September 18, 2019

China’s cosmetics industry is growing rapidly and there appears to be a more noticeable divergence among key players as well as the emergence of key trends. As a result, the more well-established cosmetics brands seem to be under pressure as their products and sales channels have to adapt to the rapid changes that are taking place.

Figure 1: Cosmetics retail sales are growing rapidly   
Source: NBS, CICC Research

In this report, we look at five trends that are shaping the beauty industry, namely: new demand, new brands, new markets, new marketing, and new channels.

Trend #1: New demand

The young generation born in the 1990s and 2000s has become the key consumers of beauty products. Boston Consulting Group predicts that millennials may make up 46% of China’s total population, and contribute 69% of total consumer spending as of 2021.

Millennials seek more personalized products, as the internet has made information more readily available, and beauty brands have responded by rolling out a greater variety of products to cater to different consumer preferences.

Furthermore, according to data from market research firm Kantar Worldpanel, the number of skincare and “color cosmetics” brands (i.e. those making bold and colorful makeup) rose more than 20% from 2016 to 2018.

Figure 2: Millennials’ share of total consumer spending vs older generation (2017)  
Source: Boston Consulting Group, CICC Research

Figure 3: Consumers now have more choices 
Source: Kantar Worldpanel, CICC Research

Consumers have also become more discerning given the increasing product transparency, and this has led to greater attention on the ingredients that go into the products. For example, nicotinamide is an ingredient that has generated positive coverage in recent years, and in response, brands have developed products featuring this.

Figure 4: Popular cosmetics products that feature nicotinamide
Source: Tmall flagship stores of different brands, Xiaohongshu, CICC Research

Trend #2: New brands

The rising demand for personalized products has transformed and reshaped the beauty industry, and alongside this has been an increase in the number of Chinese brands, as well as new brands over the past several years.

Intellectual property (IP) appears to be playing a role in this, and has, for example, allowed Chinese pharmaceutical companies such as Yang Sheng Tang and Tong Ren Tang enter the cosmetics market. Cultural landmarks such as the Forbidden City and Summer Palace have also taken advantage of their IP to launch beauty products.

Figure 5: Leveraging IP in the beauty industry
Source: luxe.co, image.baidu.com, CICC Research

Figure 6: The Forbidden City-branded lipsticks
Source: image.baidu.com, CICC Research

Figure 7: IP can help boost sales volume of 36% of IP-licensed products by 20–49%
Source: Whitepaper on China’s Brand Licensing Industry for 2019, CICC Research

Figure 8: 39% of consumers accept price premium of 21–50% for IP-licensed products
Source: Whitepaper on China’s Brand Licensing Industry for 2019, CICC Research

Trend #3: New markets

Cosmetics companies are increasingly focusing on lower-tier markets. According to data from Analysys, China’s tier-3 and lower-tier cities, towns and villages had 950mn residents, accounting for 68.4% of the country’s population. This population could become a new driver of demand for beauty products.

In addition, consumption upgrading may help improve product mix. According to KWP, sales of beauty products in all channels rose 5.3% in higher-tier cities and 7.9% in lower-tier cities in 2018, offering structural growth opportunities for beauty companies.

Figure 9: China’s population by city tier in 2017
Source: Analysys, CICC Research

Figure 10: Growth of beauty product sales in all channels in higher- and lower-tier cities in 2018
Source: KWP, CICC Research

Trend #4: New marketing

Traditional marketing channels such as TV have seen a decline in their conversion rate due to the fragmentation of channels. In contrast, new ways of marketing have sprung up. New technologies like Big Data can help create accurate customer profiling, and Key Opinion Leaders (KOLs) have been effective in driving high conversion rates.

L’Oreal is a case in point. The company has taken full advantage of Big Data and AI to create accurate customer profiles and tailored advertising. According to L’Oreal China, by leveraging digital marketing strategies, its click to open rate (CTOR) is 50–100% higher than market average.

Key Opinion Leaders (KOLs) in the beauty industry leverage online platforms such as Xiaohongshu, Douyin and Taobao Live to market beauty products and have been effective in driving sales. They are able to do this through their large number of online followers, allowing them to drive a large amount of sales in a relatively short time.

L’Oreal has made use of “KOL marketing” – according to L’Oreal China, there are more than 50,000 KOL accounts in China’s beauty and fashion industries, and the company has established partnerships with more than 3,000 of them, which in turn can help strengthen L’Oreal’s brand and conversion rate.

Trend #5: New channels

It appears that omni-channel integration will become essential for leading cosmetics companies.

While online channels generate sales for cosmetics products much more quickly than physical stores, the latter still have an important role to play. The use of new technologies, such as virtual reality makeup mirrors, and new store formats, for example self-service and pop-up stores, offer new and interesting shopping experiences. Physical stores have become indispensable for beauty brands.

Figure 11: Breakdown of online and offline sales for personal care products
Source: Nielsen, CICC Research

Figure 12: Rise of new retail technology and store formats
Source: image.baidu.com, CICC Research

For more details, please see our report Five new trends in China’s beauty industry  published in August 2019.