Growth in the world's eighth largest and third fastest growing cosmetics and toiletries market was "vigorous" in 2003, according to market research company Euromonitor, with value sales in China reaching almost RMB50 billion (nearly €5 bn).
Euromonitor's Cosmetics and Toiletries in China report credited the strong growth as a result of robust economic growth in the country, pointing out that even though SARS broke out in early 2003, the economy in China was still estimated to have experienced 8.5 per cent growth in that year. This economic growth was reportedly the highest among all countries according to the United Nations.
Healthy economic development has led to rising living standards, resulting in increasing disposable incomes and, consequently, consumers are able to afford more toiletries and cosmetics products.
The income of urban residents in particular is rising faster than rural residents. In the first quarter, the disposable income of town dwellers per capita was RMB2,639 (€258). This amount is up 12.1 per cent from the same period last year, and up by 9.8 per cent in real terms, allowing for increased prices, according to figures published in April 2004 by the National Bureau of Statistics of China.
As average disposable incomes are still comparatively low, “basic” cosmetics and toiletries products take the lion’s share of the total value of China's cosmetics and toiletries market.
Deemed as daily necessities, skin care and hair care are the two largest sectors, amounting to RMB14 billion (€1.4 bn) and RMB12 billion (€1.2 bn), respectively, in 2003, representing about 28 per cent and 25 per cent of total sales value.
As these two sectors are coming to saturation, manufacturers have used price cuts and new product launches to secure market share.
Women propel sales of colour cosmetics and fragrances
Colour cosmetics and fragrances are meant for women in China, although urban male white collar workers have started to wear perfume, especially on formal occasions. The growing numbers of ai-mei nanren are incorporating facials and other traditionally female grooming rituals into their daily and weekly routines.
But it is the increasingly appearance- and image-conscious women who are driving much of the market growth, resulting in rising demand for colour cosmetics and fragrances. In major cities, premium products are favoured by affluent women, most of whom are “office ladies” working in multinational companies.
Premium women’s fragrances grew by 6.5 per cent in 2003, while sales of mass-market women’s fragrances rose by 9.5 per cent. Sales of colour cosmetics amounted to more than RMB3.8 billion (€373 m) in 2003, with value growth of nearly 10 per cent.
Multinationals entering the market and achieving growth
Chinese company law was revised heavily in the run up to China's accession to the World Trade Organisation (WTO) in 2001. It is still undergoing revisions to bring commercial, legal and arbitration practices more in line with international ones, although intellectual property issues and counterfeiting are still major concerns.
In respect of the cosmetics and toiletries industry, prior to China's accession to the WTO import tariffs were reduced, resulting in a rise in cosmetics imports of 160 per cent from 1996 to 2001.
Of US$194 million (€158 m) worth of cosmetics imported during that period, colour cosmetics and skin care products accounted for nearly half of the products, while bath and shower, and hair care products acounted for nearly a quarter and nearly a fifth, respectively.
The largest suppliers of these products came from the United States representing a quarter of total imports. The ranking of other major suppliers included France, Japan, Hong Kong, and Taiwan.
Following WTO accession, China's imports of cosmetics are expected to grow at the annual rate of about 10 per cent over the next few years, as predicted by the US Department of Commerce in its China Cosmetics Market report.
In addition to rising imports, the multinational brands are also increasingly entering into joint venture arrangements, localising production and taking advantage of China's low labour costs and overheads. Local production also has the advantage of side-stepping the bureaucratic import licensing process.
Joint venture products lead the market
In the cosmetics and toiletries market in China, foreign or joint ventures account for the overwhelming majority of sales value. Sales of multinational brands account for less than half of volume sales, but about 80 per cent of value sales.
Most multinational brands are perceived to be premium brands, simply by virtue of being Western brands. For example, British budget cosmetics brand Constance Carroll is sold in drugstores in the UK, but in China it is sold from product display stands (although not dedicated beauty counters) in the cosmetics sections in department stores in Beijing.
Seven out of the top 10 manufacturers were joint ventures in 2003. Among them, Procter & Gamble (Guangzhou) took a 14 per cent value share of cosmetics and toiletries in China.
Besides consistent quality, the success of joint ventures is attributed by Euromonitor to aggressive advertising, effective distribution systems, multi-brand marketing strategies, and high quality packaging. Consequently, product awareness and brand loyalty is generally high among consumers.
The largest suppliers of these products came from the United States representing 25 per cent of total imports. Other major suppliers in order of ranking included France, Japan, Hong Kong, and Taiwan.
More competition in the mass market
As about 60 per cent of the population in China live in rural areas, demand for cosmetics and toiletries products is biased towards low-end mass-market products. Even city dwellers tend to opt for mass market products, although perhaps more towards the upper-end of mass market products, as the average disposable income is comparatively low, although it is rising.
Consequently, there is great potential for the development of the mass market. As a result, multinational players have increased their efforts to secure their shares in the mass market. For example, L’Oréal L'Oréal China achieved a turnover of €113 million euros in 2002 and maintained an aggressive 66 per cent sales growth in the first three quarters of 2003.
L'Oréal China acquired two well-known Chinese mass market brands, Mininurse and Yue-Sai, in late 2003 and early 2004, respectively. Launched in 1992, Mininurse has become one of the top three skincare brands in China, with 5 per cent of the market share. It is expected to achieve sales of €40 million this year.
More diversified distribution channels
Department stores and grocery outlets, led by supermarkets, are the leading channels for cosmetics and toiletries products in China. A new distribution channel began to make an impact over the review period, as specialist stores started to witness considerable growth in major cities such as Shanghai. With an image of being more professional and specialised, specialist stores have gained popularity among consumers.
It should be noted that direct sales are not legally permitted in China and direct selling companies such as Avon operate through privately owned and managed beauty boutiques. China banned direct selling in 1998 and since then the US cosmetics company's products since have been sold through 5,500 beauty boutiques in more than 70 cities that exclusively stock Avon beauty products.
Avon's chairman and chief executive officer Andrea Jung recently praised the success of the beauty boutique sales model, a first in the company's 117-year history, according to a recent article in China's English language newspaper, the China Daily.
Avon was also reported to be predicting its business in China would grow by 50 per cent in the second quarter of this year, and expected its revenues to hit US$400 million (€325 m) by 2007.
As the cosmetics and toiletries market expands, the industry expositions and events proliferate. Guangzhou in southern China's Guangdong province hosted an three-day international beauty festival in March, which predicted that natural and herbal products would be a growth area over the next five to 10 years.
Shanghai, meanwhile, is set to host the cosmetics industry events, the 3rd Shanghai International Hair & Beauty Festival and the the 5th Shanghai International Beauty, Hairdressing & Cosmetics Expo in August 2004.
And the Beijing Exhibition Centre will host the China International Beauty Week from 20-23 October 2004.