Looking Like a Billion Bucks with Sa Sa

Image: David Hartung for Forbes

BEAUTY BUSINESS “The opportunity for growth is almost assured”: Simon and Eleanor Kwok at one of their 80 Hong Kong outlets

Eleanor Kwok was working at a Hong Kong pharmacy selling cosmetics when opportunity knocked: The owner of a cosmetics store in the basement of a Causeway Bay mall offered to sell it to her. It was barely 40 square feet, but the price was right—around $2,500. Her husband, Simon, liked the idea, but the couple had doubts about the name, Sa Sa, which in Chinese evokes a happy young girl. “But we didn’t have the money to change it,” says Eleanor.

That was 1978. Today that one store has become 240, spread not only all over Hong Kong but also around Asia from Taiwan to Singapore and Malaysia. In Hong Kong it’s the largest specialty cosmetics chain, and total sales at the Kwoks’ Sa Sa International Holdings are approaching $1 billion a year, with annual profits nearing $100 million. This has put the couple on the Forbes Asia list of Hong Kong’s 40 richest for the second straight year; they rank No. 35 with a net worth of $1.09 billion.

Sa Sa is booming because tourism from the mainland is booming. The company makes fully half of its Hong Kong sales to mainland tourists, and Chinese tourism is exploding. In 2010, the number of tourists crossing the border jumped 26 percent, to 22.7 million—almost three times the city’s population. (The year the Kwoks bought the shop, only 24,291 visitors arrived from China.) At the door of a Causeway Bay Sa Sa last month a greeter called out “Welcome!” in Mandarin to mainland shoppers who don’t speak the local Cantonese dialect.

Chinese women are searching for bargains and a selection of products they can’t find at home. They walk into stores with a wish list, and Sa Sa delivers what they want. Each outlet is crammed with a mix of the 16,000 different items and 600 brands, ranging from global ones such as Estée Lauder to Asian favourites such as Dr. G from South Korea. Prices are lower than in China because China imposes big taxes on cosmetics and the cost of doing business in Hong Kong is lower.

What makes the Kwoks’ success more remarkable is that nothing in their background suggested an entrepreneurial streak. When they purchased the shop, Simon was working in a government job. To this day neither speaks English well, but Simon is working on both that and his Mandarin (Cantonese is their main language).

They had innate skills, however, that helped them make the right call at key points and keep growing. One was a willingness to take risks, and another was a good instinct for hiring the right people and figuring out what customers want. Some lucky breaks along the way also gave them a boost.

These days the once basement- dwelling Kwoks are high-profile members of the Hong Kong Jockey Club and own six racehorses. They’re respected philanthropists and hold honorary doctorates. But the two—who are both 59—still put in the same long hours and still get the same out of their staff, so a question about their personal lives brings a gaze, a pause and then a smile. They don’t have much of a personal life, Eleanor finally replies.

The hard work continues to pay off. For the year ending on March 31 analysts expect Sa Sa to report $83 million in net profit—up 26 percent from fiscal year 2011—on $802 million in sales, up 27 percent from last year. Its stock has lost around 11 percent in the past year, not bad compared with a one-quarter plunge in Hong Kong’s Hang Seng Index. Of the Sa Sa name that the couple wished to drop three decades ago, Eleanor says: “It was fortunate that we didn’t change it.”

The publicity-shy Kwoks don’t talk to international media much. But on this day last month they’re sitting around a small conference table in a cozy Hong Kong hotel meeting room—along with a retinue of public relations and other Sa Sa executives—for a relaxed two-hour conversation that flows from Cantonese to Mandarin to English. Simon’s wearing dark, geeky eyeglass frames without lenses, a fashion fad among the young in Hong Kong now. He notes that the growing ties between Hong Kong and the mainland that have helped fuel Sa Sa’s sales seem poised to expand even more, with authorities on both sides liberalising transportation links and building new infrastructure to encourage greater flows of people. “The opportunity for growth is almost assured” in Hong Kong, he says.

Yet Simon and Eleanor want Sa Sa to be more than just a Hong Kong company. It was its good reputation with a wave of Taiwan tourists that led the chain to open its first overseas store there, in 1997. It expects to have nearly 150 outside Hong Kong and Macau by April. The obvious target is China but it is proving a tough market to crack. Sa Sa lost $2 million there during the six months ended September 30, and the stock fell after the results were announced. That led the company to pull back on store openings—instead of an expected 100 outlets on the mainland by April, only 71 are now planned, according to Barclays Capital. Simon, who oversees strategy and execution as chairman and chief executive, is confident he can succeed in China: “We can’t transplant the whole model, but we can go city by city.”

If it’s China supplying the cus- tomers, it’s Sa Sa’s attention to service that keeps them filling up shopping bags in Hong Kong’s 80 stores. This is Eleanor’s bailiwick—she oversees training, marketing and store displays as Sa Sa’s vice chairman. “She knows how we should treat people”—both staff and customers, says Janet Wong. Starting at Sa Sa 13 years ago, Wong has made her mark as director of training by putting into practice Eleanor’s vision of the ideal Sa Sa staffer.

For a look at how the Sa Sa system plays out, talk to one of the company’s saleswomen, known internally as “beauty consultants”. Ka Ka Chan started two years ago fresh out of high school as a “service ambassador” welcoming visitors to a Causeway Bay store, one of the chain’s busiest. After going through more than 150 hours of training, Chan pays a lot of attention to what customers say. More than half of Sa Sa’s products are for skin care, and so the conversation is often about brands a customer will trust with her face. Does she have oily skin? If she’s from arid northern China, she might want a moisturizer for dry skin.

