Navigating the China Cosmetics Landscape—An Expert Dialogue on Regulatory Data, Market Dynamics, and Corporate Growth Strategies

According to iiMedia Research, China's cosmetics industry is poised to reach a market size of approximately 516.90 billion yuan in 2023, with a year-on-year growth of 6.4%, and will further expand to 579.10 billion yuan by 2025, signaling a positive outlook.

Looking at the competitive landscape of the market, in recent years, domestic cosmetics brands in China have rapidly gained traction by adopting the "China Chic" approach, devoting to research and development, and offering competitively priced products. This has led to increased competition with international brands and a gradual erosion of their market share, as evidenced by declining cosmetics imports. Furthermore, Chinese cosmetics consumers are displaying more rational purchasing behavior, especially in the post-COVID period. For international brands, the endeavor to effectively attract consumers has become increasingly arduous.

Given these challenging circumstances, it is crucial for enterprises to strategically position themselves for the future, identifying opportunities to secure market share and foster growth. To seek valuable insights and potential development strategies, ChemLinked conducted an interview with Ms. Jiangying Yan, Chairwoman of the China Association of Fragrance Flavour and Cosmetic Industries (CAFFCI). During the interview, Ms. Yan shared her expert perspectives on the Chinese cosmetics industry, analyzing the landscape of cosmetics registration and notification following the implementation of China's Cosmetic Supervision and Administration Regulation (CSAR) and its subsidiary regulations since 2021. She also assessed the overall performance of the cosmetics market and discussed potential development directions for industry players.

1. Insights on China's Cosmetic Registration and Notification Data

Q1: Since the implementation of the Cosmetic Supervision and Administration Regulation (CSAR) in 2021, along with a series of subsidiary regulations subsequently issued, a period of time has passed under the new cosmetics regulatory framework. What is the overall status of cosmetics registration and notification under these updated regulations?

Although some enterprises have ceased the sales of some registered and notified cosmetics and are awaiting NMPA’s clearance, the overall number of registrations and notifications remains notably high. However, the high quantity does not necessarily indicate the increase in product quality. The extensive volume of registrations and notifications also imposes significant regulatory pressure on the government and poses challenges to the product innovation of enterprises.

Q2: What are the characteristics of special cosmetics registration? What aspects should enterprises pay attention to?

A2: The characteristics of special cosmetics registration can be examined from three perspectives: registration quantity, product categories, and disapproval rate.

In terms of registration quantity, there has been a downward trend in the registration of special cosmetics from 2021 to 2023. When analyzing specific categories, sunscreens rank as the most registered category among imported special cosmetics, while hair dyes take the lead among Chinese domestic special cosmetics.

The disapproval rate deserves enterprises' careful attention. 2022 saw a significant increase of disapproval rate compared to 2021. In 2021, the disapproval rates of Chinese domestic special cosmetics and imported special cosmetics were 3.77% and 3.73%, respectively. However, in 2022, the disapproval rate of Chinese domestic special cosmetics rose to 16.70%, and the disapproval rate of imported special cosmetic surged to 31.76%, a particularly notable increase.

To improve the pass rate, I advise that cosmetics manufacturing and operating enterprises prioritize the fundamental requirements for cosmetics registration and notification. They should diligently adhere to the new regulations and thoroughly prepare application documents in accordance with the specified requirements.

Q3: Which product efficacies have gained popularity in cosmetics notification in recent years? What market trends do they reflect?

A3: By analyzing the changes in notification numbers between 2021 and 2022, we can identify some market trends. The categories with the highest notification numbers during the period included skincare, cleansing, and makeup. This indicates that the cosmetics market demand remains focused on essential skin care products.

In 2022, the efficacies with the highest notification numbers included moisturizing, beautifying and embellishing, cleansing, perfuming, and hair care. Notably, moisturizing products accounted for 47.3% of the total notifications, surpassing all other efficacies.

Comparing the data to 2021, there was an increased interest among enterprises in notifying beautifying and embellishing, perfuming, and hair care products, while the interest for notifying products with anti-acne and nourishing efficacies decreased.

