The Chinese market presents both enormous opportunities and significant challenges to brands trying to capture their piece of the China beauty prize.
To say that China is making waves in the global beauty industry would be an understatement. China is predicted to become the world’s largest beauty market in terms of sales and market share with a demand that knows no borders. Data from Euromonitor reveals that total retail sales of skincare products and make-up products in China reached RMB186.7 billion and RMB34.4 billion, respectively, in 2017, achieving year-on-year growth of 10.3% and 21.3%, respectively.
So how do you capture the hearts and wallets of these new consumers? China’s beauty market has been developing fast accelerated consumption driven by shifting demographics towards increasingly affluent consumers with a sense of luxury and a willingness to spend on products and services. Success in this massive market depends on a combination of being bold and daring, and incredibly strategic.
Charles Denton, Chairman and CEO of Erno Laszlo, shares his deep understanding of the Chinese beauty market, sharing his perspective through the lens of a brand owner that is living the challenges, navigating the evolution, and witnessing the growth of the brand.
Erno Laszlo has a fairly established business in China. How have you seen the market evolve since you launched in 2014 and what are your ambitions?
It’s indicative of the rapidly changing landscape in the China market to describe a brand as “fairly established” after only four years. We have seen many changes during this period which have wrong footed some and provided wonderful opportunities to others. The biggest shift has been the move online. Like many others we began our journey offline with counters in the leading department stores Jiuguang in Shanghai and SKP in Beijing. Our plan was to gradually expand to 50 other locations within Tier 1 and 2 cities. However, it soon became clear that the online opportunity of socially powered commerce gave us access to many more consumers which increased both awareness and revenues. The shift to a digital-first strategy for our brand was in direct response to how the consumer behavior has evolved.
In addition to offline to online there have been several other trends which have had meaningful impact on our brand and others. There’s now a much wider group of consumers upgrading to luxury brands, largely driven by premium brands penetrating tier 3 and 4 cities. The increasing sophistication of the consumer, who is being informed by more social platforms both locally and internationally, has opened up the market to niche brands like ours. The cross-border platforms have increased the confidence of consumers to try new brands. And the power of KOLs who now dominate the conversation with the consumer.
For Erno Laszlo, we’re growing well. Last year we saw some extraordinary increases online, especially with Tmall during singles day, which delivered a 200% increase, which I believe was the highest growth rate amongst the luxury skincare brands. In terms of ambition, we’ve set ourselves a growth target of RMB1 billion by 2022. It’s certainly a stretch but not out of sight.
The opportunity for beauty in the Chinese market is mind-boggling and brands of all sizes are scrambling to capture their piece. What is the right time for a brand to enter this market? Is there such a thing as launching in the Chinese market too soon?
The consumer will tell the brand if it’s too soon to enter the China market. If your brand is trending in its home market and resonating with a traveling or resident consumer then it’s probably a good time to consider expanding into China. But if there’s little evidence of appeal with that consumer abroad, then it’s going to be extremely challenging to start from scratch. How to enter the market has changed dramatically. For the last 20 years, it was difficult “to be seen” because the larger players dominated the real estate both in terms of advertising and department stores, and today it’s difficult “to be heard,” because there is simply so much noise, and the appetite for the new, interesting, and inspiring is insatiable. Big brands like Estée Lauder and L’Oréal worked very hard to cultivate the Chinese consumer. They spent billions on building their brands and have enjoyed leadership positions ever since. During the last couple of years, however, the trend towards consumers looking for a wider choice and especially the opportunity to trade up to more premium brands is accelerating. Luxury and in particular skincare are seeing rapid growth and I believe this will continue, especially as the opening of cross-border e-commerce, which is really gaining traction, accelerated the rate of international brands being adopted and this has also driven up quality, setting higher consumer expectations.
T-mall is aggressively courting foreign brands of all sizes to onboard on their cross-border platform. It reminds me of Amazon courting brands for their luxury beauty platform. They make launching with them seem easy. What should brands be considering?
