For some time, the global beauty market has been focusing in on Asia. With its massive population, changing cultures and developing economies, Asia is the new land of opportunity. But a new study reveals that not all countries within the region are equal.

The Asia-Pacific region witnessed overall growth of 8 percent in 2004, according to The World Market for Cosmetics and Toiletries, a report published by Euromonitor International in October 2005. Growth varied considerably from country to country.     

The Japanese market accounted for 53 percent of the region’s total cosmetic and toiletry sales in 2004, according to the report. Despite its dominance, the market grew less than 3 percent in constant value terms from 2003. “This was due to the ongoing internal recession and prevailing price consciousness and maturity in several sectors, most notably color cosmetics and fragrances,” stated the study.

India also exhibited less than stellar growth, edging up 1 percent in 2004. The caste system was mainly to blame, with beauty premium and upper mass brands enjoyed mainly by the upper echelons of society. South Korea suffered decline, contracting 7 percent in 2004, which was attributed to the economic downturn.

But the news from other parts of Asia was anything but bad. Euromonitor International reported growth of greater than 5 percent in China, Indonesia, Taiwan, Thailand and Vietnam. Growth was attributed to a number of factors, including higher standards of living and more women in the workplace.

Different market segments also exhibited varying degrees of dominance.

The skin care sector was particularly noteworthy. The Chinese market, for example, saw skin care sales spike by 16 percent in local currency, constant value terms in 2004. The report states skin care was the largest segment in a number of Asia-Pacific markets, including Japan, China and South Korea. The report also revealed favorable sales in oral hygiene, hair care and bath and shower products.

Other sectors hit snafus, sometimes due to cultural differences between the East and West. Fragrance was one area that fell victim to cultural influences. The report states that “in many parts of Asia-Pacific, notably India, Japan and China, the use of fragrances is a non-traditional concept, or actually frowned upon.” Still, the report noted this area and others have potential to develop. For example, despite current attitudes about fragrance, India still realized 13 percent growth in the segment.

Perhaps the most dynamic country within the region is China. Professor Stephan Kanlian, of the Fashion Institute of Technology, examines the status of the beauty market in the following report, The China Factor.

The China Factor

By Stephan Kanlian

L’Oréal’s Chinese research facility.

It is a market of paradoxes. It is one of the oldest societies in the world, yet it has pockets of dizzying modernity. Economically, the country is playing catch-up into the 21st century at breathtaking speed. With a population of 1.3 billion, the social issues, however, are much more complex. Bringing a nation of this size into the 21st century in terms of education, social programs, health care and living standards will take much longer. It is all about paradox, with the heady growth in sales of prestige products from an admittedly small initial base, to the as yet underdeveloped distribution system in vast rural parts of the country. It is the paradox of a vast rural population but an equally staggering urban population of 667 cities — 100 of which have a population over 1 million. It is China — and at best, we can only hope to understand snapshots, not take it all in at once.

China’s ability to develop into a “top ten” world market in many sectors has already been realized, and its arrival as the world’s largest consumer market becomes more of a reality with each day that passes. Within China, much attention is focused on two fixed points in the near term: the 2008 Olympics in Beijing, an “arrival party” for China into the public spotlight, and the Shanghai World’s Fair in 2010. The 2008 Olympics will be China’s opportunity to compete in a glare of global media attention with the glitz and glam of other powerful world cultures. It has resulted in a $35 billion campaign for infrastructure and new construction in Beijing, including a new subway line, highways and several new sports facilities. The Shanghai World’s Fair is looked at more in terms of China’s symbolic ascension as a world economic power, despite its membership into the World Trade Organization in 2001, and the country’s gradual relaxation of non-tariff barriers and regulatory hurdles.

Demographics

Among the population of 1.3 billion, roughly 500 million people live in urban zones and 800 million in rural areas.  The population is relatively young, with the median age of women being 32, and 21 percent of the population under the age of 14. The combinations of young population, low birth rates and impressive GDP growth foretell higher individual disposable income for the future. China’s low birth rates are the result of official policies that have encouraged the development of a generation of only children, which many market research firms point to as “China’s generation of spoiled children.” They will not only have increased disposable income, but their parents spend disproportionately on them as well, compounding the effect. While the growth and spending patterns of the middle class in China remain difficult to predict, the potential of Chinese tourists alone could impact buying patterns globally. Many major department stores in London and Paris now have Mandarin-speaking assistants on duty at all times.

Among the cultural paradoxes in China, none is more dramatic than to remember that a generation ago the country went through a period of asceticism during the Cultural Revolution such that mothers are now actually learning beauty regimens from their daughters. Coupled with a long and powerful tradition of beauty culture, perhaps this helps to explain the explosive growth in China’s beauty sector and a new obsession with extremes of beauty culture, such as plastic surgery, a market in China now worth $2.4 billion according to China Daily.

