How COVID-19 Is Affecting the Beauty Industry in China

Regulation

• Delay of CSAR

China State Council passed the CSAR during its executive meeting on January 3, 2020. The final CSAR was expected to be released soon after the Chinese New Year. With NMPAs capacities already occupied and the cosmetic sector reeling from the negative impact of the virus on demand for cosmetics, it is highly unlikely that CSAR will be implemented until several weeks after the outbreak is resolved in China ^[1]. 

• Hardcopy filing documents should now be sent by courier.

Generally speaking, the filing of non-special use cosmetics can be done online. However, in instances where hardcopy documents need to be submitted, they should now be sent by courier rather than in person. These changes will have little impact on international stakeholders ^[1].

• Slower Speed of Custom Clearance

During the epidemic, the top priority is placed on facilitating market access for much needed medical supplies. Customs officials will be wholly occupied with expediting the clearance of these kinds of supplies. As such, we can expect significant delays in customs clearance of cosmetics ^[1].                                           

Market

Influence on different categories

• Big impact on color cosmetics and fragrances

China's response to the Sars-CoV-2 virus has been to implement a policy of containment. This means most people have to stay at home. When people do venture outside, they need to wear a face mask. In this environment, the demand for color cosmetics (include facial make up products, nail care products, lip care products, and eye make-up products) and fragrances has been low. We predict the recovery of color cosmetics will be relatively slow as people will continue to use facemasks during the epidemic and for some time after.

However, there are some encouraging signals worthy of attention. The increasing popularity of video conferencing, video dating, selfies, and live streaming on social networks means that many young consumers will still wear makeup. The epidemic has also given birth to "face mask makeup styles," which focus more on eye makeup. The data from JD and Suning also proves this: the YoY growth rates of the eyeshadow palette, eyeliner, mascara is over 100% from Feb 23 to Mar 1 [2]. Sales and demand for fragrances have suffered. During the epidemic, there is less socializing. Usage of disinfectant fluid /spray has also increased, occasioning a concomitant decline in the use of fragrances.

•  Rising awareness for body cleansing and skincare products

Sales of hand wash and hand sanitizer have seen a massive spike in demand with prices also following suit. The use of face masks and frequent handwashing has a damaging effect on the skin, which has also occasioned increasing demand for skin care products and hand cream.

• Demand skyrockets for products with antimicrobial function -  “XIAO(消) products”

Antimicrobial products – designated with prefix “XIAO (消)” in mandarin Chinese are subject to huge demand. These products use a special registration number and include sanitizers, hand sanitizers, mouthwashes, and part of body lotions. Many beauty brands have launched or are launching products like hand sanitizers, including CHANDO, SpringSummer from JALA Group, One Leaf from CHICMAX Group, Geoskincare, Manuka Bee, etc. Geoskincare developed its supply chain on January 26, and new products entered the market on February 16. The company has already received over several million orders. ^[3]

• The next rising star: environmentally friendly products

The outbreak of Covid-19 has persuaded consumers to pay more attention to health and environmental protection. In the future, we expect consumers to adopt more ethical consumption preferences, which means clean-label, sustainable and environmentally friendly will become an increasingly important driver of consumer preference.

Challenges for the beauty industry

• Liquidity a major concern for Chinese cosmetics enterprise

According to the "Tsinghua and Peking University, Joint Survey of 995 SMEs" released by China-Europe Business Review on February 5, under China’s current containment strategy 85.01% of enterprises can survive for up to 3 months, and less than 10% of enterprises can maintain sufficient liquidity to survive for more than six months^[4]. Most cosmetics companies prefer asset-based operations, and few companies have large amounts of money in their accounts. Therefore, most cosmetic companies are under considerable pressure.

• Logistics is another challenge

Although online consumption has increased, transport restrictions have significantly impacted logistics, which is having a major impact on both upstream and downstream links in the supply chain. Merchants have difficulty delivering goods to consumers, and likewise, suppliers are having difficulty ensuring merchant inventories remain stocked.  

• Limited marketing activities

Marketing activities and advertising largely drive e-commerce sales. Due to ethical considerations, during the epidemic, most brands and platforms stopped all marketing activities. KOL marketing was also affected. After the epidemic, we predict a large rebound in demand, and therefore most brands have maintained their marketing budget for 2020. One thing they need to do is to adjust marketing strategies and focus on online channels ^[5].

• Shutdowns impacting all links in supply chain

Many cosmetic manufacturing factories have been shut down during the epidemic. It is hard for factories to restart work since many workers are still in their hometown, and factories need to follow a complicated procedure to apply for resumption of normal operations. Even if the cosmetic factories can start work, but the raw material factories cannot start, it is still useless. For example, P&G currently has 387 suppliers in the Chinese market, and these suppliers supply more than 9000 materials worldwide, affecting approximately 17600 products ^[6]. Currently, Schneider, L'Oreal, and many other multinational companies have resumed work and production.

• Cross-border e-commerce international shipping also impacted

 For CBEC stakeholders besides slower customs clearance and domestic logistics problems, they also have to face global shipping problems. Many cross-border transshipment logistics companies have posted announcements on their websites. They have said that due to the recent domestic epidemic and WHO public health incidents, air freight has been impacted. Demand is high, and availability is very tight. The time required for transshipping has been extended.

Opportunities for the beauty industry

• Per capita consumption of cosmetics trending upwards and set to rebound after the epidemic

 Compared with developed countries, China’s per capita consumption of cosmetics still has much room for development. In 2019 per capita consumption was only 30 US dollars, which is far lower than that of neighboring Japan. After the epidemic ends, forecasters are predicting a major rebound in consumption ^[7].

• Favorable policies, regulations, and standards lay the foundations for long-term development

2019 saw the development, drafting, and implementation of a slew of favorable policies that will positively affect the cosmetics industry. Cosmetics import tariffs, consumption taxes, and value-added tax rates were lowered several times. Cross-border e-commerce and free trade zones underwent major developments. Regulations and standards were also issued laying the foundations for the stable long-term development of the sector.

• Online shopping, especially live stream shopping, provides an excellent opportunity for cosmetic brands.
  

In the epidemic, many companies choose to turn to e-commerce platforms to sell their products. Among them, the live-streaming platform especially performs well. Recently, over 1000 salesmen/saleswomen from Intime Mall, one of the top shopping malls in China, held more than 1000 live streams in three days and sold over 10 million Yuan valued products ^[8]. And another domestic skincare brand, Forest Cabin, started its first live stream on Valentine’s Day, attracting more than 60,000 audiences and selling more than 400,000 yuan valued products. From Feb 1 to Feb 15, the YoY growth rate of this brand’s overall turnover was 45% ^[9]. The epidemic has further developed consumers’ online shopping habits. Brands can see the magic of the digital economy of these cases and are expected to seize the opportunity.