Present Situations of China Cosmetic Industry

Yuliang Liu, Qiwen Xu, Jing Deng

Jala Group Co., China

In recent years, China cosmetic market has seen rapid development and become the second largest cosmetic market in the world. In 2015, retail sales of cosmetics totaled 204.9 billion yuan, with a year-on-year increase of 8.8%. Consumers show strong demand for middle-end and high-end products, and overall market consumption level is significantly upgraded. Industry concentration is further increased and its structure is even optimized; local brands develop rapidly with market shares growing at a fast pace.

Overview of China cosmetics industry

In tandem with the favorable development of Chinese economic society, China cosmetic market has developed rapidly.

Status quo of market development

Figure 1 showed the market shares of cosmetics categories in China. In terms of product structure development, skin care products continued to rank the first with a development speed faster than average level.The market share of skin care products increased from 47% in 2010 to 48.3% in 2014, which is expected to reach 48.7% in 2015. Besides, shampoos and hair care products ranked the second in terms of market shares,as one of the earliest product categories in China. After decades of rapid development, its growth speed started to gradually slow down, with market share decreasing from 17.24% in 2010 to 15.72% in 2014, which is estimated to further decline to 15.15% in 2015. In addition, make-up products and infant care products,which developed at a faster pace than average level,increased from 7.02% and 3.07% in 2010 to 7.14% and 3.95% in 2014 respectively, which are expected to reach 7.29% and 4.24% in 2015.

From the perspective of sales channel development,traditional department stores suffered the greatest impact from the rapid development of other channels. We take skin care products as an example. The sales channels’situation is shown in Figure 2. The market share of department stores decreased from 41% in 2010 to 28.5%in 2014 and that of supermarkets decreased from 20.7%in 2010 to 12.6% in 2014. Through more than a decade of rapid development, cosmetic specialty stores started to slow down in growth, but still maintained at the average market development level. It is estimated that there’re more than 140,000 cosmetic specialty stores with a market share of over 20%, becoming one of the major sales channels in cosmetic market. The fastest growing sales channel is e-commerce. Its market share increased from 3.4% in 2010 to 16.9% in 2014. The market share of direct selling increased from 14.5% in 2010 to 20.2% in 2014.

Figure 1. Category segment in 2010 and 2014

Figure 2. Market share in Channels (2010-2014)

With urbanization and further narrowed income gap between urban and rural residents, small-and mediumsized cities markets grew much faster than large and superlarge cities markets. According to data from research institutions, the market share of large and super-large cities in overall fast moving consumer goods market decreased from 41% in 2011 to 37.6% in 2014 while that of small-and medium-sized cities increased from 59% in 2011 to 62.3% in 2014.

Due to consumer demand upgrading, market share of high-end cosmetics seems to grow. According to data from research agencie, as shown in Figure 3, the market share of high-end products increased from 25.2% in 2010 to 27.2%in 2014. From 2012 to 2014, CAGR of average price for skin care product was 5.4%, 4% for make-up, 4.4% for hair care product and 8.4% for toothpaste.

Figure 3. Market shares of high-end skin care market and mass skin care market

Similarly, from 2011 to 2014, the CAGR of prices for cosmetics categories, such as skin care, toothpaste,are higher than the average 2.5% of the Consumer Price Index, as it shown in Figure 4. It indicates that cosmetics prices in China are on an upward trend,and premium products are increasingly preferred by consumers.

Figure 4. CAGR of price in categories (2012-2014)

Achievements in cosmetic industry

China cosmetic industry further develops and expands,making a continuously increased contribution to social economy. From the perspective of taxation, taking Shanghai as an example, the tax revenue of 7 cosmetics companies out of the top 100 Shanghai industrial enterprises in 2014 accounted for 2.001 billion yuan, an increase of over 81 million yuan over 2013; the tax revenue in total of cosmetic companies out of the top 100 Shanghai service enterprises in 2014 accounted for 5.723 billion yuan, an increase of 309 million yuan over 2013 (see Table 1- Table 4).

Table 1. Top 100 industrial enterprises in Shanghai in 2013

Table 2. Top 100 industrial enterprises in Shanghai in 2014

Table 3. Top 100 service enterprises in Shanghai in 2013

Table 4. Top 100 service enterprises in Shanghai in 2014

It estimated that there are about 3.5～4.0 million employees engaged in beauty industry all over China. Among them, about 1.5 million employees are in over 0.2 million specialty stores, over 6,000 department stores, over 14,000 large-scale supermarkets and over 0.2 million e-commerce stores, 1.5-1.8 million employees are in direct selling channel and more than 0.5 million employees are in over 0.1 million professional beauty companies (including face care, manicure and body care).

