China Cosmetic Market
 
Introduction
China's present system maintains few statistics on private businesses. Given that about 95% of cosmetic companies in China are owned by private and foreign companies, there are almost no official figures available on the beauty-related industry in terms of production, sales or service. Therefore, it has been extremely difficult to gather reliable statistical data for this industry. For example, most press articles estimated the current market size at RMB40 to 45 billion, while many industrial leaders believe that this figure should range from RMB60 to 80 billion. Under such circumstances, this report is largely based on information obtained through research, meetings, interviews, and press reports. Although this report includes statistics of the industry's entire product categories, namely skin care, hair care, color cosmetics, fragrances, and personal care (bath and shower, men's grooming products, and oral hygiene), it primarily focuses on the subsectors of skin care, hair care, color cosmetics, and other beauty-related devices or products.
Summary
China is now the eighth largest cosmetic producer in the world. Its cosmetic market has grown tremendously from annual sales of RMB200 million in 1982 to approximately RMB45 billion in 2002. With China's rapid economic development, this market is expected to expand at an annual rate of about 10% with sales reaching RMB80 billion by 2010. There are 3,500-4,000 manufacturers competing fiercely in this market. 600-700 of them are foreign invested enterprises with major players from the United States, France, Germany, Japan, and Korea. These foreign companies have captured about 80% of market share while some 3,000 local companies are sharing the remaining 20% but trying to compete for greater shares. After China's accession to the WTO in 2001, an increasing number of international players are expected to enter the China market. Competition will be further intensified among foreign and domestic companies.
Despite its fast growth, China cosmetic market is still at a very low level of development and is far from saturation. With potentially the largest customer base in the world and currently a low level of per capita spending of only $4 on cosmetics, China provides tremendous business opportunities for foreign cosmetic producers. Such opportunities mainly exist in the areas of imported or localized cosmetic ingredients; effective, safe or health-oriented cosmetics made from natural, green, herb-based ingredients; instruments, devices or products for body beauty centers, beauty clinics and salons; functional and low-end hair care products for specific consumer groups. Although China cosmetic market has become highly competitive, there is still plenty of potential for new entrants, provided that they adopt appropriate market entry strategies, find right manufacturing or distribution partners, use effective marketing strategies, and make suitable products for various customer groups at reasonable price points.
 
A. Market Situation and Development Trends
a. Market Highlights
a.1 China Market Still Has a Vast Potential Despite its Past Enormous Growth
China cosmetic market has been expanding rapidly over the past 20 years. In 1982, the total market was only about RMB200 million. By 2001, this figure went up to approximately RMB40 billion, a growth of 200 times from 1982 (see table 1-2). As per market forecast, China's gross annual sales of cosmetics are projected to climb to RMB60 billion by 2006 and RMB80 billion by 2010. Despite significant growth over the last two decades, China cosmetic consumption is still far from saturation and the country is expected to remain a dynamic market. This is based on the following factors: 1) With a population of 1.3 billion comprising of 480 million urban residents, China has the largest number of potential cosmetic customers in the world. 2) As a result of China's ongoing 7-8% high rate of economic growth, living conditions will continue to improve, enabling an increasing number of people to join the cosmetic consumption force. 3) China's commitment to opening up its market in compliance with the WTO rules will further stimulate its cosmetic market with more participation of international and domestic players.

Note: The statistics contained in this table only cover retail sales of the following six product categories but do not include those sales to the beauty salons and barber shops:
1) Hair Care (2-in-1, shampoos, conditioners, colorants, and styling agents)
2) Skin Care (Facial, body, hand, and sun care)
3) Color Cosmetics (Lipsticks, facial powder, eye shadow, nail polishes)
4) Personal Care (Baby care, bath & shower, deodorants, shaving/grooming)
5) Oral Hygiene (Toothpaste, toothbrushes, mouth wash, mouth fresher, dental floss)
6) Fragrance (Mass and premium)
Source: China Cosmetics Review (1985-2001), press reports, and interviews
 
