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Beauty Inc issue 06/17/2011

When it comes to beauty, Yu Xinxin knows exactly what she wants: light, non-fragrant creams with plenty of sun protection and an extra whitening agent, simple makeup in natural and pastel tones and hair care products that deliver glossy shine. Price is not her top concern as she browses through cosmetics and creams in a Beijing Sephora store one sunny Saturday afternoon. Yu earns 7,000 yuan (about $1,078) a month and often spends one-tenth of her salary on a variety of beauty products, including skin and hair care and cosmetics. She’s loyal to moisturizers by Biotherm, which cost on average $50 to $60, but is considering switching to a slightly more expensive brand like Estée Lauder.

“I feel very strongly that these products are worth the money,” she says.

This story first appeared in the June 17, 2011 issue of WWD. Subscribe Today.

“It’s important for me to protect my skin from the sun, keep it white and to have makeup that looks natural,” she says. “Lots of companies these days take looks into consideration at the office and I want to advance, so I’m cautious.”

It’s impossible to present a typical Chinese beauty consumer since the market is so massive and varied by geography, income and levels of economic development. But Yu’s tastes and demands are not unusual. She looks at beauty purchases as investments in her career.

Beauty products have become essential for young women in Beijing and Shanghai; and increasingly, customers like Yu are no longer found only in China’s most developed cities. Instead, more and more, smaller markets—cities of many millions that were virtually unknown to the West a decade ago—are emerging and offering new opportunities for international and domestic firms to grow in China. Along the way, companies are seeking to innovate and create specifically for the Chinese market, which they say has some of the most demanding customers in the world.

Cedric Prouvé, group president, international, for The Estée Lauder Cos. Inc., describes China’s consumers as “very aspirational.”

“They want the best possible products,” he says.

To that end, Estée Lauder and other major beauty companies have or are investing in research and development centers in China.

Lauder opened a new Shanghai R&D center in early June which is double the size of its original, and will be focused solely on creating products in China. “The new center will put a lot of relevance behind local products and consumer insights,” says Prouvé, “instead of developing research out of New York and spreading it to the consumer.”

Moreover, the products and lines developed in China could go global, with Chinese consumers driving new trends worldwide.

That’s not happening just yet, but many companies believe the day isn’t too far off. As Prouvé notes, research and development in China is important because creating products for some of the most demanding customers in the world will mean excellent products for customers globally.

“Asian women in general are true beauty seekers, quite phenomenally so,” says Joanne Crewes, vice president of Asia prestige & female beauty for Procter & Gamble International, who notes that customers here drive companies to continually work on new and better products. “They expect true quality and performance of their budget. Whether it be the Beijing or Shanghai consumer or in lesser developed areas, women’s expectations are getting higher and higher.”

Their expectations are so high because women in China see a direct link between success and looks. “You have to be willing to pay more for products to look good these days,” says Sheila Yan, a 26-year-old Beijing shopper. “If you don’t, others can pass you by quickly in life.”

L’Oréal China’s chief executive Paolo Gasparrini has witnessed China’s consumer beauty boom from its beginning, and has many unique insights into Chinese culture and how it shapes the beauty market across the country. A few examples: Chinese women consider advice and extensive input from their significant others and their families when making beauty purchases, in contrast with western women, who tend to make such decisions on their own or inspired by friends and trends.

Gasparrini says Chinese women also typically refrain from coloring their hair (apart from the older generation who rely on black hair color to cover greys). While tastes are changing, China’s beauty culture is unique. “The Chinese culture is very strong, very important,” he says. “It’s extremely highly linked to the market.”

A spokesperson for Sephora agrees, noting, “Although China has become more westernized in many aspects, most of the Chinese people are still introverted. They have the desire to express, but are often constrained by considering other people’s opinion and norms formed by the society.” The spokesperson went to on explain how that relates to beauty. “The rapid economic growth leads to a marketplace flooded with brands and merchandise, creating a phenomena where people express themselves through purchasing a certain product,” the spokesperson says. “They want to associate with that product to exhibit their social status and achievement in life.”

It is this mentality that has helped China move from a developing country to the world’s second-largest economy in the space of a generation. And now it is powering a consumer market that is soon expected to begin driving global tastes and trends, as Chinese incomes rise and tastes and expectations develop.

Euromonitor International pegs China’s beauty business at about $23.6 billion, making it the fourth largest in the world behind the United States, Japan and Brazil. According to China’s National Bureau of Statistics, China’s beauty sector has grown by an average of 16 percent annually for the past five years, with even higher growth rates in more developed cities like Beijing and Shanghai. And while the major markets are big, they’re not yet saturated. So room to grow at the top is massive.

Going forward, Euromonitor expects the market to grow 6 to 8 percent—slower than in the last decade, but still double the rate predicted for more developed markets. Much of that growth will come as retailers push deeper into China’s vast interior, smaller cities and less developed markets. And there are plenty of untouched spots remaining. The so-called “first tier” cities of Beijing, Shanghai, Guangzhou and Chengdu aren’t yet saturated and the rest of China remains eager for new products.

