China's High-end Cosmetics Market ---L'Oreal's Case Analysis

With the rise of the affluent young Chinese middle class and their increasing demands for high quality products, consumers in China have shown greater interest in high-end cosmetics products. According to statistics, in 2013 one third of the global luxury product sold were purchased by the Chinese and it is estimated that by 2020, 40% growth of the global high-end cosmetics market will be contributed by Chinese consumers. 

Among all foreign brands, L’Oreal’s entry into China’s high-end cosmetics market is the most conspicuous success. According to L’Oreal’s financial statements, L’Oreal’s high-end cosmetics products sales reached 55.7 billion Euros in 2012, doubling their growth rate year on year over the last 4 years. Of this 55.7 billion 40% is contributed by emerging markets. The AP region makes up 75% of the sales in emerging markets, and 1/3 of the sales are from China. To break it down a little further, 1/3 of L’Oreal’s cosmetics sales are contributed by high-end cosmetics products.  L’Oreal’s success in China and Asia is the product of a carefully orchestrated market entry strategy.

Expansion into China’s Third and Fourth-tier Cities

LANCOME is the highest grossing L’Oreal brand in its high-end cosmetics product lines and made 10 billion euros in 2013. In the United States, LANCOME cosmetics are sold in 2000 cities, while only 170 cites sell LANCOME products in China. Most third and fourth-tier cities are still virgin territories for LANCOME products. But in recent years, LANCOME has expanded its sales in 70 new cities in China, 33% of which are third-tier cities. L’Oreal’s Global President Jean Paul Agon revealed: “we always know L’Oreal cosmetics should not be restricted to only first-tier cities. 10 years ago, we’ve already introduced LANCOME to Hangzhou.”

New Distribution Channel

Distribution channels are vital when entering a new market. Travel retail is a market sector that has grown rapidly and L’Oreal is using this model to good effect. Statistics show that L’Oreal had a market share of 21.6% in the global travel retail markets in 2012 and ranked number one in the world. Up to 2013, L’Oreal’s travel retail sales have reached 600 billion US dollars. Chinese tourists have become the target market for L’Oreal who markets and designs customized cosmetic products catering to the Chinese. For example, LANCOME launched a series of products Chinese New Year themed products in Hawaii.

Setting Up a Manufacturing Base in Asia

Besides branding and marketing, L’Oreal put a lot effort into production as well. To increase productivity in the AP region, L’Oreal is planning to set up a new manufacturing base in Japan by 2016 and make it the Asian export base. It is estimated that the new manufacturing base would double the productivity to 1 billion products annually and half of them would be exported.

L’Oreal’s success in China provides a good example for multinational companies who are planning to enter the Chinese market. It also shows the great potential of the Chinese high-end cosmetics market for foreign brands.