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Opportunities in China’s Skincare and Makeup Sector: Product Segmentation, High-end Products and Consumers in Cities below the Third Tier

  •   22 Oct 2019
  •    Hedy He
  •  170
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    Takehome:

    • Product segmentation and high-end products are the 2 major opportunities for cosmetic enterprises targeting China’s skincare market.
    • Consumers in cities below the third tier are the most untapped demographic.

    In 2018, the value of China' s cosmetic market reached 346 billion yuan (48.8 billion dollars). The market is characterized by a large overall scale but relatively low per capita consumption, reaching only 1/7 to 1/10 of developed countries.

     
    China Cosmetics Market Size from 2013 to 2018 (Billion RMB)

    Joe Wang, Director of Innovation and Brand Building of China Association of Fragrance Flavour and Cosmetic Industries (CAFFCI), said in his speech during 2019 One Asia Cosmetics & Beauty Forum, “With the continuous growth of China's economy and the improvement of household consumption levels, the scale of China's cosmetics market will grow exponentially in the future, and the market development potential is still huge.”

     
    Joe Wang' s Speech during 2019 One Asia Cosmetics & Beauty Forum

    1. Skin Care Products Market: Product segmentation and high-end products are the 2 major opportunities

    1) Market Overview
    The skin care segment of the cosmetics sector is the segment with the largest size and growth rate in the Chinese cosmetics market. The scope of this segment encompasses 4 product categories: facial care, body care, hand care and care kits.

    The market size of skin care products in China in 2018 was 203.9 billion yuan (28.9 billion dollars), accounting for 59% of the total value of China’s cosmetics market. The compound annual growth rate from 2011 to 2018 was 7.4%, which is higher than the overall growth rate of the cosmetics industry.

     
    Market Share of Major Product Categories in Chinese Cosmetics Market

    The market share of skin care products in China’s cosmetics market has gradually stabilized at around 50%, indicating that Chinese consumers have developed the habit of using skin care products [1]. It is expected that in 2021, the market size of skincare products will reach 250.6 billion yuan (35.4 billion dollars) fueled by trends towards premiumization, the rise of more educated consumers with preference for products formulated using ingredients with scientifically and clinically substantiated safety and efficacy, and the continued positive influence of social media and e-commerce on consumption in the cosmetics sector.

    2) Major Opportunities

    • Product Segmentation

    Product segmentation is a major trend. Deep skin care products such as eye creams and essences are already performing well in the market and point towards consumer demand for increasing levels of specialization and product tailoring. In the first quarter of 2019, the growth rate of eye creams and essences increased by 32% and 34% respectively.

     
    Understanding the Popularity of Deep Skin Care Products

    As consumers' skin care concepts become more mature, their preferences in product function, ingredients and brand positioning are becoming more refined. Demand is increasing for specialized products with increased efficacy and functions such as whitening, anti-spot, anti-aging, etc., and specialized products specifically formulated for the eyes, lips, cheeks and neck are now becoming more popular.

    Take eye care products as an example, with the accelerating pace of life and the habit of staying up late at night, young white-collar Chinese women in first- and second-tier cities are dealing with a host of eye skin issues such as dark circles under the eyes. Their demand for anti-aging eye care products such as eye cream, eye mask and eye essence is rising.

     
    • High-end Product Market: Local Skin Care Brands Start Moving Upmarket

    According to Euromonitor, although the retail sales of high-end skin care products in 2018 is still lower than that of mass market products, the market share of high-end skin care products has gradually increased, from 25.3% in 2013 to 32% in 2018 [2].

    Price Standard for High-end Cosmetics:

    LevelClassification Standard (1 piece/RMB)Examples
    Mass (low-end)1< 50 RMB (7 USD)Maxam, LongRIch, TOSG
    250 -200 RMB (7-28 USD)Pechoin, Proya
    3200-300 RMB (28-42 USD)Herborist, OLAY
    Masstige (middle-end)300-500 RMB (42- 71 USD)ORIGINS, AUPRES
    Prestige (high-end)1> 500 RMB ( >71 USD)Estee Lauder, Lancome
    2LAMER, Helena Rubinstein
    Source: China Industry Information[3]

    Currently the high-end skin care market and department store channels are still dominated by international cosmetics giants, especially brands from France, US and Japan. However, due to the appearance of new sales channels and new marketing models, Chinese local skincare brands are trending towards premiumization and gaining traction amongst Chinese consumers. For example, Elastin Eye Essence launched by MARUBI in 2018, is positioned as a middle to high-end product, advertised and promoted using social e-commerce models such as the WeChat friends circle, RED etc. It achieved excellent results using this model. Marubi is tapping into high-end trends, focusing on the subdivided market of eye care. It achieved sales revenue of 815 million yuan (115 million dollars) in the first half of 2019, a year-on-year increase of 11.85% [4].

