Cosmetic marketers in China are making expansion into peripheral regions a new priority in a bid to make their mark. Mark Godfrey reports from Beijing
A slump in exports dented China’s economic growth in 2008, but a strong recovery which lifted GDP growth to 10% in the second half of 2009 appears to have ensured strong retail sales across all fronts. This helped growth of cosmetics sales in China remain strong at 10% in 2009, according to the China Association of Fragrance Flavour and Cosmetic Industries (CAFFCI).
The figure is similar to 2008, when China outpaced a global average of 7.8%. Cosmetic segments such as skin care and hair care accounted for 38% and 20% of the overall cosmetics and toiletries market respectively in 2008, according to Euromonitor, which places China as the second largest cosmetics market in Asia and eighth largest in the world. Sales of cosmetics and toiletries in China reached RMB116bn (US$17.6bn) in 2007, according to CAFFCI. Data from the latter and from the National Bureau of Statistics suggests 2009 sales of RMB130bn (US$19bn).
And that figure should expand – CAFFCI predicts growth of 10% per year over the next five years and Euromonitor forecasts the local market will be worth RMB140bn in 2010.
Predictions are based largely on solid growth in both GDP and retail sales (which rose 16% year on year in 2009, according to the National Bureau of Statistics) and suggest China will eventually overtake Japan and the US.
GROWTH POTENTIAL
Given that per person, annual spending on cosmetics and toiletries still averages only between US$7-13 and given a backdrop of rising per capita GDP and income, the Chinese cosmetics market clearly has a long way to grow. Among cosmetic sectors hair care and oral hygiene have been performing strongest. In skin care, whitening and anti-ageing products continue to fuel sales. Growth in fragrance and colour cosmetics however slowed slightly in 2008 on 2007’s figures. The outlook is also less certain for other sectors such as men’s grooming products.
Anti-agers will be a growth area for the future in the high value sector. This is particularly important for importers. France retains a healthy lead over Japan in the rankings of China’s cosmetics suppliers; US$221m compared to Japan’s US$144m, with the US in third place at US$87m. But Japan’s imports are growing faster, according to Euromonitor data, as are sales from Italy.
China’s imports of cosmetics are growing faster than exports, leaping 27% year on year to US$425m. Yet exports for cosmetics, which stood at US$946m (up 17% year on year) in 2008, could be set to rise again with the China-ASEAN (Association of South East Asian Nations) free trade pact, which came into force in January. The China-ASEAN free trade agreement, eight years in gestation, creates a market of 1.7 billion consumers which is comparable to the EU in value. As a sign of the potency of Chinese exports perhaps, ASEAN member Indonesia specifically singled out cosmetics when it aired worries about cheap Chinese imports flooding its markets. Chinese skin care specialist Yamei, whose brands include Miracle, gets more than half its sales in exports to Asian markets, according to the Beijing-based company’s marketing manager Shi Weidong. “Competition in China is too intense,” he explains.
In China itself, a clutch of foreign brands control more than 50% of the cosmetics and toiletries market, according to the China Association of Cosmetics Industry data, but there is still room for innovative new products. While international companies such as P&G, L’Oréal and Christian Dior account for the bulk of revenues and advertising spending, local brands suffer from scale – 90% are small and medium enterprises (SMEs), most of them located in south China’s Pearl River Delta Region, which has over 1,500 cosmetics manufacturers.
MARKET ACCESS
Market access remains restrictive compared to Hong Kong, but penetration is much higher than in other regional emerging markets such as India or Indonesia. Yet it is clear that Hong Kong-based sales account for an enormous share of personal purchases. A 30% tax on cosmetics, classed as luxury, means high-end retailers such as Sephora have grown slowly in mainland China. Chen Siyun, a marketing manager said she buys her high-end cosmetics from Hong Kong by credit card payments to online portals which ship the cosmetics from Hong Kong.
The internet is a powerful driver of cosmetics sales among middle class consumers such as Chen, who buys skin care products from local online retailers such as Taobao, a hugely popular eBay-like operation. A reputation for reliability has drawn local and foreign brands to Taobao, proving that trust is crucial in China, where urban consumers remain wary of product safety and price. Claims of fake or inferior products spread like wildfire across the country’s internet space.
Clearly benefiting from sensitivities over quality and price, Hong Kong-owned chain Watsons has expanded fast in the mainland. Value outlets such as Watsons bank on data that suggests private domestic consumption will grow from US$890bn in 2007 to US$2.5 trillion in 2020, according to consultancy McKinsey.
Hong Kong also remains a useful launch pad for foreign brands, who often work through a distributor in the territory. Hong Kong’s closer economic partnership deal with the mainland allows tax-free imports of certain Hong Kong products, including cosmetics.
China is still wide open for cosmetics brands in particular, but newcomers need to hit the right balance in distribution, marketing and pricing. Brands such as Procter & Gamble (P&G) and L’Oréal have succeeded by aiming products at several price brackets, explains Ben Cavender, analyst at China Market Research. He also marks P&G’s success down to its localisation of manufacturing, with factories across China “bringing it nearer to local markets and local research talent”.
Research remains a key asset for cracking China which prizes technological transfers. While there are questions about the productivity of some of the R&D centres, several top brands have rushed to establish such centres. Shiseido and L’Oréal have been working on China-specific hair and skin products at their R&D centres in Beijing and Shanghai specifically. R&D investments also help brands wise up to cultural eccentricities. Market leader in China’s shampoo sales, P&G was caught off guard in the shampoo stakes in 2009 by domestic player Bawang, which has had a hit with hair loss treatment herbal shampoo.