a.2 Foreign Brands Continue to Dominate in the Chinese Market
At present, there are 3,500-4,000 cosmetics manufacturers in China. Among them, some 3,000 are small to medium-sized local private enterprises; a small number of them are relatively larger state-run companies; the remaining 600-700 are foreign-invested enterprises. Over the past two decades, these foreign companies have been successful in making their brands well-known in China, allowing them to achieve about 80% of the total market share. Although several large Chinese state-owned cosmetic companies are trying to catch up in their brand building campaigns, foreign companies still own most of the well-recognized brands in China. These brands include those of P&G, Unilever, Avon, L'Oreal, Amway, Kao, Henkel, Shiseido, Mary Kay, Kose, LVMH, Wella, Revlon, Chanel SA, Johnson & Johnson, Nivea, Yue-Sai - Coty, Beiersdorf AG, Estee Lauder, etc. Many of those brands are popular in China because of: 1) their financial strength enabling them to build their brand names; 2) their ability to understand the China market well enough through market research; 3) their effective market strategies for product promotion; 4) their strong capability of product research and development.
a.3 Production Concentrates in South and East China
According to interviews with government officials and industry leaders, China's's cosmetic production is mostly concentrated in three major production bases. 1) There are about 1,500 cosmetic manufacturers in the Pearl River Delta region covering Gaungzhou, Shenzhen, and Zhuhai. 2) There are about 400 manufacturers in the Shantou and Chaoyang regions, Guangdong province that are among the first in China to develop the cosmetic industry. 3) There are a number of producers in eastern China with a concentration in Yiwu city of Zhejiang province, Shanghai, and followed by Suzhou, Hangzhou, and Nanjing. In addition, several key producers are scattered in Beijing, Tianjin, Wuhan, and Chongqing.
a.4 Cosmetics Imports Climbed as China Gradually Lowered Import Tariffs
China's imports of cosmetics rose 160% from 1996 to 2001 (See Table 2 and Table 3) as the country reduced import tariffs in order to join the WTO. Of $194 million worth of cosmetics imported during that period, color cosmetics and skin care products accounted for 47%, followed by 23% in bath and shower, and 22% in hair care products. The largest suppliers of these products came from the United States representing 25% of total imports. Other major suppliers by ranking order included France, Japan, Hong Kong, and Taiwan. As a result of China's entry into the WTO in 2001, China's imports of cosmetics are expected to grow at the annual rate of about 10% in the next several years. As many foreign companies realize the difficulties in developing a market through mere imports, they often adopt alternative approaches by localizing their production and taking advantage of low production costs in China.
Table 2 China's  Import and Export Value of Cosmetics (1996-2001)

 Unit: US$ mn

Source: Beijing Hua Tong Ren Market Information Co. Ltd.
Table 3 China's Cosmetics Import by Region (1996-2000)

Source: Beijing Hua Tong Ren Market Information Co, Ltd.
 
