Cosmetics Category Rules Global E-Commerce

Exploring the factors driving the global beauty business and how U.S. and foreign retailers can conquer the booming China market.

by Azoya

Around the world, beauty is big business. According to a recent report from Coresight Research, younger Americans are the most likely to shop for beauty products on Amazon. Meanwhile, on the other side of the globe, consumers in China seek a range of foreign beauty brands, including U.S. companies like Estée Lauder, and France’s Lancôme and L’Oréal. Let’s explore the factors driving the global beauty business and how U.S. and foreign retailers can conquer the booming China market.

Beauty market surges in China

China’s cosmetics market already shows strong growth so far this year. China’s Bureau of Statistics reports cosmetics year-over-year sales growth of 12.5 percent in January and February 2018. Last year, total retail sales of cosmetics products in China reached nearly $40 billion, with 13.5 percent year-over-year growth — versus less than 10 percent in 2015 and 2016.

According to the annual reports of major cosmetics brands, high-end cosmetics’ growth rate outpaced medium and mass-market brands. The driving factor behind this trend is the ongoing consumption upgrade in China, as consumers evolve from basic, value-oriented products to higher quality premium and luxury goods.

Affluent Chinese citizens in first and second tier cities may buy more cosmetics due to retail channels’ diversification. Consumers can now buy high-end products from airport duty-free shops, department store counters and e-commerce channels. The increasing Chinese outbound travel frenzy has also triggered cross-border e-commerce to evolve into a major channel to buy imported beauty products.

Global beauty bestsellers

Fueled by the fast expansion of China’s cosmetics market, global brands continue to earn robust growth in China:

- U.S. brands Kiehl’s sells better than mass-market brands; MAC and Tom Ford are also popular.

- France’s Estée Lauder’s FY2018 second-quarter report shows Asian markets, including China, increased by 33 percent to reach $840 million. L’Oréal earned more than $12 billion in revenue in global emerging markets in 2017; Asia-Pacific sales spiked 12 percent. France’s Yves Saint Laurent and Lancôme earned greater sales increases than mass-market brands.

- Japan’s Shiseido surprised investors with more than 20 percent revenue growth and 2.12 times growth of its operating margin, including gains for premium brands Clé de Peau Beauté, Shiseido and IPSA.

- South Korea’s LG shows its China operation grew 34 percent year-over-year, including growth of premium lines The History of Whoo and Su:m37°.

Affluence drives premium product sales

Growth among high-end lines shows an obvious trend of Chinese consumers spending more on high-end cosmetics. Improved functionality, safe raw materials, verified product quality and solid reputations are common among successful beauty brands in China. Product innovation also matters, as companies frequently introduce new product lines, refreshes and upgrades to keep consumers coming back.

Fueled by China’s strong economic growth and booming real estate market, more Chinese families earn an annual income in excess of $38,000, versus $10,000 in 2010. Consumers’ high disposable income has laid the foundation for high-end cosmetics brands to thrive in China.

Regulatory changes have made imported beauty brands more competitive in China’s retail market. The import consumption tax exemption for cosmetics brands and reduction of import duties have allowed global brands to reduce the price gap between China and the international market.

Connecting with Chinese beauty shoppers

China’s consumption upgrade is the main factor driving Chinese customers to buy more beauty products, including high-end cosmetics as beauty consumption evolves from “crude” to “delicacy.” Here are top marketing trends beauty brands need to know:

- Personalization: Product development now focuses on personalized service to help the younger generation express their unique personality.

- Millennial target: JDND’s report on Chinese beauty shoppers reveals Chinese aged 19 to 25 are most likely to buy overseas products, mainly facial care, body care and makeup.

- Digital content: Shoppers discover beauty tips from digital sources, including social media, influencers called key opinion leaders, or KOLs, and online beauty communities.

- Augmented reality: Consumers can virtually try on lipsticks with an AR app or use their smartphone camera to learn which products could improve their skin. China’s Meitu Inc. create an AR-powered beauty app to serve customers using a facial recognition engine for personalized marketing.

E-commerce is a key success factor

For U.S. and foreign brands, e-commerce is essential to reach China’s ready market. More than 26 percent of L’Oréal’s China revenue comes from online. L’Oréal has also been collaborating closely with China’s pure-play e-commerce leaders. Savvy Chinese consumers demand a consistent experience regardless of channel. In response, many international brands are transforming and optimizing their customer experience at every retail touchpoint — online and off-line.

Search results from the Baidu Index of shows Urban Decay, a prestigious L’Oréal makeup brand enjoyed peak search volume during Single’s Day, China’s largest annual e-commerce festival. Similarly, U.S. and foreign beauty brands need to work closely with e-commerce providers and participate in Chinese e-commerce festival campaigns to stay relevant and competitive.

A digital-first strategy is essential for retail companies to connect with consumers through social media, digital technology and e-commerce channels. Chinese celebrities participate in the online beauty community. Chinese star Fan Bingbing set up an account on Xiaohongshu with more than eight million followers, a popular beauty community app in China, and recommends beauty products. Emerging celebrities such as Ouyang Nana also launched an account to target Generation Z shoppers using the app.

Cross-border beauty connections

Cross-border e-commerce emerged as a powerful business channel for U.S. and foreign brands. Most cross-border e-commerce shoppers live in affluent first and second tier cities in China with high spending power. More than 70 percent are female, making cross-border e-commerce platforms a perfect channel to acquire new customers and build brand awareness with less risk and lower up-front investment for beauty businesses.

Since entering China in 2015, U.K. beauty retailer Feelunique has become famous in China and the China market now accounts for 15 percent of its global revenue. Feelunique appeals to females in big cities who love to try new and niche brands from around the world. Unlike Amazon or other foreign e-commerce players in China, Feelunique adopts aggressive local operation. The retailer communicates in the local language and knows what customers are looking for due to extensive market research.

The localized Chinese web site of Feelunique. 

For instance, International Women’s Day is a major event in China, especially among female shoppers, who dominate Feelunique’s China business. Feelunique’s successful International Women’s Day campaign in March yielded a 40 percent higher return than 2017’s Single’s Day in November.

Stand-alone e-commerce is Feelunique’s foundation for robust growth in China, building consumer trust while retaining its exotic appeal. The retailer is seeking a range of other opportunities and offers omnichannel experiences to consumers, including a presence on ubiquitous social media platform WeChat and online marketplaces. Feelunique launched on marketplaces Xiaohongshu and Kaola in late 2017 and revenue from these new sales channels continue to increase steadily.

For U.S. and foreign beauty brands to win in China, they need to target affluent shoppers, connect with them through cross-border e-commerce and use omnichannel marketing to promote their premium products lines.

Franklin Chu is managing director of Azoya U.S.

WeChat Beauty Retail feelunique

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