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DECODING THE CHINESE IMPACT ON GLOBAL BEAUTY

March 8, 2021
March 8, 2021

In 2019, according to the investment bank Morgan Stanley, China’s share of the global beauty market could increase by 66% over the next five years, which represents a sales increase of about $38 billion—nearly half of all global beauty growth. The opportunity is real, but it’s only getting more competitive. Success requires an understanding of the dynamic retail landscape, the nuanced marketing ecosystem, and the wildly sophisticated consumer. This year China went from being ground zero of the pandemic crisis at the beginning of the year to being the first and only G20 economy widely reported to recover from COVID-19 with growth in 2020. As the first country to deal with the ravages of the crisis, China has also been on the front line of post-pandemic economic recovery and changes precipitated by the pandemic.

During the onset of pandemic shutdowns, retailers and brands large and small immediately embraced China’s technology and the market’s digital ecosystem to stay connected with their customers. In March the government proclaimed they had control over the crisis, moving quickly to stabilize the domestic economy by implementing stimulus in the form of tax cuts and lower interest rates to recapitalize local governments, and lower lending rates for businesses. Data from China’s National Statistics Bureau indicated retail sales figures increased 5% year-on-year in November, faster than the 4.3 per cent rise the month before. The International Money Fund recently predicted the world’s second-largest economy is forecast to expand 1.9% in 2020, compared with growth of 6.1% last year. And China’s growth is expected to accelerate to 8.2% next year. While the recovery in China is being widely reported, analysis by China Beige Book International, a provider of independent economic data, tells a different story, saying “China’s official numbers don’t add up” and that growth is uneven and nowhere near last year.

“China’s official numbers don’t add up” and that growth is uneven and nowhere near last year.
By China Beige Book International

As most of the Western world struggles with the impact of the pandemic, McKinsey research indicates the beauty market in China has already rebounded, reaching 2019 spending levels in May/June. Markets such as Western Europe (down 18% in the first half) and North America (down 12% in the first half) will take longer to recover. Asia and specifically China may be perhaps the only beauty market to see gains in 2020, reinforcing beauty’s position as the sector’s main growth engine and widening the gulf between Western and Eastern beauty markets. China is delivering promising results for beauty brands that got their China strategy right. The benefits of the market’s great resilience will help offset losses in other markets.

As the recovery in China takes shape, important shifts in the economic landscape have surfaced. COVID-19 has been an accelerant for emerging trends, fast-tracking the future that was already unfolding. McKinsey identified five such trends in its China Consumer Report 2021; while these trends are not limited to China, the Chinese market provides a crystal ball of sorts as to how these trends are unfolding and the long-term impact they will have on markets and behaviors.

  1. Digitization – Digital tools become increasingly popular solutions, expanding from B2C to B2B.
  2. Declining Global Exposure – Rising importance of domestic markets, technology, and capital.
  3. Rising Competitive Intensity – Technology and agility drive winners to capture the lion’s share of industry value.
  4. Consumers Come of Age – Consumers (especially younger consumers) are becoming more prudent and health conscious.
  5. Private and Social Sectors Step Up – The private sector plays a stronger socioeconomic role, while the social sector rises.

Given China’s position as one of the few large markets to report growth, big beauty will continue to be reliant on the region, ramping up investments, while smaller players will continue to tap into the market opportunity through cross-border and travel retail (when we start traveling again) focusing on domestic duty free. The Chinese consumer and the market’s digital ecosystem is arguably the most sophisticated in the world. While the market may be fueling global beauty sales, make no mistake—it’s equally competitive, and success requires significant investment, strong local partners, and a long-term view.

The Chinese consumer has matured and is equally as sophisticated. Understanding the constant evolution of behavior, trends, and market shifts is requisite, as is listening to the advice of local partners when it comes to cultural context and the translation of market nuances. The backlash of cultural missteps is swift and can have a profound impact on revenue and reputation. “The attitude of big international brands is changing significantly,” Wu Wenmi, founder of Wenzihui MCN, an agency in Hangzhou that partners with Alibaba, told Bloomberg. “They are more humble now and willing to hear our opinions of how to play the game.”

