Is Asia's Sleeping Giant Awakening?

November 10, 2005

With more citizens living in urban areas, recent entry into the WTO and better products, China may be on the brink of dynamic growth.

With a population approaching 1.3 billion and living increasingly in urban areas, China's expanding target market offers ample opportunity to cosmetics and toiletries manufacturers, keen to take ad-vantage of the country's rapidly growing economy.

Greater portions of China's population are becoming exposed to the media, whose coverage of new cosmetics and toiletries and prevailing market trends has risen in turn. In addition to this, the fastest growing segment of the population is the elderly, as more Chinese live longer thanks to improved health care and living standards. All of this means that companies have become increasingly aware of this age group as a significant market in its own right. The other significant effect of such a large and growing elderly consumer base is that this age group is now driving much of the spending being made by adults on children. It is therefore necessary for manufacturers of children's products to target their marketing to appeal to the eldest consumers in society. In particular, the significant under-10 segment of the population is not in itself a major consumer base, but is the focus of considerable consumer spending by older age groups. As parents may only have one child, they, and their immediate families, often lavish high levels of expenditure on providing for these children.

Foreign Investors Rush In
In 2000, the total cosmetics and toiletries market in China was worth RMB44.6 billion ($5.4 billion), representing impressive growth of 46% between 1996 and 2000. Retail sales of cosmetics and toiletries in this country are very closely related to macroeconomic conditions with rapid sales growth in recent years generally due to relatively successful economic reforms. In addition, a rise in demand for a wider range of cosmetic products stems from increasing disposable income in both urban and rural areas, as well as the increased proportion of women in the workplace, especially more women working in better paid positions.

In the 1970s, China had only approximately 50 manufacturers of cosmetics and toiletries. This number has increased dramatically in recent years, and today China has 5000 such manufacturers, including more than 1000 joint ventures and wholly foreign-owned companies. Faced with comparatively slow growth in many Western markets, major players have increasingly turned their attention to China, eyeing its massive growth potential, resulting in heavy investment.

The Chinese cosmetics and toiletries market is characterized by a particularly high number of products-some 1,300 brands vie for consumers' attention. Although deodorants have posted the most dynamic growth in the period since 1996, it is skin care, hair care and oral hygiene, the three largest product sectors, which can be credited with driving overall growth. These three sectors alone account for more than two-thirds of total cosmetics and toiletries sales in the country.

High Prices Still a Factor
Urban residents represent 30% of the total population but account for more than 70% of cosmetics and toiletries sales. Farmers and rural dwellers, while representing some 70% of the total population, only account for 27% of the total market. The proportion of urban dwellers is rising, and although it is hoped that average expenditure on toiletries, and most especially cosmetics, will rise, retail prices have been inflated by high taxes and represent a barrier to many Chinese consumers.

Sales of basic toiletries, such as oral hygiene, skin care, bath and shower products and hair care, remained the most significant throughout the review period. In 2000, fast growth sectors included hair care, skin care and, perhaps most notably, color cosmetics.

The oral hygiene sector represented the single largest share of cosmetics and toiletries sales in 2000, albeit a declining one, with 26% of the market. Basic oral hygiene products such as toothpaste are available even in remote areas. However, the gap in living standards between different regions results in different shopping patterns. In major cities such as Beijing, Shanghai and Guangzhou, nearly 100% of residents of all age groups clean their teeth every day, some twice a day. In contrast, in rural areas, the number of people who brush their teeth and the frequency with which they clean their teeth is comparatively low. Toothpaste and toothbrushes account for all sales in this sector, which in 2000 rose less than 3%, lower than the average growth of the overall market. This was largely due to the maturity of the sector and the high penetration rate of oral hygiene products. Future growth may be stimulated if manufacturers focus on increasing penetration in rural areas.

In a sector said to comprise 300 brands, the domination of domestic products in the 1980s has given way to better quality and higher value foreign brands such as Colgate, which now leads the market by a comfortable margin. In 1999 however, the multinationals' handle on the market appeared to waver, and 2000 saw the entrance of several local household cleaning product companies (such as Libai, Nice and Nafine) expanding into this subsector and challenging established brands with their high brand awareness, advanced technology and large scale production. Their impact on the major players remains to be seen.