L’Oréal, Unilever, Nivea and Shiseido also compete on marketing campaigns and distribution networks to pierce a fragmented market. L’Oréal still only gets 4% of its global revenues from China and may find its stiffest challenge in emerging regional markets.
INLAND INITIATIVES
While the southerly Guangdong province, remains the wealthiest, growth has slowed next to poorer inland provinces which have been beneficiaries of government infrastructure largesse. “Building out distribution chains in places such as Gansu, Ningxia and Qinghai is now a priority,” according to Matthew Crabbe, an analyst with research group Access Asia.
Increasing urbanisation (47% of the population in 2009 to 63% in 2029) and an emphasis on developing western hinterlands – notably Sichuan province, fulcrum of the Go West policy, recording 12% GDP growth in the first six months of 2009, compared to 3.3% in Shanghai – suggests brands will have to work on securing sales in interior cities.
Merrill Lynch research for 2009 retail sales shows a stronger performance in the western regions compared to Beijing and Shanghai. So-called tier two and tier three is where it’s at, explains Crabbe. He suggests much of the new distribution network for personal care products will come off the back of mega retailers such as Wal-Mart and Tesco, the latter building a string of mall-type operations as a way to get a toe-hold in China. “There’ll be space for brands to cluster around the big Tesco supermarket,” he says.
Direct selling giants are the other obvious beneficiary of expanding sales in China’s periphery. Amway, Mary Kay and Avon have recruited heavily in interior cities to compete in the mid-segment of the cosmetics and toiletries market. None of the companies were available for comment but anecdotal and local media reports suggest direct sales firms, which attract Chinese customers with free beauty courses, are popular in second and third tier cities where brand loyalty remains weaker.
RULES & REGULATIONS
When not battling each other for sales, international brands have been pressuring the government to ease up time consuming testing of imported cosmetics and ingredients.
China’s labelling and licensing requirements have long irritated foreign brands, prompting the American Chamber of Commerce to complain of “inconsistency” in licensing and “chaotic law enforcement”. Both the ministry of health and AQSIQ (the General Administration of Quality Supervision, Inspection and Quarantine of the People’s Republic of China) enforce testing and labelling requirements which importers want replaced with rules based on the cosmetics good manufacturing practice standards of the International Organisation for Standardisation (ISO).
Importers are also hoping China will clarify advertising laws. Clearly however the priority is scaling back taxes, which industry sources claim have made products 40% more expensive here than in other markets.
Regionally there will be plenty of eyes on China’s ability to capitalise on the China-ASEAN free trade pact. But back home the rising per capita spending on cosmetics suggests the growth of China’s cosmetics markets seems assured for the long-term. It is clear that competition will move to the country’s lesser known cities and towns. Getting distribution and pricing right in these fast growing regions will decide who remains top of the sales rankings, and which newcomers manage a successful market entry.
PERSONAL CARE, PERSONAL GROWTH
Euromonitor charts the rise of skin care and premium spending power
China’s personal care market has the capacity to grow far beyond the levels seen so far, but persuading Chinese consumers to spend more money on toiletries could be challenging because of the country’s high consumer saving levels – 32% of disposable income in 2008 compared with neighbouring countries such as Japan (10%), South Korea (15%) and Thailand (4%). Despite this, there are clearly areas such as premium skin care (22% CAGR 2003-8), premium fragrance (26%) and premium sun care (16%) where consumers are willing to indulge, so it is important for manufacturers to focus on the major growth categories.
But many of the categories in the Chinese market are in their infancy, meaning that there is far greater potential for upward growth in per capita spend in China.
SKIN CARE BOOM
In 2008, nourishers/anti-agers and facial moisturisers saw strong growth thanks to the cultural importance of pale facial skin in China. Whitening ingredients are pervasive in most of these products and are incorporated into most possible types of whitening skin care products in China such as toners and facial cleansers, although the aforementioned two are the most popular because they are designed to be left on the skin, meaning that the whitening effect is perceived to last longer.
In contrast to the boom in facial skin care, value sales in body care are set to remain rather flat. The main reason for this is again because whitening is the main growth driver in skin care. Although whitening body care products are available, Chinese consumers are not as preoccupied with having pale skin on the body as they are with facial skin.
As the market becomes flooded with new brands and products, facial moisturisers and nourishers/anti-agers are increasingly being segmented by consumer age group and this is also driving growth in the category.
PREMIUM POWER
In China, households earning around US$35,000 per year enjoy the equivalent spending power of a US household making roughly US$100,000 per year. These wealthy Chinese households represent the top 1% of earners in China’s cities, and the number of these families is set to rise significantly from around 1,770 in 2003 to 10,842 in 2013. This is creating demand for super-premium C&T brands such as Crème de la Mer (which was launched in 2004 in China and became an instant hit) from this small section of society who now has the spending capacity to afford them and is keen to display the trappings of its new found wealth.
More importantly for the luxury segment however is the rapid rise of the middle classes with incomes of US$5,000-10,000 in China, which are driving premium personal care sales. The number of households in this income band is set to shoot up sixfold from around 33,800 in 2003 to a projected 207,997 by 2013. These comfortable consumers place a strong emphasis on aspirational purchases, part of an overall pervasive trend in the country to embrace western lifestyles – and this is pushing up demand for premium brands from the west.
However current per capita spend on beauty and personal care stands at between US$7-13 per person.