The contributions of cosmetic industry to taxation and employment have been recognized by local governments.They consider the industry as one of the important industries and provide energetic support in policies. In Shanghai, for instance, enterprises including Jala Group, Jahwa and Inoherb received energetic support from the Shanghai Municipal Government by virtue of policies including special funds for accelerating self-owned brand construction and financial support funds for promoting cultural and creative industry development.

Characteristics of the development of China cosmetic industry

The market share of top 10 brands in China cosmetic market increased from 43% in 2007 to 45.2% in 2014.

Compared with 2012, 8 out of the top 10 skin care brands changed in ranks in 2013, including brands with rank rising or falling within the top 10, existing brands falling out of the top 10 and new brands ranking among the top 10 (see Figure 5).

Figure 5. Brand change rate in top 10 brands by category(%,2013 vs. 2012)

Compared with 2013, the market share of local skin care product brands increased by 4.8% and that of make-up increased by 3.8% in 2014. Currently, local brands such as Chando, Herborist, Pechoin, Inoherb, Maysu, Proya, OSM and Marubi are the popular brands among consumers, which account for the largest market share in local brands.

With capital pouring into, the cosmetic industry has entered the integration period. There are many cosmetic enterprises including Inoherb, Yunifang and KanS got financing from investment agencies in 2015, which indicates that cosmetic industry has increasingly become a hotspot of capital investment.In recent years, with the gradual expansion of market shares, local cosmetic companies have increased investment in R&D. Jala Group and Jahwa, for instance, have invested more than 3% of annual revenues in R&D. Meanwhile, local enterprises have also taken great efforts to attract international talents to further increase market shares through products instead of marketing. The professionals from foreign-owned enterprises such as P&G, Unilever, L’Oreal, Shiseido and Amore Pacific have been invited.

By virtue of increasing investment and attracting international outstanding talents, effective breakthroughs have been made in a number of fields in cosmetics industry such as biotechnology (including genetic recombination, fermentation, stem cell extraction, tissue culture and establishment of skin model), microelectronic technology (including skin detection, production procedure), emulsification technology (including lowenergy emulsification and ultrasonic emulsification),plant extraction technology, skin transmission technology(including microcapsules technology and lipid technology)and crystal technology.

Besides, the role and responsibilities of government are clearer. In 2013, the China Food and Drug Administration(CFDA) was founded. CFDA replaced a large group of overlapping regulators with an entity similar to the FDA of the United states, streamlining regulation processes for food and drug safety. CFDA is mainly responsible for the safety and effectiveness of food and drug in production,market circulation and consumption. CFDA will assume responsibilities that were formerly divided among several ministries and administrations. CFDA is in charge of comprehensive supervision on cosmetics. A large number of documents have been issued by CFDA to gradually improve and optimize cosmetic supervision system. Industry management laws and regulations are also further improved.On 20 July 2015, the Regulations over Supervision and Administration over Cosmetics (draft) has been launched.The draft gives clear provisions for filing or registration of casmetics ingredients and products, production of cosmetics,labeling and advertisement as well as supervision over cosmetics throughout the supply chain.

Cosmetics production administrative license and cosmetics hygienic administrative license will be integrated into one. On 17 March 2015, CFDA issued the draft of Guidelines for Cosmetics Production Licensing(Interim). The draft provids a summary of relevant experience of China with regard to cosmetics production license and hygienic license with reference to relevant experience of drug production license and cosmetics production license in Europe and the United States.

In December 2013, CFDA issued the Notice on Adjustment of Cosmetics Registration and Filing Administration. The previous post-market filing requirement for non-special use cosmetics manufactured in China has been changed into pre-market online notification. Besides that, China provincial FDAs are preparing to take over duty on imported non-special use cosmetics.

CFDA updated the Inventory of Existing Cosmetics Ingredients (IECIC 2015) on December 23, 2015 (2015 version), which listed the Chinese names and INCI names/English names of in total 8,783 cosmetics ingredients.It will adjust and upgrade the IECIC with improved understanding of safety of cosmetics ingredients and upgrade of evaluation capacity.

In April 2015, the Standing Committee of the National People’s Congress under the State Council published the new Advertisement Law of the People’s Republic of China, which updated contents of supervision over domestic commercial advertisement. In November 2014, CFDA released the draft Measures on Cosmetics Labeling for public comment, which proposed some new management requirements for cosmetics labeling on the basis of national standards and No. 100 order.

