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The Future of the Global Cosmetics Industry is made in China

· FMCG

{{{Pierre-Adrien Deffis}}}

The rapid growth of China´s cosmetics industry makes it an attractive market for the past 20 years or so. If multinationals have been dominating the Chinese cosmetics market for the past decade, they increasingly feel challenged. Indeed, the uniqueness and the technological demand of Chinese consumers consistently forces global brands like L’Oréal, Japanese powerhouse SK-II and local challengers like Perfect Diary alike adapt themselves to keep up with the rapid pace of the industry development. This raises a question. Can the Chinese market be considered as a universe in itself or is there a larger conclusion to be drawn for the global industry?

When it comes to the history of cosmetics, beauty rituals have always played a major role in Asian societies. However, at the same time, cosmetics can be perceived as discretionary spending instead of a real necessity. As a result, the Chinese cosmetics industry stood at only around RMB 15 billion (~ $2 billion) in retail sales at the beginning of the 21st century but experienced rapid annual double-digits growth alongside the overall economic development to RMB 80 billion (~ $10 billion) in the 10 years leading to 2009 (i.e., overall 5X growth).

In the following decade, the beauty market in China went through an average growth of 15% per year, reaching RMB 300 billion in 2019 (i.e., overall 3.5X growth rate). With RMB 340 billion retail sales in 2020 (~ $50+ billion), China nowadays is the second largest market in the world after the US.

Retail sales value of cosmetics by wholesale and retail companies in China from 2010 to 2020 (Source: Statista)

This article aims to deep-dive on three industry trends with larger implications for global markets.

Powerful domestic actors challenge the dominance of international players

If the beauty market in the early days has mostly been dominated by Western brands, Japanese and Korean brands captured market share especially after 2010 for their unique approach to beauty, more aligned with Asian standards.

Market share of imported cosmetic products in China from 2014 to 2019, by exporting country (source: Statista)

Even if the market seems to be saturated with multiple actors targeting the same audience (namely young female consumers), Perfect Diary (PD), a domestic company founded in 2016, is the perfect example of a Chinese success story.

By running a direct-to-consumer strategy through their distribution channels, Perfect Diary has managed to gather some precious insights into their customers’ preferences and behaviors. From opening their first flagship store on WeChat in 2017, PD is now present in various e-commerce channels (JD, Taobao, Tmall) and social media channels, gathering more than 20 million followers across Douyin and Xiaohongshu. PD had its IPO just in the end of 2020. Currently, parent company Yatsen is trading at a market cap of $13 billion.

Being consumer-driven at the core, helped the brand to create a perfect understanding of the evolving consumer needs. By partnering with KOL and celebrities, the brand used word-of-mouth to become a popular brand among young female Chinese. Moreover, the brand partnered with Discovery Channel and British Museum to create successful limited editions. Due to the continuous increase in the customer acquisition cost, brands like PD developed new 1:1 relationships with customers by creating hundreds of personal WeChat accounts serving as virtual beauty consultants and managing their own WeChat groups to share about the latest products. In 2019, PD decided to move offline and create experiential shopping experiences with the opening of 40 offline boutiques.

Source: BigOne Lab

The example of PD shows that local challengers, with their rapid approach to adoption to consumers needs, are a serious competitor for global brands. It also points at a larger trend in the Chinese consumer market overall where Chinese companies increasingly become more sophisticated and cater the need of consumers for local products.

Consumer demand drives development of new product lines

One specific aspect of the Chinese market is the weight of the skincare category with over half market share while hair care stands at 20%, make-up accounts for 15% and fragrance only accounts for 5%+. Major growth is expected to come from the hair category. It is estimated to grow annually by over 6% between 2021 and 2025 with a progressive upgrading towards more high-end products, the two main customer needs being hair loss prevention and hair growth.

Male cosmetics

According to Euromonitor, from 2016 to 2019, the Chinese male beauty market increased at an average annual rate of 14%, far higher than the global average of 6%. Fragrance, bath and shower products are the fastest growing segments among male consumers. As a consequence, brands such as L’Oréal Paris, Biotherm, and Nivea have started sponsoring both sport and e-sports events to communicate with the young male audience. However, the market is still at its early stage, less diversified than the female segment, and dominated by established multinationals such as L’Oréal and Beiersdorf. Chinese male consumers show a preference for light makeup and waterproof products that allow them to combine their beauty rituals with sport activities. The rapid rise of male cosmetics is also supported by the rise of male KOLs like Troye Sivan, Perfect Diary’s brand ambassador.

Source: Daxue Consulting

Organic/natural cosmetics

At the same time, with the increasing awareness regarding sustainability and environmental protection, consumers have moved their focus towards organic products. This trend is even more acute among the younger consumers with over 50% of Gen-Z consumers valuing plant-based skincare more than traditional products.

Today, every cosmetic product composed of more than 95% organic raw materials can apply for organic certification in China. These products are in high demand due to the recent trend for a healthier lifestyle among young urban Chinese consumers. Yet, China is still lacking a single organic certification agency and a clear regulatory environment to reassure consumers. So far, the most popular international organic brands such as L’Occitane and Origins are relying on widely recognized Western certifications.

Despite the current lack of regulatory bodies, some domestic brands are developing a wide range of products inspired by traditional Chinese medicine (TCM) and more naturals extraction methods such as Inoherb (相宜本草) and Herborist (佰草集). As indeed, natural products are growing rapidly in China, it is worth looking closer at these two companies.

Inoherb was founded in Shanghai in 1999 by Ms. Feng Shuai, who grew up in a family that practiced traditional Chinese medicine (TCH). Since the start, she insisted on creating facial products to answer the growing need of health-conscious young women by setting up a partnership with the Shanghai University of TCH.