Tmall, both domestically and through their global platform, is undoubtedly a very important platform for high-end brands entering the Chinese market. There are challenges for new brands, especially those with comparatively low brand awareness. Rather like Amazon, the better you perform the more exposure you receive. This poses a problem for late entrants seeking to gain traction, because the higher-performing brands get the lion’s share of visibility. Which is understandable in a data-driven environment. At the outset it’s critical for brands to lead with products which have unique benefits, trying to occupy the white space. It’s also essential to access and analyze Tmall’s big data to learn how and where to optimize campaigns. This is not really feasible for a brand to manage directly, so most appoint a TP to handle their relationship with the platform. This structure doesn’t really exist elsewhere outside China. But it very important because a good TP understands the rules of engagement and how to unlock the tools within Tmall to ensure a brand’s success. Choosing the right TP therefore is the most important consideration when launching on Tmall.
Given your experience in building this market and navigating what is known to be difficult and somewhat murky when it comes to regulation, what do brands need to beware of?
I’m not sure what murky areas you’re referring to. There are definitely some trading companies to be avoided and real issues around counterfeit products and IP infringement. We’ve always found the rules as set out by the government, are very clear, although it’s true that they can be tiresome and prone to change periodically without warning. But it’s important to keep in mind that they’re trying to adapt to a fast-growing and evolving market. We have always avoided trying to circumvent the regulations, although there are some companies doing this. Recently sampling or testing products domestically, which are unregistered but supplied through a cross-border platform, is a workaround which has been deployed of late. It’s a dangerous game to play because if a brand is caught-out they risk being banned from the market altogether, so it’s not worth the risk. That said there are some very interesting recent developments which make entering the market a little easier. For example, there’s now a new registration process being tested which is largely based upon trust. If a brand is honest and straightforward about declaring its formulae, the government will take this on trust and accelerate the import permit through an electronic registration process, reducing the time to market by two-thirds.
The Chinese market and Chinese consumers have fueled recent growth for many legacy brands. Given the current uncertain political and economic conditions, do you feel these brands are vulnerable?
Legacy brands have a unique quality in that they can’t be authentically replicated. As long as they have a clear and compelling brand story, with evolutionary and inspiring products (new ingredients supported by technology) with proven efficacy, they will remain relevant and the consumers will appreciate and value them. The real challenge will be maintaining growth in a rapidly changing landscape. For many brands the Chinese consumer accounted for more than 50% of their revenues. This number disguises the true figure because purchases abroad are not reported as Chinese revenue. They therefore represent a much higher proportion of revenues for most brands. Since the Chinese government has taken strides to increase local consumption through tax cuts and curbing the reselling of goods (purchased abroad) on social platforms, many brands have seen a substantial downturn in their International revenues. Time will tell if these brands can compensate by increasing revenues in the domestic market. If you take a long-term view on China, as we do, there are many reasons to remain positive about building a strong and sustainable growth story.
How are you future-proofing the Erno Laszlo business against increased competition in the market from both international and the trend of homegrown luxury brands, as well as from political and economic uncertainty?
Emerging local brands and competition from new entrants from abroad are two things I think a lot about. That said, we believe that focusing on our consumer and working as hard as possible to bring them the best results, improving their confidence and empowering them to be their best possible self, will continue to ensure we have a role to play in their lives. There’s already a strong following for our brand amongst a committed and loyal group of fans who advocate based upon the results they have seen for themselves. If we can continue to grow this community, we shall be well positioned for the future.
A good example of how we’ve been adopted into our consumer’s way of life is their use of nicknames for our hero products. They seldom refer to the product by its original description, preferring to use the name they have given. The products have taken on their own unique characteristics and the statements that accompany them are extremely strong. This is another reason why we’re confident in the future. Our momentum is increasing, and through a deeper understanding of our consumer we shall provide better products and services.
How does a brand begin to crack the consumer behavior code in a market where habits and the competitive landscape are rapidly evolving? What does it take to succeed?
