The China beauty market is maturing at a rapid pace, causing growing pains for multinational beauty firms. Companies increasingly find themselves competing against local brands and navigating a rapidly evolving retail channel where specialty chains and online retailers are gaining serious ground. South Korean brands, in particular, are gaining in popularity and putting pressure on Western beauty companies.
Their actions are now raising questions about the state of China’s beauty market for international players and what it takes to succeed there over the long term.
“The Chinese beauty market has matured, and the competition is stiff,” said Paco Underhill, founding president of Envirosell, who has helped firms enter the market. “It’s very important to pay attention. Companies have to focus on what the ground conditions are.”
A common mistake that some foreign brands have made, said Underhill, is to sell the same products and assortment and expect the Chinese consumer to find it relevant. The key, he said, is to “focus on local market research and be sensitive to local beauty issues.” For instance, he noted that Asian consumers’ interest in skin lightening products has spawned ultraniche product segmentation, such as items for underarm skin lightening.
Underhill said the surge of South Korean brands, naming in particular AmorePacific, is turning up the competition in China, and many of them are fronted by Korean pop stars and soap opera actress.
“You cannot underestimate the impact of Korean pop music and soap operas across Asia, they are a very powerful force, particularly on women,” he said.
Though the $22.8 billion Chinese cosmetics market doubled between 2008 and 2012, according to a report by Fung Group, a number of multinational beauty brands have indicated they are feeling the pinch in China, prompting beauty companies to view their prospects there through a different lens.
Both L’Oréal and the Estée Lauder Cos. Inc. continue to see ample opportunity in China. Fabrizio Freda, Lauder’s president and chief executive officer, made Asia a key priority early in his tenure, which began in 2009. He is now laser focused on the development of China’s tier-two, three and four cities, and likens the development of those areas to Lauder’s development in the U.S. in the Sixties. “There is potential for an enormous amount of people to be urbanized over the next five years,” Freda told WWD’s Beauty Inc in August, adding that one day consumption in tier-three cities will be “huge.”
L’Oréal, for its part, has decided to pull its Garnier brand from China in a move that the company said will “enable its Consumer Products Division to accelerate its conquest of the Chinese beauty market.”
Garnier accounted for just 1 percent of L’Oréal China’s total sales of $2 billion in 2012.
L’Oréal will focus its efforts on its two leading brands, L’Oréal Paris, the number-one beauty brand, and Maybelline New York, number-one makeup brand in China, said a company spokesperson.
Other beauty firms are taking a more cautious view on the market, as well. Procter & Gamble Co. recently indicated that its Chinese skin-care market share was declining, and Avon Products Inc. continues to struggle in China as it moves from a direct-selling sales model to retail boutiques. In its most recently reported quarter ended Sept. 30, Avon’s total revenues in Asia-Pacific declined 22 percent to $167.4 million, or 19 percent in constant currency. This was a result of the number of representatives decreasing across the region, and of Avon’s exit from South Korea and Vietnam, as well as a poor performance in China, where revenue slid 67 percent.
ConsumerEdge Research analyst Javier Escalante said that there are three factors creating pressure on multinational brands: Chinese customers are showing a strong preference for local brands and continually switching to new brands creating a great deal of brand rotation; online shopping is gaining steam — 20 percent of all cosmetics sales already take place on the Web — and specialty retail chains, which tend to showcase local brands, are gaining in importance. He noted that the growth of the online and specialty channels, where bold product claims abound across mass and luxury lines, could undermine brands’ ability to control the shopping experience. But China remains an important market, driving more than 40 percent of the world’s growth of premium skin care, said Escalante.
Many China-based analysts believe, in the case of Revlon at least, the failure to gain traction in the world’s third-largest cosmetics market has less to do with a general slowdown in China than problems with the New York-based company’s marketing, product and retail strategies in the country.
The growth may not be as explosive as seen in recent years, but the skin-care and makeup segments in China have increased in the past 12 months, 9.4 percent and 8.5 percent respectively from a year ago, according to Kantar Worldpanel China data.
“The cosmetics market is very fragmented here, so you have to compete aggressively for consumers in this market. In Revlon’s case, we see a serious lack of investment in this area compared with other international brands,” said Jason Yu, general manager of Kantar Worldpanel China.
Another major issue is Revlon’s lack of reach in such a fragmented market — of China’s 160 cities with more than one million inhabitants, Revlon could be found in only 50 Mainland China centers.
Yu, for one, believes the problem of reach has a lot to do with a lack of variation across retail channels, particularly a poor online presence in the world’s largest online beauty market.
“In China, you need a more diversified mix of channels. Revlon was in the department stores in top-tier cities, but there was a lack of diversification in channel strategy. More online and specialist cosmetics stores should have been brought into that mix,” he said. “I know they have an e-commerce store on TMall, but it’s about outperforming your competitors in all the channels. If you look at L’Oréal they have a full-out presence across all of the channels.”
The departure from China will save Revlon $11 million a year as it sheds 1,100 jobs in a market that accounts for less than 2 percent of net sales, the company said on Dec. 31 in a regulatory filing with the U.S. Securities and Exchange Commission.
“It is a good long-term decision since Revlon would benefit from releasing resources from China to invest in markets with better prospects for the company,” said Euromonitor International Beauty and Personal Care senior analyst Oru Mohiuddin.
The Chinese market is certainly a competitive one, with as many as 5,000 brands, according to Charles de Brabant, founder and ceo of luxury consultancy Saint Pierre, Brabant, Li & Associates.
“If you don’t have an established foothold, you are in a bit of trouble because China needs a lot of investment and if the country represents less than 2 percent of your sales and you have 1,100 employees, my intuitive feeling is that they must have been bleeding cash,” he said. “I think the cosmetics category is healthily growing, but it’s a very competitive landscape and I don’t see how you can break out without a huge investment or distinctive positioning.”
Mintel’s chief China market strategist Paul French is unequivocal in his assessment of Revlon’s performance in China, saying the company’s major failings were its unfocused positioning and product offerings in a country where international brands have done better at the premium end of the market and a wide palette selection is not as important in a society much less multicultural than many of it’s Western counterparts.
“Part of Revlon’s problem is that the products they are looking to push worldwide are not products that are going to be very popular in China,” he said. “Bringing over Olivia Wilde to China, who no one knows, to promote an age-defying product, is very weird to me.”
Far from being another indicator that the Chinese beauty market is becoming more difficult for international brands to navigate, French sees L’Oréal’s decision to discontinue Garnier in the market as exactly the kind of specific, high-end positioning that has seen L’Oréal become the dominant international player in China.
“L’Oréal is going to do fantastically in the high end. Garnier is really like a Revlon-type product. Elsewhere in the world, it’s a supermarket brand and it’s not going to sit well in the high end, so it makes sense for L’Oréal to dump Garnier and concentrate on where there is money to be made,” he said.
Despite Revlon’s decision to leave China at this point, analysts such as Yu aren’t convinced this is the end of the line for the cosmetics giant in such an important market.
“I think their move now is about stopping the bleeding, calling for a time-out and then maybe coming back with a different mix of marketing, product and retail channel strategies,” he said, pointing out that other international brands have taken a time out from China before making a comeback.
“Multinational companies tend to be smarter the second time around,” he added.
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