire Li Ka Shing's AS Watson Group is opening nearly four stores a day because selling baby and skin-care products in China is generating profit margins that Amazon.com could only dream of.

The operator of the Watsons health and beauty stores and Superdrug chain plans to open 1,400 outlets globally this year, more than a third of which will be in China, chief operating officer Malina Ngai said.

Demand is so high in the mainland that the CK Hutchison Holdings unit takes less than a year, on average, to earn back the investment it makes to open a store there, she said.

Watsons' expansion is in contrast to Marks & Spencer's decision to pull out of the country and the slowdown faced by luxury brands such as Louis Vuitton and Burberry in China.

Watsons China's earnings reached 22 per cent of sales last year, the highest of all the markets the group has stores in. Though its business recorded a 4 per cent drop in sales last year due to the depreciation of the yuan, its sales in local currency gained 2 per cent.

Behind its success are location and rents. Watsons picks areas with high foot traffic, such as train stations and streets, rather than pricier shopping malls. This has helped the company to cut costs in China, where rents are so expensive it has become one of the biggest headaches for retailers, according to  Mr Pascal Martin, a partner at OC&C Strategy Consultants.

Rental expenses alone have extended retailers' ability to recoup their investments by two or three years, he said.

Ms Ngai said earlier this month: "The figures tell us the demand is still out there. We managed to do the lease terms quite favourably."

Watsons now has 3,000 stores in more than 430 cities in China, making it the largest player with almost 30 per cent of the nation's drugstore market, according to researcher Euromonitor.

Still, the company is not only about bricks-and-mortar stores, and its success pales in comparison to local e-commerce giant Alibaba.

Watsons plans to invest US$160 million (S$221.9 million) in the next three years to improve its technology platform, enhance big data analysis, and build new warehouses, Ms Ngai said.

The goal is for Watsons' global online sales to grow at least 40 per cent a year for the next three years, she added.

BLOOMBERG

A version of this article appeared in the print edition of The Straits Times on June 28, 2017, with the headline 'Watsons' profit margins what Amazon could only dream of'. Print Edition | Subscribe