     
    Elastin Eye Essence launched by MARUBI

    Chinese local cosmetics brands also focus on creating different brand images such as marine skin care, natural plant skin care, Chinese herbal skin care, etc. They are launching more diversified products to find new growth points. For example, Extra Control Concentrate Series Products launched by HERBORIST, which uses herbal ingredients derived from traditional Chinese medicine and uses natural extraction methods.

     
    Extra Control Concentrate Series Products of HERBORIST

    2. Makeup Products Market: Cities below the third tier have great potential

    1) Market Overview

    Compared with Japan and South Korea, the market share of makeup products accounts for a relatively small percentage of the market in China. According to Euromonitor, the retail sales of makeup products in China in 2018 was 42.8 billion yuan (6.1 billion dollars), a year-on-year increase of 24.3%, accounting for only 10.4% of the Chinese cosmetics market. The penetration rate of makeup consumption in Japan and South Korea is close to 90%, but for China, is only around 30%, leaving much room for improvement [5].

    In recent years, the per capita consumption volume of makeup products in urban areas in China has shown an upward trend. Continued urbanization, growth of per capita disposable income of urban residents and promotion of makeup through social media are expected to be major drivers of growth in the makeup sector.

     

    The per capita purchase of makeup product categories by Chinese consumers has increased from 3.6 in 2015 to 4.5 in 2017. A ME LAB report shows that the complete basic makeup steps include at least 9 such as cleaning, skin care, put on foundation, etc. [6] Chinese consumers’ make-up steps will likely expand in future which will lead to the expansion of the makeup market.

    2) YOY Growth in Sales of Affordable Makeup Products in Cities below the Third-tier Increased

    According to a report from CBN data [7], affordable makeup products are the first choice for new cosmetic consumers.

    Sales of affordable makeup in cities below the third tier contributed more than 60% of the total sale of makeups. The sales growth of affordable makeups is faster than that of first- and second-tier cities, and the number of users gradually expanded.

    *Affordable Makeup Products: Affordable makeup products refer to the brand with the average price ranked in the bottom 80%.

    Among them, sales growth of domestic makeup products is particularly prominent.

    In the past 1 year, nearly half of all makeup product sales were attributable to domestic enterprise. Domestically manufactured products have become the mainstream in affordable makeup products. 1% of the leading brands contribute more than half of the domestic makeup sales, indicating strong market consolidation.

    In recent years, new domestic makeup brands such as Perfect Diary, Marie Dalgar have emerged and leveraged new retail and advertising channels to great effect. Their understanding of regional cultural background, aesthetic standards and consumer psychology, and localized new product development strategies have given them a significant advantage over both international companies and more established domestic enterprise. Social ecommerce has been a huge factor in the rapid ascension of these companies.

    Top 10 Domestic Makeup Brands in Cities below Third tier (ranked according to sales volume)
    PERFECT DIARY
    CARSLAN
    CHIOTURE
    MEIKING
    ZEESEA
    MARIE DALGAR
    MAYCREATE
    RAINBOW
    JUDYDOLL
    AMY
     

    For Chinese makeup product consumers, brand history seems to have a minimal impact on consumer purchasing preference. If the product is designed well and promoted well, it has been proven that emerging brand can surpass established brands. As domestic brands continue their upward trajectory, we expect international brands in other segments to experience greater competition.

    3) E-commerce Platform Support Policy Guide

    E-commerce became the largest channel for makeup consumption in 2018. The rise of domestic brand Marie Dalgar and Perfect Diary are inextricably linked with the development and utilization of ecommerce. Growth in ecommerce is also heavily linked to several important policies implemented at a political level and at an industry level by the likes of Tmall and JD.

    In 2019, Tmall Beauty earmarked cities below the third tier as a strategic priority, and aims to unlock their consumption potential using preferential policies and incentives for both retailers and consumers. For foreign brands, in the past lack of localized assets has been a major impediment to penetrating lower tier cities. The implementation of Tmall’s new policies such as the launch of Tmall Global’s English language website is expected to go a long way to solving these issues and opening new markets for international enterprise.

    For more information on China cosmetic market and entry strategy, please refer to our webinar on Oct. 30, 2019.

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