Online Cosmetic Sales Threaten Viability of Department Store Model Says Skincare CEO

Aug. 23, 2012 - PRLog -- Bangkok, Thailand. 23 August 2012

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“The business sector that will be hit the hardest over the next 5-10 years is, in my opinion, the mall-anchor department store and I am of the view that in many cases the viability of the classic department store will come under intense pressure, and it will increasingly become unsustainable.”

This claim was made by David Christensen (55), a New Zealand born Australian and veteran of the Asia Pacific business landscape, who now heads up Royal Siam Natural Health and Beauty, a Thailand based manufacturer of premium skincare and anti aging products.

“At the risk of sounding  overly dramatic,” he says “I don’t believe many people truly understand the implications of the changes that have occurred in Business to Consumer (B2C) distribution over the past half decade. It’s very much like what we read of the period of calm after an offshore earthquake has been recorded, and before the tsunami hits the beach, and I think that’s where we are right now with retailers saying ‘it’s not too bad … we can handle this’ unaware that the tsunami is already on its way and that will sweep away everything in its path.”

Involved in the development of online distribution since the mid 1990’s, Mr Christensen believes that the necessary infrastructure to make online consumer shopping viable at scale has only really come together over the past few years. “A simple and reliable payment system that was available to the mass market was an early inhibitor of growth, but the development of debit cards and the rise of payment processors like PayPal have resolved this issue. In addition, the need for inexpensive, reliable and comprehensive fulfillment and shipping methods for physical products has quietly been assembled by the most logical service providers – the consortium of Post Offices in each country.

“The last thing that has really only occurred over the past few years has been a change in consumer behavior towards being comfortable to purchase products online, rather than to use the internet just for research” he says.

Explaining his rationale for Mr Christensen explains the challenges facing traditional retail, including Department Stores in selling personal care products such as cosmetics. “The latest information we have is that a little over 20% of all personal care product sales occur online, and the online adoption rate is growing at twice the rate of the category’s overall growth. And it’s the most popular product to purchase online – in many mature markets more than 90% of people who say they have purchased products online say they have purchased items of personal care such as cosmetics, toiletries, and skincare.”

“A decade ago a consumer in Des Moines, Iowa or Adelaide, South Australia was to a large extent a captive of the retail distribution outlets in their city or immediate vicinity. Today, I am contesting for a good proportion of them just as hard from our offices in Bangkok – and because of my cost base have some real advantages over the local Macy’s or David Jones.”

Mr Christensen goes on to say that there is no indication where the percentage of online sales for the category will start to plateau, as the growth rate is constant and the additional impact mobile e-commerce is yet to be measured. He also believes that online purchasers tend to be those with higher discretionary spending power who choose to purchase online because of the time saved. “Looking ahead by just a couple of years and taking these factor into account, my estimate is that I will be able to target with confidence between 40-50% of the global market for personal care lines, knowing their willingness to purchase online.”

So what then leads him to such dire predictions of the department store retail model?

“Go into any department store and the model is the same … the prime traffic flow areas – often the entire first level – is dedicated to the high margin personal care lines in fragrances, skin care and the like. It’s the lynch-pin in the entire model … and you don’t need a Harvard MBA to work out that if your floor space and overheads don’t alter, but you take out 20%, 30%, 40% or more of your top line sales revenue in your most profitable departments, and you will see a domino effect that will result in the entire department store business model collapsing like a house of cards,” he says.

“In the early establishment of Royal Siam’s business I was introduced to a senior executive in a department store business by a friend, and as a courtesy met and discussed our business and plans. I was then presented with a check-list which essentially said for the privilege of having our products for sale within their stores we would pay them an up-front cash listing fee, we would pay for the cost of constructing displays which they would build to their specifications, we would employ and pay for our own sales staff, we would guarantee the store a minimum margin on products and a minimum monthly revenue amount whether our sales justified this or not, and we would give them 90 days’ credit while we funded all inventory for that period (and they had the right to return stock if they wished).

“I laughed and still chuckle about that conversation today. My response was to say that this didn’t at all fit with our view of the world, and we didn’t need to distribute products through their outlets. But the conversation gave me great encouragement because it indicated that yesterday’s thought processes were alive and well, and presumably many of our competitors are locked into this vicious circle, and while they concentrate on capturing a diminishing market we can concentrate on building our business through online channels,” says Mr Christensen.

He sums up with the comments “only time will tell how this pans out and things settle to a new normal, but there’s one thing I can say for certain … I don’t plan on buying shares in any department store chains any time soon.


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