The Luxury Cosmetic Industry in the Chinese Market - Case Study Example

Luxury cosmetic industry in the Chinese Market Introduction: The desire to look beautiful is a natural human tendency which is exhibited by all the cultures around the world. As the level of awareness is increasing, people have become more conscious regarding their looks, health, status etc. The demand for the consumer products is growing due to the huge economic expansion in the retail sector which has also led to a dramatic change in the field of cosmetics. In the last decade, the cosmetic industry has evolved into a full-fledged market with flourishing brands. The beauty sector in China has boomed 260 times since its opening in 1978. China has emerged as the 8th cosmetic market in the world and 2nd in Asia in terms of sales value. According to a recent report by a Chinese economist, there are approximately 3800 cosmetic companies nationwide. The sound economy and stable environment has fueled the growth of this industry. Moreover, stiff competition within the sector has also pushed the cosmetic industry towards the concept of industrialization and internationalization. Multinationals are expanding their operations very rapidly in China. In the 1980s, the average annual spending on cosmetic was just about 1 Yuan which rose to 5 Yuan by the early 1990s and to 60 Yuan by 2005. This increasing pattern shows the great potential of growth in the cosmetic industry. According to the Chinese Ministry of Commerce, the annual growth rate in the retail sector is more than 11%. It has been expected that by the end of 2010, the annual revenue from the cosmetic industry will exceed 300 billion Yuan. It has also been observed that the beauty and cosmetic industry, also termed as the ‘beauty economy’ has become the fourth consumption area after the real estate, car and tourism in China. This is because people are seeking better standards of living due to an increase in the disposable income. For Chinese people, beauty is a part of life as they believe that people wants to looks trendy, fashionable and beautiful not just to increase their self-confidence but it presents the personality of a person. In this essay, an in-depth analysis of the trends of the cosmetic industry is carried out in order to better understand the factors that have lead to a substantial growth in the cosmetic sector. Moreover, the regulatory procedure for the cosmetic products in China has also been discussed. Luxury Cosmetic Trend in China: The high-end cosmetic industry in China is at an earlier stage of development and is emerging at a very fast pace. The European markets have already reached the stage of maturity and are now moving towards the trend of surgeries to look better and beautiful. In order to better understand this dynamic market of luxury cosmetic in China following dimensions will be discussed: Consumers: the different consumer segments. Products: the type of product that is more preferable. Communication: the ways brands communicate/advertise about their products. Distribution channels Consumers - the emerging markets: In order to grown any industry the behavior of the consumers must be kept in mind in order to target them in the best possible manner. The high-end cosmetic products are in great demand in China due to the awareness of the personal well being by the majority of the people. Women are well-educated cosmetic market who spends a reasonable amount of their income on the beauty products. One interesting fact is that Chinese consumers are not very loyal to the brand and try several brands to compare and decide which suits the best and for what purposes. Another behavior of the consumers is they exhibit seasonal usage of the products. In winter they prefer more oily products and in summer’s sunscreen to protect their skins are widely used. The brands may vary depending upon the budget and other preferences such as the brand image, product quality, durability etc. Men: Men cosmetic market is also growing with time and is expected to rise by 8 to 10% by the end of 2010. Companies have introduced Men’s product lines such as JC of Aupres, Glf of Shanghai Jahwa, Nivea men etc. Men’s products are not just limited to the shaving creams but have a wide range of cleaners, moisturizers, hair treatment products etc. However as compare to women, men market is relatively growing at a slower pace. More awareness and education is required to change the perceptions of the people and make the market grow. Babies and Children: There is a remarkable potential of growth in the babies and children market and amounts to more than 400 billion Yuan. Under the one child policy, the Chinese parents are willing to spend and more and more to buy attractive stuff for their children. Currently only few brands are targeting this market namely Johnson & Johnson, Yu Mei Jin and Frogprince etc. Communication: In order to communicate the consumer regarding the products the mode of advertising must be relevant and efforts must be made in developing the concept of the Ad. Women are generally aware about which products to use and for what purposes, therefore Ads related to the women products must focus on explaining the product, its USP (unique selling point), its ingredients etc. On the contrary, men advertisements must highlight the