Hello, everyone. Spring is here as we hover between 'social distancing' and 'cherry blossoms in full bloom'. Let us all practice social distancing even if it may be challenging and let the spring of 2020 pass by so that we can return to our normal lives in 2021.

Social distancing has become a hot topic across the world. In such challenging times, we have seen the videos on social media such as YouTube or Instagram of the residents of Chicago, Illinois dancing to club music on their balconies or similar events across the balconies of Italy as a way to keep up morale. Another term we hear a lot as much as social distancing these days is 'untact'. Most people as well as many experts say that there will be more and more untact consumption, production, and culture in the post-coronavirus world. That means working from home, teleconferencing, choosing domestic travel over overseas travel or small local stores over large shopping malls, and a complete shift to e-commerce.

According to 2019 online shopping trend by Statistics Korea, last year's online transaction volume of cosmetics grew by 25% compared to previous year to a total of KRW 12.3 trillion. (KRW 3.5tn (2015) → 5.2tn (2016) → 6.3tn (2017) → 9.5tn (2018) → 12.3tn (2019)) Compared to 2015, the volume grew by 3.5 times. The entire online shopping transaction amounts to about 134.5 trillion, meaning that the share of cosmetics shopping accounts for quite a high percentage of 9.1%. Globally, fast-moving consumer goods (FMCG) category is growing quickly in the digital market.

Global beauty company L'Oréal announced in its 2019 annual report that its 2019 e-commerce sales grew by 52.4% compared to previous year to EUR 4.6 billion (about KRW 6tn), accounting for 15.6% of total sales. Interesting fact is that L'Oréal is investing half of its media budget in digital channel, based on the company's strategy to manage its brands as digital powerhouses.

There are apps that allow users to 'try-on' makeup as if they were testing real makeup like the Makeup Genius by L'Oréal Paris, an app using augmented reality (AR) that was released in 2015, as well as SNOW enjoying an increasing number of users and LOOKS developed by SNOW. As such, there are more reasons to use these technologies by further accelerating the changing digital technology. Due to the outbreak of COVID-19, Sephora and Ulta Beauty banned the use of testers in stores across North America. In the post-coronavirus world, the way we did things will change significantly. Even when offline stores start to reopen and return to normal, there will be small untact elements within them. When I was young, there were mineral springs in the mountains of villages, where people would draw water from and drink from the blue plastic bowl placed at the spring for everyone to drink from. But now, the blue bowls have completely disappeared as will many of the way we did things in the past. In other words, even if customers visit actual stores, they will try products using apps meaning that it will be the same customer experience to when customers don't visit the stores.

An important part of L'Oréal's e-commerce strategy is that L'Oréal closely manages its e-commerce channel by monitoring its products and that it knows that 'price' is the most important factor to customers using e-commerce channels keeping to its strategy to maintain the same prices across all channels such as flag shops or overseas direct purchasing. L'Oréal understands that prices must stay the same for other strategies preceding sales such as identifying customer needs, content and communication strategies to work effectively.

In China, where YouTube is banned, 'Douyin (抖音 , known more as TikTok)'¹⁾ takes its place. Of course, it is a different service from YouTube because it comes in the form of delivering content in a short period of 15 seconds. One thing to take note of is that unlike other existing videos that have context, videos on Douyin are mostly 'short and impactful' without context. Like in this case, the way we communicate through digital media has changed from the way we communicate offline.

1) Douyin and TikTok are of the same, while there is a slight difference in content as each server are differentiated into global and local Chinese versions.

Searching for reviews or related content before we go to a new restaurant or buy something has become an ordinary part of our lives. The digital world, especially, creates an environment for us to share reviews. In China, a new economic concept called the 'seeding economy (or 种草经济 zhongcao economy in Chinese)'. Seeding economy refers to the economy generated by the action of inducing people's desire for consumption by recommending good products. And the Wanghongs we know (Key Opinion Leaders (KOLs) or Key Opinion Consumers (KOCs)) are the creators leading the seeding economy.

The reason why this trend is important in the beauty industry particularly is that as of 2018 the influence of KOLs increased compared to previous year by 92% in the food industry, 81% in the cosmetics industry, 29% in the automotive industry, and 27% in baby and kids products. The numbers show that the beauty industry's dependency on KOL marketing grew by a lot. Example of brands that succeeded based on KOL marketing following the appearance of C-beauty in China, where K-beauty once was all the craze, are 'Perfect Diary' and 'HomeFacialPro (HFP)'. In Korea, which introduced mobile shopping in the 3G era when Apple's iPhone was launched in 2007, there are still a lot of product content that are centered around static images. On the other hand, in China, which experienced and expanded mobile shopping in the 4G era, e-commerce based on live broadcasts has become the major trend instead of content that uses static images.

The platform that grew based on this trend is Douyin and the most popular KOL is Austin, known as the 'lipstick oppa'. During his 5-hour-long live broadcast on Chinese shopping day, Singles' Day, Austin sold 39 products to 31.12 million viewers, recording CNY 1 billion yuan (about KRW 160 billion). This is a new type of commerce based on 4G, which allows users to view videos on mobile environment.²⁾

2) Seo Dasol, Top 5 Marketing Keywords that Shook China in 2019! KOTRA ＆ KOTRA Overseas News, https://news.kotra.or.kr/user/globalBbs/kotranews/782/globalBbsDataView.do?setIdx=243&dataIdx=179509

At one glance, e-commerce and digital transformation seem to be similar concepts. Digital transformation means to digitalize the overall business by combining digital technologies with the existing way of business, while e-commerce refers to the selling by suppliers and purchasing by consumers that occur in the distribution process. The two terms have different definitions, but digital transformation also comes from the same context in that it is an attempt to contribute to sales activities in the final stage in a company's commercial activity.