Q4: Over the past two years, there has been a notable increase in market attention towards biotech ingredients, such as ergothioneine. Is there a similar trend in the notification data of new cosmetic ingredients (NCIs) as well? What are your thoughts on the growing popularity of biotech ingredients?

A4: Among the 97 NCIs that have been notified as of November 14, 2023, 20 of them are biotech ingredients, obtaining the second position in the ranking.

This surge in popularity can be attributed to the implementation of new regulations by the NMPA. These regulations introduced a risk-based classification system for NCIs, which distinguishes high-risk from low-risk ingredients. High-risk NCIs require registration with the NMPA, while low-risk NCIs only require notification, allowing enterprises to manufacture and import them after completing the online dossier submission.

This streamlined market entry process for NCIs has shortened the market cycle, enabling enterprises to efficiently explore a wider range of NCIs with potential application value. Moreover, it has addressed long-standing challenges associated with the arduous and time-consuming approval process for NCIs. However, it remains imperative for notifiers to uphold the utmost standards of safety, quality, and efficacy for the notified NCIs throughout the three-year monitoring period.

2. Analysis of Market Dynamics and Corporate Growth Strategies

Q5: It is reported that there is a noticeable decline in cosmetic imports to China. Can you provide further explanation about this phenomenon and its implications?

A5: In 2022, among the imported cosmetic categories in China, only two categories "perfumes & toilet waters" and "pre-shave, shaving or after-shave prep." witnessed growth, while the rest experienced negative growth with eight categories recorded double-digit declines. In contrast, cosmetic exports continued to improve, with 13 out of 15 categories achieving double-digit growth.

This shift is crucial for understanding the development of China's cosmetic industry. Before 2021, China's cosmetic industry had a trade deficit, with import prices significantly higher than export prices. This reflected a less advantageous position of Chinese domestic brands against international counterparts. Yet, recent years have seen a decrease in cosmetic imports with an increase in cosmetic exports. This underscores the rise of Chinese domestic brands, winning favor among consumers with differentiation, efficacy, and safety.

This trend can motivate global cosmetic brands to modify market strategies to secure market share and foster growth in the Chinese market.

Q6: As you mentioned, Chinese domestic brands have seen a notable surge in the cosmetics market, marked by an increased market share and an expanded consumer base. What has led this rise?

A6: Successful Chinese domestic brands exhibit two essential traits: a well-defined market positioning and the compelling scientific research endorsements. Major Chinese cosmetic enterprises are placing an increasing emphasis on differentiation, which is crucial in the fiercely competitive Chinese cosmetic landscape. To catch up and surpass global counterparts, local brands not only positively embrace head-on competition but also explore new avenues with distinctive Chinese characteristics to establish their own advantages and barriers. Opportunities arise when brands can secure consumer recognition for their distinctive positioning.

Equally significant is Chinese cosmetic enterprises' growing emphasis on R&D. They are accelerating the development of exclusive ingredients and technologies, which are pivotal for developing flagship products. Leading listed Chinese cosmetic enterprises, such as Bloomage Biotech, Botanee, Proya, etc., have shown an upward trend in R&D expenses. For instance, Bloomage Biotech’s R&D expenses rose from 284 million yuan in 2021 to 388 million yuan in 2022, accounting for 6.1% of its revenue. In the Q3 2023, the proportion further increased to 6.56%.

Furthermore, the thriving capital market has also fueled the development of the Chinese cosmetic industry. Since 2015, the investment and financing activities in the Chinese cosmetic industry saw an upward trajectory, and reached a peak in 2021. This prosperity has served as one of the driving forces behind the growth of Chinese cosmetic enterprises.

Looking ahead, exclusive ingredients and technologies, as well as differentiated positioning are expected to become competitive barriers for cosmetic enterprises, shaping a long-term trend in the entire Chinese cosmetic industry.

Q7: Previously, many cosmetic enterprises focused heavily on marketing. Today, both domestic and international enterprises are increasing their investments in R&D. What has led to this shift? What measures are these enterprises taking?

A7: The rapid development of the Internet has provided consumers with more convenient ways to access information, fostering consumers' more specialized understanding of products including their ingredients and effects. This prevailing trend has prompted cosmetic enterprises to redirect their focus on R&D in areas such as ingredients, formulations, and technologies. Strengthening scientific capabilities allows enterprises to deliver scientifically effective products, reinforcing their professional brand image and earning consumer's trust. Moreover, in response to the ever-diversifying demands of consumers, cosmetic enterprises must continually adapt through ongoing R&D and innovation.

