Beauty in the East

1. Background: Cosmetic industry has been evolving into full-fledged market in which flourishing brands emerged. Among 300 brands, 20 of them have taken the leading position and joint venture took 80% of market share. The preponderant manufacturers in China are located along the Eastern Costal line and inland cities. It shares 90% as nation while sales value is above 60%. In respect of types, skin-care products is topping the list sharing 35%, hair-care products sharing 28%, make-up products sharing 29%, others being perfumes. According to insiders, total sales will reach to RMB 80 billion and level up at 12.9% annually. Proportion of output of Chinese cosmetics Following decade of years’ development, China has emerged as the eighth cosmetic market in the world and second in Asia. The competition within the sector has been pushing the cosmetic industry into the combination of industrialization, market and internationalization. In 2005, the market scale has reached to RMB 46 billion. Retail sector has been RMB 33.05 billion above the limit growing 19.1%. In 2005, the cosmetic industry featured number of characters as followed: 1. The market is developing in a physically sound way. 2. The cosmetic product for kids and men grow steadfast. The cosmetic has not been the patent of women but children and men as livelihood of mass has been dramatically improved. The fast growth in that area reflected by special store in growth. 3. White collar is major customer for up-scale cosmetics. The expanding middle class has formed the loyal customer basis for this market, especially ladies. Their spending on cosmetic is outgrowing over other areas. From 2004, in the light of lowered tariffs, many Europe brands are flowing into Chinese market. 16 out of 20 top brands have been presented on China’s market. They have got their market flourishing by M&A towards Chinese companies through advantage in capital and technology along with products. The monitoring data over major retail companies showed that the sales by big stores and foreign products especially color cosmetics. The top 10 grabbed majority market are foreign brands.
2. The motives behind cosmetic industry in China. There is great potential in cosmetic market under 9% of economic growth with market capacity expanding at 20% annually. In this backdrop, international famous brands have stepped in China as to stake territory early on. In March 2004, the HQ of Estee Lauder Companies moved to Shanghai from Singapore and the first Asian-Pacific present appeared in China. L’Oreal, the biggest cosmetic group has come to the headline recent as invested USD 0.1 billion and added USD 0.1 billion while engaged in second and third phases of Shang Mei Factory, a production basis in Suzhou. Amway will chip in RMB 50 million to China after amazing profit it achieved in 2003. In addition, NUSKIN has 200 outlets nationwide. China has done what it promised in WTO entry while a favorable environment has been created for foreign participation. After 2006, the tariff was lowered 10% for imported product. Thanks to low cost in export to China, it was not hard to image the big hit against Chinese market. In the age of changing, easy-got money within market get diluted in that more human resources, material and capital have been move in due to fierce competition have drive up the cost. The change in market environment also trim down the success rate of cosmetic companies. In that sense, the room for small and medium size firms has been squeezed out with eroded market. That has offered the golden opportunity for M&A among big companies, which will get frequent in the near future. Case Time Case briefLoreal purchasing Mininurse On Dec. 2003 Mininurse has 280,000 outlets nationwide form 1992, and there have been 1,000 staffs and 2,000 advisories working for it. All of this is in the eye of Loreal. On the other hand, the take-over will make relationship with domestic distributors blossoming drawing in potential employees. SOFTTO purchasing Nanjing Golden Ballet with RMB 40 million Aug, 2004 ] Nanjing Golden Ballet has 70 years of history with famous brand and RMB 0.16 billion of annual sales. Loreal purchasing Yue-Sai Jan, 2004 The reason behind the purchasing case of Loreal is the localization offered by Yue-Sai that has got its outlets in ranked 800 stores within 240 cities as to bring home the image to high-brow female in China. It is what Loreal concerned about. China-Liby purchasing COGI 2006 China-Liby purchasing COGI, a brand in Shanghai is an attempt as what it spearheaded in public goods.
3.Trend of cosmetic industry in China, the personal spending on cosmetic is lower than the industrialized nation which is US$35-70. In that sense, the potential in China’s market is large. With economy expanding and mass livelihood improving, spending power in this product will grow.The golden opportunity is introduced with consumption tax. The new tax policy laid out by the State Administration of Taxation painted a rosy picture for less competitive brands while upscale product was not mentioned in this policy. Especially in rural market, domestic ones stood a bargaining position with foreign ones based on advantage in price. Upon the analysis of Beijing Heading Century Consulting Co., Ltd., this has offered momentum and opportunity for capable domestic companies to develop. With the purpose of staking out more territory and lowering cost in marketing channel, foreign capital will gear in M&A to domestic ones and production line as well so as to push forward a broad portfolio of products. In 20 years to come, the market capacity shot at RMB50 million at least which means more room is there to be scooped out and conducive to development among domestic brand. The outlook in this sector remains clouded though, one thing is certain that domestic companies need to sharpen their edge as facing eroded market eaten out by foreign counterparts.