function, daily steps and the visible results of the products on the skin. Chinese people have a habit of trying different brands to compare the results of the companies and select the best possible brand. This means that the communication of any specific product must be clear and appealing to the eyes of the consumer. Products: In China, consumers are very particular about the ingredients of the products and prefer natural ingredients than the artificial chemicals. They are strongly convinced that natural ingredients are more effective and efficient as compare to the chemical ones. These natural ingredients go along with the TCM (Chinese Traditional Medicine) which enjoys a significant place in the Chinese culture. Many companies have understood the importance of TCM as it is associated with quality and safety. It is now being used in the cosmetic as an important ingredient. Herborist, a Chinese cosmetic brand, uses TCM in its product. It has gained considerable recognition and is also exported in the European market. Consumers also demand multifunction products such as UV protection, anti-aging, re-vitalization etc. According to Avon, the market leader in the cosmetic industry, the market of the anti-aging products is more than 300 billion Yuan. Due to this fact, Avon has allocated half of its R&D department for the anti-aging products. Distribution Channels for High-end cosmetic products: Basically, there are two main distribution channels for the Luxury cosmetic items: Luxury Department stores: Department stores are considered as a centre of reliable and genuine products. Another advantage is the wide variety of each product from mid to high range. Each product has a separate which makes it easy to try and compare the brands. The topic cosmetic brands such as Estee Lauder, Shiseido, Lancôme, Christian Dior etc are distributed in high class department stores which are a hub for the affluent customers. It is not at all easy to set up beauty corners in luxury department stores as they are very strict in terms of market standing and the sales records of the brands. Spas: In China, about 40 to 60 percent of the people go to spas as massages and spas are a part of Chinese habit and culture. Men usually go more than women in order to release their stress from work. Teenagers and youngsters never go to spas as they cannot afford it. There are two types of spas: fashionable and traditional. A fashionable spa refers to a highly luxurious spa in which skin, hair and beauty treatments, nail services and other beauty products are provided to the high-class trendy girls of all ages. The atmosphere is very pompous made of flashy furniture and pop music gives a modern touch to the spa. Whereas, a traditional spa conveys the message of natural treatments thought its atmosphere. The sound of waterfalls reflects the traditional methods used in spa. These two channels are the major sources to distribute luxury cosmetic products to the high-end users who are more concerned about the product quality and are willing to buy expensive well-known brands. A Segmented Market: The cosmetic industry of China is a highly segmented market due to the fierce competition between the foreign and the local market which has heated up the country. However, purchasing patterns have emerged depending upon the purchasing power of the consumers. For instance, people with high-income levels prefer well-known brands from international companies. At the same time, there is large number of people who are purchasing the cheaper products of the local companies. High- end/Luxury Cosmetic Brands in China: The international cosmetic brands make up the luxurious brand sector. It is an undeniable fact that the foreign companies dominate the cosmetic industry in China. About 80% of the market share is controlled by the international companies though they only make up a small portion of the industry i.e. it comprises of only 500 foreign manufacturers in the market of more than 3800 companies. These companies include P&G, C-Bonds, Amway, Unilever, Jahwa, Avon, Dabao, Chengmingming, Shiseido, Kose, Liyuan, Sanrana, Top, Natural Beauty, Golden Ballet, Olive, Chanel, Christian Dior, Kao and Raystar. The advantage of the multinational companies over the local firms is in terms of the sales of operation, technological advancements, knowledge management, financial strength etc. Product quality and promotional strategies also affect the overall sales and help in establishing the brand image. The employment of more and more local people also gives a cutting-edge to the multinational companies as it helps in understanding in the consumer behavior. Many huge companies have also setup R&D departments in China to develop the products according to the choices of the local people. Some of the major high-end luxury brands are discussed below: Avon: Avon is the number one seller of cosmetics in China and has been in operation for more than 20 years with an average sale of more than 500 million Yuan. It initially introduced its brand by door to door selling and then became a retailer. In the year 2004, the number of Avon Beauty Boutiques reached to a number of 6000 which shows the strong position in the local market and it is surely concerned as a premium brand. The company has realized the need of innovation at all times. According to