INDUSTRY SERIES: COSMETICS
INDUSTRY SERIES: COSMETICS
1 IN THIS ISSUE : I. “Cosmetics market” definition 1 II. Huge market potential 1 III. A “Brand” new era 2 IV. Principal market drivers 4 V. The emerging markets 6 VI. Supply of cosmetics 7 VII. Market entry considerations and expansion strategies 8 VIII. Market players 12 IX. Distribution channels 16 X. Performance by product sector 18 1. Hair care 18 2. Skin care 21 3. Color cosmetics 23 XI. Future outlook 26 INDUSTRY SERIES: COSMETICS July 2005 Issue 1 CHINA NATIONAL COMMERCIAL INFORMATION CENTRE Statistics Department, Room 2440, Building 2, No. 25, North Yuetan Street, Beijing, China. Postcode: 100834 Tel & Fax: (8610) 6839 2440, (8610) 6839 2441 E-mail: email@example.com Contact person: Ms Mu Xuan & Ms Liang Chi Xin The Booming Cosmetics Market in China Backed by the robust economic growth, China’s cosmetics sector is turning to a huge money-maker evidenced by the rapid development in recent decades.
The China Association of Fragrance Flavor and Cosmetic Industries ( ) estimated China’s total sales of cosmetics1 to be nearly 85 billion yuan in 2004, up by 13% from 75 billion yuan in the previous year, ranking number two in Asia after Japan and number eight in the world in terms of sales value. This paper presents the general background of the booming cosmetics market in China, addressing the following aspects: the market size and structure, market entry considerations and the existing market players. Finally, a market analysis by product sector will be provided to give more specific information.
I. “Cosmetics market” definition For the purposes of the study, “cosmetics market” in the following analysis is confined to the most prominent sectors, namely, hair care, skin care and color cosmetics, excluding the oral hygiene, deodorant, fragrance, sun care and depilatory sectors. II. Huge market potential China is currently the second largest cosmetics market in Asia, with market size estimated to be more than 85 billion yuan in 2004. Mainland people’s average annual spending on cosmetics, in the early 1980s, was just about 1 yuan (12 US cents); the figure rose to 5 yuan (60 US cents) in the early 1990s, and jumped to 25 yuan (US$3) at the end of 2000.
In big cities like Beijing and Shanghai, the annual average spending on cosmetics has reached 150-180 yuan (US$18-22.7). Cosmetics has now become the fifth-largest consumption hotspots on the Mainland only after real estate, automobile, telecommunication products, and education and tourism. The market is expected to expand at an annual rate of about 13% with sales reaching 100 billion yuan by 2010.
1 This figure excludes the cosmetics sales in beauty salons. LI & FUNG RESEARCH CENTRE LI & FUNG GROUP 13/F, LiFung Centre, 2 On Ping Street, Shatin, Hong Kong. Tel: (852) 2635 5563 Fax: (852) 2635 1598 E-mail: firstname.lastname@example.org http://www.lifunggroup.com/ Contact person: Ms Freda Tong & Ms JennyAnn Chan LI & FUNG RESEARCH CENTRE CHINA NATIONAL COMMERCIAL INFORMATION CENTRE
2 INDUSTRY SERIES July 2005 Issue 1 CHINA NATIONAL COMMERCIAL INFORMATION CENTRE LI & FUNG RESEARCH CENTRE LI & FUNG GROUP Despite the huge advances witnessed over the past two decades, China’s cosmetics market is still at a very low level of development and is far from saturation.
First of all, with a population of 1.3 billion, China has the largest number of potential cosmetics consumers in the world. Besides, the current per capita annual spending on cosmetics is well below the average of developed countries (US$35-70). The potential of China’s cosmetics market is yet to be fully unleashed. Along the rapid economic growth, living conditions will continue to improve and spending on cosmetics is likely to increase exponentially. There is plenty of room for future development and the sector as a whole shows enormous business opportunities.
