Dior, La Mer and Estée Lauder Are All Moving to the Mall's Second Floor. What Does That Mean?

In the e-commerce era, brands have given their boutiques a bigger job: to stand for the brand's image. VIP customers drop by to pass the time, and the brand builds a bond with them. Where they end up buying is not the boutique's main concern.

Lujiazui in Pudong New Area is one of Shanghai's most expensive business districts, and IFC Mall sits right in it. On its second floor is a handful of big-name cosmetics stores, all spacious and elegantly fitted out. Dior Beauty is one of them.

The 140-square-meter space is divided into three sections. The left wing is set up as a fragrance area, with bottles of every size on display. The two sections on the right are for makeup and skincare: a fuller product display, and a lounge that looks like a place to take afternoon tea. On the wall, the classic J'adore advertisement starring the Oscar-winning actress Charlize Theron plays on a loop, as if restating the promise of a refined life. "This is our brand's 'flagship store,'" explains a BA (Beauty Advisor).

In recent years, flagship stores like this seem to be multiplying. Without exception they appear on the second floor or the first basement level of newly opened shopping malls. They have more space than traditional counters, display the brand's full product line, and are fitted out with considerable care. Some even offer private spa services.

So what does a flagship store like this actually mean for a brand? Why would a brand, in a mall where rent can reach 100 yuan per square meter per day, pass up an efficient, sales-driven counter and instead fill its store with a whole row of sofas for guests, even spa beds?

Dior Beauty is not an isolated case. Next door, La Mer and La Prairie also moved into IFC as brand "flagship stores." And at Grand Gateway 66 in Xujiahui, another Shanghai mall that draws millions of visitors a year, an "upgrade" has been under way for the past few years. Some brands have moved from the first floor to the second, and the first floor now belongs to top-tier luxury fashion and leather goods brands. Cosmetics brands that arrive later also tend to land on the second floor. Today Bobbi Brown, SK-II, Estée Lauder and Burberry Beauty have all gathered there, each in its own standalone store, and none of them small.

"Once you become a member, you get a free makeup course of five 15-minute sessions. After that, if you want to keep learning, you can pay for more complete makeup courses," says a Bobbi Brown BA. The brand is known for color cosmetics, and its professional makeup courses can be booked through WeChat. It also offers one-off services such as full-face makeup and eyebrow shaping.

Some newly opened malls, such as iapm on Huaihai Road in Shanghai, have set aside enormous space on the first basement level for the "boutiques" of mid- to high-end cosmetics brands, with refined décor, complete product ranges and better service. In the Benefit boutique, a BA is giving a customer a wax brow treatment, and another customer who has just walked in greets her like an old friend. "Almost everyone who comes here for wax brows has bought an annual or half-year card," the BA explains.

Opening a flagship store (boutique) on a mall's second floor or first basement level seems to have become the trend. These stores usually carry a fuller range of products and offer a higher level of service. The wide space leaves room for more service areas, and the BAs, who have been screened at several stages and trained in professional service (there are often only two of them), do not keep pushing products on customers who walk in. At the MAKE UP FOREVER flagship store, our reporter tried one of the brand's star products. During the trial the BA offered only a few personal skincare tips and showed no sign of pressing the customer to buy the product being tested.

When QDaily called the major brands to ask what standalone stores mean to them, every one gave the same answer: they are meant to deliver better service and experience, express the brand's identity fully and accurately, and make consumers more willing to come to physical stores.

Commercial real estate professionals, however, see the trend as cosmetics brands adapting to changing shopping habits, pushed along by a broader restructuring of the department store sector. "Cosmetics brands are opening bigger and bigger stores now. Another important reason is the decline and transformation of department stores. More and more shopping malls only support standalone stores," says Zhu Zhaorong, vice chairman of Savills.

The decline of department stores is now an undisputed fact in the industry. According to the latest data from RET's China commercial real estate research center, 38 large chain department stores have announced closures since 2014. At the start of 2015, department stores in Tianjin, Beijing and elsewhere announced they were shutting down. Department store sales make up a smaller and smaller share of total consumer spending, a clear sign that people rely less and less on department stores for their shopping.