Now, the majority of customers are white-collar workers, but the situation is also changing,” says Yu Fei, chief executive officer of Langezhiyang International Marketing and Sales, a consultancy focused on the beauty industry. “The rural market was on a very basic level before, but with financial and policy support from central government, people from the countryside have more money. It is developing and is a new power,” continues Yu. “In five years, [rural markets] will take up 30 percent of the whole market.”

Marketing firms break down China’s developing regions in terms of “tiers” based on a city’s size, development and purchasing power. With more than 100 cities of over 1 million people and a rapidly urbanizing population, such cities represent an immense potential consumer base.

Analysts at JP Morgan Chase say second-tier cities like Tianjin, Dalian, Ningbo, Wuhan, Chongqing and Xi’an are growing extraordinarily quickly and offer great potential.

“Now the distribution channel is expanding; many international brands only have stores at nice department stores in first-tier cities, but they are paying more attention to the second- and third-tier cities,” says Yu. “The countryside is a big potential market. The purchasing power of rural people is increasing along with increasing urbanization.”

Second- and even third-tier cities are developed enough that consumers follow fashion trends and have disposable income, analysts say, and they’re hungry for new products and new trends.

“If we get a good product that people have heard of or been waiting to try, I can barely keep it in stock nowadays,” says Fan Lingling, a clerk who works in the Gingko Center, a high-end mall in Kunming, Yunnan Province. Kunming is one of the new growth cities, and it illustrates how individual each of the locations are. The capital of Yunnan, which borders on Laos, Myanmar and Vietnam, much of the new wealth here is related to trade with Southeast Asia.

As different as each city is, trends remain constant with other smaller cities in China. Skin care dominates, rather than makeup, and whitening products are a priority.

Research firms, all of which have their own classification systems, say China has between 30 and 40 cities that are classified as second tier, and even more that fall into third- and fourth-tier categories. The lower the tier, the greater the potential for raw growth, if current development patterns continue. But right now, analysts say, second-tier cities are beauty companies’ prime target for retail expansion. The Chinese government has targeted many of these cities and regions, including Chongqing, Chengdu, Xi’an and other western points, for aggressive development programs, offering tax breaks for big investors and building new infrastructure. Investments are beginning to pay off, as second-tier cities and beyond grow. Along with broader development has come greater consumer buying power. In addition, growth in these cities is essential to central government plans to turn China’s economy away from basic manufacturing and toward consumer- and innovation-driven growth.

The cities themselves are growing quickly in population as well, as more former agricultural workers and farmers move to urban areas for better opportunities.

The power of China’s lesser-developed consumer markets, particularly reaching into the internal hinterlands in places like Sichuan Province, has a deep allure for international companies who are looking to China to fuel their business. More than half of the country’s 1.3 billion people still live in those parts of China, and as Yu mentions, their income and buying power is increasing by leaps and bounds. So too is their taste for imports and quality goods, including beauty products.

Another unique twist of the market here is that target buyers are significantly younger than in more developed markets. Not only are they younger, but they’re also more influential, and have taken on the role of teacher, educating their parents about cosmetics and other products, according to Yang Yan, a spokesperson for Shiseido. In the U.S. and Europe, most women learn about products from older female relatives. Yang notes that women born in the 1980s, now in their 30s, are the major beauty trend leaders in China, influencing those younger and older than they are.

In terms of sales techniques, Shiseido believes that a hands-off, gradual approach works best with Chinese customers. Shiseido shops are low-pressure, offering guidance and advice to customers who ask, but steering very clear of high-pressure sales techniques. “Shiseido is not that aggressive,” says Yang. “That’s a really different service than other companies.”

In its 30 years of business in China, the company has seen incredible change. “Buying power is growing so fast and people care very much about how they look,” says Yang.

And hence China’s beauty market will continue to grow. Analyst Gong Wenqing, a researcher from Beijing Shangpu Information Consulting Co., notes that growth will not just be in the high end. “Many years ago, high-end shopping malls were the biggest market player, with 70 percent of the market,” says Gong. “Now those malls are more used for brand promotion, while beauty retail stores and supermarkets together take up most of the market.”

“Online shopping is growing very fast recently,” Gong adds, noting that online sales account for 8 to 10 percent of the market.

For international brands, the opportunity seems boundless. Gasparrini says L’Oréal plans to double its business in China in the next three to five years. Says the executive: “What is interesting and attractive in this market is it’s still a market that allows you to have a dream that is not a dream, but an actual goal.”

The New China: 5 Key Points
Great Expectations: Chinese women see a direct link between success and looks, and hence have high expectations for product performance.
Social Studies: Rather than an individualized view, women here are still very much governed by overall societal opinions.
Growing Pains: Though the market has been growing at about 16 percent annually for the past five years, that figure is expected to decrease to 6 to 8 percent over the next five years.
Second Best: As the country urbanizes, Tier Two cities are gaining in importance for international marketers.
Young Influencers: The target demographic for beauty marketers skews younger in China than in other markets; many young people have taken on the role of educator, teaching their parents about products.

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