Chinese consumers are confident, optimistic, and ready to spend. The Chinese government’s effectiveness in its response to the pandemic has inspired an unparalleled rebound in consumer confidence, according to McKinsey’s consumer sentiment survey. Net optimism over the recovery of the economy in China has hovered around 50%, compared with about 22% in the US, and in stark contrast to the pessimism that pervades Europe, Australia, and Japan. From a global perspective, Chinese consumers are most confident they will be able to resume their daily routines after the pandemic, with 60% indicating they expect to do so within two to three months. In comparison, a mere 13% of consumers in Germany, and 5% in Japan, expect their lives to return to normal within the same time frame.

Follow the Money China’s position in the beauty ecosystem expanded beyond its borders in 2020. Multinationals and strategics have been fueling growth and creating competitive advantage through investment and M&A activity for years. This year investors have piled into domestic companies that are overtaking multinational rivals, doubling the combined value of China’s 500 top brands in the past four years to about $3.8 trillion, according to marketing consultancy World Brand Lab. Venture-backed Chinese beauty brands and retailers are gaining traction. The most notable C-Beauty brand is Perfect Diary, but emerging beauty retailers such as Wow Colour and The Colorist are giving Sephora a run for its money by targeting the mid-end segment, and China’s male skincare market has seen a flood of domestic start-ups, tapping global investors for funds—six of the new brands raised more than 300 million yuan between them, the founder of one brand told Reuters. According to media reports, at least 10 new Chinese male skincare brands have launched this year. Bertelsmann Asia Investments said it has invested in a new Shanghai men’s brand, without saying how much, while others like SIG Asia and Redpoint Ventures have also placed sector bets, according to domestic media reports and start-up research database CB Insights.

The Rise of C-Beauty After decades of lagging behind foreign rivals, “Made in China” is no longer a badge of derision. A boom in domestic businesses has given rise to formidable competition from C-beauty brands, with a distinct competitive advantage putting pressure on global rivals that depend on the country for much of their growth. Fueled by increasing nationalism and prices typically lower than foreign brands, they also have the agility to keep up with the speed of innovation. With “internet thinking” as part of their DNA, online connectivity with local customers is native to these concepts, and marketing that resonates for locals is intuitive. The growth of online sales during the pandemic has weakened multinationals’ advantages in distribution and marketing. “Chinese shoppers are showing stronger confidence in local brands,” Helen Wong of Qiming Venture Partners, which has backed local start-ups such as lingerie maker Neiwai and cafe chain Coffee Box, told Bloomberg. “The coronavirus is accelerating the trend as people stay home, watch livestreaming, and shop.”

These brands have not only taken market share from the likes of L’Oréal and Estée Lauder in the hyper-dynamic beauty landscape in China—they have global ambitions. Yatsen Holding Ltd., the parent company of C-Beauty unicorn Perfect Diary as well as Little Ondine and Abby’s Choice, is a growing threat to strategics, jumping 75% since its $617 million US IPO valuing the company at $7.82 billion in November. According to Yatsen’s prospectus, which cites a CIC report, China’s beauty market is expected to grow by $29.9 billion between 2019 and 2025, accounting for nearly 60% of the total growth of the global beauty market during the same period.

We’ve yet to see a Chinese beauty brand emerge onto the global beauty stage, but Perfect Diary might be that breakthrough brand. In just four years Perfect Diary trails only L’Oréal and LVMH in the world’s No. 2 market for makeup. The domestic market is still the focus, but Yatsen CEO Huang Jinfeng has made his global ambition for the business known. The company threw its hat in the M&A ring making its first acquisition in October 2020, buying skincare brand Galenic from French group Pierre Fabre and recently acquiring Eve Lom from Manazinita Capital both for undisclosed sums.

The Amplification Impact As China increases in importance for many beauty brands, we may see market trends spread beyond its borders more quickly than in the past as companies become more comfortable experimenting with strategies that work in China in other markets, such as livestreaming and private messaging. China has fueled the growth in the skincare category over the past couple of years and, to a lesser extent, in the color cosmetics category; the same dynamics seem to be creating opportunities in the fragrance and men’s categories.

Mintel estimates the Chinese men’s skincare market is forecast to hit 12.5 billion yuan ($1.90 billion) this year and expand 50% to 18.5 billion yuan in 2025. Euromonitor International estimates the men’s skincare business in China, excluding post-shave products, was already more than three times the size of the US market last year in dollar terms and more than twice the size of South Korea, with value growth through 2024 seen easily outstripping both.

