THIS MATERIAL IS A MARKETING COMMUNICATION.
A Makeover for China’s Cosmetic Industry
The cosmetic industry is consistently trying to adapt products against dynamic and fiercely competitive environments in the hope of capturing that extra edge in market share, similar to that of the fashion industry in the previous article (“Guochao” – The Rise of Homegrown Chinese Labels).
With the rise of e-commerce, there is a drastic improvement in production efficiency, shrinking the inception-to-sale lead time to as short as two weeks in 2019. The short lifespan was exhibited when a popular face mask took China by storm in 2019, and a competitor was able to launch a very similar product in as short as two weeks following the wave of demand for this hot product.
The advantage of an ultra-short product lifecycle strategy translates to a positive Return-on-Investment (ROI) endeavor for companies that are successful in execution. Aided by polished marketing operations, a handful of domestic beauty product companies found a profitable and fast-growing niche in the middle of the premium spectrum. Their products are gradually filling the previous void in supply between the high-end Multi-National Corporation (MNC)/foreign brands and the mass-market domestic brands. Thus, the apparent market share gain in POS sales value terms is the result of organic up-trading.
Premiumization: The Key to the Growth of Domestic Brands
Due to the lack of enduring domestic Chinese brands, the competition among local beauty product companies is much higher than those seen among MNCs. This is especially true in the premium segment, where brand equity grants the highest pricing power. In the premium segment, consumer awareness of brand equity is central to their product choice. Consumers that fall within the premium MNC market category have a stronger sense of brand loyalty, and regardless of whether a competitor delivers an identical product offering, the consumer would generally tend to stick to the original brand.
Premium MNC consumers have attached their consumption decision to the brand itself, and unless the quality of these products drops significantly, the switching cost between brands will remain high. The premium MNC market has high barriers to entry, making it difficult for competitors to close in on market share. The most notable example is Proya’s Ocean Skincare line of products, which essentially mimics that of La Mer’s products. Despite Proya’s marketing and product advantage over its domestic peers, it barely created any material effect on La Mer’s sales.
Domestic brands are agile in their approach in providing mass-market products, being able to replicate products of competitors effectively with speed to deliver demand-driven trends. These companies may find it difficult to penetrate the premium MNC market but remain competitive in the mid-tier space.
Domestic Segment Trend: Consolidation and Premiumization
According to Euromonitor, the beauty product market in China had RMB360bn in aggregate sales in 2017, of which 74% was sales in the mainstream segment. Tencent’s 2019 domestic beauty products report found that domestic producers had 56% of the overall beauty product market share by value in 2018.
As of 2019, color cosmetics sales only account for a tiny proportion of annual sales of Proya and Marubi; this could be a potential growth driver in the future. Despite color cosmetics only comprising of a small portion of sales, Proya has delivered strong color cosmetics growth for 2019. Color cosmetics grew 482% YoY in 2019 and is now 5.3% of 2019 sales, up from 1.2% of sales in 2018. On the other hand, Marubi’s 2019 color cosmetics sales declined 5.8% YoY, accounting for 1.4% of 2019 sales.
With the new era of internet shopping, there is an increasing number of consumers who are moving online to save time and money. From a pricing perspective, consumers are able to compare competitors and check reviews of products, allowing them to make informed decisions on their purchase. In terms of e-commerce as a percentage of the People’s Republic of China (PRC) sales, we can see from Exhibit 1. that Proya, Shanghai Jahwa, and Marubi make up a significant portion of sales, comparable to its global competitors L’Oréal, Estee Lauder and Shiseido.
Domestic Penetration
Chinese domestic cosmetic brands have seen a makeover in the past decade. They have created a presence in the mid-tier range, even though the penetration into the premium MNC market is still relatively low. Companies are increasingly engaging with their consumers and are learning from industry leaders the meaning of value creation for customers. The journey for Chinese domestic players is still growing at a full-speed, whereas they follow leading players and are yet to lead the market to a premiumized MNC level. They are, however, adapting to changes in consumer behavior and successfully tapping into a mid-tier niche.
The question remains in sustainability. Maintaining traction against competitors and consistently innovating products to capture consumer interest will be the barriers most face. In the long-term, we believe if Chinese domestic cosmetic brands strive to reach the iconic success of multi-national cosmetic brands, they will need to be seen as an aspirational and trend-setting leader on a global scale.
Disclaimer & Information for Investors
No distribution, solicitation or advice: This document is provided for information and illustrative purposes and is intended for your use only. It is not a solicitation, offer or recommendation to buy or sell any security or other financial instrument. The information contained in this document has been provided as a general market commentary only and does not constitute any form of regulated financial advice, legal, tax or other regulated service.
The views and information discussed or referred in this document are as of the date of publication. Certain of the statements contained in this document are statements of future expectations and other forward-looking statements. Views, opinions and estimates may change without notice and are based on a number of assumptions which may or may not eventuate or prove to be accurate. Actual results, performance or events may differ materially from those in such statements. In addition, the opinions expressed may differ from those of other Mirae Asset Global Investments’ investment professionals.
