Business

Skincare invasion stretches to low-end market

By Lu Chang (China Daily)
Updated: 2010-12-03 11:41

BEIJING - Cosmetic industry experts in China are striking an alarmist tone over the stepped-up efforts by multinational corporations in recent years to acquire domestic skincare brands.

"Foreign cosmetics and healthcare brands account for more than 70 percent of (China's) market share, which is very startling as they occupy almost all the high-end markets. And many of them are now expanding into the middle- and low-end markets," said Zhang Tiecheng, director of the China Association of Fragrance, Flavor and Cosmetics Industry.

A report by Guolian Securities Co Ltd said sales revenue of China's cosmetics and healthcare industry has been booming with annual sales of 200 billion yuan ($30.2 billion) in 2009. That total ranks China second in Asia after Japan. China's cosmetics market has been growing at an annual rate of 12 percent in recent years, in line with growing demand for makeup and skincare.

But the report also said that only a few Chinese cosmetics companies have managed to gain a foothold in the high-end market, which has recently been dominated by international giants such as Procter & Gamble, L'Oreal, Shiseido and Unilever.

Industry experts are worried that "an invasion" by international giants, as they put it, in the personal care market will force domestic brands to lose more and more ground in the market.

"The domestic companies are competing with brands from all over the world, but they are far less competitive. It's not because domestic products are inferior to foreign brands in terms of quality, but they have few ways of doing the kind of advertising that international brands can," said Xu Jingquan, secretary-general of the All-China Federation of Industry and Commerce (ACFIC).

Following French cosmetic giant L'Oreal SA's acquisition of a number of Chinese brands, such as Mininurse in 2003 and Yue-Sai in 2004, more foreign giants have looked to China to acquire local skincare brands.

The successful bid for Mininurse, a skincare brand of Shenzhen-based Raystar Cosmetic Co in 2003, is helping L'Oreal gain access to the middle- and low-end market with about a 90 percent recognition among Chinese consumers.

L'Oreal's purchase of Yue-Sai allowed the international company to acquire more than 800 outlets in 240 cities and a Shanghai factory to tap into China's medium-end makeup market.

Yue-Sai, founded in 1992 by Chinese-American Yue-Sai Kan, had been China's biggest cosmetic distributor.

"The acquisition was an outstanding opportunity to speed up our growth in the Chinese market," said Lindsay Owen-Jones, L'Oreal's chairman and chief executive officer.

In 2007, Johnson & Johnson, the US-based consumer goods producer, acquired Beijing Dabao Cosmetic Co Ltd, China's largest cosmetics manufacturer that year, in a move that shocked the skincare industry.

So why aren't domestic brands succeeding against the multinational firms? Xu Jingquan said it comes down to name recognition. International brands, because they are well known, are more welcome than domestic brands to enter shopping malls.

"It's extremely hard for Chinese companies to enter the high-end market as there's a huge entrance fee for them to pay to shopping mall operators, which is easy for these international players," Xu said.

Yu Xueling, general-secretary of Guangdong Cosmetic and Healthcare Chamber, said among 4,000 domestic enterprises, only 5 percent have the financial wherewithal to have a presence in a high-end department store.

"It's too much cost for the domestic companies to enter the department stores," said Yu. "Even if they do, few are able to survive."

Zhang Xiaodong, a trade analyst with the China Information Center of Daily Chemical Industry, said domestic companies are "falling short in innovation and sustainable development as they face fierce competition from international companies".

But the acquisitions are not looked upon unfavorably by all experts.

Yang Zhifang with the Beauty and Cosmetics Chamber with the ACFIC said in an interview with Beijing News that Johnson & Johnson's acquisition for Dabao shouldn't be regarded as a business failure. Instead, he said, it shows that China's cosmetics and healthcare industry is on the way to becoming mature and that consumers will benefit from the product quality at a reasonable price.

China Daily