CHINA COSMETIC MARKET

By Lau Geok Theng

The total retail sales of skincare products and make-up products in China reached RMB160.8 billion
and RMB25.1 billion respectively in 2015, achieving year-on-year growth of 6.7% and 10.9%,
respectively.1 Skincare products represent the fastest growing sector in the cosmetics market. The
make-up market is unsaturated, particularly in the rural regions and inland cities. Sales of eye make-
up products recorded significant growth in recent years.

The men’s cosmetics sector exhibits strong growth, in particular skincare products for men.
According to estimates by Euromonitor, the market of skincare products for men expanded by 7.6%
year-on-year in 2015 as more and more male consumers are accepting skincare and make-up
products for men. Sales of cosmetic products designed for use by children experience high growth as
well.

Anti-aging products are increasingly popular. Sports cosmetics that can help prevent the loss of
moisture, are anti-odour, antisweat, and anti-bacteria and of compact portable size are also popular.
Consumers have growing awareness of products which combine cosmetic and pharmaceutical
features, namely “cosmeceuticals”, such as spot lightening cream, acne treatment lotion and acne
ointment. Green and natural cosmetics products which contain natural or nutritional ingredients
such as aloe and vitamins are increasingly preferred by Chinese consumers.

As consumers are in constant pursuit of beauty and the unceasing release of demand from second-
and third-tier cities in China, the Chinese cosmetics market will continue to maintain steady growth
in the future, with the total volume of retail sales expected to be RMB245.3 billion by 2017.2

Competition

According to China Food and Drug Administration (CFDA) statistics, the number of enterprises
qualified to produce cosmetics in China as at the end of November 2015 was 4,542. Domestic brands
positioned in the mid- to low-end segments, while foreign-invested enterprises and joint ventures
dominated the high-end segment. Foreign brands are estimated to account for nearly 60% of the
unit sales of cosmetics in China and nearly 90% of the sales value. The rapid development of
domestic cosmetics companies boosted the growth of domestic brands at a rate of about 10-15% in
2014. The market share of domestic brands is growing gradually, posing competition to the foreign
brands.

A number of emerging mainland cosmetics producers such as Chinfie, CMM, Houdy, Longrich,
Herborist and Chando are aggressively marketing their products while some of the long-established
domestic brands like Pechoin, Maxam and Bee & Flower are actively carrying out research,
rejuvenating existing products or developing new ones to meet market needs. The greatest
competition is seen among foreign brands such as L'Oréal, Shiseido, Mary Kay, Estée Lauder and
Olay.

1
Hong Kong Trade Development Council, “China’s Cosmetic Market,” 25 July 2016. http://china-trade-
research.hktdc.com/business-news/article/China-Consumer-Market/China-s-Cosmetics-
Market/ccm/en/1/1X000000/1X002L09.htm. Accessed on 26 July 2017.
2
CISION PR Newswire, “China Cosmetics Market Report, 2014-2017,” June 30, 2015.
http://www.prnewswire.com/news-releases/china-cosmetics-market-report-2014-2017-300106824.html.
Accessed on 26 July 2017.
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The table below shows the top ten cosmetic brands in China revealed by the Brand Footprint Report
revealed by the Kantar Worldpanel in June 2016.3 Kantar Worldpanel’s Brand Footprint Ranking
computes the strength of brands through the use of an insightful metric called Consumer Reach
Points which measures how many households around the world are buying a brand (its penetration)
and how often (the number of times shoppers acquire the brand).

Sales Channels

The major sales channels of cosmetic products in China include wholesale markets, supermarkets
and department stores, dedicated counters, specialty chain stores, drugstores, beauty parlours and
direct selling. Online shopping channels also recorded significant growth in recent years.

Currently, department stores, supermarkets and specialty stores are the top three sales channels. It
is estimated that retail sales of cosmetics through these three major channels account for
approximately two-thirds of the whole cosmetics market.

Dedicated counter is a major traditional sales channel for cosmetics, adopted by many world-
renowned cosmetics brands. Dedicated counters generate good returns in terms of word-of-mouth
publicity and are thus highly effective in establishing brand image. Top global brands such as
Lancôme, Estée Lauder, Chanel and Dior utilize the dedicated counters to a large extent.

Some brands expand their business by opening specialty stores, either operating the stores directly
or through franchise operation. The directly operated specialty stores enable the brands to better
display their products, ensure the quality of service management and enforce unified, stable pricing,
and the multinational cosmetics giants prefer to adopt such sales format. Opening franchise chain
stores is regarded as the most effective format for rapid expansion with the least input and highest
rate of success.

3
Kantar Worldpanel, “China’s beauty market remains buoyant in 2016,” 17 October 2016.
https://www.kantarworldpanel.com/global/News/Chinas-beauty-market-remains-buoyant-in-2016. Accessed
on 26 July 2017.
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Direct selling is a means to sell cosmetic products through distributors’ personal networks. Direct
selling companies will award the distributorship according to the quantity of goods they sold
through their respective networks. Avon was the first brand to engage in a pilot programme after
the Regulations for the Administration of Direct Selling were promulgated in 2005. Subsequently, the
authorities also granted direct selling licences to Amway, Perfect, Longrich and others.