“China will be one of the top three world beauty markets within 3-5 years,” predicts Estée Lauder International President Cedric Prouvé, who characterizes the market as rapidly changing. “What is surprising is how many consumers want to trade up to prestige products, based on the importance of appearance among a growing number of Chinese career women.”

Challenges and Strategy

The barrier to entry is the high cost of regulation in China, where, for example, each SKU must be registered with the government, even by shade for color products. There are Intellectual Property concerns still rampant, though China’s entry into the WTO has aided in this regard. “It is an investment market,” confirms Prouvé, “don’t expect to be profitable yet. The long term opportunity requires some investment now.”

La Mer’s counter at Isetan in Shanghai broke store records at opening.

There are signs of progress, however, with the bans on foreign-invested companies with retail interests in China being lifted late in 2004, and the government’s recent agreement with Avon to reverse its 1998 ban on direct selling, opening the way for Avon to begin using its global business model in China. Avon was one of the earliest entrants to China, having built a local research facility and a portfolio that included 30 percent products designed for local consumers before the 1998 law. Up to now they have created a hybrid model of 6,300 boutiques with direct sell personnel and 1,600 counters in department stores, according to The NPD Group. Avon revenues are estimated to have grown 24 percent last year and the company expects China to be a $1 billion market for them in the next few years.

Procter & Gamble, a major player in China considering their tenure in the country and ability to focus on appropriately positioned products, like shampoos, for broad penetration into the rural markets, entered the Greater China beauty market in 1988 with Head & Shoulders. Current sales of their beauty products account for the better part of P&G’s business in China. A market leader in China, Olay is P&G’s fastest-growing brand with a business in China comparable to the business in the U.S. Last fiscal year (July 2004-June 2005), Olay grew sales nearly 50 percent in Greater China. “We have the leading skin care brand at mass with Olay, and the leading prestige skin care brand with SK-II,” reports Austin Lally, vice president — P&G Beauty, Greater China. “Additionally, we have the number one hair care brand in Rejoice, as well as a leading share of the hair care market. We recently expanded our beauty presence with distribution of Max Factor and Cover Girl cosmetics. Over the past year, our business has grown in the double digits.”

L’Oréal’s current strategy in China reflects their corporate commitment to respecting cultural differences in beauty ideals and using a diversified portfolio to adapt to consumer needs. In China, that portfolio was enhanced by the acquisition of two local brands. Mininurse, which The NPD Group reports as having 5 percent of the skin care market share in China and local production, gives them an ability to grow their expertise more deeply in the trade. Yue-Sai, purchased last year from Coty, is a local brand developed around a Chinese television personality that L’Oréal has long term plans to develop into the first truly global Chinese brand. They have identified a universe of approximately 120 million urban women (country-wide), aged 15-50, with an average monthly household income of 3000 RMB (about $360), as a target customer for makeup, skin care and sophisticated products.  “Roughly one-third of our products are specifically designed for China today,” reports Jean-Michel Ripoll, development general manager, L’Oréal China Consumer Products, “with technologies specific to Chinese skin, hair and coloring. We need to better understand consumer taste.” To further develop this expertise, L’Oréal announced the opening of its first research center in China last year, in Pudong, on the outskirts of Shanghai. Initially focusing on makeup, hair care and skin care, the facility will expand through 2006 to house biology laboratories and chemical laboratories that will leverage botanical raw materials inspired by or used in Chinese medicine.

Luxury products firms have taken a different approach. LVMH, long dominant in the Japanese market, has focused on major statements in advertising and retail store environments to build a following for star brands like Dior in China. While observers report foot traffic in these luxury retail stores is still quiet, LVMH claims that its China operations have been profitable from the inception.

Shiseido has a very interesting approach, which is a model for Western companies in China to observe. Their Aupres brand, launched specifically for the Chinese market and utilizing their Asian skin care expertise, enjoys a perception that is often referred to as “J Sense” by local marketers in China. It refers to Japanese (and the model extends to Korean firms as well) firms being perceived as having an understanding of Asian culture, having product ranges closer to the needs of Chinese consumers (specifically Shiseido’s preeminent reputation in whitening products) and being dubbed “cool” by influential, younger Chinese consumers.

