COSMETICS MARKET CONTINUES TO MATURE IN INCREASINGLY PROSPEROUS CHINA

BY MARK ROWE
AN EXHIBITION centre in the southern Chinese city of Guangzhou will next month (March) be the venue for Asia’s largest personal care trade conference. Manufacturers, formulators, scientists and suppliers will converge to promote new ranges to what is now recognised as being the world’s most burgeoning market: China.

The Middle Kingdom is the second largest cosmetics market in Asia, after Japan, and the eighth largest in the world, making it a crucial battleground between rich country and local companies, all seeking to tap into the enormous social change that China is undergoing.

While cost prices are still low compared to Western Europe (according to a data survey by the China News Media Agency, the Chinese typically spend about 107 RMB – or Yuan (US$13.80) a month per capita on cosmetics, the major toiletries companies are only too aware of the sheer volume of Chinese who now have a disposable income. In 2000, just 2.4% of urban households in China had an income over 50,000 Yuan (US$6,500), but by 2010 that’s expected to be 12.5%, according to consultants Asia Demographics. One eighth of a population would be a reasonable, run-of-the-mill dominant market share – the difference in China of course is that this translates into around 130 million people. And it is these higher earners who are being targeted: as elsewhere, the money spent on cosmetics tends to grow in line with income, and according to the China News data survey, those who earn more than 4,000 RMB (US$515) every month averagely spend more than 300 RMB (US$38.69) on cosmetics.

Yet reading the demographic runes does not always make for encouraging reading: China has an ageing population – the 60+ age group will rise to 14% by 2010 – which will put pressure on the economy, and this is a group that does not spend as much on cosmetics. At the same time, China’s one-child policy has reduced the national birth rate to 12.4 per 1,000 people well below the global average of 20/1,000: the next generation of cosmetics buyers will come from a shallower pool.

For now, these detracting factors seem unable to apply any kind of handbrake to the cosmetics market, and developments during the past 12 to 18 months make it clear that China’s market is rapidly transforming. Indeed, according to market analysts AC Neilsen, the generation of “Little Emperors” is exactly what is fuelling the cosmetics and wider markets. “They are enjoying income levels unmatched by that of previous generations – born and raised in a period of economic boom, Little Emperors have grown up on a steady diet of foreign brands and western notions of consumption which they have happily adopted,” the company notes in a report, China Trends 2006.

The growth of toiletries and cosmetics is, according to Euromonitor International’s 2006 market report, Cosmetics and Toiletries in China, driven by rising disposable income and growing product awareness among consumers, which has led to them trading up to more specialised products. “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,” says Euromonitor International.

According to Diana Dodson, senior industry analyst at Euromonitor International, a number of opportunities exist for the cosmetic market in China. “There’s a low-cost production base – for now anyway – from which to centre operations not just for China but the whole Asia-Pacific region,” she said. “There is also a large and mostly untapped consumer base and strong demand among the consumer elite for premium cosmetics and fragrances, and value-added skin care. Hygiene essentials also enjoy high volume sales. The industry in China is following a similar development progression as that seen in the developed markets, although obviously it is still has far to go before it catches up.”

Two issues are hugely influential. First, the Chinese government’s decision to lift the ban on direct sales in 2005 – Euromonitor International anticipates this will result in deeper penetration of direct sales players into rural areas over the longer term. In the short term, analysts reckon it will have little significant effect, mainly because the main direct sellers – Amway, Avon and Mary Kay – had already delivered strong sales figures through the constraints of traditional single-layer direct sales models.

The second issue is China’s membership of the World Trade Organisation (WTO), of which it gained full membership in 2002. In accordance with its obligations, China lowered import tariffs on cosmetics from a high of 35% down to 10% or lower – though it chose not to abolish them all together. The move, according to AC Neilsen, both lowered the shop price of foreign brands and potentially increased the competitiveness of local products.

The jury is still out on just what this means for local brands. “Globalisation is clearly creating opportunities for international cosmetic brands, enabling them to expand beyond the maturing core markets to more dynamic ones,” said Ms Dodson of Euromonitor International. “Theoretically too, it can enable local producers to become major global players. But to be successful, local manufacturers either need mass or a unique positioning that differentiates them from competitors on the international market. In terms of China’s local players, despite many of them using ingredients based in traditional medicine, something which is popular in today’s global market, their products lack the sophistication and marketing grunt of other multinationals.”

Although demand is heaviest in the power houses of Shanghai and Beijing, an emerging, longer-term trend is that huge growth in the sales of cosmetics is occurring in all major cities – China, according to The Economist, is on course to have 125 cities with a population of more than one million by 2010. And Chinese citizens’ incomes have been increasing by 9% over the last 9 months, thereby causing a fast evolution of consumer’s behaviour. “Purchasing motivations change and become comparable with those prevailing in Hong-Kong,” says Euromonitor International’s report. “While consumers in white-collar positions are paying more attention to their personal image and appearance, many choose to buy premium brands.”

