For over a decade, I have been closely following Watsons. It is one of the brand chain retail enterprises I have visited most frequently during my store inspections across the country. I also pay close attention to information about Watsons. Whether it is its strong product organization and procurement capabilities, its powerful product and operational innovation, or its robust store management, Watsons has become a model for industry enterprises to learn from. In recent years, many shopping malls and department stores have been proud to bring Watsons into their establishments.

Watsons started as a small pharmacy founded in 1828. After being acquired by Hutchison Whampoa, owned by Asia's richest man Li Ka-shing, it developed over the years into a global giant in personal care, beauty, and skincare retail. However, from a data perspective, the myth of Watsons over the past two decades has collapsed.

Recently, according to the latest financial report, although the number of Watsons stores in China increased by over 400 in 2016, overall performance declined by 3.82%, with comparable store sales down 10.1%. At the same time, the former CEO of Watsons China, Luo Jingren, resigned... These circumstances have pushed Watsons under unprecedented pressure. Watsons announced that Luo Jingren, CEO of Watsons and ParknShop China, resigned for personal reasons and would officially leave on July 1, 2017. His successor is Gao Hongda, the current Chief Operating Officer of Watsons China, who will take over on April 1, fully managing Watsons China's business, and will complete the handover with Luo Jingren over the following months.

This is a change of leadership that is both unexpected and reasonable. Unexpected because Luo Jingren was a meritorious figure in expanding Watsons' territory in China, and now he resigned directly without promotion or transfer; reasonable because the significant decline in performance in recent years and the creation of the COO position for Gao Hongda last year seem to be paving the way.

In my observation of Watsons and ParknShop, I feel that from the perspective of traditional retail thinking, it is worth learning from in many aspects. My personal deep insights include the following:

----Clear positioning: Watsons' target customer positioning is very clear. This clear positioning conveys accurate information to customers. Analysis shows its target customers are basically locked onto female customers; aged 25-35; petty bourgeoisie, white-collar workers, and wealthy women; focusing on personal life, single consumers plus small family daily basic living needs; fashion-conscious people. In recent years, it has also tried to expand its target consumer group, attempting to attract men of the same age: tall, rich, handsome, and young stylish men. But in its stores, I feel this has not achieved its goal.

This is very different from the unclear positioning of many of our current retail stores.

----Customer-centric business organization: I feel Watsons' business approach is very clear: first determine the target customers, then design stores, organize products, operations, and promotions around them. In Watsons stores, you strongly feel that everything in the store fits its target customers perfectly. Whether it is the fashionable store design, product assortments organized by life scenarios, flexible consultant-style shopping guidance, or highly targeted membership marketing.

In these aspects, Watsons leaves general retail enterprises far behind.

----Store design with advanced concepts: The Watsons store design I have experienced and learned about is very concept-driven, with every design detail carefully considered. Watsons overall implements a fashionable and humanistic store design concept, with open entrance designs, sufficient aisle width, low shelves, flexible display fixtures, and product display organized by life zones, giving an overall high-end feel. Even the placement of the cashier counter is full of knowledge: Watsons' cashier is located deep in the store, a conclusion drawn from scientific analysis, with many insights, including how far apart shopping baskets should be placed and the angle of the top basket, all with concepts behind them.

In these aspects, Watsons is absolutely ahead of general chain enterprises.

----Strong product creation capability: In my experience and understanding, Watsons' product organization is absolutely different from the general retail procurement concept. Watsons' procurement is a creative product organization. To create product characteristics and differentiation, it generally does not directly accept suppliers' standard products but mainly uses customized product organization, and has developed its own corporate brand products in multiple categories. Some Watsons private brands, such as Watsons distilled water, have very strong market brand influence. In Watsons stores, you can see many promotional packaged products. Watsons relies on its own plus ParknShop's large scale advantage and has strong supplier integration capabilities. Its product creation capability is very strong.

Moreover, its product organization is very focused, basically focusing on about ten life scenario units such as personal skin care and family planning. In Watsons stores, there is no sense of scattered or messy products.

