MARKET TRENDS
FOREIGN COSMETIC BRANDS IN CHINA
Sales of cosmetics and toiletries in China grew by nearly 11% in current value terms in 2005 to reach RMB 85 billion (around US$ 10.8 billion or EUR 8.3 billion), according to Euromonitor International .
The continuous double-digit growth of the Chinese beauty market is driven by both rising disposable income and fierce social competition motivating female and male urban white collar workers to invest in their personal appearance. As there is no sign that these two deep-seated social trends would revert in the near future, all market analysts forecast a rosy outlook for cosmetics and toiletries in the country. According to Euromonitor International , the Chinese beauty market could grow up to RMB 140 billion (US$ 17,8 billion or EUR 13.6 billion) in 2010.
Foreign brands already hold key positions in the Chinese beauty market, benefiting from strong consumer confidence, especially in the high-end segment. However, the recent withdrawal of the SK-II line from the Chinese market, following the detection of small amounts of heavy metals in the products , has demonstrated the growing attention that Chinese consumers pay to health and safety issues and that no brand is safe from a sudden loss of public confidence, especially in a country where business and political issues often overlap.
Furthermore, as there are more and more imported brands offered to Chinese consumers, there are also increasing opportunities to test new products and to change habits. Chinese consumers, who are relatively lacking in experience with international beauty brands, easily switch from one product to another. Brand loyalty is the most difficult goal to achieve for new entrants.
Cosmetic imports soar
According to Euromonitor International , the compound annual growth rate (CAGR) of the cosmetics and toiletries market in China was 10.2% from 1997 to 2005. The cumulated growth exceeded 117% over the same period. Those are impressive figures already, but the growth of imports was even more dramatic. From 2003 to 2005, imports of beauty, make-up, skin care and hand care products grew from US$ 78.7 million to US$ 207.1 million; more than 165% over three years!
France , the United States , Japan and South Korea are the leading exporters of cosmetic products to China .
As far as perfumes and toilet waters are concerned, France holds the main market share (75%) followed by the USA (10%).
While this is a relatively big market share compared to many other Asian countries, the alcoholic perfumery segment remains small in China : less than 10% of the market. Indeed, basics remain unchanged: skincare products continue to account for the lion's share of the market. Facial care, facial moisturisers, nourishers and anti-agers remain the most performing subsegments. Chinese concern about reducing the signs of ageing, keeping the body in good health is also very much in line with the country's deeply rooted Taoist culture . Furthermore, although the average Chinese beauty consumer is usually younger than 35, anti-ageing products achieve strong results as they are used at a younger age than in the US or in Europe .
" The sector remains one of the most competitive, with established players investing heavily in media campaigns and product innovation to build consumer loyalty. There were also many new entrants to skin care, from direct sales Le Club des Créateurs de Beauté, drugstore brand Freeplus to the all-natural L'Occitance en Provence and Innisfree, " comments Euromonitor International .
The wealth of a nation.
The interest of Chinese consumers in imported beauty products addresses their will to boost self-esteem and increase social differentiation. Thanks to the fast growth of their personal income, many of them can now afford these products and the number should continue to increase in the future.
Reliable statistics on average annual wages in China are lacking. However, while the various sources usually differ as regards absolute figures, they all show the same two trends:
- quick progression, mainly in coastal cities
- but still low wages compared to many other nations
With an average annual wage of US$ 2,979 per year in 2005, Shanghai was the second most affluent Chinese city after Guangzhou (US$ 3,349) and before Beijing (US$ 2,756). According to Hewitt Associates , annual wages averaged US$ 2,413 in Suzhou and US$ 2,353 in Nanjing in 2005. But the main cities of the interior offer much lower wages: US$ 1,787 per year in Chongqing and US$ 1,489 in Chengdu . " In China , salary increases were prevalent in non-manufacturing 'hot' jobs such as sales, marketing, and HR. This trend is likely to continue throughout 2006 as Hewitt data suggest further increases of 3.5 percent in Hong Kong and 8.0 percent in China , " explains Jihann Moreno of Hewitt Associates .
Even if they are growing quickly, annual wages are still low in China even in the wealthiest regions, where disparities are growing too.
The Gini coefficient, which measures income inequalities, is estimated at 0.44 in China , which is higher than most European countries where it is around 0.30 but slightly lower than in the USA 0.496. The most important fact is not the current level of the Gini index in China but its regular increase. Indeed, while almost everybody in China can see their annual income growing, the gap between the wealthiest and the poorest is widening.
