Salsa International (00178), which has already been “frozen for three feet”, has been covered with another layer of “frost.”

The Zhitong Finance app learned that recently, a spokesperson for Salsa International said that the group is taking various measures to save money in all aspects.

The measures include adjusting the deployment of various departments and frontline employees. From February to April, frontline employees adopted a segmentation system to reduce the number of employees on duty. At the same time, the Group is also reviewing the overall workforce structure. It is estimated that when the structure is streamlined, employee turnover will account for no more than 3% of Hong Kong's overall frontline and logistics staff.

In addition, Salsa International will also consider short-term salary cuts from March to May. Among them, senior management will be reduced by about 40%, while the rest of the grassroots employees will be reduced by 10% to 15%. Earlier, the salaries of all executive directors of the Group were cut by 75% starting in February for a period of three months. The Group hopes that through a series of structural streamlining measures, it can save about 30% in costs in the short term. It is reported that Sa Sa International will also continue to discuss rent reduction matters with landlords.

According to Sa Sa International, the reason the group is saving money is that at present, Sa Sa Sa, like its Hong Kong retail peers, is being affected by an unfavorable market environment.

The retail environment in Hong Kong has changed dramatically, and salsa has experienced the coldest winter

According to information from the Zhitong Finance App, social events in Hong Kong and public health events in the mainland that have occurred since 2019 have indirectly dealt a heavy blow to Salsa's operations.

According to the latest data from the Hong Kong Tourism Board, the number of visitors to Hong Kong in 2019 fell 14.2% year on year to 55.9 million. Among them, the number of visitors to Hong Kong in the first half of the year increased 13.9% year on year, while the second half of the year fell 39.1% year on year.

According to data from the Hong Kong Immigration Department, from January 24 to January 30, 2020, the number of visitors to Hong Kong fell 85.5% year on year during the seven-day Chinese New Year holiday.

Affected by this, Sa Sa Sa International's performance declined sharply. The company's 2019/20 annual report showed that in the six months ended September 30, 2019, the company achieved a turnover of HK$3.49 billion (same unit below), a year-on-year decrease of 15.7%; net loss of $36.53 million, and net profit of $202 million for the same period last year. You need to know that this is the first time in nearly 17 years that Salsa International has experienced a medium-term loss.

On January 15, 2020, Sa Sa International released the latest unaudited sales data for the third quarter from October 1 to December 31, 2019. The announcement showed that the Group's overall retail and wholesale business turnover fell 27.3% year-on-year during the period.

Among them, sales performance in Hong Kong, China was poor. As the number of mainland visitors to Hong Kong worsened, it fell by more than 50% in November, which dragged down the number of transactions with mainland visitors in the third quarter by 71.7%, while the number of local visitors also fell by 9.5%, leading to a year-on-year decline in sales in the Hong Kong Special Administrative Region in the third quarter by 47.5%. Among them, sales performance improved slightly in December, with a year-on-year decline of 45.8%, mainly due to positive growth in sales from local customers in the same month due to delayed consumption, while there was no significant improvement in mainland visitors.

Under these circumstances, the sales performance of Macau, China was relatively good. From August to December, it achieved a double-digit year-on-year sales increase, mainly due to the shift in spending power of some mainland Chinese tourists from the Hong Kong Special Administrative Region to the Macau Special Administrative Region, which led to an 18.6% increase in sales in the third quarter.

The Zhitong Finance app learned that with the outbreak of public health incidents, the “life-saving straw” of salsa in the Macau market has also been affected. Sa Sa recently announced that in order to ensure the safety of employees and customers, and considering the current reduction in consumer demand, it has decided to temporarily suspend operations at its 20 Salsa branches in Hong Kong and Macau and 1 LaColline specialty store. Among them, the Tuen Mun Zhuoerju branch will also be suspended from February 17 until further notice.

The closure of stores has made salsa's recent sales situation even worse. On February 6, Salsa released sales data for the Lunar New Year, showing that from January 25 to January 31, 2020, during the Spring Festival in the Year of the Rat to the 7th day of the Lunar New Year, Sa Sa Sa International Hong Kong and Macau market plummeted 75.5%, while sales fell 76.9%.

Salsa said that during the Spring Festival, the overall passenger flow in Hong Kong fell sharply, causing the transaction volume to plummet by 54.4%. Among them, the decline for mainland visitors was as high as 92.1%, while the transaction volume for local visitors fell by 8.0%. In addition, the average transaction value of mainland customers and local customers decreased by 14.5% and 25.6% respectively. As the average transaction amount of mainland customers was larger and accounted for a higher share of turnover, the average transaction amount of Sa Sa International's overall transaction volume plummeted by 51.5% during the holiday season.

