Changing the Face of China
Chinese consumers spend increasing sums on cosmetics in a foreign-brand dominated sector.
Trend Description
China has become the largest daily use chemicals market in the world, with an annual sales volume exceeding 100 billion RMB (over US$12 billion), and demand is increasing year-on-year. China’s daily use chemicals sector is rapidly changing from basic to individualized consumption, and the focus of the market is shifting to include both urban and rural areas. Market prospects are huge.
China’s daily use chemical market is mainly divided into three sectors - cosmetics, detergent products and oral cleansing products. Of these, the cosmetics market is showing the fastest growth. Rising disposable income, ever more sophisticated marketing strategies and a general heightening of consumer awareness regarding fashion trends and branding are all significant drivers in this sector.
According to statistics, China’s annual sales of cosmetics have grown at an average annual rate of 23.8 percent over the past 20 years, much higher than the average growth of GDP. China’s sales volume of cosmetics reached 68.4 billion RMB (nearly US$9 billion) in 2005, up 17 percent year on year, ranking eighth in the world and second in Asia. However, per capita consumption of cosmetics is still low, being only US$7, one-seventh of the world’s average level.
It is expected that in the next few years, sales in China’s cosmetics market will grow at an average annual rate of over 13 percent, and that by next year, total market sales will top 80 billion RMB (over US$10 billion). Skin-care products and makeup will be the driving force of the growth, and females are the main marketing target. Skin-care products currently make up 40 percent of China’s cosmetics market, and are still growing at an annual rate of 20 percent.
Another key market dynamic is the increasing number of brand-name luxury consumer goods actually manufactured in China. Companies such as Burberry, Prada and Armani already outsource to China, and according to a report by the World Luxury Association 60 percent of the world’s luxury brands will have at least some of their products made in China by 2009.
Image source: China Daily
Case Studies
L’Oreal
Paris-based cosmetic maker L’Oreal and the Beijing Wangfujing Department Store have just announced a strategic partnership, and the two parties will begin a year-long strategic cooperation in China. The partnership will be effective in all Wangfujing Department Stores in China.
Until the end of September, L’Oreal are providing beauty salons and lecturers for VIP members of Wangfujing Department Store’s flagship stores in Beijing, Chengdu, Changsha and Wuhan. Statistics from 2006 show that L’Oreal has achieved consecutive double-digit increases in mainland sales for the past six years, and that China has become its largest market in the Asian region.
Late last year L’Oreal announced a plan to bring its cosmetic brands to supermarkets across China in order to expand current sales channels. Paolo Gasparrini, president of L’Oreal China, said that the group would put four brands, including L’Oreal Paris, Mininurse, Garnier and Maybelline, into supermarkets in order to seize more market share. However, he also said that L’Oreal would not be offering top-grade products in supermarkets.
Currently L’Oreal sells most of its products in department stores. In China alone, its products are now sold at over 500 department stores, and the company is now test-selling its products at Wal-Mart and Carrefour. L’Oreal has made great efforts in developing markets in “third-tier” Chinese cities. Data shows that the company now has 3226 sales points in 199 cities around China, while Maybelline has 12873 sales points in 646 cities and Mininurse has 250,000 in 660 cities.
Image source: Daniel Allen
Hugo Boss
German high-end garment and cosmetics line Hugo Boss opened its first Chinese flagship store on the Bund in Shanghai in October last year. Located on the ground floor of Bund No.3, the landmark building on Guangdong Road, it is the 1000th Hugo Boss outlet worldwide. The store is surrounded by other world-class luxury brands. Bruno Saelzer, Chairman of Hugo Boss, considers China’s garment and cosmetics market to have huge growth potential. In the first nine months of 2006 Hugo Boss China registered a sales increase of 15 percent, from EUR 24 million to EUR 28 million.
Hugo Boss has built up a strong customer base and high brand awareness throughout its 12 years in the Chinese market. The company is looking to explore markets beyond Beijing, Shanghai and Guangzhou, extending to comparatively poorer inland cities such as Hefei in East China’s Anhui Province, Taiyuan in North China’s Shanxi Province, and even Urumqi, capital of Northwest China’s Xinjiang Uygur Autonomous Region. It is the market leader in China, with 65 shops in 37 major cities.
Procter & Gamble set up a site pitching its beauty brands Olay, SK-II, and Hugo Boss during last year’s Shanghai Fashion Week.
Image source: Hugo Boss
Trend Impact
The high-end cosmetics market in China is dominated by foreign enterprises. P&G, Unilever and L’Oreal, leveraging their advantages in branding and product quality, have formed a trend of oligarchic competition, with collective sales increasing rapidly over recent years to nearly 20 billion RMB (over US$2.5 billion). Together these three companies currently have an 80 percent share of China’s lucrative cosmetics market.
Less than 60 Chinese cosmetics producers reported annual sales of over 100 million RMB (US$13 million) last year; less than 10 reported annual sales of over 500 million RMB (over US$60 million); and less than five reported an annual sales of 1 billion RMB (US$130 million), with profit rates generally less than 2 percent. A major reason for the poor performance is the lack of R & D input, with key raw materials and core contents provided by foreign factories.
China’s cosmetics market will become increasingly subdivided in the future. High-end brands will move further upmarket to cater to the growing demand for luxury products, and cheaper, more popular products will become more individualized. In terms of the product mix, sun-screening, anti-ageing and “eco-content” are the current keywords of China-focused cosmetics concept development. The orientation of product development will concentrate on bio-preparation, “bio-active” extracts and natural plant additives.
Considering market segmentation, the potential of cosmetics for children, the elderly and men remains huge. This is especially true for the male cosmetics market, which is expanding gradually and likely to become the next big growth area. It is expected that the sales volume of male cosmetics will top 400 million RMB (over US$50 million) in 2007, and further expand to 4 billion RMB (over US$500 million) by 2010.
In terms of China-based manufacturing, China needs far stricter quality-control procedures and improved technical and management skills to ensure luxury brands with the “Made in China” label are well-received. Some Chinese-made products from well-known fashion houses Armani, MaxMara, Burberry and Ermenegildo Zegna failed to pass a quality inspection in China last year, and there’s still a way to go before “Made in China” has the same consumer appeal as “Made in Italy”.