Selling cosmetics through drugstores has become popular for cosmeceuticals. This channel is now
dominated by foreign players although a number of local pharmaceutical companies are setting foot
in this territory. Domestic brand Longrich, for example, has adopted a two-pronged approach of
distributing through shopping centres and supermarkets as well as local pharmacies.

Cosmetic products can also be distributed through various types of beauty parlours, such as
traditional, pampering and therapeutic beauty parlours; large and medium-sized high-end beauty
spas; franchise chain spa and beauty stores; and grooming and hairdressing parlours. The retail
concept of “cosmetics supermarket” or “one-stop shop” is gaining popularity with the entry of
players like Watson’s, Sephora, and Sasa.

Online cosmetics shopping has seen rapid growth and 69% of the female consumers and 65% of the
male consumers would buy skincare products and cosmetics from online stores because online
shopping is convenient and offers delivery services. Internet purchases represents 25% of China’s
cosmetics market sales.4

Many foreign brands have entered the Chinese market by acquiring domestic brands and making use
of the their distribution networks. For example, MiniNurse and MG were acquired by L'Oréal, TJoy
by Coty, and Dabao by Johnson & Johnson.

Trade fairs held in China provide an ideal channel for industry players to gather the latest
information and to meet dealers. China Beauty Expo is an annual beauty trade fair in Shanghai taking
place in the month of May. It is considered to be one of the world’s largest cosmetics exhibitions and
it is divided into three exhibition spaces: Cosmetics China, dedicated to cosmetics products, skin care
products and perfumes, Cosmetech Shanghai, dedicated to equipment, packaging and ingredients,
and Beauty Shanghai, dedicated to professionals and spa products.

Distribution Structure

Li and Fung have identified the major alternative distribution channels for beauty and personal care
products as shown in the Figure below.5 Distributors and agents are authorized by brand owners or
manufacturers to distribute their products; typically, they do not involve in manufacturing and
retailing of the products. Distributors or merchants are obliged to the buyout of products carried,
and so they carrying inventory risk. Agents do not need to buy out the products carried and they
receive a certain amount of commissions if they sell the products on behalf of the manufacturers.

Allowing some distributors to display and sell their goods on site, wholesale markets are often
regarded as a distinct feature of China’s distribution landscape. Mushroomed in the 1980s-90s,
wholesale markets have been playing a significant role in channeling products of the country’s
numerous small and medium sized manufacturers into the hands of urban and rural consumers.
Many people view wholesale markets in China as disorganized and selling mainly low- end and
unbranded products. In recent years, however, some large-scale wholesale markets have been
upgrading themselves with sound management, modernized facilities and better brand positioning.

4
Gentlemen Marketing Agency, “China’s Cosmetic Market.” http://cosmeticschinaagency.com/wp-
content/uploads/2015/04/Chinas-Cosmetics-Market-2014-2015.pdf. Accessed on 26 July 2017.
5
Li and Fung Research Centre, “Distribution in China,” September 2012.
http://www.funggroup.com/eng/knowledge/research/china_dis_issue101.pdf. Accessed on 26 July 2017.
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Facilitated by improving logistics infrastructure in China, some established brand owners or
manufacturers have set up their own wholesale and retail arms to conduct wholesaling and retail
activities.

Li and Fung commented that most beauty and personal care brand owners and manufacturers adopt
a combination of Models II & III. For instance, for personal care products, brands such as Olay sell
directly to modern trade channels in key cities; and use distributors to sell to traditional trade
channels in lower-tier cities. Some brand owners and manufacturers start to sell through a
combination of Models II, III & IV (online shops).

Market channels for personal care and cosmetics products are changing rapidly, reflecting consumer
distrust of mass market channels; the upgrading of Chinese consumer preferences; and the growing
middle class in Tier 2 and Tier 3 cities.6

Major Distribution Models for Beauty and Personal Care in China and their Characteristics

6
USA Department of Commerce, “Asia Personal Care & Cosmetics Market Guide
2016.” http://www.trade.gov/industry/materials/AsiaCosmeticsMarketGuide.pdf. Accessed on 26 July 2017.
4
Sales of these products via grocery stores is down while sales via non-grocery channels, including
beauty specialist, department and pharmacy stores is up. Direct selling is also growing and online
retailing is by far the fastest growing channel and is expect to grow to 30% or more of total sales in
the next five to ten years. The increasingly popularity of online channels reflects both the sparser
access to retail stores and diversity of brands in Tier 2 and 3 cities.

The rise of online sales was also driven in part by the advantageous terms that cross-border,
imported products received vis-a-vis domestically produced products and products imported via
traditional channels. These cross-border products were not subject to these same product
registration requirements, which in China can cost $1,000 or more per SKU and take up to 8 months
to complete registration for nonspecial use cosmetics. As a result, many products not registered for
consumption in China, were available via the online channel. Similarly, these products were also
subject to fewer taxes. In April 2016, China introduced new e-commerce cross-border regulations
requiring registration for cosmetics as well as for a number of other consumer goods sold through
this channel—putting these products on a more equal footing with products sold via traditional
outlets. It is not yet clear how these policy changes will impact online product sales.