Increasing some 150% between 1996 and 2000, deodorants represent the most dynamic sector of the market, albeit emerging from a low consumer base as body odor is not a major concern for the Chinese, and deodorants tend to be marketed as "body fragrances." In 2000, deodorants still accounted for only a marginal proportion of total market sales. Sales tend to be seasonal, and consumer awareness of such products remains limited. Deodorants' growth can also be attributed to Henkel's substantial investment in the sector. However, after two years of impressive growth, Henkel has consolidated its market share and sales have levelled after meeting low demand. Growth in deodorant sales is likely to remain stable in the future.
Although deodorant has been the fastest growing sector since 1996, the star performer between 1999 and 2000 was skin care, one of the most competitive product areas in the Chinese market. Furthermore, skin care products account for the second largest portion of sales, representing 21% of total market value in 2000. Sales increased nearly 14% in 2000 to $1.2 billion.

Facial products dominate, accounting for nearly 90% of sector sales. Revenue has been stimulated by increased sales of innovative, higher value new products and growing awareness of the importance of such products among consumers, particularly those in urban areas with higher levels of disposable income than their rural counterparts. Multinationals dominate this sector and popular brands include Procter & Gamble Guangzhou's Oil of Olay, Yue-Sai's Yue-Sai, Shanghai Pond's Pond's and Vaseline and Shiseido Liyuan Cosmetics' Aupres. These global players are able to take advantage of their stronger marketing resources to increase sales. For example, they place more emphasis on prestige appeal and beauty consultations at department stores; their brands are aimed at consumers with higher incomes. Domestic manufacturers try to retain share in their own regions by offering products at more affordable prices. In particular, many survive by including traditional Chinese herbal ingredients in their formulas. This selling point helps garner brand loyalty, as Chinese consumers have a strong preference for natural ingredients.

The skin care sector also includes products with sun protection properties, which has resulted in a negligible market for specific sun care products. Sun protection properties are considered an added-value benefit for standard skin care products; for example, the Yue-Sai range of skin care products from Jin Yue-Sai Cosmetic Company includes basic offerings as well as those which have SPF ratings of 8, 15 and 30. It remains to be seen whether products sold purely on the basis of their sun care properties will succeed in China, as consumers tend to associate sun protection with skin care products. However, given sufficient advertising support and educational campaigns to increase awareness among Chinese consumers of the dangers of sun exposure without sufficient protection, this sector may develop in the future. To this end, 2000 saw a number of new product launches: L'Oréal introduced two sun protection products under the La Roche Posay and Vichy brands. Procter & Gamble also entered the sector with Yulanyou and Yulanyou Whitening, while Estée Lauder introduced Day Wear.

2-in-1s Drive Hair Care
The second fastest growing product sector last year was hair care, another of the largest components of the Chinese market. Sector sales rose nearly 13% to $1.1 billion in 2000. Although including colorants, perms and relaxants and styling products, the bulk of hair care sales came from shampoos, conditioners and 2-in-1 products. Interestingly, 2-in-1 products dominate, with a 65% share, and unlike elsewhere, their sales continue to grow. In fact, they are expected to cannibalize sales of shampoos and conditioners. The hair care sector is particularly saturated, especially in urban areas, and competition is intense due to the wide variety of brands that are available. Foreign brands are active with promotional strategies aimed at eroding the share held by domestic products. Manufacturers of smaller brands in turn are shifting their focus from urban to rural areas in order to maintain share.

A Bright Future for Color
Although functional toiletries dominate the Chinese market, the future looks promising for color cosmetics. Sales of these products rose more than 10% between 1999 and 2000, making color cosmetics the third fastest growing sector. Lip products and facial makeup are the major subsectors, accounting for a combined share of more than 86% in 2000. Growth in this sector has been stimulated as existing consumers increasingly purchase premium products, while many others simply overcome their wariness of wearing color cosmetics and start buying the products for the first time. Multi-national joint ventures represent the major players in this sector, despite the fact that there are numerous generic brands sold regionally. These brands, with established reputations, are perceived to be of better quality, and they are also more expensive, which ac-counts for their greater share. In April 1998, when the Chinese government banned direct sales, direct sales companies such as Avon, Amway and Mary Kay saw their market shares quickly decline. However, these companies changed their marketing strategies and set up special counters or specialist outlets. Today, Avon and Amway are among only a handful of direct-selling companies operating as such in China. Both companies set up manufacturing plants in the country, a key condition for such companies to be allowed to operate. Avon in particular saw a notable increase in sector value share during the 1999-2000 period.