the Huang Qing, the manager of the Avon store in Wangfujing: "Avon has high-end, medium-end and low-end products, and it’s everywhere, our network of shops has penetrated the whole country.” This shows the variety that Avon tends to provide to its billions of consumers in the local and the international market. L’Oreal China: The French Giant L’Oreal is the second best seller of cosmetic products and entered China in 1997. It has captured a huge market share and has brought most of its famous labels such as Maybelline, Lancôme, Vichy, and Shuemura over to China with great success. The retail sales of the company double to 300 million Yuan in 2004 which shows the higher penetration of the company in the local market. It has employed more than 7000 people and has set up nearly 400 cosmetic counters in 100 cities all over the country. It also took over two local brands namely Yue-Sai and Mininurse in 2003 and 2004 to tap the mass market. It moved its Asian centers from Singapore to China in 2005. Procter and Gamble (Guangzhou) Ltd: This company has positioned itself well in the local market of China since 1988. It was introduced in a joint venture with the Hong Kong-based company Hutchinson Whampoa. It caters to all sorts of people from young to old, rich to poor. It has a wide range in skin care, hair care, bath& shower products, baby products, women’s health products, oral hygiene, foods and drinks. The major brands of P&G in China includes Olay, Cover girl, Head & Shoulders, Pantene Pro-V, Wella, Crest, Zest, Rejoice, SK-II etc. It has five distribution channels in china namely Guangzhou, Shanghai, Xi’an, Beijing and Chengdu. Unilever China Ltd: It was established in 1986 in Shanghai under a joint venture. They mainly focus on hair care, skin care, deodorants, detergents, soaps and fragrance and their major brands in China include Ponds, Vaseline, Pears, Lux and Dove. They are attempting to minimize their cost of the production by relocating their production and logistics facilities and enhancing their R&D capabilities. Massive spending of about 100 million Yuan have been made by the company to promote Ponds. Factors contributing the Luxury cosmetic industry in China: Huge Market Potential: China has the largest number of potential consumers of cosmetics as it has a huge population of more than 1.3 billion. People are seeking and trying to enhance their quality of life as the level of income is increasing day by day due to the progressive and prosperous attitude of the nation which leads to a sound economic system. Increasing brand awareness: The cosmetic industry of China is very vast with a wide variety of products available for all kinds of people. The companies must direct all their efforts towards the brand recognition in order to distinguish their products and services from the others. Advertising plays a major role in the creation of the brand as it is the representation of the product being promoted. Nowadays, people are highly dependent on the electronic machines like computers, cell phones, television etc. The advertising of the products is done in a number of ways such as advertisements in press and media, internet, emails, buses, metro-stations, etc. This captures the sight of every common man and in this way people are becoming more aware of the products. According to a survey released by CTR Market Research the cosmetic and the toiletries sector was ranked 1st in the advertising sector in the year 2004. Competitive pressure: As the cosmetic industry of China consists of more than 3500 local and foreign manufacturers, this lays a pressing need to the enterprises to come up with innovative products and services as this will enable them to survive highly competitive industry. Companies are striving to become better than before which has given rise to the level of the competition and has also improved the quality of the products. Market drivers in China: Rapid economic growth and awareness: This is a key factor in driving the market towards the demand of luxury goods. The economy of China has shown tremendous growth in the last decade and is growing day by day. People are becoming more educated, well-paid and are paying more attention towards personal grooming. They have understood the importance of personal hygiene and are more aware of the health and beauty issues than before. This has boosted the cosmetic industry in China. Expansion of the rural market: The government of China has always been very concerned about the socio-economic development of the rural population. To promote the agricultural activities and raise the income of the farmers, the agricultural taxes have been removed and more subsidies have been given to the farmers for crop production. This will improve the quality of life which will eventually encourage the rural consumption in the retail sector. Rise of the middle-class: The gap between the upper and the lower class is diminishing which has given rise to the middle class category. These people with stable incomes have extra money to spend on consumer products like health-care and beauty items as they pursue a life of ‘style and taste’. This means that as the middle class will grow in number, the consumption rate of these high-end cosmetic products will also increase. Women fueling the cosmetic market: In today’s world, women