Chart source: CBRE Research, "The Evolving Landscape of China's Retail Industry, Report Series Part 2: Department Stores"

The reasons people have shifted from plain shopping to experiential consumption (or what might be called lifestyle consumption) are complicated. "Now that people can buy things online, the only way to get them into a mall is to improve the experience. Consumers' shopping habits have already changed, but department stores, limited by floor area and other constraints, cannot meet the demand. Shopping malls have more space and more room for leisure and experiences," Zhu Zhaorong points out. E-commerce is affecting more than individual brands' physical stores.

"The decline of department stores also has to do with their rigid operating model. For brands in a department store, the store handles everything: it does the fit-out uniformly and takes a cut of sales (mostly above 20%). Operating costs are low, but during holidays brands are forced into uniform promotions. Intime, for instance, runs spend-and-save campaigns every National Day and May Day holiday, which squeezes brands' margins considerably. Shopping malls are freer. They charge rent or a sales commission, whichever is higher, and leave everything else to the brand, which keeps its own profits and absorbs its own losses," Fan Hongjuan, head of CBRE's commercial services department for East China, told QDaily. "What awaits department stores is closure or transformation. There is no third way."

Cosmetics counters, naturally, shift as the department store sector changes. Follow the department stores, and all you can run is a counter; follow the shopping malls, and you open a standalone store. "Which floor a cosmetics store ends up on depends on the mall's own plan. The brands themselves have very little say," says Fan Hongjuan.

Both the change in consumer habits and the decline of the department store track closely with the rapid growth of e-commerce.

On April 21, La Mer opened on Tmall and sold 3.2 million yuan worth of products in just three days. Last year, Estée Lauder, SK-II, Lancôme and other cosmetics brands each opened flagship stores on Tmall, and within days matched a month of their physical stores' sales. Shiseido, SK-II and L'Oréal have also authorized flagship stores on JD.com's Beauty Street.

Cosmetics e-commerce platforms such as Jumei and Lefeng are also scrambling for cosmetics supply through every channel they can, to say nothing of the many other e-commerce platforms and online shops, large and small, genuine and fake. Whatever their quality and whatever their relationship with the brands, these platforms all bring the major cosmetics brands considerable sales.

A few years ago, when Estée Lauder and Clinique launched their official online stores, the brands said the goal was to serve places their counters did not reach, such as consumers in remote towns. That made e-commerce sound like just an extension of one of the brand's channels: a way to reach new consumers, or to use online big data to decide which cities should get physical counters.

But does e-commerce actually affect offline business? Put differently, how much does it matter to a brand's sales? To find out, we interviewed Lu Xiaoming, founder of the cosmetics brand Youjijia. He told QDaily: "iResearch has a report on cosmetics. Across China's cosmetics industry as a whole right now, online sales account for roughly 15% of a brand's total sales."

What does 15% really mean? Take Uniqlo, a fast-fashion brand with a large number of physical stores and a widely praised e-commerce operation: its figure is only 6%. The 2013 China Online Shopping Market Research Report states: "Online consumption's share of total retail sales of consumer goods has risen year by year, from 1.1% in 2008 to 7.8% in 2013." In other words, in 2013 online shopping accounted for an average of just 7.8% of spending across all channels and all categories.

Chart source: CBRE Research, "The Evolving Landscape of China's Retail Industry, Report Series Part 2: Department Stores"

Moreover, big-name cosmetics brands started selling online only two years ago, and many still refuse to. "That 15% will keep rising. My guess is that the big-name brands won't let e-commerce's share get too high, but it should eventually reach around 30%," Lu Xiaoming adds. "A few brands have been online for only six months and their growth has nearly doubled. Online sales now make up about 12% of their total. Next year I estimate it will reach 30%, and within five years it should reach 50%."

Whether e-commerce has really dealt physical stores a devastating blow is a question on which the industry is divided. What no one can deny is that e-commerce still has enormous room to grow as a sales channel.

Bain & Company's 2013 online shopping report found: "Opening authorized flagship stores on mainstream e-commerce sites increases consumers' total spending on high-end brands, and the tendency to buy online keeps getting stronger."