Now, CFDA is organizing the preparation of the Guiding Principles on Cosmetics Efficacy Verification. It also organized and prepared the Guidelines on Cosmetics Safety Evaluation (exposure draft) and will publicly invite comments from society since November 10, 2015. Mean while, CFDA is improving the cosmetic adverse reaction monitoring system.

In addition, the State Council energetically supports the development of cross-border e-commerce of emerging businesses. And how to balance the relationship between supervision and development is a research topic for the government and industry.

Major issues

With limited consumption per capita on cosmetics, the market demand for cosmetics needs to be further explored in China. From the perspective of per capita consumption on cosmetics, China remarkably lower than other developed countries. Statistics show per capita spend on cosmetics in China is only USD 35 while that in developed countries such as Japan and Korea generally reaches USD 200 and above (see Figure 6).

Figure 6. Per capital consumption of cosmetics (USD/person)

There are two causes of the low consumption per capita on cosmetics in China: the low overall income level and the immature cosmetics market. Besides that, Chinese comsumer’s awarencess and understanding of cosmetics is still relatively limited. Compared with western customers,Chinese customers only accept the basic functions of cosmetics such as cleaning and moisture. The low cosmetics consumption per capita suggests that China cosmetics market has plenty of room for growth.

The existence of fake and poorquality products is a widespread issue in China current cosmetics market. Some unlawful enterprises add banned substances or restricted substances exceed the threshold in their products, which may harm consumers’ health. Currently, online sales of fake products and counterfeit cosmetics products are widely available on the site. However, There is neither any special legislation on Internet intellectual property protection nor any special regulations on supervision over cosmetics online sales.

In addition, some emerging cosmetics sales models is not within the current scope of supervision. Business promotion of salon cosmetics, TV shopping products and direct selling products often contain exaggerated and false information.Therefore, industry self-regulation and rights protection should be further enhanced and the government should intensify efforts on supervision.

Besides, it should strengthen supervision over sales channels, which include 4 major channels, department stores, supermarkets, cosmetics specialty stores and online shopping. Currently, there is a variety of charges including advertisement fee, passage fee, listing fee and slotting fee in various sales channels, especially in department stores and supermarkets. Some enterprises,in particular the domestic enterprises and medium and small enterprises have difficulties to enter the market due to brand popularity, funds and prejudice against domestic brands in channels.

There’re over 3,000 cosmetics manufacturing enterprises in China, most of which are small companies with limited independent innovation capacity, weak R&D power,inadequate investment in scientific research and frequent product homogeneity. There’re only a few famous national brands with independent innovation technology. The product structure needs to be optimized. Especially, domestic brands need to be promoted.

Most Chinese cosmetics manufacturing enterprises fall far behind in brand operation, brand management and technology innovation. Most of them still focus on traditional product marketing, paying much attention to competition in distribution channels and product price while neglecting brand construction and management.Although some products successfully entered the market through advertisement and marketing at first, they may be ultimately defeated in long-term competitive due to lack of power of sustainable development.

Cosmetics safety concerns human’s health, and consumers and social sectors pay close attention to it.Chinese government attached great importance to regulation construction and supervision management in cosmetic industry. It issued a series of regulations and rules to standardize manufacturing and operation behaviors of enterprises, enhance lawful supervision and management.With the rapid development of cosmetics industry, change of supervision system and fast-changing social progress,these regulations and rules saw increasingly obvious problems. The original regulations and rules system needs urgent improvement. Therefore, regulation supervision of cosmetics shall be in line with industry and product characteristics of cosmetics.

Currently, among the cosmetics standards in China,product standards account for 20%, import & export inspection and quarantine standards account for 40%,while standards of management and safety of cosmetics account for only 15%. Overlapping management situation causes repeated project establishment and ignorance of standards quality. It should intensify efforts to make improvements so as to satisfy the practical demand of industry development.

Compared with developed countries, China still faces low information level of enterprises. In recent years, Chinese enterprises have made certain progress in information construction, and some enterprises have achieved favorable results by attempting to optimize industrial chain, and reduced transaction cost through e-commerce. But most companies are still sitting on the sidelines, especially in cosmetic industry. In China, the enterprises are usually small with laggard operating mode,relatively inadequate investment in information, backward information processing equipment and breakdown in information communication between upstream and downstream in the industry. This situation can’ t adapt to the application and development of e-commerce of Chinese companies, and limied the development of cosmetics industry.