Hello. Today, I'd like to talk about the offline channels of K-beauty. We now live in a time where the term 'untact' is spreading in news and our everyday lives due to the outbreak of COVID-19. It is time to look back on the journey of the offline channel and its current state. According to Fair Trade Commission's Franchise Information System, the number of cosmetics road shops was showing an increasing trend, recording 4,934 nationwide until 2016 (compared to 4,868 the previous year). But starting from 2017, the number began to drop by 3.2% and by more than 10% in 2018. On the other hand, health & beauty (H&B) stores, which first appeared with the name 'drug stores', are showing strong trend like in the US, Europe, Japan, and Southeast Asia. In 2010, the H&B market was in the KRW 200 billion range, which increased significantly to KRW 1.7 trillion by 2017. And the market is expected to grow to KRW 4.5 trillion in transaction volume by 2025.

In the 1990s, the main channel for beauty products was multi-brand cosmetics stores. The distribution network of such multi-brand cosmetics stores dominated the mid-to-low priced market, while the luxury lines were dominated by imported products mainly across department stores in Korea, when it opened its doors since the Uruguay Round. This started to change with the appearance of one-brand shops (OBSs) in the 2000s. The background to how mid-to-low priced one-brand shops appeared was because of consumers' needs for sophisticated brands and products as well as a consumption pattern that sought better containers and good-quality products to meet customers' higher expectations. The OBSs experienced fast growth. Behind the growth of OBSs, there was the specialization of production, branding and marketing by brands that began utilizing original design manufacturers (ODMs). It meant that the entry barrier was lowered. Since then, an amazing number of brands and products entered the market, sparking fierce competition. And fierce competition inevitably led to tremendous innovation.

Overturning the prediction of many who said that Korea will face a crisis when we open our markets in 1993, K-beauty was equipped with strong capability. At the height of the 2010s, many brands came out to the streets focused on penetrating the retail sector. Brand shops ensured their own manufacturing and distribution capability and became able to control the excessive discounts that hit their selling and administrative costs they had to offer pressured by the power of distribution. They also began to focus on spaces. And by 2010, there were winners and losers in the road shop market. The brands that became winners of the road shop market had what the Oracle of Omaha Warren Buffett called 'economic moat' and established a system to safely defend against new brands entering the market.

Since 2013, around the time the market struggled to grow with just the domestic demand of a country with a domestic market of 50 million in population, customers started flowing into the country like stars from the sky, following the hit drama series, "My Love from the Star", featuring Cheon Song-yi (played by actress Jun Ji-hyun). They were called Youke (meaning tourists in Chinese, 游客) flooding into Korea led by the Korean Wave (or Hallyu, 한류).

Since the 2008 financial crisis triggered by the US, the world's asset markets began to divide due to low growth and low interest rates. This impacted the trends in retail markets, including the beauty market. In other words, the market began to divide into two markets – the super high-end prestige and the cost-effective market. This trend hit most of the road shops that offered mid-to-low priced products. Also, new indie brands entered the market via ODMs leveraging platforms like Get It Beauty, Instagram, and YouTube. And contact points with customers expanded beyond the retail channels dominated by existing brands to mobile shopping and H&B stores. This change did not only impact cosmetics brands, but also the traditional retailers. As you all know, America's J. C. Penney, Sears, Macy's and other traditional big names that led the consumer market in the US for more than a century collapsed, while Amazon, which began as a mere bookstore, made huge advances achieving the largest market capitalization in the world (J. C. Penney filed for bankruptcy in the struggle during the COVID-19 pandemic, ending its 118-year history). In Korea, Naver, which was thought as simply a search engine, and Coupang, which offered deals collecting coupons, dominated online marketplace and direct buying online distribution market, taking over the entire transaction volume of the previous offline distribution market.

