High-Speed Growth of the Cosmetics Market in China

Wang Jixing

China Information Center of Daily Chemical Industry, China

In the past few years, the market for cosmetic products in China has seen steady development.

Chinese brands become more dominant

Chinese women have been attentive to their physical appearance since the ancient time. China's cosmetics industry also has a long history. The first cosmetics company in China was Xiefuchun in Yangzhou city, Jiangsu Province, opened in 1830. Kongfengchun established in 1864. And in 1898,Hong Kong Kwong Sang Household Chemical Company,predecessor of Shanghai Jahwa, was founded in Hong Kong and began producing cosmetics under the VIVE brand. The products had gone on sale in Shanghai in 1903 and within seven years became the most popular cosmetics there.

The Chinese cosmetics industry has evolved through three stages: the prosperity of local brands stage, the dominated by foreign brands stage and the recovery of local brands stage.

With China's growing purchasing power, sales for cosmetics are increasing. Chinese e-commerce websites have also provided more opportunities for cosmetics brands to grow. China's local cosmetics and skincare brands are in the midst of a period of upgraded consumption,urbanization and supply-side reforms.

With the rapid development of e-commerce and the rise of the third- and fourth-tier mass consumer market,some local brands that pay attention to brand marketing,technology research and development gain more market share.

From 2012 to 2017, the total number of domestic players in China's top 20 cosmetics companies increased from 6 to 8, and their combined market share increased from 7.6% to 14.3%. In 2017, Shanghai Jahwa, Jala, Pechoin, Kans, Yunnan Baiyao and other local cosmetic companies were named among the top 20 companies by market share in China, and their market share was basically on the rise (Table 1). With low price, remarkable marketing and rapid growth of e-commerce, the local brands are steadily increasing market share.

Table 1. Top 20 leading cosmetics enterprises in China

With the popularization of e-commerce, the consumption patterns and consumption habits of Chinese people began to change. As a result, the income level of residents increased,and the demand for cosmetics by residents in third-and fourth-tier cities significantly increased. The per capita consumption of cosmetics in China increased from 185 yuan in 2012 to 261.5 yuan in 2017 (Figure 1). Chinese consumers are becoming more particular when picking cosmetic products, not only in terms of quality, but also in terms of health and safety. Local cosmetics companies seize the opportunity, carry out Internet marketing, and use e-commerce channel to increase the market share. The market share of domestic brands began to gradually recover.

Figure 1. The per capita expenditure on cosmetic products in China, 2012 ～ 2017

During this period, traditional cosmetics companies such as Pechoin, MAXAM and Chando were back into the public eye, and the new brands such as Yujiahui, One Leaf and Mariedalgar thrived through their ecommerce stores (Figure 2).

Figure 2. Market share of China's top 20 domestic cosmetics companies, 2012 ～ 2017

With the diversification of sales channels and the growth of demand brought by consumption upgrading, the market share of domestic brands is expected to witness a further increase.

Consumption upgrade drives high-end cosmetics consumption growth

The masstige and high mass segments had the largest market share of almost 50% in China's cosmetics market in 2018, followed by the prestige segment (25～30%) and the mid-to-low mass segment (20%). But in recent years,the cosmetics market is trending towards the high-end.

The market size of mass cosmetics in China grew from 175.8 billion yuan in 2012 to 239.5 billion yuan in 2017, at a CAGR of 12.53%. In 2017, the growth rate of the mass cosmetics market slowed down to only 5.46%, while highend cosmetics rose rapidly, with the growth rate as high as 24.95% (Figure 3).

Figure 3. Consumption of cosmetic products in China,2013 ～ 2017

In China, international brands have remained in the major dominate market position. The top three companies, Procter & Gamble from the United States,L'Oreal from France and Shiseido from Japan, took up 21.8% of the overall value sales on the Chinese beauty and personal care market. Their success can be owed to their extensive product ranges, established reputation and quality, and dominance in the premium and medium cosmetic markets (Figure4).

Figure 4. Sales of local brands vs. sales of international brands (100 million)

But increasingly, Chinese domestic companies such as Shanghai Jahwa, Proya and Marubi, which dominate the lower end of the market, are proving capable of competing with the big international names in China's cosmetics market (Table 2).

Table 2. Main domestic cosmetics companies in China

Among the top 10 companies in China's cosmetics market, there are only three local companies: Shanghai Chicmax Cosmetic Co.,Ltd., Pechoin and Jala Group,ranking between 6th～10th (Figure 5).

In recent years, with the accurate marketing, the popularization of e-commerce and the consumption upgrade of 3-tier and 4-tier cities, the market share of some domestic cosmetics brands has been significantly increased.

The market share of Pechoin increased from 1.4%in 2014 to 2.3% in 2017, ranking the second place; the market share of Chando increased from 1.3% in 2014 to 1.7% in 2017, ranking the fifth place. The rise trend of domestic cosmetic brands is obvious (Figure 6).