I truly believe that the consumer must lead the conversation. Gone are the days when a brand can dictate. There are clearly trends to be aware of, such as the growing demand for anti-aging products, the appreciation and desire for luxury, and the importance of trust. But ultimately a brand needs to be consumer centric, and the more they invite the consumer into the brand, the better. That means being transparent, leading with a clear set of values that resonate, and having a strong brand story which is inspiring and truthful. It also helps to have a couple of star products that consumers rave about, because it’s a social market, and good news (especially about results) travels fast. The opposite is also true—if a brand seeks to exploit the consumer it could eventually be heavily criticized, which might be fatal.
La Mer had a big, public misstep that got called-out by Chinese beauty blogger Hao Yu aka Doctor Big Mouth. What are the most common easily avoidable mistakes you’ve seen brands make when launching and marketing their brands in China?
La Mer is one of the fastest-growing luxury brands in China and they have done an excellent job building value into their proposition. Unfortunately, I think this was misinterpreted, which caused some fallout. Remaining true to the purpose and proposition of your brand is the key to solving this problem. If an influencer feels that the brand is not adding value, or worse, trying to unfairly exploit or mislead their audience, then they may take a negative position. More and more consumers are relying upon proof of efficacy, provided by their friends, rather than the claims of brands. Helping our customers gain a better skin condition and being able to demonstrate this remains our proposition. Our purpose is to help them improve their self-esteem and, in so doing, lead a more confident and fulfilled life. Of course, we must pay close attention to truly understanding our consumers’ needs, placing them first, to ensure that our efforts match their expectations. It’s not about what we think they would need, especially in terms of values, culture, and nationalism—all of which can be very sensitive and emotional subjects. No matter what, we must always make sure we’re honest and transparent—that way if we’re criticized, at least we can stand behind our point of view with truth and dignity.
China has one of the most advanced digital ecosystems in the world, with completely indigenous social platforms and e-commerce platforms. Where does a brand even begin building a digital footprint in the market?
The consumer journey often begins with a KOL creating awareness (some have their own online shops so it’s a one-stop proposition), research then takes place on social and e-commerce platforms, perhaps followed by a visit to a department store counter before a final buying decision is made. The latter can be price driven, prompting further research online. For Erno Laszlo, our brand digitalization means using all the digital tools available to establish a one-to-one relationship with each consumer in order to deeply understand their characteristics and behavior. Strategically any brand entering the China market needs to build their own CRM system in WeChat and to cooperate with the leading e-commerce (Tmall/Taobao, JD) and social platforms (Weibo and Little Red Book), using their big data to understand consumer profiles and develop communication strategies. This market more than any other is data driven. Whether the brand is operating locally (which I’d recommend) or remotely from their home market, they need data analysts who can interpret the information in order to make better-informed decisions.
Do global social platforms like Instagram, Facebook, and YouTube have an impact on Chinese consumers even though they are banned?
The influencers and early adopters have an eye on the global market and often they are well traveled with their own accounts on these US-based platforms. They follow European, Korean, Japanese, and US fashion and beauty, relying on these social platforms for trends. Some key influencers will visibly leverage their Instagram assets to facilitate their social content in China. However, consumers in new tier 1 or tier 2-4 cities are less aware of Instagram, etc. For example, in a tier 1 city like Shanghai the consumer may well know of a KOL’s official account related to Instagram; however in Beijing (still a tier 1 city) many more would rely on print advertisements, in-store information, television, and the local Chinese social platforms. At some point the consumer will check out the brand in their home market and, as such, having a strong Instagram, YouTube, and Facebook presence would be an advantage.
What are the most important social platforms and apps for beauty brands launching in the Chinese market?
The leading social platform is WeChat, which is like Facebook + Instagram + WhatApp all combined. It’s a 360-degree tool that facilitates people’s daily lives, including networking, daily city services like paying utility bills, accessing public transportation and social security etc. The next platform which has become extremely important is Little Red Book, a user-content-driven one-stop search tool for stories on product use and efficacy. Thereafter Weibo is valuable for the latest news and acts a little like Twitter. And more recently Tiktok has become the place for viewing entertaining videos. Brands need to have a strategy for each one of these and to understand why they’re present and what the consumer expects.
