Posted by: Natalie on 2009.08.05 19:47 in Natalie Zhu

Cosmetics retailer Sephora has proven to be a sunny spot for LVMH Moët Hennessy Louis Vuitton (EPA:MC, OTC:LVMUY), its parent company and the world’s largest luxury products group, and a huge roadblock for competitor Sa Sa International Holdings Limited (0178.HK).

Despite the fact that LVMH saw profits drop 23% in the first half of 2009, mainly on lower watch and jewelry sales, “Sephora registered revenue growth in all of its markets … and an increase in its profit from recurring operations.” Meanwhile, Sa Sa dragged its mainland-market bottom line from a RMB 17 million loss in 2005 to a RMB 27 million loss in 2008.

For the following reasons, I expect Sephora China to continue its strong mainland performance, while I suggest Sa Sa start shadowing Sephora.

Since first coming to Shanghai in 2005, Sephora now has about 40 stores in 19 cities, including one in Hong Kong. Sa Sa entered the mainland in the same year and now has 33 locations, including stores and counters, and intends to expand to 54 locations in fiscal 2009. Sephora’s network is not only larger, but is located in high-profile, high-traffic locations, mainly on the first floor of urban shopping malls. Meanwhile, Sa Sa’s poor locations and inferior design concepts make it look like an ordinary mom-and-pop store and raise doubts about product quality and authenticity.

Sephora supplants impatient and judgmental sales girls – in some stores it’s advisable to dress up before going in – with open shopping space and testable products. In the same way, the company keeps its customers informed about promotions via emails and text messages but at a moderate, i.e., not annoying, rate. Furthermore, their giveaways tend to be things consumers actually want. For example, two to three times a year the company will hold sales events that let consumers use points, which are earned for making purchases in the store, as cash towards the purchase of any product.

Sephora started out by focusing on the brands trusted by Chinese consumers. While these well-known brands may mean thinner profits, they give Sephora credibility and, thus, the ability to introduce new products with higher commission rates.

In contrast, when consumers go to Sa Sa stores, they find themselves surrounded by strange brands. This generic branding has fueled Hong-Kong success by offering low-priced products, but, because recognition of the Sa Sa brand is lacking in the mainland, customers are unwilling to buy. As I mentioned earlier, location and décor do little to ease consumer uneasiness.

In a more macro perspective, I see cosmetics as a necessity for most Chinese woman, and, therefore, a relatively inelastic good. In my June retail report, I already noted that cosmetics sales have outpaced that of sportswear and fashion this year, even in first-tier cities where consumers are more affected by the financial crisis. Accordingly, I won’t be too surprised if, as LVMH suggested in its earnings report, Sephora garners an even larger share of the China market going forward.

Posted by: Natalie on 2009.07.10 18:36 in Natalie Zhu

Chinese sports brand enterprise Li Ning (2331.HK) tapped into the badminton market when it announced this week that it had wholly acquired Kason Sports (Hong Kong) for RMB 165 million. According to Li Ning's five-year plan ending 2013, the company hopes to shrink the ratio of "Li Ning" brand revenue from 95% of total revenues to less than 80%. While this acquisition may help realize this long-term goal, it's not expected to have much material impact in the short term.

The popularity of badminton in China – a survey by the General Administration of Sports suggests that badminton is the second ranking sport in terms of participation in China – could mean good things for Li Ning and its new subsidiary, but problems with competition and integration loom. Although Li Ning has the benefit of taking up badminton before its main competitors, company data places Kason third in China's badminton market in 2008 with about 12% of the market, compared with 20% for Japan's Yonex and 14% for Taiwan's Victor.

Finding it difficult to compete with popular Nike (NYSE:NKE) and Adidas brands and cheaper 361 and Anta products, Li Ning is right in trying to explore new markets. However, whether it can manage the new brand smoothly remains to be seen.

Li Ning gave up on the Kappa brand in 2005, two years before its five-year distribution license ended. Kappa brought the company 2004 revenue of RMB 100 million, before being taken over by China Dongxiang and booking China revenues of RMB 2.8 billion in 2008.

The current success of Kappa in China indicates a problem with Li Ning brand management, and I hope Li Ning has learned enough from its experience to avoid making Kason another Kappa.