Figure 5. Market share of cosmetics companies in China,2017

Figure 6. Market share by beauty brands in China, 2017

Foreign brands dominate the high-end market

China's skincare products market is trending towards the high-end. Euromonitor figures show that though the retail-sales value of high-end skincare products was still below that of mass-market fast-moving alternatives in 2017, the market share of the former has been rising gradually to 31% in 2017 from 27% in 2012.

Multinational players continue to dominate the cosmetics market in China. According to Euromonitor International, among the TOP 40 companies in China's high-end cosmetics market in 2017, the market share of foreign brands was 92.3%, while domestic brands accounted for only 7.7% (Figure 7).

Figure 7. Market share of top 40 companies in high-end beauty market, 2014 ～ 2017

Relying on the world-class R&D and manufacturing capabilities, strong market position and brand recognition, international brands dominate the Chinese beauty market.

In the 1990s, some Chinese cosmetics companies started to appear in the market but they didn't last long.At the time when the Chinese cosmetics market was at a low point, foreign brands took the opportunity and entered China.

Big brands from the West, such as L'Oreal and Estee Lauder, spotted the opportunity early on and entered the Chinese market as early as in the 1990s. While Japanese and Korean cosmetic companies are relatively new in the market. They are gaining ground at an astonishing pace due to good quality products and smart marketing tactics.Fierce competition from both the West and the East has squeezed domestic brands.

R&D investment is the key to improve competitive advantages of products. Recently, we have seen an increase in local brands.

Much of that success can be attributed to research and development in which Chinese companies invested heavily. The Chinese companies put the most into R & D.For instance, in 2017, the R & D spending of Shanghai Jala accounted for 2.48 percent, and that of Proya was 2.29%. Although the R&D spending of local companies still lower than L'Oreal's of 3.82%, it is higher than Estee Lauder's 1.51% (Figure 8).

In 2017, Shanghai Jahwa spent 161 million yuan on R & D,while Proya spent 40.83 million yuan, while L'Oreal spent 6.843 billion yuan and Estee Lauder spent 1.21 billion yuan.This situation is difficult to change in the short term, and foreign brands will continue to have advantages in product development (Figure 9).

Figure 8. R & D spending rate of companies

Figure 9. R & D spending by companies

Local cosmetic companies compete in the mass market

China's cosmetics market is trending towards the high-end. Euromonitor figures show that though the retail-sales value of high-end skincare products was still below that of mass-market fast-moving alternatives in 2017, the market share of the former has been rising gradually to 31% in 2017 from 27% in 2012. Consumers favour major international brand skincare products, and spending habits are switching from price-focused to quality and brand driven.

At a time when local players are finding it hard to compete in the Chinese cosmetic market, a few companies are blazing a new trail. China's local cosmetics brands performed very well in 2017, the main reason being expansion into tier-3 and tier-4 markets. Instead of going after high-income customers in China's tier-1 and tier-2 cities, local players consciously reached out to the underserved consumers in tier-3 and tier-4 cities. They have also been developing online sales vigorously and boosting advertising on new-media platforms (WeChat and Weibo) to raise brand recognition.

According to Euromonitor International, among the top 30 companies in China's mass cosmetics market,domestic brands have been developing constantly, with their market share rising from 7.8% in 2010 to 23.1% in 2017 ( Figure 10).

Figure 10. Market share of local brands in mass cosmetics market, 2010 ～ 2017

Domestic brands are instead going to focus on midand low-end products, and have higher performanceprice ratios. Take Estee Lauder and Proya for example, the price of Estee Lauder's hydrating suit (cleanser + water +cream) is 1,290 yuan, while the price of Proya's hydrating suit (cleanser+ water + cream) is only 148 yuan.

In addition, sales channels are very important to the cosmetics industry. In the recent years, increasing use of e-commerce channels to sell cosmetics as one of the key emerging trends in the global cosmetics market.

Chinese e-commerce websites have also provided more opportunities for cosmetics brands to grow. Chinese brands are doing a better job of this than their global rivals. They're growing quickly online, leveraging lower-cost channels such as product reviews for communication and branding.

In general, domestic brand is by far the leader in terms of cost performance and e-commerce share, but nowhere near international brand in terms of brand recognition and R & D ability.

Table 3. Brands of Shanghai Jahwa

According to Euromonitor International, in 2017, the market share of top 10 cosmetics enterprises in China was only 38.5%, among which there were 3 domestic enterprises, and the market share was below 3%.

Shanghai Jahwa develops several different brands to meet the unique needs of each of the consumer segments.It has five famous brands in total: Maxam, Herborist, gf,Liushen, and Giving. Each brand focuses on the different segmentation, targeting and positioning as can be displayed in Table 3.

In addition, Shanghai Jahwa also committed to multichannel development. Its offline revenue achieved doubledigit growth, and online store also achieved high-speed growth.