The retail value of China's fragrance segment is projected to experience considerable annual growth and expand from $1.18 billion in 2018 to $1.81 billion in 2023, according to Euromonitor International, which noted that the market had surged 48.2% between 2014 and 2018. An influx of capital from big fragrance houses are a testament to the industry’s faith in China. In 2018, CITIC Capital, a major state-owned investment company, acquired the New Zealand natural fragrance group Trilogy International Limited for its strong China potential.

Fragrance is a relatively small and slow-growing category dominated by well-known international brands. Still considered a nonessential item by many Chinese consumers, the market value will continue to expand over the next five years, driven by a growing diversity in product offerings and consumers’ appetite for premium and niche fragrances, according to Alice Li, a senior research analyst with Mintel. “The Chinese fragrance market is expected to continue experiencing dynamic growth, mainly driven by premium fragrance, which takes up about 80% of the total fragrance market in China,” according to Kelly Tang, an analyst at Euromonitor International. “There's huge potential in the China market as consumers are still in the elementary stage of wearing fragrances. Awareness of personal grooming is also on the rise.”

The home fragrance category has reached a critical mass and become a post-COVID craze driven by the rapid expansion of international perfume brands and domestic labels. Tianle Feng, the CEO of Double Horse Fragrances & Flavors (who is also a Chinese perfume KOL), told Jing Daily that the market has already seen soaring sales before the pandemic hit. “The home scent category was growing at around 35% for the past 3-5 years,” said Feng. “Due to China’s skyrocketing property price in recent years, young consumers have been shifting their spending from bigger purchases to smaller ones that could concretely improve their life quality, such as candles. People have become more demanding about sensory experiences in their homes.”

The Reality of 2020 In a BeautyMatter year-end webinar debriefing the Chinese beauty market, industry experts translated the spin. According to Julian Reis, CEO of SuperOrdinary with a team of 200 in China, the long-term view for China is strong in general but most brands are not living up to the hype and are flat or even down. Recovery is happening, but it is very category-based and specific, with a seismic shift happening in the channels of distribution.

Singles’ Day on 11.11 set multiple sales records. Alibaba generated $74.1 billion in gross merchandise volume (GMV)—an increase of 26% compared to 2019; and JD’s 2020 promotions reached new highs of over $40 billion, while its international business saw transaction volume increased more than 120% year-on-year in the first 10 minutes. Charles Denton, Chairman and CEO of Erno Laszlo, described Singles’ Day this year as a “bit of a bloodbath.” Denton revealed that what fueled much of this growth for international beauty brands is a dirty secret no one likes to discuss—very deep discounts on surplus inventory that was built up around the world and liquidated on Taobao.

In effect, premium brands have been servicing the Daigou grey market through legitimate distribution channels like Korean Duty Free, providing a bit of control but creating a dynamic in which brands are having to compete through their Tmall platforms with this product that ultimately ends up discounted on platforms like Taobao. This has led to the most extreme discounting ever seen. Denton said some Korean brands were discounting their products between 70% and 80%—the La Mers, L’Oréals, and Lancômes of this world were discounted at unprecedented 50% discounts, causing interesting knockoff effects. For example, if you look at the top ten Singles’ Day rankings for the last five years, in pretty much every year there were four or five Chinese brands in the top ten. This year because of the aggressive discounting by international brands, only one domestic brand, Winona, was left in the top ten.

China Beige Book shared with South China Morning Post that their analysis continues “to show a less-robust recovery than official statistics, which are in many cases being wildly inflated by downward revisions to their 2019 baselines.” Shehzad Qazi, Managing Director, China Beige Book, warned, “Don’t confuse the fourth quarter’s services recovery with the ‘Chinese consumer is back’ narrative. This is a business services—not consumer-side—recovery. Retail sector data bear this out even more clearly, with spending on non-durables sagging.”

“Don’t confuse the fourth quarter’s services recovery with the ‘Chinese consumer is back’ narrative. This is a business services—not consumer-side—recovery. Retail sector data bear this out even more clearly, with spending on non-durables sagging.”
By Shehzad Qazi, Managing Director, China Beige Book

The Future All signs indicate that big-beauty brands will continue to rely on the Chinese beauty market to fuel growth for the foreseeable future as Western markets struggle to get back to 2019 activity. Have big-beauty brands become too reliant on China for growth? Perhaps, but given the size of the market and the indications that China is already well on its way to a rebound, brands are left with few options. There are no shortcuts, and wearing rose-colored glasses is not going to help navigate what is sure to be a tough couple of years. China is certainly a part of any global growth strategy, but look beyond the spin and dig deep.

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