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Will China’s Beauty Market Sustain Robust Growth in 2022?

Crackdown under the name of common prosperity and sporadic COVID-19 outbreaks in cities across China cause great uncertainty for the sector.

The once red-hot China beauty market could be facing a tough year ahead.

With the crackdown on the tech, entertainment, real estate, and tutoring sectors under the name of common prosperity resulting in direct scrutiny of luxury purchases, as well as the sporadic COVID-19 outbreaks in cities across China, consumer spending sentiment has been dampened across all categories, including beauty.

The numbers are not looking good. Data compiled by Jeffries showed that China’s cosmetic sales growth logged a greater-than-expected slowdown in December 2021, down from 8.2 percent in November to 2.5 percent year-over-year. Meanwhile, Bain flagged in its latest annual China Luxury Report that growth throughout the second half of 2021 dipped to an estimated 0 to 25 percent.

Online channels are also impacted. Bernstein’s data on Tmall and Taobao beauty tracked market showed that beauty heavyweights saw an average 9 percent marginal share loss in December of 2021, compared to a 27 percent increase in the same period in 2020.

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L’Oréal and The Estée Lauder Cos., for example, saw a 17 percent and 4 percent decline in sales values in the period, respectively.  Bernstein said the declines were caused by a mixed shift where there is less contribution from premium products and bigger contribution from mass-market.

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Still, some analysts expect the market will quickly rebound. Erwan Rambourg, co-head of Global Consumer & Retail Equity Research at HSBC, said that “COVID-19 and investor concerns about ‘common prosperity’ and slowing economic growth is unlikely to impact spending materially in 2022,” and that “Chinese consumers will continue to support luxury demand strongly this year and beyond.”

Results from HSBC’s fourth China Deluxe survey indicated that luxury goods companies and premium beauty brands are somewhat insulated from market volatility in China as “likely local competition is not that credible.” Some 45 percent of around 2,000 wealthier respondents said that they prefer to buy the highest-quality products, while 29 percent of them preferred to purchase imported brands as the price is justified by the quality.

L’Oréal CEO Nicolas Hieronimus is also bullish about China’s long-term prosperity. “There’s no reason to be worried about the measures of China…I think the desire of the Chinese authorities to share the wealth to increase the size of the middle classes is something that we should benefit from,” he said during the 2021 Q3 earnings call.

Both HSBC and Vanessa Wu, Europe business director of the Shanghai-based communication agency Gusto Luxe, which handles companies like Rituals and Tata Harper for the Chinese market, observed that robust growth in the beauty sector in China will continue in 2022, especially for homegrown beauty brands in makeup categories, which largely cater to high-frequency fashion demand targeting young customers.

“They are resonating with Gen Z and are formidable at creating engagement across social media. Many of these up-and-coming brands are backed by investors and have important budgets to drive awareness,” Wu said, adding that clean beauty remains a huge opportunity for both local and international players.

At the same time, Wu warned that the Chinese beauty sector is getting increasingly noisy and competitive.

“The ways of connecting with beauty consumers are increasingly diverse in China. Virtual Idols, livestreaming, social media, influencers and e-commerce shopping festivals all need to be part of a carefully defined marketing strategy. Unique social media platforms like Xiaohongshu are playing a key role in aiding the growth of both established and emerging brands as well,” Wu said.