Cosmetics and the Chinese Gold Rush

11 April 2006 (Last Updated April 11th, 2006 18:30)

In China, brand awareness in the cosmetics sectors is causing western companies to scramble for a slice of this valuable market. Ursula Horne, Euromonitor, reports.

Cosmetics and the Chinese Gold Rush

The Chinese cosmetics and toiletries industry presents an attractive proposition for any business. Valued at $7.9bn according to Euromonitor International, it is the world's eighth largest market for the industry (Asia's second largest) and registered growth of 12% in 2004.

Euromonitor International's analysis of the Chinese cosmetics and toiletries market pinpoints two key factors that have helped the industry expand in recent years: the rising affluence amongst consumers; and the development of better distribution channels. Increased disposable income means that more consumers can afford higher-value products and so are increasingly buying into the growing 'upper mass' sector, or are trading up from mass brands to premium ones. Distribution has been affected by chained retailers, such as Wal-Mart, Carrefour and Hong Kong-based Sa Sa, extending their retail networks in China. Already present in the market, these retailing giants have been penetrating deeper into affluent areas such as Shanghai, while expanding into other less affluent regions and away from the first-tier cities.

Recently, China has leapt to the forefront of many company's strategic ambitions, but westerners need to be cautious when establishing a presence there, due differences of culture and etiquette. Many companies have had to adapt their traditional offering to achieve success in China; the country's vast expanse and the difference between urban and rural dwellers present logistical problems in themselves. However, Chinese consumers are changing too, showing an increased preoccupation with personal appearance and image, as well as greater interest in Western brands or norms, suggesting that China is ripe for further growth in cosmetics and toiletries.

SKINCARE POTENTIAL

Skincare is the most valuable cosmetics and toiletries sector in China, accounting for 38% of all industry sales this year, and demonstrating significant potential for further expansion. Key to the growth of skin care was a rise in the uptake of anti-ageing or nourishing facial care products, which form part of the emerging 'upper-mass' segment. Such brands command higher prices as they adopt attributes that were once confined to premium products, therefore offering consumers added value above their usual moisture products. With dynamism and high value, skin care was the sector that presented the most opportunity for brands to establish themselves in China, in addition to this the Chinese pay particular attention to their skin and often their daily regime will have up to seven steps of application. Therefore the sector presents an eager and informed consumer base which Western brands are keen to have on board, particularly when local markets are proving to be stagnant.

"China is ripe for further growth in cosmetics and toiletries."

However, cultural differences can often make it harder for them to establish themselves. Chinese skin care draws inspiration from the abundance of herbs and plant life in the country and this is one way in which companies have tried to become closer to understanding the market. Multinationals are quick to establish partnerships with local scientists and doctors so as to increase their understanding of the medicinal properties in native herbs and plants on the skin.

Another reality of the Chinese market is the fashion for whiter skin, so companies in skin care have had to develop products in their ranges that cater for this. Sun care products have also benefited from this as protection from the sun plays an important role in maintaining a paler skin colour. The sector has seen dynamic growth, at 14% for the year. Raised awareness of the dangers of sun exposure on the skin has also helped sales grow.

Deodorants, on the other hand, have particularly low penetration in the Chinese market, suggesting opportunity for development and raising awareness of the sector. Current consumption is largely confined to the young urban male who participates in outdoor activities. Rising purchasing power and enhanced personal hygiene among men is again apparent here.

Pricing pressures continued to plague hair care as key players such as Procter & Gamble (Guangzhou) Ltd and Unilever China Ltd led the pack in keeping prices down to boost sales. Meanwhile, maturing demand and near saturation offered limited growth for bath and shower products, and China's huge oral hygiene sector. These two sectors saw the slowest growth at 4% and 3% respectively.

MARKET PENETRATION

The improving situation in China has led companies such as Procter & Gamble and L'Oréal to step up their investment in the market. Procter & Gamble's Olay brand has an established and strong presence in China, which is maintained through an extensive product range, affordable pricing and strong national advertising, often endorsed with celebrities. In April, Procter & Gamble launched China as a test market for their make up brands Max Factor and Cover Girl, and so looks set to fortify its dominant presence in the market by using the channels established on the strength of its Olay brand.

"Deodorants have particularly low penetration in the Chinese market."