Other product sectors also registered a healthy performance in recent years, and were little affected by depressed consumer confidence in the late 1990s. In baby care, low penetration together with the one-child policy helped maintain a steady demand, as only children were increasingly subject to pampering.

Sectors such as bath and shower products and men's grooming products exhibited relatively slower sales between 1999 and 2000. Growth in bath and shower products sales is hampered somewhat by intense competition, and high numbers of smuggled goods tend to pull down average prices. Bar soap, a low-priced commodity product, is by far the dominant subsector, controlling nearly 90% of sales in 2000. Contending with intense competition, manufacturers focus on building growth through new product launches and developing sales to consumers in rural areas.

The men's grooming products sector is neither dynamic nor significant in terms of its size, accounting for less than 1% of total value in 2000. Razors and blades account for the lion's share of sales by far, and the sector's lackluster performance is underpinned by increased usage of electric razors, which serve to erode sales of traditional shaving products. Furthermore, Chinese men are less concerned with body hair compared with their Western counterparts. The increasing number of males shifting from wet shaving to use of electric shaving products does not bode well for the future of this sector, whose sales come wholly from shaving products-male-specific skin care and hair care products remain practically non-existent.

Fragrances account for just 2% of the Chinese cosmetics and toiletries market, with women's fragrances accounting for most of this, and mass market scents by far outweigh premium brands. This sector remains underdeveloped as traditionally only women wear fragrance. However, with burgeoning exposure to Western culture, people's attitudes are gradually changing. Educated men, especially those working for foreign companies in urban areas, are becoming important consumers, and steady growth in fragrance sales is expected in the future.

Innovation is Critical
The speed at which new products are being developed in China, particularly among local manufacturers, has increased rapidly during the past three decades. New product launches are frequent, and quickly eat into the market share of older offerings, as consumers are attracted to innovative alternatives. Besides seducing new consumers, fast innovation is viewed especially crucial as a means of combatting counterfeiting, a problem endemic in China.

Most multinationals enter the market by establishing joint ventures with local manufacturers. The successful cooperation between multinationals and local partners lies in the unique contribution from both parties. Mul-tinationals take advantage of local, cheap resources and infuse their marketing and management techniques, while their local partners contribute their regional knowledge and distribution networks. With the growing scale of multinational joint ventures, it is becoming increasingly difficult for Chinese domestic manufacturers to keep pace. To survive, these manufacturers are forced to set up joint ventures with multinationals, or alternatively develop traditional products (such as skin care products with medicinal ingredients) with advanced technology, and to improve their product quality and image. Others survive by targeting the rural, low-end market.

Joint Ventures Dominate
About 450 joint ventures and wholly foreign manufacturers are estimated to control more than 70% of China's cosmetics and toiletries market, and account for nearly all sales of premium products. The leading cosmetics and toiletries joint ventures in 2000 were Procter & Gamble Guangzhou Co. Ltd., Guangzhou Colgate Co. Ltd. and Unilever (China) Co. Ltd. Among them, Procter & Gamble had a strong presence in all major sectors in 2000 and continued to lead overall sales with a share greater than 22%.

With 13 joint ventures, P&G made an early entry into the market in the 1980s, since then it has maintained a prominent position in a variety of consumer markets. Today, it is one of the largest consumer products companies in China, and its brands are the best known among consumers. Its famous brands include the two leading hair care brands, Rejoice and Head & Shoulders, Crest toothpaste, Safeguard soap, which leads the country's bath and shower products sales, and Oil of Olay skin care lotion, the No. 1 skin care brand in China. In addition, the U.S. heavyweight also has a range of similar products under local brand names and several of them are sector-leading brands.