Proya built a cosmetics brand by betting on China's lower-tier cities. In a little over 10 years, Proya has become a leading domestic cosmetics brand through a smart strategy of focusing on the underserved population in China's hinterland. By 2017, Proya's specialty stores have covered 4 municipalities, 293 prefecture-level cities and 368 countylevel cities.

At a time when local players are finding it hard to compete in the Chinese cosmetic market, Proya is blazing a new trail. Founded in 2003, Proya is still a young brand but it became one of the Top 3 domestic cosmetic companies in China.

So how did Proya manage this? Through a simple yet smart positioning strategy. Proya consciously reached out to the underserved consumers in tier-3 and tier-4 cities with affordable products. According to China Industrial Information Network, the total population of third-tier and fourth-tier cities accounted for 43 percent of the country's total population in 2017 (Figure 11). Proya will continue to benefit from China's urbanization.

Figure 11. Proportion of population in China cities

Thanks to this positioning and to selling affordable products, Proya's sales volume increased. In the first half year, Proya's revenue rose 24.92 percent year on year and its net profit rose 44.88 percent, far outpacing the industry's growth. Revenue growth was up sharply versus last year.

Targeting Chinese male consumers

For a long time, women always are regarded as the only target for cosmetics and makeup industry. Compared to women, men were never a large part of the cosmetics market share, but that seems to be changing. China's male grooming market is performing well and is projected to continue to grow quickly. Urban Chinese men, particularly millennials, are increasingly image-conscious, and they spend more time and money on grooming than do male consumers in other demographics.

Men have been putting more effort into looking good,boosting China's 34 billion yuan cosmetics industry.Retail sales of Chinese male grooming products have risen steadily over the past five years, and the category recorded strong year-over-year growth of 6.9% in 2017. Euromonitor International estimates that male grooming category sales in China will post strong year-over-year growth of 6.8%in 2018 and reach 14,220 million yuan (Figure 12). Many grooming and beauty brands will further target Chinese male consumers to drive revenue growth in the coming years.

Figure 12. China: male grooming retail sales (CNY Mil.)

Chinese male consumers' grooming needs are not confined to basic personal hygiene items. Skincare is by far the biggest of the male grooming categories in China,generating around 7.4 billion yuan in sales in 2017 and growing by 6% year over year, according to Euromonitor.Men's fragrances achieved the highest growth among all men's grooming categories in 2017, with sales increasing by 16.7%. The firm expects men's fragrance sales in China to increase by 14.3% year over year in 2018. These figures suggest that Chinese men are trading up from basic,traditional men's grooming categories such as shaving to less-traditional categories such as skincare and fragrances(Table 4).

Table 4. China: male grooming retail sales (YoY % change)

Euromonitor further estimates that the male grooming sector in China will grow by 6.5% in 2019, well above the expected global category growth rate of 4.9%. Given these figures, the male grooming market in China has much room to run in the coming years (Figure 13).

Figure 13. Market size of cosmetics and male cosmetics in China from 2013 to 2017

More males became willing to use men's skincare and make-up products. Personal grooming products marketed directly to men, including facial cleansers, shampoos and deodorants, have risen by 7 percent in China, compared to the industry wide 5 percent growth.

Differences between male and female - from gender to skin property and from social attitudes to aesthetic - decided that male cosmetics should be different from female cosmetics in function, packaging and promotion. Men have different skin care needs and thus deserve products specifically designed to meet these unique needs. For example, men's skin care products should be designed to deal with excess sebum production by removing oil effectively and fighting shine. Men's products should also be designed to combat the thickness of the skin by providing better absorption than women's products. In addition, effective skin care products for men will work against clogged pores, irritation and other effects of shaving by removing dead cells, soothing the skin and keeping it well hydrated.

Male skin care products accounted for more than half their spending (53%), followed by shampoo and hair care products (20%), perfume and make-up (14%), and body care (11 %).

Based on the research, total sales of male beauty product in China grew 59% and 54% in fiscal years 2017 and 2018, respectively. Data shows the Chinese male skin care market reached 12.12 billion yuan in 2017.

Compared to their elders, young men are beginning to build skin care habits early. And more and more men are pursuing the differentiated, specialization and high-end beauty product.

According to data released by Tmall, in 2018, the three categories of men's beauty products - hair styling,perfume and antiperspirant - showed the most stable growth, maintaining a year-on-year growth rate of 51%,55% and 78% respectively. The growth rate of Eyebrow pencil, lipstick and facial Sunseteen for men reached 214%, 278% and 145% respectively (Figure 14). The growth rate of men's cosmetics brand was 56%. In addition, men's grooming is high-end, and the average price of Tmall's overall grooming products has increased by 16% in the past year. However, as there are few highend categories for men, many men will directly choose high-end cosmetics brands for women.

Figure 14. Sales growth rate of male beauty on Tmall by category, 2018 vs. 2017perfume

However, the share of cosmetic products for men in the overall cosmetics market is still relatively small,creating huge room for further growth of this sector.