Investment involves risk: Past performance is not indicative of future performance. It cannot be guaranteed that the performance of the Fund will generate a return and there may be circumstances where no return is generated or the amount invested is lost. It may not be suitable for persons unfamiliar with the underlying securities or who are unwilling or unable to bear the risk of loss and ownership of such investment. Before making any investment decision, investors should read the Prospectus for details and the risk factors. Investors should ensure they fully understand the risks associated with the Fund and should also consider their own investment objective and risk tolerance level. Investors are advised to seek independent professional advice before making any investment.
Sources: Information and opinions presented in this document have been obtained or derived from sources which in the opinion of Mirae Asset Global Investments (“MAGI”) are reliable, but we make no representation as to their accuracy or completeness. We accept no liability for a loss arising from the use of this document.
Products, services and information may not be available in your jurisdiction and may be offered by affiliates, subsidiaries and/or distributors of MAGI as stipulated by local laws and regulations. Please consult with your professional adviser for further information on the availability of products and services within your jurisdiction. This document is issued by Mirae Asset Global Investments (HK) Limited and has not been reviewed by the Securities and Futures Commission.
Information for EU investors pursuant to Regulation (EU) 2019/1156: This document is a marketing communication and is intended for Professional Investors only. A Prospectus is available for the Mirae Asset Global Discovery Fund (the “Company”) a société d'investissement à capital variable (SICAV) domiciled in Luxembourg structured as an umbrella with a number of sub-funds. Key Investor Information Documents (“KI(I)Ds”) are available for each share class of each of the sub-funds of the Company.
The Company’s Prospectus and the KI(I)Ds can be obtained from www.am.miraeasset.eu/fund-literature . The Prospectus is available in English, French, German, and Danish, while the KI(I)Ds are available in one of the official languages of each of the EU Member States into which each sub-fund has been notified for marketing under the Directive 2009/65/EC (the “UCITS Directive”). Please refer to the Prospectus and the KI(I)D before making any final investment decisions.
A summary of investor rights is available in English from www.am.miraeasset.eu/investor-rights-summary/.
The sub-funds of the Company are currently notified for marketing into a number of EU Member States under the UCITS Directive. FundRock Management Company can terminate such notifications for any share class and/or sub-fund of the Company at any time using the process contained in Article 93a of the UCITS Directive.
Hong Kong: It is intended is for Hong Kong investors. Before making any investment decision to invest in the Fund, Investors should read the Fund’s Prospectus and the information for Hong Kong investors (of applicable) of the Fund for details and the risk factors. The individual and Mirae Asset Global Investments (Hong Kong) Limited may hold the individual securities mentioned. This document is issued by Mirae Asset Global Investments (HK) Limited and has not been reviewed by the Securities and Futures Commission.
Singapore: It is not intended for general public distribution. The investment is designed for Institutional investors and/or Accredited Investors as defined under the Securities and Futures Act of Singapore. This document is issued by Mirae Asset Global Investments (HK) Limited and has not been reviewed by the Monetary Authority of Singapore. Please consult with your professional adviser for further information on the availability of products and services within your jurisdiction.
Australia: The information contained in this document is provided by Mirae Asset Global Investments (HK) Limited (“MAGIHK”), which is exempted from the requirement to hold an Australian financial services license under the Corporations Act 2001 (Cth) (Corporations Act) pursuant to ASIC Class Order 03/1103 (Class Order) in respect of the financial services it provides to wholesale clients (as defined in the Corporations Act) in Australia. MAGIHK is regulated by the Securities and Futures Commission of Hong Kong under Hong Kong laws, which differ from Australian laws. Pursuant to the Class Order, this document and any information regarding MAGIHK and its products is strictly provided to and intended for Australian wholesale clients only. The contents of this document is prepared by Mirae Asset Global Investments (HK) Limited and has not been reviewed by the Australian Investments & Securities Commission.
Swiss investors: This document is intended for Professional Investors only. This is an advertising document. The Swiss Representative is 1741 Fund Solutions AG, Burggraben 16, CH-9000 St. Gallen. The Swiss Paying Agent is Tellco AG, Bahnhofstrasse 4, CH-6431 Schwyz. The Prospectus and the Supplements of the Funds, the KI(I)Ds, the Memorandum and Articles of Association as well as the annual and interim reports of the Company are available free of charge from the Swiss Representative.
UK investors: This document is intended for Professional Investors only. The Company is a Luxembourg registered UCITS, recognised in the UK under section 264 of the Financial Services and Markets Act 2000. Compensation from the UK Financial Services Compensation Scheme will not be available in respect of the Fund. The taxation position affecting UK investors is outlined in the Prospectus. This document has been approved for issue in the United Kingdom by Mirae Asset Global Investments (UK) Ltd, a company incorporated in England & Wales with registered number 06044802, and having its registered office at 4th Floor, 4-6 Royal Exchange Buildings, London EC3V 3NL, United Kingdom. Mirae Asset Global Investments (UK) Ltd. is authorised and regulated by the Financial Conduct Authority with firm reference number 467535.
Copyright 2024. All rights reserved. No part of this document may be reproduced in any form, or referred to in any other publication, without express written permission of Mirae Asset Global Investments (Hong Kong) Limited.