Global beauty and personal care companies continue to enter China’s booming market — and Hua Fang, vice president of Shanghai Jahwa United Co. Ltd., offered a road map to doing business in the country.
This story first appeared in the May 24, 2013 issue of WWD. Subscribe Today.
Fang took a three-pronged approach to explain the opportunities and challenges inherent in selling beauty and personal-care products in China. First, he put the Chinese market into perspective through growth data and insights. Second, he touched on presumptions of the Chinese market, especially in four key areas: consumer behavior, channel structure, communications and competition. To conclude, Fang discussed winning strategies he’s seen in the Chinese market, and ones that should be changed.
“The Chinese market has seen a very fast growth [in beauty and personal care] in all of the major markets,” said Fang. “The growth has reached about 15 percent, almost double the average growth globally. But after so many years of growth, the China GDP is also slowing down a little bit, so we expect that the growth is going to slow down and reach high-single digits.”
In terms of the most popular category, there’s no contest. “Skin care is by far the largest category in the Chinese market,” he emphasized, adding that bar soap is another winning area. “People love their skin care and the category still shows a very strong growth momentum. Hair care and oral care are also big categories. But the penetration — the percentage of people who use it — is already very high, so the growth rate is relatively low and the market concentration is very high. The men’s grooming category is another area with strong growth potential, because people are seeking more personalized and diversified products.”
Fragrance, on the other hand, is a very different market in China. “In the U.S. and Europe, fragrance is a very big category, but in China, people are still developing the habit of using it — so this category is still very small.”
As the market grows, Chinese companies are also jostling for a place at the table — sometimes with names that closely mirror competitors from other countries, as with a brand founded in 2001 in Shanghai with the name Chcedo.
Aside from products, the key to winning is all about location, Fang opined. Lower-tier cities — the smaller cities and towns which make up the majority of China — are emerging as an engine to propel the growth of the market, said Fang. “The potential of lower-tier cities stems from the large number of population and relatively low penetration,” said Fang.
And this market is voraciously seeking facial creams, he said. “We see not only the value growth, but the volume growth,” he said. “That comes from the large population base in the lower-tier cities. If you look at the towns and the villages, the number of households is almost 10 times of the number in the municipals and cities. And if you add up the prefectures and the counties, there’s another 10 times.” And on average, he added, the penetration rate is lower than in metropolitan areas.
Turning to his second point, consumer behavior, channel structure, communications and competition, Fang noted that Chinese consumers are starting to trade up to pricier products. Cosmetics specialty chain stores and e-commerce are gaining significant ground in China, buoyed by the fact that major department stores in China are located in major cities only. “We have counted almost 200,000 [privately owned cosmetics specialty shops] in the lower-tier cities,” said Fang. “They haven’t reached a national level. They haven’t even reached a provincial level. They’re just doing a regional prefectural level business there. It’s a very, very strong category in lower-tier cities.”
For e-commerce, “We don’t see a lot of [product] companies running their own Web sites,” he said. “Taobao and Tmall, which are owned by the Alibaba Group, dominate the consumer-to-consumer and business-to-consumer online sales markets, respectively.” Taobao is said to garner 95.1 percent of consumer-to-consumer sales, while Tmall, a virtual shopping mall where cosmetics brands can sell their products directly to consumers, is said to account for 51.3 percent of business-to-consumer sales. The online growth is especially encouraging, because in the past, items not bought in bricks-and-mortar were generally assumed to be counterfeit by consumers, he said.
Online and regional specialty stores are siphoning sales from major Chinese department stores, he said.
Social media networks are another critical component of sales. While Facebook and Twitter are banned in China, alternative portals exist there. Weibo, a Facebook-Twitter hybrid, is red-hot, as is a site called WeChat, a mobile phone text and voice messaging service meant to be used between close circles of friends.
“With 300 million users combined, Weibo and WeChat have more users than the population of the U.S.,” said Fang.
Chinese herb-based products are also going mainstream. “It’s grown very fast,” said Fang, whose company owns the Herborist brand, launched in 1998. The winning combinations involve both cutting-edge technology and the ancient wisdom of herbal power, he said.
Finally, the strategies of selling in China are key. Three stages of local adaptation — inspired by the Romans — have been proved to be successful winning strategies, said Fang: price destruction, concept innovation and channel differentiation. The first involves a low price that entices a consumer to purchase the product, using a low-price strategy to grab market share. While this strategy works better in the mass market where product differentiation is small, maintaining product quality and eroding product margins are risks, he said. Channel differentiation is to copy a successful brand concept in the market and sell it in a different type of channel. While this attracts a different segment of consumers, challenges include sustaining the development of the brand and migrating into other channels. Concept innovation is to instill local culture elements into the development of brand and products, he explained. While pros include the ability to leverage local culture, heritage and philosophy to create a new brand which enjoys sustainable differentiation, it can be challenging due to the scarcity of such concepts and the high cost of customer education.