Cosmetics are standardized products. Unlike clothing, they do not depend on body shape, bearing or skin tone. People buy them again and again, and once you have tried a product and liked it, you can simply order it online. They are almost as well suited to online shopping as books.

This puts physical stores under heavy pressure. They must pay rent and hire staff, their display space is limited, their location confines them to customers within a few kilometers, and their sales per square meter keep falling. The only reasons shoppers buy offline, as the Bain report puts it, are "worry about buying fakes online" and "the wish to experience and touch the product in person."

If you are already loyal to a product, a few taps on your phone and you can sit back and wait for the courier. But if you are hesitating before you buy, and want to smell a new fragrance or test whether a face cream really is as light, moisturizing and non-greasy as people say, then with today's technology you still have to go to a store in the mall and try it yourself.

Online is for selling, offline is for experience. A customer who has a good experience in a store will naturally reorder the product online, and a customer who likes the look of a new product online will find time to try it in a store. For a brand, online and offline stores are taking on distinct roles, yet they feed each other and remain closely linked.

E-commerce has sped up the flow of goods and, indirectly, retrained consumers' shopping habits. People no longer want simply to buy and sell. "They want lifestyle consumption" is a line industry insiders repeat again and again. "Even when they could complete the purchase online, plenty of customers still arrange to browse the store with their girlfriends on weekends, and they always end up taking a few things home."

May (a pseudonym), who works for a French luxury cosmetics brand, told our reporter that the brand divides its physical stores into two types: ordinary "counters" and "boutiques." Counters have always existed; boutiques are larger and do more. The stores now appearing on the second floors of shopping malls are all "boutiques." The largest boutique is also called the "flagship store." Every material in its décor is top grade; even the glass was custom-made in Italy and imported. On opening day, the brand's global CEO attended in person.

All this investment is certainly not just about selling a few more bottles of perfume and foundation. In the e-commerce era, brands have given boutiques a bigger job. A boutique is the brand's shop window to the world, expressing its image and giving VIP customers a place to drop by and pass the time whenever they like, leaving them comfortable and relaxed. Where they eventually buy is not the boutique's concern. As long as you leave with a good feeling about the brand, buying it online when you get home is perfectly fine.

The brand now has dozens of boutiques across China. These pleasant spaces are where each city's socialites and wealthy wives chat with their girlfriends in their spare time, and where the brand builds a bond with its customers and keeps them happy.

Physical cosmetics stores cannot be transformed overnight, and problems inevitably surface along the way.

A BA at the Estée Lauder store on the second floor of Grand Gateway 66 told QDaily that customers who buy from Estée Lauder's Tmall flagship store or its official website cannot become brand members. That means they cannot get the free full-face makeup or spa services that a single in-store purchase would earn. Online and offline are clearly not yet fully connected.

If the big cosmetics brands want to compete on service, the question is how to raise its quality through actual management policy. Above all, how do you get boutique BAs to put real effort into service? Bear in mind that the vast majority of cosmetics BAs today are paid on sales commission. If good service does not bring BAs real income, then no amount of talk about service is likely to produce lasting results.

At the MAKE UP FOREVER flagship store on the first basement level of iapm, a BA revealed: "My pay is no different from a counter BA's. It's just that working in a flagship store is a bit freer. Nobody from the department store comes round to check on us, and there's less foot traffic than at a counter, so I can really look after the customers." Does that mean the brand's BAs get a fixed salary unrelated to sales? The BA would neither confirm nor deny it.

At the Dior flagship store on the second floor of IFC, no one tries to sell any products during spa services. Only after the customer has finished does a salesperson from the front of the store step in to introduce products.

May told QDaily that the company keeps reinforcing BAs' commitment to service in various ways. At internal meetings, for example, someone might share how she gave a customer thoughtful service and became her friend, after which the customer got into the habit of dropping by the store and picked out products herself without any recommendation.

"The pay system hasn't changed yet. Some in the industry use fixed salaries, but not many," May said. "Material incentives alone won't get BAs to deliver good service. You have to change the way they think. There are always some smart BAs who love service, and they gradually stand out."