China To Remain A Challenge For Global Beauty Players

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L'Oreal

L’Oréal (OTC:LRLCY) is the leading cosmetics and beauty care player globally with a market capitalization of about $98 billion. The company competes with other notable pure-play cosmetics manufacturers like Estee Lauder (NYSE:EL), Shiseido, Avon Products (NYSE:AVP) and Revlon (NYSE:REV) in the multi-billion dollar cosmetics market. Additionally, it faces strong competition from cosmetics brands of global consumer product companies such as Unilever (NYSE:UL), Procter & Gamble (NYSE:PG) and Beiersdorf.

L’Oréal reported revenues of approximately $30.5 billion in the recently concluded fiscal 2013. The company has a strong market share position across skin care, hair care, makeup and fragrance product categories in key demographic regions worldwide. However, it has been particularly aggressive in expanding its market share in emerging market regions of Asia-Pacific and Africa. In this note, we take a broader look at China, the largest cosmetics market among emerging economies, and analyze various trends shaping its future.

View our detailed analysis for L’Oreal here

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Chinese Acquisitions Strategy Not A Sustainable One For The Long Term

The Chinese beauty and cosmetics market is the third largest market globally, after North America and Japan, and had a market sales of approximately $23 billion in 2013. [1] Within this huge market, L’Oréal reported sales of over $2 billion in 2013. [2] This translates into a 9% market share for L’Oréal in the overall Chinese beauty market. However, the company has faced intense pressure from domestic players within the mass-market cosmetics space and has bowed out of the Chinese hair care market by shutting down its Garnier brand. [1]

L’Oréal still commands market leadership positions in beauty and make-up cosmetics, with L’Oréal Paris and Maybelline New York being the number one brands in their respective segments. [2] However, domestic players, like Shangai Jahwa United, have displayed a better understanding of the Chinese consumer tastes. The company’s brand ‘Herborist’ uses traditional Chinese medicinal and herbal practices in developing its beauty products and has shown strong resonance with Chinese consumers. [3] Adapting such practices  has given domestic Chinese beauty players a decent lead over large, international players.

To counter this strengthening competition from domestic players and retain their market share, global beauty companies have been on an ‘acquire-to-grow’ strategy in the Chinese market. L’Oréal announced its acquisition of Magic Holdings International Limited for $850 million last year, which is the company’s largest acquisition in the Chinese market. Magic Holdings is the leader in the Chinese facial care market, with annual revenues that grew 14% on a constant currency basis to reach $220 million in 2013. The acquisition of Magic Holdings indicates the company’s stance against domestic competition. (For more on L’Oréal’s previous acquisitions, see L’Oréal Vies For Top Spot In Growth Markets With Rapid Acquisitions)

Going forward, we expect market conditions for International players in China to remain challenging. Chinese consumers in tier 1 cities are exhibiting a greater preference to local beauty manufacturers who have an understanding of traditional practices. This trend should become evident in tier 2/tier 3 cities as consumer discretionary income levels expand and consumer demand for cosmetics increases. Moreover, the Chinese consumer has become more sophisticated over the years and is unwilling to spend a premium on International brands when a domestic brands can provide similar benefits at a lower price point. [4] [5]

We expect International beauty players to complete more acquisitions in China to maintain their market shares in the near term. Over the longer term, these acquisitions should allow global beauty brands to better position themselves in this market.

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Notes:
  1. Revlon and Garnier exit the Chinese $22.8 billion beauty market, Telegraph, January 2014 [] []
  2. L’Oréal’s acquisition of Magic Holdings marks firm’s biggest investment in Chinese beauty market, L’Oréal News Room, April 2014 [] []
  3. Domestic Beauty Brands Use “Chinese Wisdom” To Edge Imports, Red Luxury, February 2013 []
  4. Because it’s no longer worth it, The Economist, January 2014 []
  5. Chinese Opt For Korean Imports Over Western Beauty Brands, Ad Age, February 2014 []