Such movement of the offline sphere becoming smaller was not the only trend in distribution. Conversely, online-based retailers started to enter the offline sphere successfully. In 2017, Amazon acquired organic foods supermarket Whole Foods Market, and China's Alibaba started to manage a supermarket specializing in fresh produce called Hema Xiansheng. JD.com also, through its affiliated company Dada-JD Daojia, provides one-hour delivery service of fresh foods across the country. Walmart, which its fresh food division accounts for more than 50% of entire sales, also achieved a turnaround through similar efforts, then started to enter the e-commerce market. This is a worldwide trend in distribution we are now seeing.

Underneath this trend of change, there is data on the behavior of customers in both online and offline channels and digitalization of offline channels. They may be physically offline stores, but they are no longer the same previous stores. They are now digitalized, changing in the direction to respond to customers' demands. There are different definitions around this like online for offline (O4O) beyond the previous O2O or omni-channel. But whatever the term is, the key to success lies with who creates the most optimal conditions in the most efficient manner for customers to enjoy shopping comfortably.

If you visit Melrose Avenue in LA, there is the Paul Smith's Pink Wall and the new hot spot Glossier. Glossier is a brand founded by Emily Weiss, power blogger of the blog 'Into the Gloss'. From when she began her blog in 2010 and recorded USD 100 million (approximately KRW 120 billion) in sales in 2018, only 4 years since her product launch, and until the company grew to be valued at USD 1.2 billion (approximately KRW 1.5 trillion), the brand only had two stores - one in New York, another in LA. (Glossier plans to open 5 pop-up stores including one in Miami). The brand's offline store strategy is not to create an optimal space for sales, but a space for customer experience like Disney's Disneyland. An interview with the founder, Emily Weiss, shows a glance into her philosophy. She said, 'I hope to create a store that customers visiting the US from the UK want to come and feel that they are connected to the brand. I plan to run the offline store like a showroom with a single goal of strengthening customer engagement'. This is a strategy to make customers relate to the brand. It can be interpreted as a commitment to stick to the essence of the company, connecting individuals' interest and passion for beauty, or peer-to-peer (P2P) strategy.

On the other hand, Sephora takes on a different omni-channel strategy to Glossier. Sephora merged its digital and physical retail teams to create one 'omni-retail' department. It introduced augmented reality (AR) and artificial intelligence (AI) in its stores. One example is the 'Color IQ' developed in collaboration with color research institute Pantone. Color IQ is a device that captures a customer's skin tone and recommends appropriate products to that tone. Also, once data is entered, it can be pulled when the customer visits a store again. Sephora recommends not only makeup items, but also the perfect products to customers through Skincare IQ and Fragrance IQ. There are more examples of leveraging IT in beauty. Customers can use Visual Artist to virtually test lipsticks, eyeshadows, and blushers without having to try them on directly on the face.

Accumulated data is all stored online and ultimately can be used to predict long-term demand of products customers want.

Many beauty YouTubers were excited to hear that Sephora opened a store at Parnas Mall in Seoul in the autumn of 2019. Their reviews on visiting the store talked about one common element they loved – the MD composition and sourcing. They loved that they were now able to buy the various brands and products that were only available through direct purchasing at the same price as direct buying at a time when the trends of the millennials and Gen Z were in sync through mobile. It was almost a repeat of when in 1993 non-tariff barriers were abolished as a result of the Uruguay Round and various brands and products flew in from overseas. One notable point is the loyalty program for customers called Beauty Insider, which accounts for 77% of Sephora's sales. If a customer joins the program in Korea, he or she can enjoy the same benefits at a store in another country, giving a sense that beauty users in Korea are not discriminated and are treated the same. This policy sends a message considering that customers now cannot understand or accept that the prices in the domestic market, prices of direct purchasing or local prices are different as the world becomes more interconnected. It is important to shift towards an omni-channel structure for offline channels to endure recessions. But, ultimately, offline stores must offer good content through sourcing, which is the essence of offline stores, and good customer experience in order to survive.