As a latecomer to China, The Estée Lauder Companies hopes to capitalize on American glamour and their upscale image to attract Chinese consumers. They have also recently opened an R&D facility in Pudong. “We are a little behind our competition in terms of rolling out distribution,” says Prouvé, “but we always prefer to have more selective distribution.” The Lauder and Clinique brands are distributed in about 50 doors, with La Mer launching in three doors about 18 months ago, and MAC and Bobbi Brown also launching in three doors this past summer. La Mer is certainly an example of the paradoxes of the Chinese beauty market, providing evidence of the growing potential for spending on luxury products. With a product that has an entry price point of about $245 in local currency, the brand ranked number one in its first month of distribution at SciTech with only 3 SKUs, and similarly broke the record for first day opening sales at Isetan in Shanghai. In November 2005, the company achieved instant 100 percent sell through for the launch of its 16 ounce Crème de la Mer Grande, which retails in China for the equivalent of $1,700, thanks to a waiting list of 200 customers.

In terms of traditional consumer purchasing patterns, there were only about 7 million credit cards in China by June 2004, with an additional 704 million bank cards, 640 million of which were ATM cards and the remainder were bank cards backed by deposits. Only 2 percent of the country’s merchants have the ability to accept bank cards, with more of them concentrated in cities.

Also important to understand are the challenges of business beyond the larger cities, where personal income and distribution networks have yet to equal the opportunity in the major cities. “Reaching the more rural areas of the country, where there are significant populations is often difficult,” points out Lally, “it can be hard to maintain inventories and assortments to the same standards we expect in other parts of the world due to shipping limitations.”

The Beauty Sector

According to a recent article in Fortune magazine, Access Asia reports that the beauty industry in China is growing at amazing speed, “doubling since 1998 into a $7.9 billion market that is expected to climb to $9.6 billion by 2009.” The same report indicates the makeup category was forecast to register sales of $524 million in 2005, increasing to $705 million by 2009. McKinsey and Company qualifies these growth rates by pointing out that no other industry sector is growing this quickly in China, astonishing for a market that was banned through the mid-1970s, and when you consider the as yet untapped potential.

“Retail is still a strange paradox of mind-boggling, modern, large shopping centers and apothecary-type, health oriented local entrepreneurs,” observes Wendy Liebmann, president of WSL Strategic Retail. “One of the challenges is assessing the more mainstream beauty model, more on line with a perfumery, which mirrors the local entrepreneur. That opportunity has not emerged dramatically yet, but it will, because it fits with the existing culture.”

Not surprisingly, skin care remains the dominant sector in China’s beauty market, with strong growth attributed to increasing concern among consumers over their appearance and their rising income levels. The increased number of product launches, especially at mass, is now providing Chinese consumers with a wider array of more sophisticated, technologically-enhanced skin care product at accessible price points, sold in hypermarkets and other retail formats that have penetrated into less affluent cities and provinces. The higher disposable income has also influenced Chinese consumers past the basic skin care regimen of cleanse and moisturize, to now include growing interest in toners, anti-aging products and facial masks. “By comparison, the Japanese consumer could support a 7 or 8 step regime,” remarks Prouvé, “and geographical diversity in China also impacts consumer behavior in skin care with climate varying widely from north to south, and from urban to rural.” This is also a factor in Lauder’s decision to open R&D facilities in China, to better study and respond to these diverse consumer needs.

“Skin care is inherently a strong Asian category,” observes Liebmann, “but the younger generation has disposable income, and color cosmetics and hair care are becoming more important. Fashion and technology are also driving that opportunity.” The hair care market, in particular, seems to be a battle of the titans in China. P&G has an advantage in their global positioning, product offering, and brand presence in China, but L’Oréal’s purchase of Mininurse, and opportunities opening in bridge or masstige markets may also play an important role. Consumers are gradually becoming more receptive to the concept of separate shampoos and conditioners and young consumers in urban areas are the driving force for hair colorants.

Olay’s White Radiance line

The key to the untapped potential in the mass hair care sector in China is education. For example, if shampoo is the only habitual product, the challenge is to educate consumers to the benefits of conditioner, styling products and hair colorants. If usage is infrequent, the opportunity to educate consumers to the benefits of higher frequency usage of hair care products is an explosive exponential growth opportunity. The Chinese are very receptive to education. For example, during Christmas 2004, L’Oréal sponsored a full day beauty seminar in all the Carrefour stores in China with classes on makeup techniques and beauty trends.

The NPD Group recently completed a study of department store activity in eight major cities in China. In all of the beauty categories The NPD Group tracks (makeup, skin care, fragrance) the top two brands in terms of department store distribution across the eight Chinese cities studied were of Japanese origin. Shiseido led the market, followed by SK-II, a P&G brand originally developed in Japan. Also of interest, there were geographical disparities that underscore how diverse a market China really is. Both of these brands are more widely distributed in the south of China. The NPD Group’s research uncovered that the two leading brands (in this study) in the north of China, by contrast, were both French brands: Christian Dior and Lancome. While this was a study limited to eight cities, and certain brand penetration criteria for each store surveyed, the results provide yet another interesting snapshot of the complexities of doing business in China.