As a consequence, rich people in China are becoming richer every year. Merrill Lynch & Co. estimates that more than 300,000 Chinese have a net worth over US$1 million, excluding property. According to Goldman, Sachs & Co. , Chinese are already the 3rd biggest buyers of high-end products such as luxury cars, luxury boats or jewellery.
However, it makes no sense to compare wages without taking local price levels into consideration: wages are low in China, but prices of food, basic consumer goods and services are lower than in the EU, the US or Japan. A study published by Merrill Lynch last year revealed that the purchasing power of the 5 million Chinese people earning more than US$ 30,000 could be compared to Americans earning US$ 140,000 a year. As a consequence, around 175 million Chinese people (13.5% of the population) would have a purchasing power equivalent to Americans earning US$ 30,000 a year and the wealthiest 10% Chinese households (10 million people) would have a purchasing power equalling the one of all Koreans in 2002.
Furthermore, between 9% to 14% of the population (130 to 175 million), mostly "white collars" in main urban centres, can afford imported cosmetics, and if only 0.3% (5 million) can buy luxury goods, they would already contribute from 1% to 3% of the segment's global revenue.
Trading up to more expensive brands
Considering the level of wages in China , it is no surprise that the bulk of the Chinese cosmetics consumption is concentrated on basic products and the mass market, but as income levels of Chinese urban employees are constantly growing, people tend to invest more in their external appearance. More sophisticated products aimed at the "upper-mass segment" directly benefit from this change, with brands such as: Olay (P&G), L'Oréal, Dabao (Beijing San Lu Factory), Herborist (Shanghai Jahwa Co Ltd) or Shiseido Aupres.
Along with the progression of their revenue, Chinese consumers are trading up to more specialised products. Like imports, the market for premium products is progressing faster than the overall consumption of cosmetic goods.
The high and mid-priced segments are dominated by foreign companies like L'Oréal (Lancôme, Biotherm, Helena Rubinstein, and Shu Uemura), Procter and Gamble (Max Factor and SK-II, before the withdrawal of the brand ), Shiseido, Estée Lauder (Clinique and La mer), Clarins, Chanel, Sisley, Dior and Guerlain. There are hardly any local firms in this segment yet, which is probably due to the temporary lack of knowledge in the luxury production, branding and trust from the consumer.
The fierce competition on the Chinese market also led to incorporating more added value into imported products. " Keen to protect their profit margins, especially with the rising costs of raw materials, manufacturers increasingly focused on brand building and product innovation. While top international brands incorporated the latest technology and provided specific functions and benefits, local players have had to play catch-up, " notes Euromonitor International .
Which prospects for newcomers?
Apart from regulatory considerations, the main challenge for all international cosmetic brands in China is to find a retail space corresponding to its prime positioning. Most of the local space in the mass markets is already occupied by local brands or by foreign brands that global players are manufacturing locally. According to Euromonitor International , rapid retailing development saw modern distribution channels such as supermarkets and hypermarkets, drugstores and specialist outlets penetrate deeper into the Chinese market, bringing a wider product variety of products and brands to consumers.
For the newcomer high-end cosmetic brands that try to build up a strong customer base and high brand awareness, there are currently three main options: department stores, perfumery chains or stand-alone stores.
The new entrant can try to find space in the most prestigious department stores or retail centres that have already gathered a lot of imported brands. Another option is to enter through a partnership with perfumery chains that are opening in the country (Sephora already has eight stores and has planned a lot more openings), AS Watson-owned Marionnaud should open its first store in the next few months in Shanghai . Watsons You Personal Store has a more mid-range positioning but already has 200 stores and is pursuing its expansion, so are Wal-Mart and Carrefour, which may also offer opportunities for upper-mass brands.
Opening a stand-alone store is certainly the best way to control the whole mix. Of course it is an expensive option, especially when considering high real-estate costs in China . But building strong brand recognition and customer loyalty in China will always be expensive.
Innovative products and concepts can still find their place in the growing Chinese beauty market, but foreign companies must be ready to consider high investment requirements to enter the market and to build up a strong product identity. There are many unavoidable costs to take into consideration: legal costs due to burdensome registration procedures, real estate costs due to the lack of premium locations in big cities, communication costs due to the size of the market and also investment in human resources mainly for sales and training people required to build up brand loyalty.
Vincent Gallon
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