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February 21, 2007

China’s cosmetics and toiletries market gets posh

China is fertile ground for sophisticated and premium cosmetics as the nation's fast-emerging middle class embraces Western consumerism.

China's vast population, totalling 1.3 billion last year, and its emergence as a world economic hotspot, are an irresistible draw to cosmetics and toiletries manufacturers. The country is seen as central to a strategy of diversification into the emerging markets as the industry tries to lift itself out of a growth slump caused by an over-reliance on the high-value but maturing markets of Western Europe, North America and Japan.

Yet the beauty industry's interest in China has largely been as a source of rapid volume growth - the goal being to lift penetration rates and reach the nation's largely untapped population. Average annual per capita spend on cosmetics and toiletries in China is just US$8 (RMB65), five times lower than the global average of US$40 and far below that of its developed neighbour Japan on US$248 (¥26,672), according to Euromonitor International.

This is changing, however, and quickly. Phenomenal growth saw GDP almost double to US$2.3 billion (RMB18.7 billion) in 2001-2005 and, importantly for cosmetics and toiletries, female average disposable income rose by close to 50% to US$520 (RMB4,264) a year over the same period. This dramatic rise in affluence has seen the rapid evolution of a more sophisticated shopper. China's new wealthy are looking for status brands or ones that offer specialist beauty benefits, and they are increasingly willing to spend extra to get them.

Premium pays off

The result is that China is becoming one of the most important markets for premium cosmetics, breaking into the global top 10 in 2004, with value sales totalling US$1.3 billion (RMB10.5 billion) last year, according to Euromonitor International. It also ranks among the world's five fastest growth countries for this market, a dynamism arising not only from increased affluence and consumer sophistication, but also from a fast-modernising retail environment, including an abundance of department stores and specialist retailers such as Herborist, Sasa and Sephora.

Skin care brands take by far the largest chunk of China's premium cosmetics sales, accounting for over 70% of total value. The influence of Western culture and the domestic mass media has made consumers aware of the importance of looking after their skin, beginning in their early teens. Whitening, anti-ageing, firming and hydration have become the cornerstones of this sector, with a constant flow of evermore sophisticated and premium products launched to satisfy demand. Premium brands such as Clinique, Estée Lauder and Lancôme are enjoying exceptional value growth, rising 91%, 60% and 48% respectively in 2005 alone, and niche labels, such as L'Occitane and Innisfree, are also beginning to find demand. There are opportunities for mass brands too. Procter & Gamble's Olay accounts for almost 16% of total skin care sales in China, maintaining its lead through high-tech line extensions including Olay Regenerist and Olay Total Effects in anti-ageing, Olay Clarity in oil control and natural-based Olay Nature Science.

The premiumisation of the Chinese market means a new focus on brand building, as well as value-adding innovation. Part of Olay's success has come from aggressive advertising that relies heavily on celebrity endorsements. Taiwanese singer/actress Angela Chang became the face of Nature Science for its 2005 launch.

Colour cosmetics and fragrances are the other two significant premium cosmetics sectors, both generating almost US$150 million (RMB1.2 billion) each in 2005. Beyond lip products, wearing make-up is a relatively new concept in China, but women are quickly becoming more adventurous and demanding multi-functionality from their foundations, lipstick and eye make-up. New launches include Revlon's anti-ageing facial make-up line and Olay White Radiance. In fragrances, where image is everything, premium sales outstrip mass and the increase in department stores and perfumeries is making products more accessible.

A bright future

While there is plenty of cause for optimism, the recent controversy surrounding SK-II, one of the country's favourite premium skin care lines, suggests that there is a growing backlash against the influx of foreign brands. Counterfeiting too remains an issue, particularly for prestige brands.

With sales set to rise by more than 10%-a-year to 2010, expanding the market to US$17 billion (RMB139.8 billion), manufacturers are unlikely to be deterred from pushing into China, but should be aware of the possible pitfalls when eyeing the country's attractive long-term prospects.


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