Multinationals account for the lion's share of the market, although several domestic players maintain strong positions in different subsectors. Numerous small manufacturers produce regional or generic brands and distribute their products within their own province or neighboring provinces, but their share of the overall market is very small. Major domestic manufacturers include Shanghai Jahwa Co. Ltd., Shanghai Toothpaste Factory, Liuzhou Liang Mian Zhen Co. Ltd., Tianjin Toothpaste Factory and Beijing San Lu Factory. Shanghai Jahwa is one of the largest domestic cosmetics and toiletries conglomerates in China. Its brands, such as the popular Maxam, Liu Shen and Chinf & Chinf names, are well promoted nationwide, and its product range covers baby care, skin care, hair care and fragrances. With the development of the market in smaller cities and rural areas, domestic manufacturers may see their respective market shares increase. However, their ability to do this remains hindered by their inability to match the multinationals in terms of financial investment.

Most major multinational brands are available in major cities, although they face the pressure of lower purchasing power compared with the rest of the developed market. The country's lack of a national distribution system and regional protectionism remain serious obstacles for multinationals.

Department Stores Are in Control
Although their share is slowly contracting, department stores represent by far the leading outlet for cosmetics and toiletries sales. Being one of the traditional distribution channels for such sales, they replaced the specialist shops of the Communist era. Most department stores remain state-owned, and they do not have the prestige appeal they have elsewhere.

Nevertheless, a new generation of upgraded department stores, offering a full range of quality goods and professional service in a modern environment have helped boost sales. Since the mid-1990s, for example, department stores have set up concession counters for manufacturers, providing tailored personal beauty services for individual customers, thus increasing sales. The Chinese public quickly accepted this service, especially for those products for which they had little knowledge.

Of the other distribution channels, the grocery chan- nel has grown in importance for this market, thanks to its rapid expansion in residential ar-eas, as well as its widening pro-duct ranges. Spec-ialty cosmetics shops are usually privately-own-ed and are seen to be emerging; however, sales remain insignificant. In small towns they main-ly target the low-end market while in major cities they also sell expensive products such as premium perfumes.

Nevertheless, this channel has potential, as such outlets are increasingly offering high quality brands, with assistants able to offer advice to consumers when making purchasing decisions. As more young people perceive specialists as prestigious places in which to purchase their cosmetics and toiletries, these outlets are likely to eat into the share held by traditional channels such as department stores and grocery outlets.

Direct selling in China experienced dramatic change in the late 1990s. Avon first began ringing doorbells nearly 10 years ago and the company quickly gained success in important cities such as Guangzhou. Multi-nationals such as Mary Kay and Am-way Asia Pacific also took an interest in the mainland market, with a growing army of sellers hawking cosmetics, skin care lotions, deodorants, soaps, household cleaners and kitchen products. In April 1998, the Chinese government issued a directive banning all direct selling in China, following fraudulent practices from unscrupulous pyramid selling organizations. Direct selling companies such as Amway and Avon modified their sales strategies, transferring their direct selling system to special counters and specialists within stores, in an effort to salvage part of their core business in the world's biggest potential market. However, these companies are now permitted to operate as direct sellers, having set up manufacturing plants in the country.

Opportunities Abound
Euromonitor expects the Chinese cosmetics and toiletries market to grow more than 63% in constant terms by 2005, making it the fastest growing country in the Asia-Pacific region. Development of the smaller sectors in urban areas and of larger sectors in rural areas will underpin growth. In particular, color cosmetics, fragrances and deodorants all have potential for growth in urban areas, while hair care, oral hygiene and bath and shower products have significant growth potential in rural locations, and skin care will continue to see its value share increase across the country.

Brands imported or developed by joint ventures are expected to maintain their important role in the market over the forecast period. These manufacturers are more competitive than domestic players. Since the 1990s, many foreign manufacturers have invested in China, either directly or through joint ventures. Now that China has been welcomed into the World Trade Organiza-tion, foreign brands are likely to account for an increasing share of the Chinese market, although this will depend on levels of disposable income among consumers, as products from foreign players are often prohibitively expensive for many Chinese consumers.

New product development will remain key to the development of the market over the forecast period. Value-added products, such as those including aloe or vitamins, will be welcomed even though they have higher prices. In addition, whitening, anti-aging and anti-wrinkle cosmetics can also expect good growth, with skin care overtaking oral hygiene to become the most important sector in the cosmetics and toiletries market.

China's low levels of product penetration offer unparalleled opportunity to both domestic and multinational players to profit from expanding consumption as spending on non-essentials becomes more widespread. With all the major players now well established in the country, solid foundations are in place for a promising future performance across all sectors.