The biggest competitor, Herborist, is also providing TCH-inspired natural cosmetics products but with high-end positioning. As one of the 10 biggest cosmetics brands in China, Inoherb successfully convinced Chinese consumers, looking for personal care products, hypoallergenic, and made through a natural and chemical-free extraction process. This segment is not going to curb down as more and more Chinese consumers are re-discovering TCH and related disciplines such as acupuncture and massages as a normal daily practice.

Source: EqualOcean

Male cosmetics has been on the rise across the globe for a while but it for sure the Chinese market, also for its closeness to K-pop, to watch for innovations in this space. Likewise, the rise of domestic beauty brands emphasizing their cultural heritage and traditional methodologies, is a trend worth following with potential to affect global markets.

Consumer engagement heavily relies on digital channels

If in the past decades the Chinese economy has been mostly driven by exports, the 2010s represented a drastic change with the fast development of domestic consumption. While retail sales grew by 8% in 2019, online sales are driving most of the growth with a 17% increase in 2019 achieving RMB 10,000 billion of sales (~ $1.5 trillion).

E-Commerce

The fast development of online sales in China rested upon the advancement of three major pillars: generalized mobile payments, efficient logistics, and innovative interactive e-commerce platforms. Alibaba, JD.com, and Pinduoduo have successfully transformed into multi-category online platforms that disrupted the whole retail market and incumbents. Their respective shopping festivals, 11.11 for Alibaba and 618 for JD.com, have become major events for Chinese consumers. According to Statista, retails sales of cosmetics products through e-commerce channels represented 74% of total sales in 2018 and are expected to reach 80% by 2024.

In China nowadays, beauty products are the leading category during major shopping festivals, including Double-11. Thanks to an exciting assortment (i.e., new product launches), sophisticated promotions (i.e., additional gifts) and discounts (i.e., up to 30%), several Western cosmetic brands such as L’Oréal, Lancôme, or Estée Lauder typically achieve more than RMB 1 billion of sales (~ $150 million) each at this occasion.

Source: Tmall

Social Media

In addition to a unique e-commerce ecosystem, the Chinese market is also driven by specific social media channels different from the rest of the world. Though different, the engagement approach required in the Chinese market is something brands can learn from.

By developing dozens of services within the main app, WeChat has become the swiss knife of every Chinese citizen, allowing them to chat with hundreds of friends while shopping online through one of the numerous mini-program available. Therefore, WeChat official accounts have become a unique touchpoint for brands to interact with consumers while Mini-Programs are supporting omnichannel shopping experience. For instance, Perfect Diary users can apply for an additional sample when they purchase through the mini-program and enjoy the free trial of limited products.

Source: Own picture

In terms of innovation, L’Oréal is paving the way by developing make-up solutions based on ModiFace augmented reality technology that allows customers to apply virtual filters on their faces by using a dedicated Mini-Program on WeChat. When it comes to skincare, La Roche Posay has developed an online diagnostics for acne so users benefit from customized recommendations directly from Taobao’s platform.

Short-video and live streaming

The emergence of new social media channels relying on short video contents such as Douyin and Kuaishou created thousands of new influencers, earning revenue by editing and sharing their content.

Those new influencers like Austin Li do not limit themselves to sharing short videos with promotional content but eventually converted into a real sales people. Both, social media channels and e-commerce platforms have incorporated live streaming options to allow influencers to directly share their trial videos or product recommendations. Initially trained by L’Oréal to run trials of the brand’s products through social media, Austin Li (also called Lipstick King), has been widely recognized as a top-notch beauty influencer. His Douyin account is followed by more than 30 million followers. By integrating purchase options within the video, users can directly buy the showcased products. During the shopping festivals, most of the beauty brands such as L’Oréal Paris and Lancôme are running permanent 24h live streams to present the different products available and introduce the potential discounts. As a consequence of this very specific environment, beauty brands have adapted accordingly and became truly digital-native brands.

As brands are competing with each other to gain more market share, most of them resort to KOL or celebrities like the actress Yang Mi, brand ambassador for Estée Lauder, to promote their products. Indeed, in 2019, 24 beauty brands partnered with famous stars to be brand ambassadors and showcase their products through social media and large-scale media campaigns. By acquiring deep knowledge on some product categories, KOLs manage to gather an important audience of fans that follow each of their content creation. Partnerships with KOLs helps brand both to support the reputation of their core products such as skin-lightening and anti-spot, and also drive attention on their new face and body care innovations like anti-wrinkles masks or hydrating products.

The evolving needs of a very demanding audience has driven China to become a leading cosmetics market where companies are continuously adapting to compete and secure their position.

To summarize, international beauty companies are slowly moving their focus from the Western world to Asia, and especially China where the future of cosmetics is being built through the fast digitalization of the market and the shortening of product life-cycle. As a consequence, multinationals are investing massively in local R&D centers and partnerships to benefit from the local expertise and develop innovations that could be eventually leveraged in other markets. For instance, by partnering with the Tmall Innovation Center, L’Oréal got access to crucial consumer insights and developed a new “Midnight Cream”, with a record time of product development of only 59 days. Despite the current crisis, L’Oréal China managed to achieve over 24% growth in 2020, proving its successful adaptation to the Chinese market, largely driven by strong e-commerce sales.

From gathering insightful consumer data over digital brand building to the testing of new products: as it turns out, the Chinese market is much more than just another source of revenue but is providing multinationals with an inspiring model that could be replicated worldwide.

All opinions expressed in this essay represent my personal views only.

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