Amorepacific asserts that “there is no plan to artificially change the current system”
It may be a new opportunity for small and medium-sized brands to enter offline... Prospects for the revival of 'road select shops'
The off-line road shop (Roadshop channel) system, which has been passed down as 'Olive Young & Others', is facing a whirlwind of upheaval.
On the 20th, LG Household & Health Care formalized its plan to convert the offline franchises (Nature Collection and The Face Shop) system that it had maintained so far into a 'supply contract'.
To summarize the key point, this change in the contract structure means that franchisees that have been able to sell only LG Household & Health Care cosmetics brands and products will be able to sell other brands and products in their stores.
To put it more simply, it can be expanded and interpreted to mean that the revival of offline stores in the form of 'specialty stores' prior to the 2000s may be possible.
Domestic cosmetics offline channels have changed to a 'specialty store → brand shop → Olive Young & other brand shops' system, and since 2017, the structure of 'Olive Young, Lalavla (Watson's), Rob's H&B Store VS Brand Shop' has been maintained for a while. is currently solidified as 'Olive Young & Others'.
As LG Household & Health Care announces a change in the franchise contract structure, changes in the domestic cosmetics sales channel are expected to become inevitable. At the same time, the movements of the rest of the companies, including Amorepacific, which are currently maintaining the road shop (affiliate) system, are also emerging as a matter of keen interest.
Concept of LG Household & Health Care
LG Household & Health Care, which has 406 offline franchises, including Nature Collection and The Face Shop, has formalized a plan to convert the current “franchise contract” into a “product supply contract.”
Regarding this plan, LG Household & Health Care said, “The reality is that the current single-brand shop (road shop) is in crisis due to changes in consumer purchasing patterns centered on the pandemic situation over the past three years. We decided that a change from the current franchise contract structure to a product supply contract method that removes restrictions on the handling of other companies’ products is a more realistic win-win solution.”
At the same time, it was also confirmed that LG Household & Health Care is in the process of consulting with offline franchisees to change the contract structure.
LG Household & Health Care estimates that the process of changing a franchise contract to a product supply contract will cost at least 10 billion won.
The compensation plans of LG H&H, which can be confirmed so far in relation to the contract change, include △ interior improvement expenses △ support for early settlement expenses such as 50% of store rent for 9 months △ refund of franchise fees paid △ return of long-term unsold inventory such as color cosmetics △ signboards Including replacement.
In addition, △ maintenance of the current promotion and policy operation method for the next two years when a product supply contract is made △ support and compensation in case of wanting to close the business without switching to the product supply contract △ support for disposal and return based on the contract △ support measures such as payment of rent for 3 months prepared situation.
Regarding this decision, an official from LG Household & Health Care said, “The transition from the existing franchise contract structure to a product supply contract is a plan that expects a cost of at least 10 billion won, and this is a strategy for coexistence between the company and the existing franchise owners.” Here, CEO Lee Jung-ae made a decision that business restructuring could not be delayed any longer.”
Will a new wind blow in offline channels?
Regarding LG Household & Health Care's latest decision, the cosmetics and distribution industries are overwhelmed by the response of 'a signal of change in the offline (road shop) channel'.
In other words, △ Olive Young’s monopoly system is progressing more strongly in offline channels △ A single brand of a single company cannot satisfy the changing purchasing patterns of consumers △ Online shopping beyond online shopping malls e-commerce and live commerce In a situation where the expansion of channels and the combination of online and offline continues to evolve, the change in the existing road shop system was only a matter of time.
It is a perception that it only depended on when and which company made the decision to change LG Household & Health Care.
It is only natural that other companies, such as Amorepacific, Nature Republic, and Tony Moly, which maintain a road shop franchise system, are also paying attention to the movements.
Regarding this, Amorepacific said, “It is impossible to evaluate other companies’ business structure changes and decisions.” I don't have it,” he said.
A high-ranking official from Amorepacific said, “We believe that if brand power exerts its power in the market and consumers, the brand shop will also have a chance to survive.
Resurrection of the 'specialty store' system? The birth of a new distribution?
Starting with LG Household & Health Care's announcement of a change in the affiliate store system, the brand shop system is highly likely to transform into a new type of road shop. Accordingly, related changes, including organizational changes of each company, are also inevitable.
There is also a prospect of whether the specialty store system before 2000 can be revived. However, the prerequisites for this are that △brand and product composition △store environment △customer service △on-offline connectivity must at least approach the current level of Olive Young.
This is because consumers' level of judging brands and products and purchasing patterns have far surpassed those of 20 years ago, and it is impossible to secure competitiveness without connecting to purchases through online channels.
With the exception of Olive Young, small and medium-sized brands, which are in a situation where it is 'almost' impossible to enter offline, are expected to act as a new opportunity. The background is that it is irrelevant to say that there are no offline channels other than Olive Young other than the current single brand shop.
However, it can also be interpreted as meaning that the barriers to entry and expansion of offline channels for small and medium-sized brands have been lowered as an opportunity factor has arisen that existing brand shops will be able to sell other brands and products from LG H&H's switch to supply contracts. .
Along with this, although it is a new road shop, there is a possibility that the sales behavior targeting the former specialty store will be revived. Although a new supply system has been established due to changes and developments in the logistics environment, there is also a possibility that the former 'agency system' will appear because there is also a real-world task of whether the head office can manage all road shops.
In the case of small and medium-sized brands with relatively weak brand power, the expectation that expedients (back margins, etc.) to ensure adequate margins for road shop owners may revive is persuasive.
The eyes and ears of the entire cosmetics industry are focusing on one place, whether the road shop system that cannot avoid the turbulence of change and the 10-year cycle theory of cosmetics distribution will be proven once again.