During 2004 L'Oreal made two acquisitions in the Chinese cosmetics and toiletries market, firstly with Mininurse, a well-loved domestic skin care brand, and then Yue-Sai. L'Oréal will benefit from the strong and extensive distribution channels that these brands hold and is challenging Olay's dominance in the market through development of the Mininurse brand image. L'Oréal has already introduced the Garnier Naturals range under the Mininurse name, which has proved popular with young and trendy consumers and their market share, particularly in the skin care sector, is building rapidly.

Procter & Gamble and L'Oréal's increased presence in China has helped the expansion of the 'upper-mass' segment in skin care too, which creates higher value sales for their products. The growth of these and other multinational companies runs in tandem with supermarket and hypermarket expansion, as the channel gives their brands access to a wider audience. With the massive advertising and marketing budgets in place to support their brands it is no wonder multinationals are driving the market forward.

"Three of the top ten C&T brands in China are direct selling brands."

Jiangsu Longliqi Group Co Ltd has the distinction of being the leading domestic player in China's cosmetics and toiletries industry with an overall value share of almost 2% in 2004, according to Euromonitor International. The company is followed closely by Beijing San Lu Factory. Both players largely target consumers in the lower income brackets with low-end pricing, extensive distribution into the rural regions, and established brand names. Shanghai Jahwa Group Co Ltd has been one of the more active domestic companies over the review period by expanding its brand portfolio and actively sprucing up its existing brands, including GF and Liushen, through the use of celebrity endorsement and mass media advertising. In addition, Shanghai Jahwa has introduced a greater range of brands at different price points to target a number of consumer groups.

NATURAL PRODUCTS TREND

Consumers are drawn to cosmetics containing natural ingredients not just because of their perceived health benefits, but also because many believe they have higher standards of quality. This has enabled cosmetics manufacturers to charge higher prices for natural products, thereby injecting value into the market. Major manufacturers have also used this perception of quality to drive packaging developments, which convey fresher, more upscale appearances for natural products. Origins and Aveda, for example, have achieved success by emphasising the quality of their products, which in turn have prompted smaller producers to introduce competing products and rejuvenate their packaging.

Also benefiting manufacturers of natural cosmetic products is their widening availability. Upscale department stores such as Nordstrom's in the US are taking advantage of the growing interest in natural personal care products and are expanding their selections accordingly. "Natural supermarket" chains and health food stores, such as Whole Foods in the USA, are also educating consumers on the benefits of natural personal care products and some now devote considerable space to natural personal care products, including moisturisers, lip glosses and toothpaste.

FIVE-YEAR FORECAST

Over the next five years, Euromonitor International predicts that natural cosmetics and toiletries will grow strongly, but will remain inferior to mainstream products in terms of overall sales. The largest potential for growth in natural cosmetics and toiletries market lies in sectors such as baby care, bath and shower products and hair care.

In the future, manufacturers are likely to increase the amount of natural ingredients used in their products in order to satisfy consumers, without completely abolishing chemicals that they deem necessary to increase the shelf life or effectiveness of their products. At the same time, the major players are likely to dedicate huge marketing budgets to promoting the natural aspects of their products.

A potential hindrance to the industry, however, are forthcoming regulations in the EU and USA that will force manufacturers to disclose ingredients that are known to cause allergic reactions. Since many synthetic ingredients are actually found to be safer than natural ingredients, this could potentially damage the market for some natural cosmetics and toiletries products.

Three of the top ten C&T brands in China are direct selling brands, namely Alticor, Avon and Mary Kay. Their strength is even more impressive when you consider that a ban on direct selling was introduced to China in 1998 as a means to prevent pyramid selling. Foreign-funded enterprise is permitted but only on the single-layer direct sales model, so representatives have to be attached to a retail outlet. Therefore, direct sellers have had to open standalone retail outlets for their brands and have had to grow through opening more of them, often confining them to cities. Notably they have adapted their traditional sales strategies in the light of the legislation and have still proved a formidable force in the market. In April 2005 Avon was granted permission to start testing its sales model in preparation for full legislation in direct sales, and have since reduced their forecast growth for China, suggesting that the standalone model is more apt for the retail channel for the environment.

So success in China, Euromonitor International suggests, is certainly achievable and growth looks set to continue, but for many brands the market demands constant re-evaluation of traditional values that work in other regions.

Author

Ursula Horne is a packaging analyst for Euromonitor