A telling moment comes when the shopper announces which brands she wants. “You can’t tell from looking” if the customer is a big spender because the mainland’s rich often don’t show off their wealth, says Chan. Wearing make-up and a Sa Sa shop suit, she states her goal for this year: “I want to add value to myself,” meaning answering customer questions in a way that clinches more sales.

An eager staff, along with an ever broader range of products, helps separate Sa Sa from its rivals. Those are the big Hong Kong drugstore chains that sell cosmetics along an aisle or two of their stores, such as Mannings, controlled by the Jardine Matheson Group, and Watsons, part of Li Kashing’s Hutchison Whampoa. “Sa Sa fits exactly what mainland tourists want when they come: A lot of choice,” says Eugene Mak, an analyst at Core Pacific-Yamaichi in Hong Kong. Sa Sa is more than twice as big as Bonjour, Hong Kong’s only other listed cosmetics chain.

In a Hong Kong that’s full of rags-to-riches stories in real estate, the Kwoks’ very different rags-to-riches story is refreshing. The two grew up in Hong Kong with little money (Simon’s family of six lived in a tiny flat) and met at a party at a club in Central. Friends had arranged dates for the couple, and the two hit it off on the dance floor (they still enjoy dancing together). Eleanor says Simon won her over with his looks and sense of humour, but it took him seven years to propose. “I was too young to marry,” he says with a smile, sitting next to his spouse.

After buying Sa Sa they experimented with some of the sales techniques they credit for their success. One big one: They let women try out products by themselves. And they steadily expanded their tiny rented space. There’s a grainy photo of that original Causeway Bay store—a landmark in Hong Kong retail lore—in the 2011 annual report.

Then in 1989 the two were booted out of the basement spot when they didn’t quickly agree to an increase in their rent. It looked like a disaster, but it turned out to be an opportunity. “We left the basement and discovered another world” by renting a street-level store nearby, says Simon, who by 1984 had quit his government job to focus on Sa Sa. The rent was higher, but they found they had more and better-off customers who were interested in pricier cosmetics. “We had to leave what had been a comfortable space, but we found a new strength,” he says. “It gave us a lot of confidence.” With that, the Kwoks started opening more stores. Sa Sa had 10 in Hong Kong by 1997 and was ready to go public. “I was thinking, ‘How can we only have several stores and go public?’ ”

But once again a big move paid off and spurred deeper thinking about Sa Sa’s direction. One advisor was Roger King, who was an outside director on the company’s board and is now the director of the Center for Asian Family Business & Entrepreneurship Studies at Hong Kong University of Science & Technology. He stressed the importance of keeping logistics efficient and not compromising on product quality.

Most of Sa Sa’s top-selling items in its early years were big-name overseas brands bought from third parties at a big discount rather than the manufacturer or its agents—an approach known as parallel importing. It’s the free market at work—goods not sold in one place move to another. But that makes it tricky for a retailer to assure the quality of what it sells. So Sa Sa focussed on becoming the sole distribution agent for manufacturers in each of its markets. “With Sa Sa we get good penetration across Hong Kong and Macau,” says Dirk Trappmann, executive vice president at the US’ Elizabeth Arden, which signed Sa Sa as its sole distributor there in 2003. Today exclusive agencies and its own brands account for 40 percent of Sa Sa’s sales, and Simon says he hopes the figure will rise to 50 percent in three years. Meantime, parallel imports have shrunk to just a quarter of the chain’s sales.

With a firm grip on Hong Kong, the Kwoks are trying to duplicate their success in China. Sa Sa opened its first store there in 2005, in Shanghai, taking advantage of its reputation with mainland shoppers and offering distribution in China to its suppliers. But China presents many problems that drive up costs. It levies a 15 percent import tax and a 17 percent value-added tax. Mainland customers don’t seem as interested in trying new brands at home as they are in Hong Kong. And even if they were, slow product approvals in China mean that goods don’t get onto store shelves as fast. To get its arms around China’s widely different regions, Sa Sa divided the country into five business clusters. “It’s too big to be thinking about the whole thing,” says Simon.

Perhaps the biggest challenge has been training the staff, so Sa Sa is changing its system for China. Rather than holding training sessions only at headquarters, the company is moving them to the stores to speed things up. It also moves executives around faster. When it comes to specialised cosmetics sales, Sa Sa’s staff “training is better than anyone in Hong Kong,” says Mariana Kou of brokerage firm CLSA, who follows consumer stocks in Hong Kong. “It will take time in China.”

One of those executives moving around is Kitty Kwok, daughter No. 2 and in her late 20s, who focusses on business development in China. Melody, who’s in her early 30s, oversees corporate strategy and development in Hong Kong. The youngest, Patrick, is at college in the UK.

The six racehorses are also part of the family. All have the Chinese character for beauty in their name: Beauty Flash, Beauty King, Beauty Lead, Eternal Beauty, Beauty Success and Life of Beauty. Simon says the publicity generated by the horses helps the business. Beauty Flash has captured races both in Hong Kong and overseas. “Come join us at the races!” he offers. The Kwoks look like a good bet, both at Sha Tin and, given their track record, in China.