In an interview on February 4, Hsieh Qiu An-yee, chairman of the Hong Kong Retail Management Association, said in an interview on February 4 that from January 24 to February 2, the members of the Association generally said that retail sales fell by 40%-60%, and some retailers that relied more on mainland tourists even reported a decline of more than 60%, or even 80%. “The situation on the 10th can be said that the retail industry has entered another super cold winter. We expect the situation in the next month or two to be similar. Many retailers have indicated that they are considering measures such as salary cuts and layoffs.”

It can be seen from this that Salsa International's plight today is largely due to changes in the external environment, yet the external environment is not the only reason for Salsa's dilemma.

Multiple markets continued to lose money, passively shrinking store size

The Zhitong Finance App learned that in an announcement on January 15, Sa Sa said that since the severe business environment in the Hong Kong Special Administrative Region has not significantly slowed down, the Group will continue to implement various measures to reduce overall costs to maintain competitiveness and restore profitability. Since rent costs are one of the biggest operating expenses, the Group has begun to reduce the Hong Kong store network. Depending on the sales performance of stores, the business situation in each district and the rent reduction rate, the provisional plan is to close about 20% to 25% of stores within the next 18 months, mostly in tourist areas with a high impact, and has already closed 6 stores in the third quarter, resulting in a net reduction of 3 stores in the Hong Kong Special Administrative Region in the third quarter. Furthermore, the Group will continue to review market conditions and actively conduct rent negotiations with owners, with the primary goal of restoring the store's profit contribution as soon as possible.

If Sa Sa Sa decided to close its stores in Hong Kong, it is still justifiable because of the short-term environment. However, this reason does not fully apply to the company's past store closures.

Sa Sa issued an announcement on December 2, 2019. The board of directors decided to close all retail stores in the Singapore market and concentrate resources on developing China's Hong Kong and Macau SAR, mainland China and Malaysia markets, and e-commerce business. As a result, it was decided to close the Group's 22 stores in Singapore.

The Zhitong Finance app learned that Salsa entered the Singapore market as early as 2005, but has performed poorly in Singapore in recent years, and has been losing money for 6 consecutive fiscal years.

For the six months ended September 30, 2019, Salsa's turnover in the Singapore market was HK$99.4 million, a year-on-year decrease of 4.6% in local currency, accounting for 2.8% of the Group's total turnover.

In fact, earlier, in March 2018, Sa Sa left the Taiwan market for the same reason it left the Singapore market. The company also lost money continuously in the Taiwan market for 6 years before leaving.

According to the Zhitong Finance App, in addition to external factors, in the decline of salsa in some markets, its own business model of selling cost-effective “water goods” also has certain disadvantages. For example, competition for upstream supply of popular products is becoming more intense. As a result, the traffic of salsa customers is being diverted by local counters in Hong Kong, large domestic cross-border e-commerce, and major duty-free shops.

Take e-commerce as an example. Domestically, in recent years, cross-border e-commerce platforms such as Tmall International, NetEase Koala, SF Express, and Xiaohongshu have risen, rapidly dividing market share. As a rising star, salsa didn't get much of the share in e-commerce dividends.

In the first half of fiscal year 2019/20, the turnover of Salsa's e-commerce business fell 8.2% year on year to 170 million yuan. Among them, customers from mainland China accounted for more than 90% of revenue, and revenue from third-party platforms accounted for 67% of e-commerce business sales. The company's self-built website and mobile app experienced a 34.6% drop in sales.

In the short term, it is difficult for the mainland China market to become a breakthrough in the growth of salsa's performance. The reason is that in the interim fiscal year 2019/20, the company's revenue in mainland China was 132 million yuan, the same as the previous year, accounting for 3.8% of the company's total revenue.

During the period, due to improved same-store sales growth, Salsa's profit contribution to stores in mainland China increased by 39.8% year over year, but there was still a loss of 12.9 million yuan. Furthermore, at present, Sa Sa's stores in the mainland are mainly concentrated in the South China market. On September 30, 2019, the number of stores decreased by a net eight over the same period last year.

Should a beautiful “daughter-in-law” become a “wife”?

Combining the above factors, the harsh winter of Sa Sa, a company that once “protected” the faces of countless women who love beauty, may continue to want to stay for a long time. So, does salsa have the strength to survive this winter?

In fact, it can be sensed from Salsa's decision to make every effort to save money that the company's financial situation is already in a difficult situation.

According to Salsa's 2019/20 annual report, the company's balance to debt ratio reached 47.31%. Of current liabilities, lease liabilities reached $605 million, and the company's time deposits and cash and cash equivalents were approximately $788 million. Against the backdrop of sales setbacks, it is no doubt that these funds are struggling to cover rent and employee wages at the same time. Otherwise, Sa Sa would not vigorously cut employee expenses and seek rent reductions.

The question is, how long will the adverse external situation continue, how long will salsa last, and everything will have to be answered by time.