Its product organization capability is far higher than that of general chain enterprises.

----Strong store operation and management capability: Watsons' store operation and control capabilities are very strong. Although the overall operational level may have declined slightly in recent years due to performance issues, it is still far higher than that of general retail stores.

Whether it is the concept-driven store design mentioned earlier, the high-quality staff and consultant-style shopping guidance, the consistent cleanliness and brightness, the high-level store displays, including its backroom management, and even more so its standardization, process-oriented, and efficient supply chain, all demonstrate the deep expertise of a century-old enterprise.

In terms of comprehensive store operation level, I have not yet seen a retail store that surpasses Watsons.

----Strong membership marketing capability: Because Watsons' target customers are very focused, its membership marketing is very professional. Whether it is the professional marketing methods, highly relevant content marketing, marketing strength formed by product integration based on its scale advantage, distinctive marketing posters, or the company's strong marketing organization.

As far as traditional retail marketing is concerned, Watsons' marketing is definitely among the best.

----Strong innovation capability: In my over a decade of observing and learning from Watsons, I have always felt that Watsons is constantly changing, whether in store design, product changes, displays, or deepening operational details. I feel that Watsons is always changing, and the newest stores have reached the eighth generation.

Watsons' innovation capability in the traditional retail field absolutely surpasses that of general retail enterprises.

From the perspective of traditional retail enterprises, Watsons is definitely an excellent retail chain enterprise. In terms of the previously defined concepts of retail and chain, it has achieved the ultimate compared to general chain enterprises. Indeed, there are many aspects worth learning from for retail industry enterprises.

So, the next question to consider is: why would such an excellent enterprise still experience continuous performance decline?

Especially since: it is a small format, it has achieved precise target customer positioning, it has demonstrated store design with high commercial concepts, it has practiced private brand and customized creative product organization, it has achieved efficient category management, it has reached a high level of store operation management, it has strong membership marketing capabilities, and it has been continuously innovating.

In the first half of 2016, I checked Watsons' 2015 performance and was shocked to see that performance had also declined.

The Watsons phenomenon indeed deserves deep thought by chain retail enterprises. Why would a retail enterprise with such high operational management technology and a century-old brand experience continuous performance decline today? How should we view the current environment? Does retail need change? Does retail need fundamental change or just simple formal change?

In this environment, is there still the assumption that small formats are the future of retail? In this environment, what issues should we think about? If we still focus on small formats and push private brands and customization, can we solve the fundamental problems we face? If we are still troubled by how to improve store operation capabilities and only look inside the enterprise, can we cope with the severe environment? Watsons' problems warn us that we really need to think carefully about where to go in the current environment.

Thought 1: Is the current economic environment the main cause of retail difficulties?

Recently, when communicating with relevant enterprise managers, I feel that everyone has different perspectives on analyzing the environment. Some lament the impact of economic decline, while others hope that one day the economy will return to its previous ultra-high growth. Analysis of the economic environment must be accurate. In 2016, China's economy grew by 6.7%, ranking first globally. The US economy grew by less than 2%. Of course, compared to the double-digit ultra-high growth of previous years, it has been declining, but this rate is already the highest in the world. Looking ahead, China's economy will certainly continue to steadily decline and adjust to a relatively reasonable economic growth space.

Looking at the FMCG industry, Nielsen data shows that in 2016, the FMCG industry only grew by 2.6%, a 0.6 percentage point decline from 2015's growth rate.

In 2016, per capita disposable income grew by 8.4%, and disposable expenditure grew by 8.9%. These figures outpaced economic growth. Therefore, how to correctly judge the current economic situation, macro environment, and future trends is crucial.

In general, attributing industry decline to economic downturn is meaningless, waiting for the situation to improve is even more frightening, and lacking sufficient understanding of the industry-wide problems in the current environment is extremely frightening.

So, what needs to be clear now is: how to view China's economic growth, and in such a macro economic growth environment, what are the main problems causing industry issues? At such a time, the most valuable choice for enterprises is to look for reasons from consumption changes, industry problems, and their own problems.