III. A “Brand” new era After decades of robust economic development and market opening, cosmetics market in China has undergone tremendous changes. It has evolved from an underdeveloped market to a market in which consumers have strong brand preference. 1. The pre-reform era - an underdeveloped cosmetics market In the pre-reform era before 1978, cosmetic products were scarce on the Mainland. The living standard of the Mainland people was low and they paid little attention to appearances and styles. On the other hand, cosmetics available in the country were poor in quality, of limited choice and loosely packaged, owing to the underdeveloped domestic cosmetics production and the lack of imported goods.
2. Early stage of economic reform – a booming cosmetics market with surging disposable income and the entry of foreign enterprises In the early stage of economic reform, rapid economic growth was registered. The rising disposable income of Mainland people had led to the upgrading of consumption structure. People demanded higher quality and wider choice of cosmetic products. Meanwhile, multinational cosmetics enterprises offering quality cosmetics, such as L’Oréal, Olay, Johnson & Johnson and Shiseido, gradually entered the market and served as an important external stimulus triggering Mainland consumers’ demand for better cosmetics.
The entry of foreign cosmetics enterprises also helped boost the market development. Facing the intense competition with the foreign players, domestic cosmetics enterprises began to upgrade their production technology, management skills, product quality, and to expand their scale of production. 3. The present situation - increasing brand awareness Nowadays, decades after the reform program was first implemented, Mainland consumers, with increasing product knowledge and surging purchasing power, are more sophisticated and value-oriented. Instead of looking solely for low prices, they place strong emphasis on product quality, functions and branding.
Branded products, having an up-market image in terms of style, product quality and safety, have become priority choices for consumers. Statistics of IMI Consumer Behaviors & Life Style Yearbook 2004-2005, a market research surveying over 34,000 Mainland consumers, provide good illustrations of this trend. From Exhibit 1-3, it can be seen that, apart from prices, branding and product functions have become key factors affecting consumers’ choice of cosmetics.
3 The Booming Cosmetics Market in China CHINA NATIONAL COMMERCIAL INFORMATION CENTRE LI & FUNG RESEARCH CENTRE LI & FUNG GROUP Exhibit 1: Factors affecting consumers’ choice of shampoos, 2004 (% of respondents that regard the factor as important) Others’ Sample Product Buying recommen- City size Prices Brands functions convenience Advertising dations Packaging Others Beijing 5,862 51.8 45.2 35.4 27.5 14.8 4.3 5.7 14.6 Shanghai 6,638 49.5 51.7 49.6 20.4 25.2 4.7 2.7 13.4 Guangzhou 2,971 42.8 49.7 35.7 26.0 15.2 8.7 11.0 14.3 Shenzhen 3,787 31.1 53.8 48.9 21.1 20.2 7.7 7.8 9.3 Chengdu 1,992 47.1 52.8 42.2 23.6 18.7 8.2 10.7 9.7 Chongqing 2,275 42.4 28.8 41.4 36.0 13.1 4.0 2.3 6.3 Wuhan 2,985 49.3 51.8 41.1 17.6 17.0 3.7 3.6 13.3 Xi’an 1,970 48.3 46.8 44.6 19.5 16.9 9.2 2.3 9.4 Shenyang 2,757 52.2 46.8 35.9 23.2 14.2 5.6 5.8 8.5 Nanjing 2,314 38.8 47.3 36.7 18.3 14.6 2.4 3.0 9.2 Total 33,551 46.0 48.2 41.7 23.2 17.9 5.6 5.3 11.6 Source: IMI Consumer Behaviors & Life Styles Yearbook 2004-2005 Exhibit 2: Factors affecting consumers’ choice of face moisturizers, 2004 (% of respondents that regard the factor as important) Others’ Sample Product Buying recommen- City size Prices Brands functions convenience Advertising dations Packaging Others Beijing 3,691 54.9 45.5 34.0 26.3 10.2 7.3 4.9 9.3 Shanghai 4,077 46.9 52.4 48.6 18.4 17.8 10.6 2.9 9.4 Guangzhou 816 42.3 46.6 43.2 20.3 15.6 13.8 8.0 8.4 Shenzhen 1,416 37.0 51.9 49.2 16.1 13.3 16.4 3.5 4.0 Chengdu 972 47.0 40.1 45.4 21.5 18.1 11.5 11.2 6.5 Chongqing 757 34.7 26.4 48.9 17.8 12.4 6.7 2.0 5.9 Wuhan 1,664 50.1 44.4 45.3 9.3 18.4 11.9 4.0 9.5 Xi’an 1,179 52.9 41.2 43.3 15.2 10.6 14.9 4.7 8.3 Shenyang 1,524 50.0 43.0 36.7 19.4 12.4 12.6 6.2 7.4 Nanjing 1,217 45.1 42.3 38.0 14.1 9.5 5.0 1.4 7.9 Total 17,313 47.9 45.7 42.6 18.8 14.0 10.6 4.5 8.2 Source: IMI Consumer Behaviors & Life Styles Yearbook 2004-2005
4 INDUSTRY SERIES July 2005 Issue 1 CHINA NATIONAL COMMERCIAL INFORMATION CENTRE LI & FUNG RESEARCH CENTRE LI & FUNG GROUP Exhibit 3: Factors affecting consumers’ choice of lipsticks, 2004 (% of respondents that regard the factor as important) Others’ Sample Product Buying recommen- City size Prices Brands functions convenience Advertising dations Packaging Others Beijing 1,162 48.2 55.2 22.0 8.4 16.2 17.5 7.7 6.8 Shanghai 1,648 43.8 61.9 31.2 20.3 17.0 15.6 5.2 9.5 Guangzhou 287 40.0 57.1 38.9 23.0 18.6 15.2 6.6 12.4 Shenzhen 621 30.4 56.8 39.6 15.3 10.4 19.5 5.9 8.2 Chengdu 435 51.5 55.4 27.1 14.7 20.6 19.0 6.9 7.1 Chongqing 361 32.4 44.7 26.0 14.7 19.4 14.0 0.7 2.9 Wuhan 545 49.8 49.1 33.4 29.3 16.0 9.1 6.4 15.2 Xi’an 337 52.4 53.9 24.1 16.7 15.9 13.6 3.0 6.3 Shenyang 633 49.9 45.2 27.1 15.4 14.3 15.8 7.0 9.2 Nanjing 245 33.8 46.6 27.6 8.6 7.7 13.4 2.1 6.6 Total 6,274 44.2 54.7 29.4 16.7 15.9 15.7 5.7 8.6 Source: IMI Consumer Behaviors & Life Styles Yearbook 2004-2005 In a competitive market like China, where a vast variety of products catering to different consumers’ needs are available, there is a pressing need for enterprises to put more efforts in brand building so as to distinguish their products from the others.
Cosmetics enterprises now devote a lot of resources in advertising and research and development to shape their brand images and to provide customized products for their target consumers. A survey released by CTR Market Research shows that cosmetics and toiletries sector ranked first in advertising spending in China in 2004 with US$4.8 billion plunked down, an increase of 34%. Olay, a famous brand of Procter & Gamble (P & G), spent US$565.8 million on advertising, a 160% increase over 2003. The promotion and advertising activities for cosmetics take various forms, such as placing advertisements in press, Internet, high-traffic roads, buildings, metro stations and buses; organizing on- site displays and demonstration shows; and employing celebrities as spokesmen to increase brand reputation.
Enterprises are also actively utilizing the comprehensive coverage of CCTV to improve their reach across the country, especially in second- and third-tier cities and the rural area. In November 2004, CCTV auctioned its prime time advertisement slots for a record sum of 5.3 billion yuan (US$634 million). P & G became the new bid champion spending more than 385 million yuan (US$46.5 million) on the auction.
IV. Principal market drivers 1. Strong economic growth and growing awareness of personal well-being The strong growth of the cosmetics market has been underpinned by the vigorous economic growth of China and the increasing disposable income of Mainland residents (see Exhibit 4). In 2004, China’s GDP hit 13,651.5 billion yuan (US$1,648.7 billion), rising 9.5% year-on-year (y-o-y) compared with the previous year.
