Global health and beauty giant AS Watson has big plans for China, with ambitions for as many as 5,000 stores there. Tim Danaher flew to Shanghai for a rare interview with managing director Dominic Lai, the man masterminding the Superdrug owner’s expansion.

A gaggle of supermodels, dancing lions and a banquet in a Michelin-starred restaurant. It might seem a little extravagant for the opening of a 2,500 sq ft store.

But for AS Watson, the world’s largest health and beauty retailer, the opening of its 500th Watsons store in mainland China last week was symbolic of something far bigger than the opening of a single small shop. The Hong Kong-based owner of Superdrug, Savers and The Perfume Shop has plans to increase its store numbers on the mainland tenfold, as it seeks to capitalise on the enormous potential of China’s 1.3 billion population.

It is a retail expansion programme as ambitious as any on the globe, and last week Retail Week travelled to Shanghai to witness the dramatic changes first hand, and for a rare interview with Dominic Lai, managing director of the low-profile company.

China is only one of the 38 global markets AS Watson operates in – it has 8,600 stores globally in total – but the scale of the 500th store celebrations reflected just how big the company thinks the opportunity there is. “China could easily accommodate 4,000 to 5,000 stores,” says Lai. “If you look at Hong Kong, there are 7 million people and, between us and our biggest competitor, we have 600 stores.”

Room to grow

In contrast Shanghai, which has a population of 20 million, has only 66 Watsons stores so far. Although its origins are actually as a trading company in China, AS Watson only entered the Chinese market 20 years ago, with the real growth coming in the past three years. The company is now in 80 of the 116 cities in the country with populations of 1 million or more, and is now looking at the next tier.

The drive to grow is coming right from the top. AS Watson’s chairman and the Far East’s richest man, Li Ka-Shing, has clear ambitions to expand the business – and that means there is a strict timetable to meet. “In 18 months we will have 1,000 stores in China. Not two years, 18 months,” says Lai.

Ka-Shing’s hands-on management style is replicated throughout the business. Despite his immense wealth through his Hutchison Whampoa empire, which also owns the 3 mobile phone network, he holds a monthly review with Lai on the state of the retail business. “He knows how many stores we want in China, how many we have in the UK,” says Lai.

Lai’s confidence in the Chinese market is based not just on the size of its population but also the pace of its economic growth. Even with the global recession, the country is set to record GDP growth of over 8% this year. “Earlier in the year everyone was saying it would be impossible to achieve 8% this year,” says Lai. “But we’ve got a month to go and it’s looking set to hit. Asia as a region has weathered the economic tsunami.”

Knowing the local market

The challenge, though, is understanding that China is a big place, and not everywhere has the huge growth in consumer spending and commerce of a city like Shanghai. Some Western retailers have come unstuck by just looking at population numbers rather than the disposable income that’s there. Lai says the key is understanding the local market and tailoring the offer accordingly. “Our offer is different in Shanghai from in the south. This isn’t cookie-cutter expansion,” he says.

But mention of China being a one-party Communist state – something that is easy to forget when surrounded by Shanghai’s forest of office towers and apartment blocks – gets Lai animated, who says that is no longer relevant. “People say China is a one-party Communist country – no! You can feel the energy in all the big cities, and while the overseas-influenced cities are developing first, the inland cities are catching up so quickly,” he says.

Any brands associated with celebrities, particularly film stars, do very well. “The Chinese customer is very astute,” says Lai. “The penetration of the internet is growing exponentially and, also because travel within China is growing so fast, Chinese consumers have all the means and ways to find out about brands.”

And despite China being a communist country, Lai says it is much more open to overseas businesses coming in than the other great Asian emerging market, India, which Western retailers have found an even tougher nut to crack. Despite the advantage of AS Watson’s heritage, it can’t take anything for granted. Sephora is making headway in the fragrance market, which AS Watson is planning to counter by bringing French perfumery chain Marionnaud to China. It also plans to expand its Hong Kong food operation Parknshop on the mainland, although Lai says AS Watson has no aspirations to “be a Carrefour or a Walmart”.

