Li Ka-shing's brick-and-mortar Watsons stores defy online shift

[HONG KONG] Who says brick-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 Inc. 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 in an interview. Demand is so high in the mainland that the CK Hutchison Holdings Ltd unit takes less than a year, on average, to earn back the investment it makes to open a store there, she said.

Watson's expansion is in contrast to Marks & Spencer Group Plc's decision to pull out of the country and the slowdown faced by luxury brands such as Louis Vuitton and Burberry in the world's second-largest economy. Earnings at Watson's China business reached 22 per cent of sales last year, the highest of all the markets it has stores in.

Behind its success are location and rents. Watson picks areas with high foot traffic such as train stations and streets, rather than pricier shopping malls. This has helped the company reduce costs in China, where rents have become so expensive it's become one of the biggest headaches for retailers, according to 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, Mr Martin said.

"The figures tell us the demand is still out there," said Ms Ngai, who spoke in Hong Kong earlier this month. "We manage to do the lease terms quite favorably." Watson 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 isn't only about brick-and-mortar stores and its success pales in comparison to local e-commerce giant Alibaba Group Holding Ltd. Watson plans to invest US$160 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 Watson's global online sales to grow at least 40 per cent a year for the next three years, she said.

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