Some Trends in Distribution of Cosmetic Products in China5

China’s distribution sector is highly fragmented. There are countless numbers of small-sized players;
most of which are with rudimentary infrastructure. Competition is intense; those who cannot offer
higher value-added services to clients often have to resort to price cuts and thereby eroding their
profitability.

Disintermediation which refers to the removal of intermediaries in a supply chain is occurring with
increasing frequency in China. Some big name retailers have set up their own sourcing department
in China to source directly from manufacturers. Some established manufacturers or distributors have
also set up their own retail outlets to reduce their reliance on retailers. The rapid development of e-
commerce is posing the same threat to distributors and retailers.

Many foreign brand owners were willing to grant national distributorship rights, oftentimes
exclusive, to distributors in China when China sales represented a small proportion of their global
sales years ago. These distributors often enjoyed lucrative profits. As China’s market grow and
represent a larger proportion of their global sales, many brand owners are developing their own
sales and distribution arm for a better grip of the market. Others switch to granting non-exclusive
distributorship rights as a way to foster competition and expand the distribution network.

There is a significant shift in power in China’s retail supply chains. Retail chain operators in China
have been expanding rapidly which gives them more bargaining power over their distributors. By
contrast, the majority of distributors in China remain fairly small in size with narrow product lines
and are serving in limited localities. With greater bargaining power in the supply chain, retailers are
placing more stringent requirements upon their distributors. Many big-scale retailers charge
suppliers numerous types of fees and extend payment terms to get extra working capital. However,
a growing number of retailers have realized that retailer-supplier collaboration is conducive to
achieving sustainable growth.

Some Chinese distributors have expressed their concern of rising costs. The distribution sector in
China is labor-intensive, and labor cost in the country is rising rapidly, especially in big cities such as
Beijing and Shanghai. Some distributors said that high logistics costs in China, particularly
transportation and warehousing costs, are also severely impacting their businesses.

Today, China’s distribution models are more diversified with the emergence of multi-channel
retailing and distribution. Many retailers have embarked on multi-channel strategy to lower

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operation costs and to achieve wider customer reach. Online retailing, telephone retailing, television
retailing and catalogues sales are becoming increasingly popular. While many cosmetics brands have
been expanding into online retailing in the past few years, some B2C online operators are starting to
break into store-based retailing to gain market share.

Cosmetic Universe and Online Buying

China has the world’s largest number of online users. Thus, Internet word of mouth is becoming
increasingly influential in China: most of Chinese consumers now read comments and opinion from
other web users and take them into account before making a purchase decision. In China, there are
interactive websites dedicated to the beauty and cosmetics universe, such as Meilishuo and Kimiss.

Meilishuo which means “Beauty Talk” or “Conversation on Beauty” is the most influential website
specializing in fashion, beauty and cosmetics for young Chinese women. The website was created in
2009 and it acts like a shopping guide, seeking to help Chinese women find clothes, bags, shoes,
accessories, beauty and cosmetics products. Web users have the possibility of sharing their opinion
and recommending some brands and products. They can also look for expert advices and links to
group buying and shopping platforms. Meilishuo targets 20 to 35 year-old white-collar and semi
white-collar women who have the leading spending power in China. Around 35% of Meilishuo’s
users are located in China’s key cities such as Beijing, Shanghai, Guangzhou and Shenzhen.

Kimiss is China’s largest online community for rating beauty and cosmetics products. Founded in
2007, Kimiss allows web users to share their own tips and expertise about make-up and cosmetics
products. The website now hosts nearly 1 million user reviews of over 140,000 beauty and cosmetics
products from more than 2,500 different brands.

Online sales represent 25% of the total cosmetics sales volume in China. Chinese consumers are
increasingly buying their cosmetics products from general websites such as Taobao, Tmall, Amazon
or Jingdong, or from specialized cosmetic websites such as Jumei and Lefeng. These websites
regularly offer all kinds of discounts.

Jumei Youpin is China's first and largest cosmetics group buying website. It offers flash sales of
cosmetics. Today, Jumei is no longer a typical group buying website. It has successfully transformed
itself into a vertical B2C website. Lefeng is another large online shopping mall on the Chinese web.
This is the first cosmetic website which engages Chinese stars in their promotion and publicity
activities. Lefeng also provides fashion tips.

Questions

1. What are the functions performed by marketing intermediaries in the cosmetic market in
China? Which of these functions, do you think, can be more effectively performed by the
intermediaries and which of them can be performed by the manufacturers resulting in
bypassing of the intermediaries?

2. What channel design will likely be used by large cosmetic companies and what channel design
will likely be used by smaller players in China? Comment on the length, coverage and type of
channels in your analysis of channel design? What factors affect channel design in China for
the large and small cosmetic companies?

3. What sales channels can be used to sell cosmetic products to consumers in China? What
factors would determine the number and types of channels used?
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4. What omnichannel marketing? How can cosmetic manufacturers apply omnichannel
marketing strategy in China?