Inside Shiseido’s Chinese research facility.

In addition to the department stores which now populate major cities in China, the most explosive growth is happening in the mass market through the proliferation of hypermarkets. Megastore chains such as Carrefour and Wal-Mart are already well-established, and The NPD Group reports that in the first half of 2004 Carrefour had total revenues of $935 million and Wal-Mart $448 million.

There have been other new developments, such as the recent opening of the first Sephora store in China, a 3,200 square foot space in Shanghai. The Sephora formula for China will include heightened customer service, treatment installations, brand consultants at launch, and a focus primarily on skin care and color cosmetics. Young Chinese consumers, especially, will find the Sephora environment less intimidating and may be attracted to experiment with Sephora’s in-house brands.

Fragrance remains an enormous opportunity in China, one which could counterbalance the historically low product mix of this segment in the Asia Pacific region, owing to Japan’s relatively small fragrance culture. In China, sales of fragrance are limited thus far, but are occurring over a wider olfactive portfolio when compared with other Asian markets. “This bodes well for the long term opportunity,” says Symrise project manager David Silverman, “the Chinese are open to a variety of olfactive offerings and want to be educated. The Chinese fragrance consumer will diversify as they earn more.”

Knowledge of fragrance is also growing in China thanks to the increasing penetration of beauty and fashion media. The Chinese are very literate and magazines are gaining momentum in China, though circulations are recognized to be widely exaggerated. Beauty product advertising is predominantly for skin care, though there is increasing editorial and advertorial about fragrance. Long rumored, but now a reality, Vogue China’s first issue launched in the second half of 2005. Other Western titles, like Rolling Stone, will launch this year. Again, with still low circulation, much of the hype is symbolic, and there is intense regulation by the government and strict censorship. However, their existence bodes well for further educating the Chinese consumer about beauty culture, regimens and products.

Trends and Opportunities

“China’s share of the global beauty market may seem small compared to huge markets like the U.S. and Japan, but with a population of over a billion people, the growth potential is staggering,” says Lenka Contreras, vice president and head of the Consumer Products practice for Kline & Company’s research division. According to the firm’s new study on beauty retailing in China, 80 percent of current beauty sales are through hypermarkets and mass merchandisers, but this channel is losing ground to specialty (drug) stores based outside of China, such as Watson’s and SaSa. The advantage of drug stores like Watson’s is size: it is less intimidating to the Chinese consumer and they can more easily locate real estate for expansion.

Much can be learned from the global distribution model used by Shiseido, which seems to be providing them with an especially strong advantage in China. In addition to its department store locations, Shiseido sells through local retailers who are willing to host a Shiseido counter installation, which gives them deeper penetration into areas outside the first and second tier cities in China, and even provides a more accessible distribution point for locally produced brands it develops in China. Its potential domination of the market, given their local market expertise, understanding of Asian skin and the adaptability of their retail formats to poorer, rural areas is a distinct competitive advantage in China.

Among the trends being watched in the Chinese beauty sector is the explosive growth of the men’s market, though admittedly from an initially small base. There is also the expansion of the drug or specialty stores, and continued expansion of hypermarkets, which is contributing both to the education of Chinese beauty consumers who use these outlets to experiment with products, and to increased penetration of areas not previously served by more sophisticated retail concepts.  

“The market will also be impacted by more consumers coming from rural areas to urban centers to purchase beauty brands,” predicts L’Oréal’s Ripoll, “rather than just through deeper penetration into rural areas.” Ripoll also points out that at this stage there is not one Chinese brand that is a strong player across all categories, so there is still a future opportunity for smaller, independent global brands.

Lauder’s Prouvé predicts that prestige brands will gradually replace mass and bridge brands currently selling in China’s department stores, as inevitable channel conflict will develop, pushing mass brands to hypermarkets and drug stores. He sees China as a growing focus of global R&D. “Certain markets are hotbeds of innovation globally (New York, Paris, Tokyo) and we expect China to join that list,” asserts Prouvé. “Labor is cheaper, and China will become the R&D center for worldwide markets.” Many global companies are increasingly developing new products and brands specifically for China.

Also important will be the purchasing patterns of the relatively small percentage of Chinese consumers who travel, or who purchase beauty products in Macao or Hong Kong, where tariffs are dropping further this year.

“I believe there are opportunities to grow both in mass and prestige,” says P&G’s Lally. “Mass benefits from expanding distribution and prestige benefits from the growth of higher disposable incomes. We’re certainly pursuing growth via both avenues.”

Conclusion

“It is more about companies being willing to invest in China now, for the long term,” explains WSL’s Liebmann. “China is still more oriented to the larger companies, but changing rapidly. It is a culture that has a beauty heritage, and has created a lot of what impacts Western beauty culture.”