We’ve all heard of the power of KOLs in the Chinese market. How are they similar to the influencer ecosystem in the US market? What is different?
They are similar in many ways—they can be divided by a specific industry and or their expertise, they have loyal followers, often promote brands through a commercial cooperation, rely upon their social audience, and can be transformational in the brand’s success and/or failure. The main difference is that many have their own apps on WeChat providing their audience with a one-stop, content driven e-commerce solution. There are a number of risks to brands working with KOLs. KOLs can suffer from the same criticisms of “selling out” to brands who pay for their posts. Although more recently, paid posts are being called out on platforms, making it more transparent for the audience. They can also get into trouble with the authorities casting a negative shadow over the brands with which they have visible and long-standing associations. And they may well become the next competitors to the very brands that have funded their careers. It’s interesting to see how their popularity can change, and how there’s a trend toward different types of KOLs, for example the use of fresh-faced young men to promote beauty, which is gaining momentum. Although there is much local talk about reducing their influence, I don’t see their power waning anytime soon.
Given the difference in culture and language, how do you recommend foreign brands manage the Chinese social platforms and relationships with KOLs?
The KOL trend is becoming increasingly influential in China; however, individual KOLs are unpredictable and, as outlined above, can work against a brand just as easily through a halo effect. This has created a need for better scrutiny and understanding of each KOL, spawning a new group of KOL agencies. It’s perhaps better to build relationships through these specialists who can advise on which KOLs to choose and why. They’re also very sophisticated in tracking performance, which is useful if you’re keen to understand the ROI on each campaign. While agencies offer a form of reputation insurance, I believe the best way forward for a brand like ours is to build genuine relationships with the KOL and to work hard in trying to understand their needs in the same way we approach a relationship with our consumer. Our objective is to build authentic relationships with those KOLs who have a real passion and liking for our brand. That’s the best of both worlds.
What are common misconceptions or assumptions brands make about the Chinese culture and consumer?
It’s very dangerous to underestimate the Chinese, their culture, their taste, and their ambition. For two decades they’ve been playing catch-up as hundreds of millions moved into the middle class, and as is normal they wanted to experience a better standard of living for themselves and their families. This has fueled massive consumption of Western brands. But it would be a mistake to think this will last forever. The Chinese are a proud nation, and their culture, which is focused on the family, is important to them. It won’t be long before local brands start to gain visibility and, in the future, it’s possible to imagine a shift from “West is best” to “China is better.” It’s also important to remember there are many Chinas in the sense that it’s a diverse population, with behaviors varying dramatically in the different city tiers, and geographically north to south. To describe the customer as one type of person would be a misunderstanding. And the greatest mistake of all is to take this consumer for granted.
You have team members in Hong Kong, Singapore, but decided to open an office in Shanghai. Do you think bundling a substantial business in the Chinese market requires a brand to have a physical presence? Why did you decided to take this path?
I don’t believe it’s possible to build a sustainable growth story in China without truly investing time and resources into understanding the consumer. To do this remotely from New York or even closer in Singapore or Hong Kong does not provide a finger on the pulse level of engagement. Our team is made up of consumers and, through this approach, we’re bringing them into the brand, for deeper understanding and a faster response to their needs, the two most important factors in a highly developing and hugely challenging market. Our goal is to serve our consumer better and, by empowering our local team in China with this ethos, it allows us to meet this objective.
China seems to be softening its stance on animal testing, but many brands have circumvented this issue by only selling on cross-border online platforms. Do you think this approach is short-sighted?
