Rethinking China’s Beauty Market | BoF

Before Shanghai entered its now-easing lockdown, 26-year-old Chen Xi was a self-confessed beauty addict.

The e-commerce coordinator regularly patronised international and homegrown brands like Tom Ford, Skinceuticals and Florasis, but she rarely shops for them now. After being homebound for months, her beauty spending has dwindled and she’s no longer scrolling through social commerce app Xiaohongshu to find the perfect shades and formulas.

“I’m still trying to buy moisturiser and my favourite serums, but it’s not so much about discovering cool brands and products as it is making sure I don’t run out [of essentials],” she said. “I know people who have been getting done up to sit at home on their video meetings, but it feels pointless to me.”

Across China, people like Chen are shopping less due to factors both within and outside of their control. On top of lingering Covid-19 measures which negatively impacted consumer sentiment and forced many physical retailers to shut for months, supply chain troubles are now making it difficult to receive e-commerce orders. Even if a shopper is living in a city with fewer restrictions, shipments are often disrupted or severely delayed.

“Someone on my team in Suzhou last week got a delivery for something she ordered in early April,” said Elisa Harca, co-founder and Asia chief executive of Shanghai-based digital marketing agency Red Ant.

It’s no surprise that brands are feeling the pinch. Early this month, Estée Lauder Companies halved its full-year profit forecast on the back of its exit from Russia and Chinese lockdowns. Meanwhile, Shiseido’s Q1 sales in China, its second-biggest market after Japan, dropped 21 percent year-on-year due largely to low store traffic. Even local favourites aren’t doing so well.

In recent months, Chinese media have been teeming with articles about the direct-to-consumer cosmetics darling Perfect Diary, whose parent company Yatsen Holdings suffered losses of 1.62 billion yuan ($243 million) for its 2021 fiscal year and 291.4 million yuan in Q1 2022. Yatsen’s colour cosmetics division saw sales drop 45.6 percent in the first quarter.

But as the authorities work to reopen cities like Shanghai, most beauty companies seem to expect a rebound in Chinese consumer sentiment. Many frame the recent downturn as a blip and see China not only as one of the world’s most important beauty markets today but also a relatively stable place to keep investing to capture future growth.

Forecasts from Euromonitor International support their confident stance. The retail value of China’s beauty and personal care market surpassed pre-pandemic levels as early as 2020. The market is predicted to achieve a compound annual growth rate of 6 percent between 2021 and 2024, increasing from $88.8 billion to $106 billion over the period. This year is also expected to register a year-on-year rise despite current market headwinds.

Not all beauty players will enjoy the upward trajectory. Some will see significantly weaker performance than average and even those that outperform will need to brace themselves for a rebound that looks different to the one experienced in 2020 while planning for longer-term shifts in the market.

New Long-Term Growth Strategies

Beauty brands are facing several long- and short-term obstacles in China, depending on their physical retail footprint, product category exposure and prowess in digital channels and supply chain management. A V-shaped recovery may not be on the cards this time.

For starters, Shanghai and Beijing — where most beauty brands and retailers have focused their investment — carry far more economic weight than China’s other large cities, noted Patrice Nordey, managing partner of Fabernovel Asia. In recent years, brands and retailers from Shiseido to Tmall have cemented Shanghai as a hotspot for the beauty industry; LVMH announced last year that it would be home to a $154 million beauty e-commerce hub.

This suggests recent lockdowns in those cities could have had a more severe impact on the national economy than those in cities like Wuhan two years earlier. Moreover, e-commerce and logistics generally ran smoothly in 2020 after physical stores closed, while non-essential deliveries largely halted in Shanghai since the city-wide lockdown was officially imposed in April.

Given these and other factors, it’s no surprise that global players are focused on long-term strategies to spur growth and innovation.

In May, L’Oréal established its own investment company in China, Shanghai Meicifang Investment Co, which will target the beauty tech category as well as companies in marketing, R&D, data, supply chain and packaging. In the same month, Shiseido officially registered its own beauty investment fund for the Chinese market, Xiamen Ziyue Equity Investment Partnership.

Not only could these moves foster local beauty tech start-ups and brands, but they also could help strengthen the beauty giants’ digital capabilities globally and tap into C-beauty’s international sales potential. “If these big groups create the funds, they can help [homegrown] brands polish what they’re doing so they’re fit for long-term success,” said Harca.

For global players competing with C-beauty upstarts, knowing their strengths and weaknesses will be even more important as local demand strengthens. As Nordey notes, C-beauty brands excel at the “downstream of the overall beauty value chain”: areas like distribution, packaging and brand visuals, while larger global firms in particular lead in product innovation, giving them the upper hand when it comes to categories like active cosmetics, premium skin care and hair care.

Also worth watching is whether local frustrations over Beijing’s ‘zero-Covid’ stance could dent the patriotism that helped fuel C-beauty’s growth to begin with. “The China pride we’ve been feeling for years … there’s definitely a cooling off, but it’s not felt across the whole country,” explained Harca, noting that Shanghai is where the attitude is most evident.

Lessons From Local Competitors

While some challenges in China’s beauty market have stemmed from or been exacerbated by zero-Covid restrictions, homegrown brands were already facing a set of challenges before recent lockdowns began.

As a shopper, Chen says that one of the main attractions of C-beauty brands is price. “With [global] brands, there’s a prestige factor, whereas buying [local] I’m going off the recommendations of key opinion customers’ (as micro-influencers are known in China) and they’re more affordable.” But this has made some local brands more vulnerable to dips in demand.

Harca likens the current climate as a coming of age for C-beauty brands, many of which appeal to the mass market. “What they’ve done is go for speed, but they haven’t spent time on the longer-form product [and] brand building side of things.”

Nordey draws a comparison between the trajectories of C-beauty brands like Perfect Diary and Glossier’s, which he says are shaped by a ‘growth at all costs’ strategy, low profitability model and venture capital funding.

This helped many C-beauty brands establish themselves quickly and compete against incumbents, but also rendered them “hyper-sensitive to consumption inflections and media cost inflation,” said Nordey. Perfect Diary, for one, spends around 65 percent to 72 percent of its total expenses on marketing. The company did not respond to a request for comment.

However, within the direct-to-consumer cohort, not all players are facing the same struggles. Many C-beauty players have built their brands with a focus on makeup (take Florasis, Girlcult, Hedone and Rainology) and the mainland customer. But those with larger portfolios and multi-category scopes have been more insulated, while colour cosmetics and personal fragrances are taking a bigger hit with social distancing in place, Nordey noted.

Yet Harca is optimistic that best-in-class C-beauty players can overcome some of the more immediate obstacles they face, given their data-driven, quick-pivoting business models. “It’s more about them taking the time to finesse what brand storytelling means for them. If they can understand it, they’ll maintain their drive within the market and build into consumers’ hearts.”

It’s important to note that the global market remains untapped for most C-beauty players as the category has a long way to go in the US and Europe, where K-beauty and J-beauty are already relatively well known.

Interestingly, both global expansion and branding upgrades are opportunities that international players like L’Oréal and Shiseido can help local brands tap once they start investing in them.

Though it will be a bumpy road ahead for some players, Harca believes that the overall short-term outlook for the China market is one where it bounces back soon after the current malaise dissipates. Revenge spending is on the cards for at least some shoppers, and brands who are ready for it, and make use of their time now to build stronger relationships with customers, will eventually reap the rewards.

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