Global footprint

While the big push now is in China, Lai’s company has certainly made the most of opportunities to grow globally. Under Lai’s predecessor, Yorkshireman Ian Wade, AS Watson went on a spending spree early in the decade, which started with the acquisition of UK value chain Savers in 2000. The company now has a collection of businesses across the world, particularly focused on Europe, where it owns chains including perfumery Marionnaud in France and Kruidvat, the 890-store health and beauty chain in the Low Countries, the market leader in the Netherlands, as well its UK businesses.

While its growth won’t rival that of China, the Watsons brand is being rolled out into Eastern Europe – despite the economic problems that have faced AS Watson’s businesses in Baltic states like Latvia and Ukraine – with Poland, Hungary and the Czech Republic being key new markets and Russia and Turkey also being seen as significant opportunities.

The UK may be a much more mature market but, like all the businesses, it gets close hands-on attention from head office in Hong Kong. Last year its biggest UK business, Superdrug, fell into loss after a decision was made to clear out a mountain of terminal stock. Lai won’t be drawn on numbers, but says: “Superdrug will deliver much better results this year.”

Admitting Superdrug has faced “some challenges”, Lai says the key to the business’s future is to differentiate it from Boots and tailor the offer to the community it serves. With Boots moving to become a more healthcare-focused business, Lai says the mission with Superdrug is “to make it more fun”, with more of a beauty focus.

At the same time, though, as with the stores in China, the business has been going through a segmentation process to ensure each store is right for the local market it serves. “Each store should be unique,” says Lai. “A store in Westfield should be different from a store somewhere in Yorkshire.”

Value chain Savers has done better, helped by what Lai calls “improved operational discipline” and consumers’ shift to value in the recession. In the past question marks have been raised about whether Savers should be absorbed into Superdrug – particularly after AS Watson moved 200 stores from Savers to Superdrug two years ago. But Lai says that the chain has a future on the UK’s value-focused secondary high streets. “At one time people were saying close it, but if you look at Poundland there is clearly a place for a chain like Savers,” he says.

Loyalty launch

The next big development on the agenda for Superdrug is the launch of a loyalty card, which Lai says is inspired by experience elsewhere within the AS Watson Group. Boots has had huge success with its Advantage Card and Lai says: “We will have a UK loyalty card in a year’s time. In the future no retailer will do well without a loyalty programme.”

AS Watson as a business is run in a style characteristic of its home territory of Hong Kong – very direct, straight-talking and focused obsessively on the numbers. But there is also a lot of cross-border work in order to maximise economies of scale. “If the Netherlands buys better the group’s volume will go through the Netherlands – we always take the global perspective,” says Lai.

But while the group remains firmly focused on being an international power, China is where AS Watson sees the big opportunity right now. And with its unique heritage, it appears well-placed to make the most of the development of this new global superpower.

Shanghai Surprises

It was the store that supposedly had a curse on it. When Marks & Spencer opened its first store on the Chinese mainland last autumn, everything that could go wrong seemed to, from customs problems preventing stock arriving to the tragic death of a customer on the escalators. The company was mocked for trying to sell Chinese ready meals to the Chinese.

A year on, the Chinese ready meals are still there, housed among an eccentric collection of ambient and frozen food products. Good news if
you want biscuits, wine or Yorkshire puddings, but not very much else.

In the general merchandise areas stock density remains low, but the density of customers is even lower – at midday on a Tuesday the store was very quiet. However, M&S has made tweaks and expects to take £12m in the store this year. It has changed the manager, altered the sizing
of clothes and put more dresses in.

“It’s better than it was – but not much better,” says one expat working locally, who says the food selection varies from week to week depending on what arrives on the boat.

It has proved challenging, but M&S remains confident of the potential of the Chinese market and plans to grow further there.

Certainly those Western retailers that appear to be prospering are those at the top end of the market. The eight-storey Westgate Mall gives an insight into what works. Brands like Burberry and Calvin Klein figure large in an environment a million miles away from the real Shanghai, taking advantage of the burgeoning wealthy class of the city. They may make up a small proportion
of the population, but their spending power is big and growing, and they have a real hunger for Western brands.

Territories AS Watson operates in


Hong Kong


























Czech Republic