China Cosmetics Industry

By: Sol Ahn, CFA

Senior Investment Analyst – Consumer Discretionary & Materials

Q1. Why is China beauty an attractive industry ?

Cosmetic is a unique category with discretionary or luxury element as many women are willing to pay a premium for a ‘Chanel lipstick’ for instance, and at the same time it is still a staples category as women and increasingly more men also need to put on it every day. Thus, the category tends to benefit from rising disposable income during good economy and it is also relatively more defensive as a necessity product during the downturn. In fact, many staples categories in China rely largely on price increases or the premiumization trend, but cosmetics can still enjoy both pricing and volume growth because there is still ample room for penetration. China is the largest and fastest growing market in global cosmetics industry. According to Goldman Sachs, China beauty consumption was estimated to be USD 79bn in 2019 including USD 33bn that Chinese spent in overseas countries. It estimated the industry had grown 20% CAGR between in 2016-2019 and forecast industry to grow 11% in the next five years to nearly double the market size from USD 79bn in 2019 to USD 145bn by 2025. We believe this may be possible considering cosmetics consumption volume per capita in China is still one fifth that of Korea and Japan in 20191.  

Q2. What are the key trends within cosmetics industry?

Three key trends we see in beauty industry are digitalization, premiumization and rising local brands. Similar to other consumer categories, online share has increased in beauty industry which accounts for 31% of China’s Business to Consumer (B2C) cosmetics sales. This number is higher for many leading domestic brands. For instance, the majority of Yatsen or Perfect diary’s sales come from online and also Proya which started with offline but has more than half of its sale coming from online channel. We believe more than half of overall cosmetics sales will occur online in the foreseeable future considering COVID-19 has accelerated the pace of digitalization. In fact, online is not only the key channel for sales but also for marketing as livestreaming has become a norm for brands and a communication hub with consumers particularly millennials and gen Z who are the major target consumers for many brands2. 

Premiumization is another continuous trend we see across consumer goods including cosmetics. Prestige segment has grown faster than overall industry and we expect the trend will remain the same in the next few years. Multinationals still dominate prestige segment in China and similar to other luxury categories, western brands take up large shares. In fact, many Japanese and Korean brands have increasingly shifted their focus to premium brands in China. This is not only because prestige segment has been growing faster than overall industry but also due to rising local brands. Local brands have been gaining shares particularly from mass or masstige foreign brands. Yet, we have not seen strong local brands at prestige segment at this moment.     

Q3. Will there be prestige Chinese brands in the future?

We don’t expect to see prestige Chinese brands in the near future because it may need more time for local companies to build such aspirational brands in cosmetics. However, this may actually happen earlier than expected considering strong ‘guochao’ trend. Many young consumers have strong patriotism and are willing to buy local brands. In fact, we have already seen China Li Ning sold very well at a similar price point of Nike and Adidas in sportswear industry. Local companies indeed have been more agile to rapidly changing consumer trend in terms of product development, marketing, and distribution channel. This is why local brands overall continue to gain shares within the whole industry. We expect to see such a trend in China even at prestige segment in cosmetics earlier than other luxury goods as we have experienced in Korea with brands like Sulhwasoo from Amorepacific and Whoo from LG H&H. Meanwhile, local companies have been acquiring western brands to fill up their premium part of the product portfolio and compete with multinationals in the prestige segment. China definitely is an exciting and attractive market with its vast market size and robust growth rate, but it is also a very competitive market. Both foreign and local brands will have to be innovative, agile, and relevant to attract rising Chinese consumers.