China is expected to be the world’s largest cosmetics market in a couple of years, and probably already is if you count purchases made by Chinese abroad. However, many brands have preferred to delay entering the market until the animal testing issue is resolved. For them the cross-border route is an ideal way to enter the market without having to submit their products to the formal permitting procedure. We took the view that the government would move into other forms of product vetting once there was sufficient evidence that the products entering the market were safe for their citizens. Of course, to reach this position, brands like ours had to trail-blaze in order for reforms to follow. The same happened in Europe and the US, and China is no different. China will be moving toward alternatives to animal testing, helped by the work of various nonprofit organizations and cosmetics companies like ourselves, who are partnering with Chinese scientists on finding substitute methods. These new technologies will accelerate the end of animal testing, which is good news for us all.
What does an omni-channel strategy consist of in the Chinese retail landscape? How important is brick-and-mortar retail in this market ?
The purpose of an omni-channel proposition is to add value to how a consumer experiences your brand. We make the product accessible where they want to shop and curate the experience to meet their expectations. If you maintain a consumer-centric approach, the purpose becomes clear. The consumer gets to choose the most suitable way to engage with your brand depending on their needs and preferences. The ROI should be seen from their perspective. If they invest time in visiting a department store counter or mono brand boutique, they need to feel that it was time well spent. Time is of course the most valuable resource of all, and choosing how we invest it is the new luxury. Our mantra is simple: whatever, wherever, and however the consumer wants to experience our brand dictates our omni-channel strategy. Listen to them and they’ll tell you.
China’s modern beauty consumer increasingly buys makeup and skincare items while traveling abroad, especially in China’s neighboring markets or shopping online. How should this behavior factor into a China strategy?
It’s important for brands to ensure they are present and visible where their consumers want to shop. The Chinese are increasingly traveling abroad, and shopping is still an important part of their agenda, although this is changing in favor of experiences. With the reduction in import taxes, increasing hunger for brands available both domestically and via cross-border and the increasing adoption of price parity across the global markets, there’s perhaps less reason for the Chinese consumer to buy abroad. Again, the guiding rule should be to place your brand where the consumer wants to buy it. We gained insight that there was significant demand in South Korea for our brand, and in 2017 opened duty-free counters with Lotte and Shinsegae. These proved to be very popular with visiting Chinese providing access to our latest products 18 months before they were permitted for sale domestically.
The opportunity in the Chinese market is obvious, but what is not talked about is the potential competition of C-beauty brands in the global marketplace. What are your thoughts on these brands and their potential outside China?
It’s easy to dismiss China as a copycat economy, because in some ways that’s how they got a foothold on the modern economic ladder. But today it’s much more sophisticated. Some C-beauty brands can already make the same or even better claims and pick up on the same global trends that are being exploited by international brands. They use similar ingredients, have access to the similar science, modern technology, packaging with strong aesthetics, and premium feel. The only thing that C-beauty brand cannot deliver today is legacy and brand heritage with a story. For the time being the C-beauty brands will probably grow fastest in the mass/masstige segments as it’s still challenging for them to penetrate prestige. But in time this will change; perhaps five years from now we’ll see some truly powerful C-beauty brands penetrating international markets having built a strong home base in China.
What does the future of the Chinese market look like in the global beauty landscape? Any predictions?
The Chinese market is underpinned by a huge population base and the economy is continuously growing, albeit at a slower pace than before. In addition, the level of education is increasing, a desire to trade up, and there’s a move towards encouraging more domestic consumption. All these factors should drive higher growth in the cosmetic market. China is already the world’s second-largest cosmetic market, and if you only consider skincare, it is the world’s largest.
1. Beauty knowledge, insights, and behaviors will penetrate into tier 4 cities, making beauty know-how more generic for all Chinese people.
2. While international brands cascade down to smaller cities, smaller niche brands will have more room to grow in tier 1 and 2 cities as well-informed consumers seek individualized forms of expression.
3. The movement towards environmental protection and related green issues will continue to gather momentum driven by the exposure to pollution and the negative impact this can have on health.
4. International brands will try to counter the growth of local brands by either acquiring them or considering developing tailor-made Chinese formula products that fit Asian skins.
5. Cosmetic medicine supported by technology and science will increase, as will the use of beauty tools.
6. Chinese brands will take hold domestically and will grow globally through the international Chinese community.