Overall, according to Euromonitor International, the market for cosmetics and toiletries rose from 50.7 billion RMB (US$6.5 billion) in 2000 to 85.1 billion RMB (US$10.9 billion) in 2005, the latest year for which official figures are available. Hair care and skin scare are the largest sectors but in the past year, several sectors have shown double digit growth, and all have grown by at least 29% – and often more – since 2000.

In terms of growth rates, these figures are hugely impressive. Overall the cosmetics market has risen by 68%; bath and shower products by 29%; deodorants by 83%; hair care by 45%; men’s grooming products by 51%; fragrances by 107%, and skin care by 133%.

Forecasts for 2006 results, expected to be confirmed in March or April, draw on the optimism and buoyancy implicit in these figures. Overall, the sector is expected to grow by 64% between 2006-2010.

Hair care product sales was forecast to rise by 77% between 2005 and 2010; men’s grooming products by 79%; skin care by 74% and, as health awareness improves in line with disposable incomes, sun care is becoming an increasingly important sector and is predicted to grow by 90% over the period, to 3 billion RMB (US$386 million) by 2010.

Skin care remains one of the most competitive sectors, with established players investing heavily in media campaigns and product innovation to build consumer loyalty. The 12 months to June 2006 also saw many new entrants to the Chinese skin care sector, from direct sales Le Club des Créateurs de Beauté, drugstore brand Freeplus to the all-natural L’Occitance en Provence and Innisfree.

A variety of new trends have developed in the past 12 to 18 months. Sales of sun care products more than doubled from 802 million RMB (US$103 million) to 1.8 billion RMB (US$232 million) in 2005. Much of this increase is thought to be due to a new trend in sun tan oils – in a country where it has become important to show that you have wealth, tanned skin is becoming as popular as white skin (the desire for the latter does still account for the continuing high sales of whitening products).

Historically, beauty in China is culturally associated with fair skin. According to Chinese government figures, a third of China’s cosmetics consumer spending involves the purchase of whitening products. As a result, L’Oréal, Estée Lauder, Procter and Gamble (Olay and SK-II lines) and the Japanese Shiseido Co (Aupres White) have all moved quickly to establish a strong presence in this sector. “Whitening creams are very important to the Chinese cosmetics market, because Chinese people regard white skin as the most important criterion for beauty,” said Mr Li, a spokesman for the China Association of Fragrance, Flavour and Cosmetics Industries (CAFFCI).

Male grooming is another area of growth, which again reflects increasing affluence. This has led to the emergence of what the China Hair and Beauty Association describes as “aimei nanren,” or “love-beauty men”, the Chinese equivalent of western metrosexuals, who have embraced facials and other traditionally female beauty applications. According to a survey by the China News Media Agency, men now spend as much time as women in front of mirrors. The survey found that, in seven major Chinese cities, cosmetics for men have become a necessity in about 33% of the male responders’ families, especially to those families with a monthly income of over 5,000 Yuan. The average Chinese man spends about 80 RMB (US$10.32) on cosmetics a month, and about 8.6 minutes in front of the mirror. These factors compensate for the low level of interest in other segments. Due to cultural mores, for example, Chinese consumers have not historically been attracted to deodorants and fragrances.

As for the thorny issue of price – for all China’s apparent wealth and booming economy, incomes remain far lower than comparable white collar jobs in the West – the past 18 months have been notable for moves by manufacturers to ease pricing pressure by creating value through product innovation. Typical examples include hair care and colour cosmetics, where top brands such as Rejoice and Maybelline New York slashed prices in order to boost volume sales, and compete more effectively with low-end domestic brands. Keen to protect their profit margins, especially with the rising costs of raw materials, manufacturers increasingly focused on brand building and product innovation. Last year, the government announced it was to drop the 8% consumption tax on skin and hair care; but a 30% levy exists on premium cosmetics, which are already significantly more expensive than in neighbouring Singapore or even Japan.

The key to growth is, for now, the responsibility of the international brands. Foreign firms and joint ventures with Chinese companies account for 80% of the Chinese cosmetics market. “While top international brands incorporated the latest technology and provided specific functions and benefits, local players have had to play catch-up,” says Euromonitor’s report. “Top international players have indicated their commitment to developing their positions in China by investing in research and development centres in the country. They are also setting up more manufacturing plants and moving their regional headquarters to China. More brands are also expected to be introduced to the Chinese market over the forecast period, as existing players and new entrants try to meet the increasingly varied demands of different consumer groups.”

Just as crucial is the environment in which these goods are sold: typically clean and comfortable – i.e. recognisably Western – shopping centres are good platforms for a wide variety of goods and have given consumers a new shopping experience, and helped raise product awareness. This is especially the case for emerging cosmetics and toiletries such as men’s skin care and deodorants.

In a classic case of cause and effect, the expansion of western companies and their western-style shopping centres, has helped consolidate the distribution network, and provided relative ease for the top brands to further their national expansion. Manufacturers are also able to liaise directly with these chained retailers rather than going through third-party wholesalers and distributors – even in a profoundly nationalistic nation, such factors seem set to offset any predisposition towards domestic brands.

Links:

*Euromonitor International http://www.euromonitor.com/Cosmetics_And_Toiletries.

*AC Neilsen: www.acnielsen.com/reports