A recent report from Morgan Stanley suggests that China is set to become the world’s largest market for beauty products, with growing demand for premium cosmetics. In 2015, China became L’Oreal‘s (OTC:LRLCY) number 2 market in sales terms (behind the U.S.) and the company is well poised to take advantage of this beauty boom in the region. As L’oreal reinvents itself and adapts to the shifts in China’s beauty market, its industry leadership in digital initiatives will appeal to the internet savvy younger generation of China. According to the Morgan Stanley report, online channel sales of beauty products grew from 3% of the domestic Chinese market in 2010 to 19% in 2015. For cross border e-commerce — i.e., online sales from outside of China — this number jumped to 26%. For L’Oreal, which already has a store on Alibaba’s Tmall and is ahead of competition in its e-commerce initiatives, these numbers work well. More than 20% of its consumer products division’s sales through e-commerce are in China.
Demand for premium cosmetics through online channels is rising in China. The Morgan Stanley report states that domestic cosmetic purchases in China are declining since 2014, while overall spending by Chinese consumers on cosmetics grew 15% between 2014 and 2015. Chinese consumers are shopping for cosmetics either while travelling abroad or through online channels, in the quest for lower prices. L’Oreal’s luxury unit is well poised to capture this trend. The company is augmenting this division with acquisitions to cater to the increasing demand in this segment. In July this year, it acquired US based prestige beauty company IT cosmetics for $ 1.2 billion.
According to our estimates, Skin Care is the most valuable segment for L’Oreal and accounts for more than 30% of its valuation. We expect L’Oreal to increase its market share in this segment steadily from 12% in 2016 to nearly 15% by the end of our forecast period.
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China is likely to play a significant role in this growth. As Chinese consumers prefer more premium cosmetic products and look for lower prices while traveling abroad or by shopping online, L’Oreal’s initiatives in the e-commerce and social commerce space will pay off. In China, the L’Oreal Luxe brand is working on recreating an exclusive consumer experience online through its initiatives such as My Beauty Box.
While the Chinese beauty market is booming it is also undergoing a transition with consumer preferences shifting towards premium products and travel and online sales channels. L’Oreal, with its innovation and digital initiatives, has a competitive edge to capture this market and take advantage of the booming Chinese beauty market.
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