Notes From China

Lockdowns, Supply Chain Woes Affect the Cosmetics Industry

Sales gains slow, new products launches drop 20%, explains Ally Dai.

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By: Ally Dai

Lockdowns, Supply Chain Woes Affect the Cosmetics Industry

For all cosmetic players in China, the list of on-going challenges keeps growing. Just when you think things cannot possibly get worse, they most certainly do. 

Following a flurry of tougher regulations and constantly rising costs during the past two years, here comes another significant blow to the cosmetic industry—a new wave of Covid-driven shutdowns. The first, in April, impacted Shanghai and its neighboring area. The second affected Guangdong. Together, they are most important hubs in China’s cosmetic industry. Consequently, the industry is witnessing a knock-on effect across the whole supply chain

Feeling the Pinch Already

Signs of a slowdown have been apparent for more than a year. Last year, cosmetic retail sales rose 14% to reach 402.6 billion RMB (about $16 billion). Yet, there is a sharp decline in the number of entities that have completed the submission in China Cosmetic Registration & Notification Information Service Platform (launched by NMPA a year ago). Submissions fell to 150,000 in 2021 from 870,000 in 2020. The number of new products filed reportedly dropped at least 20% on a year-over-year basis.

Sluggishness continues in 2022, as Q1 cosmetic retail sales rose just 1.8%, with unprecedented profit declines reported by big industry players including Bloomage Biotechnology and Nox Bellcow. Most declines could be explained by increasingly tighter regulations, as well as business closures caused by higher costs.

An Industry on Edge

What has the industry even more on the edge, is the current wave of strict lockdowns driven by recent outbreaks of the Omicron variant. Restrictions started with a total shutdown in Shanghai at the beginning of April, a partial one in neighboring cities including Kunshan and Suzhou in Jiangsu province, and then in Guangzhou on April 11. All hold great significance to China’s cosmetic industry in terms of production and consumption.

Based on the latest statistics from the Cosmetic Supervision Mobile Platform by SFDA, Shanghai currently has 208 cosmetic enterprises with official business licenses. It ranks No. 4, behind Guangdong province (3,008), Zhejiang (455) and Jiangsu (315). The figure jumps to 500,000 when including all companies engaged in cosmetic businesses, from raw materials and ingredients supply, product manufacturing, marketing and retail, according to the latest figures from Qichacha, a mobile searching platform on China’s enterprises information.

Moreover, Shanghai is a cosmopolitan destination for many high-profile beauty players, domestic and international alike, from Jahwa, Pechoin and Jala to L’Oréal, Estée Lauder and Shiseido, as well as Tmall’s beauty division. Its position as the new beauty capital is strengthened by the bordering cities in Jiangsu and Zhejiang provinces, a major manufacturing base for cosmetic OEM/ODM and packaging in China. All industrial activities there are facing widespread interruptions caused by the prevention measures against the Omicron spread from Shanghai.

Guangdong imposed a less strict lockdown in the capital city Guangzhou. Yet, its Baiyun District, home to one-third of the licensed cosmetic manufacturing in China (approximately 1,400 licensed manufacturers and more than 4,000 related companies), temporarily suspended all operations in the middle of April. Subsequently, the entire supply chain and logistics, as well as retailing services in these cities are moving through a more distressing stage under the current zero-tolerance Covid policy.

A Diversified Future

For the industrial operations outside the cities on lockdowns, the pain is felt over materials shortages—even if operations are not suspended. Many imported raw materials and ingredients, such as key emulsifiers and thickeners which most domestic cosmetic manufacturers heavily rely upon, are having difficulty being transported out of Ningbo-Zhoushan (in Zhejiang) and Shanghai, two of the world’s largest ports. 

It surely takes a heavy toll on the development and manufacturing of new products in the near- to mid-term. It requires more time and money to procure key imported ingredients, or find their alternatives and register in the NMPA’s system. Some industry insiders predict sales declines of over 30% this year for those heavily dependent on imports. Meanwhile, ripple effects have extended to other activities across the industry. All major events scheduled in the first half of this year have been postponed, including PCHi and CBE (China Beauty Expo), both regarded as must-attend trade shows in China. 

With restraints coming one after another, diversification is top-of-mind for many industry leaders. While accelerating the process of reducing their dependence on imported ingredients and/or developing their own, many cosmetic companies here are decentralizing in the Yangtze River Delta (the region centering around Shanghai, Zhejiang and Jiangsu) and Pearl River Delta (including Guangdong and Shenzhen). 

On the retail side, one recent example is Harmay, a Chinese beauty retailer known for its architecturally-designed stores and niche brand offerings. Harmay just expanded to central China and opened its first physical store in Wuhan in April. The up-and-coming retailer is regarded as a disruptor and competes with Sephora.

On the R&D and manufacturing side, two recent examples are Florasis and Proya. Both domestic masstige brands recently upped the ante on R&D by establishing their own ingredient and product innovation centers, as well as collaborating extensively with well-known institutions and big suppliers. 

The industry eagerly awaits a return to full production capacity, so an April 27 announcement by SFDA provided some relief. According to the official, the deadline for submitting materials on product information and efficacy verification has been extended to the end of 2022. Further, the strict requirements for person in charge of product quality and safety were loosened to include those with management experiences in pharmaceutical, medical device and functional foods industries. 

On more question to be answered: how will all this uncertainty impact the upcoming 618 Shopping Festival, the second largest shopping festival in China?


Ally Dai
Freelance Writer
allisondai@126.com
allydai73@gmail.com
 
Ally Dai is a freelance writer/independent consultant based in Shanghai. She has covered the beauty industry for more than 15 years. Previously a senior editor and industry researcher, she now works on content creation with publishing houses, event organizers and PR companies in the personal care and life science industries. 

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