Currently, Chinese cosmetic enterprises' R&D strategies primarily revolve around ingredient development and technological innovation, with a particular emphasis on areas like microbial fermentation and synthetic biotechnology. They are embracing multidisciplinary integration and collaborations with universities/laboratories in terms of their R&D initiatives. In addition, leading enterprises are strategically recruiting seasoned R&D professionals with backgrounds in renowned international corporations, or inviting technical experts from fields such as biomedicine to elevate their technological capabilities.

Q8: How do you perceive the changes in the attitudes of Chinese cosmetic consumers in recent years?

A8: In recent years, Chinese cosmetic consumers have shown a notable shift in attitudes. Firstly, as I mentioned before, the convenience of the information age has empowered consumers with a deeper understanding of products, making them less susceptible by traditional advertising and more discerning in their purchasing decisions. Simultaneously, driven by the self-gratification lifestyle, consumers are placing significant importance on consumption experiences and the emotional value derived from products and services. Moreover, consumer demands have become more diversified, shifting from "a single need" to multidimensional demands with requirements for scenarios, refinement, and customization.

China Chic is also a noteworthy trend. Nowadays consumers have an increasing affinity for Chinese traditional culture and Eastern aesthetics. Consequently, their focus is expanding beyond international renowned brands to include cosmetic brands with distinctive Chinese characteristics. This shift is particularly noticeable among the younger generation.

Besides, it is worth noting that the pandemic has prompted consumers to adopt a more rational approach, prioritizing the cost-effectiveness of products and minimizing impulsive buying.

Today, people are living in an era where the market trends and consumer preferences are constantly evolving. Yet the pursuit of beauty remains unchanged. Enterprises should stay attuned to these changes and provide more targeted products and services.

Q9: There is a strong momentum of content e-commerce platforms represented by Douyin. Is this evolving into a channel that cosmetic enterprises should strategically focus on in the future? What other channels do you suggest for enterprises to keep a close eye on?

A9: Undoubtedly, online consumption has witnessed significant growth in recent years. This surge is a result of China’s entry into a new consumption era where combines virtuality and reality, and emphasizes the significance of social connections, diversity, individuality, and spiritual pursuits. The operators of content e-commerce platforms usually have a precise understanding of consumer psychology, based on which they leverage short videos and livestreaming to attract consumers. However, it's crucial to recognize that traffic algorithms can also constrain the independent development of brands. Additionally, as online traffic gradually peaks, the cost of acquiring traffic becomes higher, and the substantial sales generated by livestreaming do not necessarily guarantee profitability.

At present, offline sales still hold a greater market share than online. In 2022, the combined market share of three major offline cosmetic channels—department stores, supermarkets, and specialty stores—reached 51.3%. Offline channels play a pivotal role in providing customers with professional services and conveying brand concepts, which are essential for enhancing consumer recognition and loyalty. Therefore, it is recommended that cosmetic brands focus on integrating online and offline channels, enhancing t he overall channel operation capabilities, and achieving a synergy where online activities drive offline engagement and vice versa.

Q10: Sustainable beauty has emerged as a prominent trend, with more enterprises actively engaging in the sustainable beauty cause. The CAFFCI has made significant commitments to sustainable practices in the Chinese cosmetics industry. Could you share some initiatives undertaken by CAFFCI to guide enterprises on the path of sustainable development?

A10: In response to global trends, national policies, and industry demands, the CAFFCI has established an ESG Special Committee. This committee is designed to assist enterprises in thoroughly understanding sustainable development principles and translating these concepts into tangible actions. During the 2023 Annual Meeting & High-quality Development Summit of CAFFCI, CAFFCI organized the 2023 ESG Forum, unveiled the outstanding ESG cases, and initiated the formulation of ESG-related standards. In the future, CAFFCI will further collaborate extensively with experts, scholars, sustainable development organizations, and enterprises to provide more targeted guidance for promoting the healthy, stable, and sustainable development of China's fragrance and cosmetic industry.