5 The Booming Cosmetics Market in China CHINA NATIONAL COMMERCIAL INFORMATION CENTRE LI & FUNG RESEARCH CENTRE LI & FUNG GROUP Exhibit 4: GDP, urban and rural income and total retail sales (both absolute amounts and annual growth rates), 1980-2004 Total amount (yuan) Average annual growth rate (%) 1980 1990 2000 2001 2002 2003 2004 1980-90 90-2000 2001 2002 2003 2004 GDP (billion yuan) 451.8 1,854.8 8,946.8 9,731.5 10,479.1 11,669.4 13,651.5 15.2 17.0 7.3 8.0 9.1 9.5 Per capita annual disposable income of urban households (yuan) 477.6 1,510.2 6,280.0 6,859.6 7,702.8 8,472 9,422 12.2 15.3 9.2 12.3 9.0 7.7 Per capita annual net income of rural households (yuan) 191.3 686.3 2,253.4 2,366.4 2,475.6 2,622 2936 13.6 12.6 5.0 4.6 4.3 6.8 Total retail sales of consumer goods (billion yuan) 214.0 830.0 3,415.3 3,759.5 4,091.1 4,584.2 5,395.0 14.5 15.2 10.1 8.8 9.1 13.3 Source: National Bureau of Statistics of PRC (NBS) Mainland people are now better-educated, better-paid and they attach more attention to fashion and their personal image.
They not only focus on improving basic living conditions, but are also keen to enhance their overall quality of life. Their increasing awareness of health, hygiene and appearance has made cosmetics one of the consumption hotspots. In fact, the pursuit of beauty and health is no longer confined to young women only. Cosmetic products are gaining popularity among men, children and the elder people. The cosmetics market is getting bigger and bigger embracing consumers from all ages and from all walks of life.
2. The fast expanding rural market Currently, rural income remains low and the cosmetics market growth is mainly led by urban consumption. With 62% of the national population, the rural residents made up only 34.1% of the total retail sales of consumer goods in 2004. Boosting rural economic development and consumption have always been the Central government’s main concerns. To raise farmers’ income and to accelerate agricultural development, several measures and polices, such as reducing or abolishing agricultural tax and granting more subsidies to farmers for crop production, have been implemented in recent years.
To improve the efficiency of rural distribution network, in February 2005, the PRC government announced its plan to build a national rural retail network covering 70% of all villages within three years, by developing chained retail stores such as supermarkets and convenience stores2 in counties and major towns.
It is expected that, in the coming future, significant improvements will be made in respect of farmers’ income and distribution efficiency, which will encourage rural consumption and unleash the huge potential of the vast rural market. 2 The operation modes of these stores may be different from those in the urban areas to cater to the specific needs of rural residents.
6 INDUSTRY SERIES July 2005 Issue 1 CHINA NATIONAL COMMERCIAL INFORMATION CENTRE LI & FUNG RESEARCH CENTRE LI & FUNG GROUP 3. The rise of the middle-class Sandwiched between China’s most affluent people and the hundreds of millions of farmers and factory workers, a rapidly growing middle class has emerged.
According to the National Bureau of Statistics of PRC (NBS), middle class refers to those with annual household income of 60,000 yuan (US$7,230) to 500,000 yuan (US$60,240). This group of people has stable income, can afford private-owned houses and cars, and have extra money to spend on beauty goods, holiday and education. They have higher expectations than other consumer groups and pursue a life with “style and taste”. Generally speaking, they demand a better shopping environment and higher product quality. They are also brand-conscious and less price-sensitive. Many of them are employees of multinational firms.
The NBS predicted that by 2020, middle class would increase from the current 5% of total households to 45%. They will expand exponentially in major cities such as Beijing, Shanghai, Guangzhou and Shenzhen, and will become an influential group in the society. This rising middle class is becoming one of the most active consumer groups for cosmetics in the next 10-20 years.
4. Women fueling the market growth Mainland women, especially those office ladies, are now increasingly appearance- and image-conscious. The proportion of cosmetics spending in their total expenditure has been increasing. The growing number of young females in white- collar jobs will further drive the cosmetics sales. Being more financially independent, their demand for cosmetics will be greater than ever. V. The emerging markets 1. Babies and children The market for babies and children offers huge business opportunities with market potential exceeding 400 million yuan, according to official statistics.
