In a meeting last week with Nextinsight, Aries Consulting and Greater China fund managers, Group Financial Controller Mr. Andy Chan said that the Hong Kong-listed firm (www.nblife.com) still enjoyed 80% gross margins for some key product categories and new franchises would carry the day this year.
As of December 31, 2009, the company had a total of 1,606 franchisee spas, with 18 spas and 47 counters directly operated by Natural Beauty.
There were also 15 counters entrusted to reputable operators.
A total of 184 new stores were opened and 510 stores were closed during the year under review.
The closure was mainly due to franchisees’ violation of franchise terms as concluded by a store audit carried out during 2009.
Franchisees who sold non-Natural Beauty products, failed to achieve minimum targets or failed to attend Natural Beauty's free and compulsory training programs would have the franchise arrangement terminated.
“Through the elimination of those non-compliant stores, a good and consistent franchise network is maintained, thus ensuring the service quality for consumers,” the company said.
And Natural Beauty’s Group Financial Controller Mr. Andy Chan emphasized that quality control was the top priority of the company.
“We make 100% of our own skin care products in order to ensure quality and consistency. This is consistent with our position as a premium to super-premium type brand,” Mr. Chan said.
Challenging 2009, Promising 2010
With its high margin growth model and premium product line of beauty goods and spa services, Natural Beauty realizes that it is particularly vulnerable to economic downturns, when even well-heeled clients are more likely to more closely monitor their billfolds and control what some might consider discretionary spending.
This phenomenon was primarily responsible for the company’s revenue falling 9.2% last year to 538.1 mln hkd and net profit shedding 37.3% to 149.6 mln hkd.
And the fact that the group lost a net 326 stores last year in a cleanup of non-compliant partners certainly took a bit out of the top line.
But Natural Beauty was confident that this “housecleaning” exercise, and the rapidly improving economies in Mainland China, Taiwan and Hong Kong/Macau will make for a much brighter 2010 and beyond.
“We are expecting another 258 new stores to open this year, mainly in the second half,” Mr. Chan said.
Natural Beauty went public on in March 2002 at 0.55 hkd per share, and was last trading at 1.4 hkd with a P/E ratio of 18.9x.
Store growth – quality store growth – was critical to a company that relied on brand prestige to drive margins.
He also said that startup fees were a big boost, with around 30,000-50,000 yuan needed to join Natural Beauty’s sales network from a counter POS venue, and at least 500,000 yuan required to open a Natural Beauty spa, with the company gaining from continued sales of its products and the one-off startup fees for sites operated under its franchise model.
Mr. Chan added that the average spa needed at least 150 square meters to be competitive.
And 2009 did have some silver linings, despite the difficult operating environment.
“The group’s average annual sales per store remained stable at 294,000 hkd, and we do have around 80% gross margins for many product categories,” he added, saying overall gross margins for the group also stayed stable at around 77.2%.
If the write off and special provision of 14.9 mln hkd made on inventories were excluded, the overall gross profit margin would be approximately 80%.
Operating margins and net margins “remained healthy” at 34.7% and 26.7%, respectively, last year, the company added.
Mainland China would continue to be the companies main focus going forward.
Last year, the PRC accounted for 73.5% of total revenue, Taiwan 24.6% and Hong Kong/Macau/Malaysia just 1.9%.
Gross profit margins in Mainland China did not in any way lag behind their richer neighbors in Greater China, and in fact the opposite was true. Gross margins in the PRC last year were a market-leading 81.0% and operating margins were 48.5%.
“Our selling prices are much higher than those in supermarkets – so we attract premium customers,” Mr. Chan said.
This compared to comparative margins of 71.3% and just 12.0% across the strait in Taiwan during the same period.
"The threat of global recession affected consumer sentiment in China last year. Product sales in the PRC dropped by 18.7% year-on-year in the first half, yet the decline was stabilized in the second half.
"We found that there is a degree of recession-proof quality to our industry as beauty and health are increasingly considered required expenditures,” Mr. Chan said.
It’s a good thing Mainland Chinese consumers feel that way, because Natural Beauty has been in the PRC market since 1992 and one of its executives has had experience opening hundreds of Kodak stores in the PRC for many years, a skill which Mr. Chan said is transferrable to Natural Beauty’s needs.
“Our chairman has a dream to allow people to hear our name around the world and say 'Oh, that’s a Chinese brand'.”
See also: BONJOUR: Tapping the PRC consumer... in Hong Kong