Western-style beauty images and counters now predominate in China.

<EM><FONT size=1>This article is one in a series of three exploring emerging markets in Russia, China and Brazil. The remaining articles in this series are available by </FONT></EM><A...

This article is one in a series of three exploring emerging markets in Russia, China and Brazil. The remaining articles in this series are available by subscription.

The beauty industry continues to boom in China, as lower-income areas become increasingly urbanized.

Enter almost any department store in China, and the first thing you will see are the cosmetics counters. Glittering point-of-sale booths for brands like L’Oréal, Maybelline, Revlon, Yue-Sai, Za, Red Earth and Olay cram into the country’s choicest retail real estate, which they occupy because they generate both foot traffic and actual sales.

China’s beauty industry is booming, and looks to enjoy continued growth rates that are high even by the standards of this exploding economy. As recently as a decade ago, personal care was a luxurious novelty in China, but now urban consumers are becoming as savvy and brand-conscious as their equivalents in developed countries. Rising incomes are allowing them to trade up to more prestige brands, while low-end products continue to expand their reach among rural and semiurban markets.

The legal and taxation landscape is also constantly changing. As of April 1, the Ministry of Finance and the State Administration of Taxation eliminated an 8 percent consumption tax on hair and skin care products; the tax was introduced in 1994 at 17 percent and was reduced in 1999. Some high-end skin care products, however, will now be classified as cosmetics, and thus subject to a 30 percent tax.

The actual size of the industry is still difficult to pinpoint, as studies vary in terms of breadth of categories. Kitty Shum, a spokesperson for Procter & Gamble China, estimates the value at $13 billion per year. “The category includes hair care, skin care and cosmetics, feminine care and personal cleansing categories,” she says. “Cosmetics are currently less than 10 percent of the total beauty category.” A 2005 China Daily report pegged the industry value at $5 billion to $5.5 billion.

According to the Hong Kong Trade Development council, the market breaks down as follows: 35 percent skin care, 28 percent hair care, 24 percent cosmetics and 8 percent perfume. The China Federation of Industry and Commerce predicted that sales of skin care alone will grow to $9.6 billion by 2008, with dominance by foreign and joint-venture companies growing to 80 percent of the market.

“The biggest development will be the continuous growth of market size of the beauty category,” says Shum, “and the urbanization of the lower-income markets or areas in China that will account for enormous spending potentials for the future beauty industry.” Other significant market trends include the expanding market shares of products for men, children and the elderly. Anti-aging products are hot sellers, even among younger consumers, as high pollution levels take their toll on Chinese skin. Whitening products are also popular, in accordance with a traditional preference for pale skin. Plastic surgery and slimming products are in vogue with those who can afford them.

Retail outlets for beauty have been expanding beyond the traditional grocery stores, mini marts and department store stop-and-shop counters to more dedicated spaces. Watsons, a subsidiary of Hong Kong’s Hutchinson Whampoa Ltd. and the world’s third-largest distributor of personal care products, has dominated mainland sales since launching here in 1989. It expanded to over 160 stores last year, and recently introduced a growing range of lower-end Watsons products to compete with the more expensive brand names it distributes.

Watsons is facing increasing competition from LMVH’s Sephora, which celebrated its first anniversary in China on April 12. Sephora currently has three Shanghai stores, and by the end of this month will open a forth in Xujiahui’s Huijin Department Store plus an inaugural Beijing store in Zhongguancun Plaza.

Beauty products have also risen into the ranks of China’s top five advertising categories, after food, pharmaceuticals, retail services and real estate, with expenditure rising 34 percent to $4.8 billion in 2004, according to a CTR market study.

No one ventures to say how long it will take for China’s beauty sector to be fully developed, as the market remains promising but geographically unbalanced and highly competitive. While annual growth rates as high as 41 percent, like those achieved in the Nineties, have evened out, they seem likely to remain in the double digits for the foreseeable future.

This article appeared in WWD BeautyBiz a special publication to WWD available to subscribers.