Every year, around 20 million babies are born on the Mainland. The total number of children aged between 0 and 14 is estimated to be 300 million. Under the one child policy, Chinese parents are willing to spend as much as they can on baby and children care products. Currently, only few brand owners offer such products, with some famous ones being Johnson & Johnson, Yu Mei Jin and Frogprince. The lucrative market potential is likely to attract more brands to enter and bring in new technology. Thus, a rapid sector growth is anticipated. 2. Men Men’s cosmetics market is growing in China with market growth rate forecasted to surge to around 6% or much higher by 2008.
To get a share of this newly emerging market, many cosmetics enterprises have been introducing men’s product lines, such as JC of Aupres, Glf of Shanghai Jahwa, Nivea men, Biore Men, etc. Men’s cosmetic products are, presently, far more diversified and are no longer limited to shaving tools. Other products including cleansing products, moisturizers, essences, hair treatment products and fragrance etc. are now available. However, compared with the market for women, men’s market is relatively small and the growth rate is much slower. Currently, men’s cosmetics are only popular among the more affluent and fashion-conscious young men in big cities, while most of the men on the Mainland are still reluctant and do not feel the need to use cosmetics.
More time and product education are needed for the perception to change and for the market to grow.
7 The Booming Cosmetics Market in China CHINA NATIONAL COMMERCIAL INFORMATION CENTRE LI & FUNG RESEARCH CENTRE LI & FUNG GROUP VI. Supply of cosmetics 1. Production In the early 80s, there were less than 200 cosmetics manufacturers on the Mainland. However, this number has been increasing dramatically since the 90s. The cosmetics industry grew exponentially with annual growth rate outpacing that of the whole light industry. Official statistics reveal that around 3,200 cosmetics manufacturers are operating on the Mainland at present. This figure is calculated based on the number of renewal production licenses granted in 2003.
However, the actual number of manufacturers should be far more than 3,200, given the fact that numerous small cosmetics factories are in operation without formally applying production license. Of the 3,200 factories, some are set up by brand owners to produce their own products, while some others are Original Equipment Manufacture (OEM) factories performing processing functions only.
The huge potential of the Mainland market has been attracting many multinational cosmetics manufactures to invest in China and to exploit this new source of profits. However, before joining the World Trade Organization (WTO), China imposed high tariff rate on imported cosmetics. Foreign exchange control, product standard and quality control requirements are also barriers to export to the Mainland. As a result, many foreign brands, in cooperation with their domestic counterparts, set up their manufacturing base on the Mainland to take advantage of the low production costs and to be free from the trade barriers.
Currently, there are around 600-700 foreign-invested cosmetics manufacturers in China, with total investment exceeding US$1.5 billion. Examples of these enterprises include P & G, Johnson & Johnson, Avon, Revlon and Amway from the U.S.; Unilever from the U.K.; Henkel and Weina from Germany, L’Oréal from France; and Shiseido and Kao from Japan.
While the foreign-invested manufacturing enterprises account for the lion’s shares of the premium market, several domestic manufacturers maintain strong positions in certain products. Numerous small domestic manufacturers produce regional or generic brands and distribute their products within their own province or neighboring provinces, but their share of the overall market is very limited. Nearly 90% of the domestic manufacturers are small in scale having annual sales less than 50 million yuan. Besides, they focus on the lower market segment and offer cosmetics at extremely low prices. As at 2003 year-end, only around 50 domestic manufacturers realized annual sales of over 100 million yuan.
Of which, only Shanghai Jahwa, Beijing San Lu, Raystar Cosmetics (Shenzhen), C-bons Group, Arche Group and a few could achieve annual sales exceeding 500 million yuan.
2. Imports of cosmetic products Though China’s cosmetics imports surged by 39.2% to US$100 million in 2003, imported cosmetics still constitute a limited share in its cosmetics consumption. Perfume, body spray and eye care were the major items of imports. Due to mad cow disease, imports of cosmetic products from certain countries were regulated in 2003, which dampened the year’s import. From 2005 onwards, the tariffs are reduced to around 10% on average, which creates a more favorable environment for foreign enterprises wishing to export to the Mainland. The tariff reduction will push down the retail price of cosmetics but the impact is not likely to be as significant as expected, given the fact that many foreign brand owners have already set up manufacturing base in China and imported cosmetic goods only accounted for 1% of the total cosmetics sales in China.