The Power of Cosmetics in China

Cosmetics are invariably the first thing you encounter when you walk into a department store. As fellow enoVate extraordinaire Simon exclaimed when he walked into our local Shanghai department store, “There are so many different brands!”

There are numerous reasons for cosmetics prime placement on the first floor of all department stores, but foremost among them is cosmetic’s sheer market power. Estimates suggest that the cosmetics market in China will still grow 11% in 2009, just 1% less than 2008’s rate. Clearly, these goods are recession-proof.

In China, the cosmetics industry is not only resilient, but also huge. This author has estimated its size from anywhere between a $5 and $10 billion dollar industry in 2008. Why the range in figures? Different definitions. Viewing the segment from a legal perspective, many would include shampoo, hair dyes and deodorant in the definition of cosmetics. Many others cap their inclusions at just skin care, perfumes, lipsticks, fingernail polishes, eye and facial makeup preparations, items most consumers consider “cosmetics” or the “beauty market.”

At least in China, skin care products are certainly the force behind these figures. In the Mainland, skin care accounts for an incredible 80% of the beauty industry’s product share. Colorful facial makeup, in China, does not command the same attention it does abroad. As anyone who has lived in China understands, skin is big business here.

As with many other markets in the Mainland, the cosmetics market is also highly segmented. P&G and its Olay brand control the biggest share of the market. L’Oreal is a close second with about 10% of the entire market and made a cool $1 billion in revenues in 2008. After these two powerhouses, we see Estee Lauder, Shiseido, China’s Jahwa, Avon and others. But, according to sources, the top 20 cosmetic manufacturers hold only about 50% market share. That means there are hundreds of local brands out there that we won’t have space to detail here

Don’t assume that we are only talking about women consumers. Men’s skincare is a growing segment with cosmetics. L’Oreal reported that men’s products now contribute almost 12 percent of L’Oreal’s sales revenue in China and this figure is expected to dramatically increase. It’s pretty hard to avoid Biotherm ads nowadays and many brands report that their men’s business is their fastest growing segment.

And how are Chinese getting these goods. In fact, the distribution network is fairly similar to other nations’ markets. Specialty retailers and departments stores are the first stops for premium and mass premium cosmetics. Supermarkets, grocery stores and pharmacy chains (Watson’s in particular) provide mostly mass market and a few more premium products.

China, though, remains unique for two reasons: Taobao and direct selling. As enoVate blog readers will know, Taobao is a force to be reckoned with. As our own contacts have told us, many cosmetic brands worry about Taobao. Chinese consumers are smart. Many visit department stores to sample cosmetics and then buy them off Taobao at home and for a discount. Other customers use brands’ websites to do their own research but then Ctrl T over to Taobao.

Direct sellers themselves haven’t yet found the pot o gold in China. In Taiwan, 1 in 4 buy their cosmetics from direct sellers. In China, the figure is 1 in 20. The Chinese government very early on made clear is dislike of these “unscrupulous multilevel marketers” and banned direct selling until 2006. Mary Kay, the first “direct seller” to enter the China market, originally created a network of retail stores. After the lifting of the ban, Mary Kay, Avon and others have reignited their direct selling activities and continue to expand. enoVate will certainly keep an eye on these developments.

From men’s cosmetics to Taobao’s growing clout, enoVate will continue to keep abreast of these cosmetic trends!