are becoming career-oriented and prefer a financially independent life. The women cosmetic market is already mature in China and will further grow because 90% of the women are appearance and image –conscious. Cosmetics market regulation in China: China has very complex system for the registration of the cosmetic items. Anyone who is willing to supply cosmetic products in China must first register its cosmetic product in order to receive the certificate for marketing which is of two types depending upon the purpose. Before the lawful distribution of the products, the certificate must be approved by the State Food and Drugs Administration (SDFA). After the registration of the product, the certificate of labeling for manufactured and imported cosmetic products must be granted by the PRC’s Administration for Quality Supervision and Inspection and Quarantine (AQSIQ). After obtaining these necessary documents, any cosmetic product will be allowed to export in China. Apart from these two main governmental agencies, the involvement of other non-governmental organizations is also required which includes cosmetic sanitation inspection institution in national level appointed by the Ministry of Health (MOH) and the agent representative of an importer. The general registration process is divided into four steps: Firstly, prepare the samples of the products or the items that are subjected to the import. Apply and submit the samples to the inspection institution. After the approval of the inspection team, prepare the documents and files for a Cosmetics Safety and Quality Test which will be performed by an institution or organization appointed by MOH. The registration documents for the non-special purpose cosmetics includes the imported non-special-purposed cosmetics recordation form, the formula of making the cosmetic item, the quality standard for cosmetics (enterprise standard), inspection report given by the inspection institution, the original package of cosmetics which includes the labeling , any special packaging design along with the labels if planned to introduce in China, free sale certificate of cosmetics in the manufacturing country, the instruction (Guideline) book, the Authorization letter, legalization and notary, submitted by the agent of the cosmetic exporter if any agent is being involved, other information important for recordation, several sealed samples. Further documents required for special purpose cosmetics registration: if it is used for special purposes like hair growing, breast beauty etc, the supply of special effect ingredients name and ground must be provided along with large amount of sealed samples. After the submission of the above mentioned documents, the SFDA will verify these documents and will also check the quality and performance of the cosmetic product. The time duration for non-special purpose cosmetic is four to five months. Whereas the special purpose cosmetic may take eight to nine months for the completion of the procedure. The export tariffs of China are adjusted with time under the compliance of the WTO requirements. These tariffs have been lowered time and again but the duties on luxury goods including the cosmetic products are increased by 10 to 30 percent in the past three years. Opportunities: The trend of the cosmetic industry in China implies that there are many opportunities for the international as well as the local brands to enter in this industry and discover new horizons of success. There is a great potential to grow the men cosmetic market in China as it is emerging and is not very mature than the women cosmetic market. This means less competitive pressure and more chances to lead the men cosmetic market. Another opportunity is to open modern spas as Chinese are very habitual of taking massages and high-end products are highly recognized and purchased by the rich people who can afford these spas. Conclusion: It can be noticed that the competition in the cosmetic industry is intense and the battle of beauty has just begun. The market is expanding in all the possible directions providing the best to its consumers at reasonable prices. The need of high-end cosmetic products is also increasing as people have become more brand- conscious. They are less price-sensitive and are more concerned about the product quality and image. At the same time, the preferences of the Chinese people vary from other markets. They encourage the use of natural products which is different from the perception of the European market. In order to flourish and further expand the luxury cosmetic industry all these factors must be considered. Bibliography Labbrand: High-end cosmetics trends in China [Apr 18, 2010] http://www.greenbook.org/marketing-research.cfm/high-end-cosmetics-trends-in-china Brands Battling for Chinas Cosmetic Market [2005] http://english.cri.cn/2600/2005-2-9/116@204759_7.htm Simon Pitman: Changes in retail shape China cosmetic industry [Sept 16,2005] http://www.cosmeticsdesign.com/Products-Markets/Changes-in-retail-shape-China-cosmetic-industry Newspaper Vedomosti 26.06.2006, №114. View from within: Luxury Retail, by Lyudmila Chicherova http://www.vedomosti.ru/newspaper/article.shtml?2006/06/26/109309 Luxury Goods in Russia and Chine, August 2006 : International Business Strategies www.internationalbusinessstrategies.com Read More