Let's take a look at a few companies that are known for their success in implementing digital transformation in the consumer goods industry although they may not be beauty companies. The first is Starbucks, which successfully combined IT and coffee, and the second company I'd like to talk about is Nike, which connected exercise and sneakers using IT.

Starbucks manages selecting store location and efficiency of store management using its 'Atlas' program. Atlas manages the distance from commercial district, revenue, population density, and traffic to identify good locations. By collaborating with Microsoft's IoT solutions, the program reduces the cost of maintenance by identifying and monitoring the conditions of coffee machines in real time and manages recipes customized to VOCs received on site based on data ensuring fast scalability and stable quality management.

If Atlas is about combining digital with business from a supplier's standpoint, the digital transformation from a distribution standpoint would be Starbucks 'digital flywheel' strategy. Siren Order, Starbucks' mobile ordering system we use, is a model that began in Starbucks Korea and spread to the US. The company's digital flywheel strategy is a 4-step strategy of ① Personalization → ② Ordering → ③ Payment → ④ Rewards. It is a strategy to lock-in customers by enabling them to order and pay and continue to receive rewards through a customer loyalty program customized to the accumulated data from Starbucks app Siren Order. It is about building a virtuous circle of collecting data, managing individual customers, and thereby further inducing customer loyalty beyond simply pursuing a shift from offline payment to mobile payment.

In Nike's case, it is a direct-to-consumer(D2C) model. Nike announced that in 2019 it recorded USD 39.1 billion (about KRW 47tn) in sales, and that 32% of sales came from D2C.³⁾ Nike's e-commerce sales also grew by 36% compared to previous year. The company's digital channel shines especially in the outbreak of COVID-19. It strengthens the inflow of customers through its pre-launch only offered to Nike members and by managing exclusive products, while the company focuses on customer management providing Nike Customer Experience (NCX) at Nike mall. Here, the additional value spreads to offline channel, selecting partners that can offer the Nike experience offline and creating an environment that allows for that exclusivity leveraging on its power in having a D2C channel. Nike also links this to a consumer-to-business(C2B) model by applying data gained by being close to the everyday lives of customers through Run Club and Training Club in its product development. After predicting demand, Nike sells products on its D2C channel and completes a platform of enjoying the profits alone. The most important lesson Nike gives to manufacturers of even different industries is that although expanding e-commerce quickly by leveraging on others – meaning, many e-commerce platforms – is very important, a D2C model that can build customer data, accurately predict demand based on that data, and fully and flexibly control selling, general and administrative expenses in the sales phase should be the end goal in protecting a company's profit especially in crises like COVID-19, described as World War III.

3) Kim Bogyeong, , Korea International Trade Association (KITA) Institute for International Trade, 2019, issue no. 41

There is a common feature among companies that have succeeded in achieving digital transformation. That is, they utilized IT to strengthen the nature of their businesses and meet customer needs and did not lose sight of its nature by just being IT-oriented. For example, beauty company L'Oréal did not forget end users' trouble with testing products when combining with IT technologies, while F&B company Starbucks focused on providing convenience in ordering and identifying customer needs. Nike, the workout and sporting goods company that offered membership benefits launching exclusive products by working out together and delving deep into the lives of customers, did not use IT as a standalone technology advancing on its own, but rather pursued digital transformation with a two-pronged approach towards a single goal of strengthening the nature of its business.

A transition towards digitalization was an opportunity for many but it was also a crisis. The strong model of gaining economic benefits by building a solid sales network based on existing sales capacity and leveraging that pipeline struggled in the face of a new model-based channel of e-commerce and social media, and more and more companies that failed to adapt to the change temporarily experienced challenges. On the other hand, there were companies like L'Oréal, Nike, and Starbucks. Of course, the three companies did not achieve digital transformation overnight. L'Oréal invested almost a decade, recruiting around 1,600 employees, and establishing new teams since 2010 in pursuit of digital transformation. Since Howard Schultz returned to management in 2008, Starbucks recruited talented people in the field of cloud, big data, and mobile, investing in more than 10 years⁴⁾. And Nike, too, created a new division called Nike Digital Sport since 2010⁵⁾ and after company-wide effort, its D2C sales grew from a mere 16% of total sales in 2012 by 20% CAGR every year until 2019, reaching 32%. These companies that succeeded in digital transformation also went through trial and error over a long period of time, invested in capacity and resources, and progressed steadily in one direction to, in the end, achieve digital transformation optimized to their customers. If we recognize that the post-coronavirus world or the era of untact in 2020 is not a crisis but an opportunity for us to become a great company once more and continue to pursue combining the nature of our business and new technologies, we will surely rise once again. Today's column looked at digitalization quickly approaching us as change in our everyday life and the challenges of the beauty industry. I hope that fellow members of Amorepacific stay healthy in the continuing COVID-19 pandemic and enjoy the warm weather of spring.

4) [Biz Focus] Turning to Starbucks for Digital Innovation, Maeil Business Newspaper, https://www.mk.co.kr/news/business/view/2019/01/6883/
5) Cases of Successful Transformations Overseas | 'Divide and Conquer' transformation of GE, Nokia and ING by restructuring manufacturing, shifting towards services and strengthening software, Maeil Business Newspaper, https://www.mk.co.kr/news/economy/view/2017/02/78620/