Thought 2: Should retail continue to improve along previous lines, or does it need deep-level change and innovation?

This is the most urgent question for retail enterprises to calmly consider, especially given Watsons' continuous performance decline, which highlights the need for clear understanding.

Watsons is the best retail enterprise. Its retail concepts, technology, and management are absolutely leading. Why would such an excellent retail enterprise have problems in the current environment? What should be attributed to?

Including the small format issues and private brand development attempts that everyone is discussing recently, Watsons has already tried these, but still has performance problems.

So, seeing Watsons' problems, combined with the serious problems of many retail enterprises closing stores or even going bankrupt, how should retail change? Should it continue to change along previous concepts, ideas, methods, and models, or does it need fundamental change? This must be clarified first.

Especially, we must not misjudge, such as the current discussion on small formats. Is the current retail problem a format issue or something else? I already feel that some enterprises and bosses have misjudged, such as Carrefour and Tesco turning to small formats, which currently seems ineffective; this move is somewhat wrong.

We must not look in the wrong direction. What is the key problem and main problem? Is it private brands? I think not. Currently, the main problem for retail enterprises is definitely not product issues; declining customer traffic is the main problem.

Thought 3: Is formal change needed, or fundamental change?

Fundamental change is revolution; formal change is reform. No one wants revolution because revolution is painful and requires sacrifice. But sometimes, in the face of severe situations, revolution may be necessary.

Without overthrowing old China, there would be no new China today. Similarly, without abandoning past successful experiences, it may be difficult to adapt to today's new environment.

For retail enterprises, the current environmental changes are indeed enormous. Changes in consumption and the influence of the internet society mean that in some aspects, a thorough transformation of previous retail models is needed.

In the current environment, retail enterprises really need to quickly abandon some past experiences and concepts, and integrate into the new internet environment as soon as possible. Indeed, they need to give up some things and learn new things.

Current analysis shows that to completely solve the problems enterprises face, relying solely on formal change is not enough; fundamental change is needed.

Two enterprises I have been studying and researching recently, Hema Fresh and Leyu Aegean Sea store model, both overturn or change traditional retail models in many ways.

In the current environment, we must learn more from and study the practices of innovative enterprises, understand and master the essence of their change and innovation deeply, and avoid just looking at surface phenomena like blind men touching an elephant.

Thought 4: To solve the problems faced by retail enterprises, is it one-sided change or systematic integration?

From the Watsons phenomenon, we can also analyze that it has a very good enterprise foundation, it is constantly changing, and it has the full ability to organize change, including changes in various aspects. But in the face of the environment and pressure from managers, it still experiences continuous decline.

So, at present, to truly solve problems, first, deep change is needed, and second, comprehensive change is needed. Merely focusing on product issues, operational issues, and a few aspects may not completely solve the problems. It is necessary to thoroughly change concepts and methods, and to completely reconstruct around customers, stores, products, services, employees, and enterprise organization. From Haier's transformation experience, enterprise transformation in the internet environment requires comprehensive reconstruction.

Thought 5: Act quickly or wait and see?

We can no longer harbor illusions, hoping for economic improvement and waiting for the environment to change. This thinking is wrong and seriously unrealistic.

We cannot continue to debate conceptual issues like what new retail is. What we need is to see the current problems clearly, see the essence of the problems, see the future development trends of the environment, and quickly and practically explore ways to solve the problems.

We cannot continue to hold onto past concepts, insisting on some past ideas, thoughts, and methods. We should quickly abandon some outdated ideas and adopt new ideas, models, and methods.

We must act quickly. The problems are very obvious, and the future trends are very clear. The key now is to make a firm decision and act immediately.

Bao Yuezhong Column:

New Distribution Special Contributor Senior Economist Expert of the Ministry of Commerce's "Ten Thousand Villages and Thousand Towns Market Project" Adjunct Professor at Shandong Institute of Economics and Trade Famous FMCG Retail Expert Bao Yuezhong New FMCG, New Retail Innovation Practice Studio -END-