b. Market Development Trends
b.1 Ingredients Needed for the Industry Largely Depend on Imports
Due to its short history and lack of technologies and expertise in ingredient manufacturing, China has not been able to produce enough qualified ingredients for its growing industry needs and has had to import most of its cosmetic ingredients over the past 20 years. Although there is no official statistics on annual import value, interviews with a number of industry professionals showed that 70-80% of cosmetics ingredients depend on imports. These ingredients are mainly imported from Japan, Southeast Asian countries such as Indonesia and Malaysia, the United Sates, Australia, and European countries like Germany, France, Italy, Spain, and Switzerland. Because of consumers' growing concerns over product safety, producers are showing more and more interest in natural and green ingredients such as those from marine resources, plants, or medicinal herbs. Other ingredients developed through new technological methods such as microbiology, bio-engineering, and space technology are also well received.
b.2 Instruments & Products for Beauty Services Appear Promising
At present, there are approximately 1.6 million beauty salons and barbershops in China. During 1980s-1990s, most cosmetic consumers focused their attention on facial and hair care due to spending constraints. As more and more Chinese have been getting better off, they began to attach importance to overall health care, body care, and appearance. Hence, there emerged a growing number of new beauty service providers in recent years in coastal provinces. These providers, comprised of body beauty centers, health centers, beauty clinics, and specialty beauty salons, offer customers with diversified beauty care for body, leg, hand, feet, nails, eyes, nose, teeth, and breast, as well as beauty educational programs. This market appears promising for a wide range of equipment and products, including those for body sliming, fat removing, weight reducing, skin rejuvenating or revitalizing, hair removing, hair growing, breast configuring, nail polishing, body building, fit keeping, anti-aging, wrinkle removing, teeth cleaning and whitening, scar/fleck dispelling, spa, etc. Although no statistics are available, press reports estimated this potential market size at RMB100-200 billion. For example, China now has a population of 70 million over-weight people. Sales of weight loss dietary supplements alone were projected at RMB6 billion in 2002.
b.3 Skin Care Products Remain the Fastest Growing Segment in the Cosmetic Market
Annual sales of skin care products in China in 2001 were valued at RMB11 billion, accounting for about 27% of total cosmetic sales. With high annual growth rate of 13% over the last 5 years, it is forecast that the skin care sector will continue to rise 13 % annually during 2002 - 2006, achieving annual sales of about RMB20 billion in 2006. Products for age defying, moisturizing, cleansing, whitening, acne/fleck dispelling, and sun care will continue to be the main stream of consumption in the China market. As China implements one-child policy, especially in urban areas, Chinese parents are willing to spend as much as they can on baby care products. Consequently, baby care segment, with the present annual sales of over RMB800 million, will see a steady yearly increase of over 10% in the next several years.
b.4 Green and Natural Cosmetics Are Increasingly Favored by Consumers
While the Chinese cosmetic market is headed to a maturing stage, some product safety problems occurred in recent years. As a result of press reports on a rising number of incidents harmful or allergic to skin combined with the sudden outbreak of mad cow disease, Chinese consumers began to question the safety of cosmetics use. Through analysis and education, many Chinese consumers have come to realize that it is much more important to consider safety rather than beauty when using cosmetics. Hence, they are paying more attention to health-friendly, safe, and effective cosmetics. Those products processed from natural and green ingredients containing no preservatives, and no or least harmful chemicals are getting more popular in the Chinese market. Since Chinese consumers tend to believe in traditional Chinese herbal medicine, cosmetics using natural herbs appear to be appealing to many users.
b.5 Color Cosmetics still Maintain Dynamic Growth
Unlike skin and hair-care products, color cosmetics in China are still at its growing stage. During the 1980s and early 1990s, many Chinese consumers mainly spent on skin and hair-care products rather than make-ups due to their low disposable income. After about 10 years of economic development, market for color cosmetics has changed considerably. For example, lipsticks sales rank first in all make-ups; facial powder comes second, followed by eye shadow, nail polishes, etc. Experts estimate that color cosmetics will enjoy good market potential in the future because of the following: 1) China's color cosmetics market is still far from mature due to its short history. 2) Many consumers have not yet exposed themselves to such products to date. For example, it was only several years ago that more Chinese customers began to show interest in eye shadow and nail polishes. 3) With rising income and growing public awareness of how to use these products through education and advertising, there should be an increasing number of consumers using such products. Color cosmetics sales are projected to go up at an average rate of about 10% from 2002 to 2006, with annual sales of RMB5.2 billion by 2006.
b.6 Hair-Care Products Show Sign of Saturation and Face Stiff Competition
Compared with other cosmetics products, hair-care products have enjoyed the longest history of all in China. They have undergone three major stages, from emerging and growing to the present maturing stage. There are now about 2,000 hair-care product manufacturers (including over 200 hair-colorant producers) competing in this market. Although gross sales are projected to increase by an annual rate of 7% in the next five years from RMB10.5 billion in 2001 to 15 billion in 2006, industrial experts believe that the hair-care market has already been saturated and consumption will slow down in large and medium-sized cities. However, new products like functional products, e.g., anti-hair loss and hair growth promoter, may still find potential market. Furthermore, as a large percentage of 800 million rural people have not been exposed to hair-care products, there should be a vast market potential for hair-care product manufacturers that are able to develop affordable, low-priced products for this particular group of consumers.
B. Competitive Situation
B.1 Major Competition among Foreign Companies
American companies are among the largest suppliers in the Chinese cosmetic market. Although large U.S. multinational players like P&G, Amway, Avon, Mary Kay, and Revlon are doing well in China, they are facing increasing competition from a number of international players. These players are mostly from France, Germany, Switzerland, Japan, Korea, etc. Many of those players have been operating successfully in the China market. For example, Japanese products such as Aupres have been gaining nation-wide popularity despite their high prices. Their successes are chiefly attributed to: 1) Products designed and claimed to be more appropriate for friendly and better skin-care of people with yellow skin tone: 2) Familiarity with the Chinese system, culture, and business practices; 3) Better research and understanding of Chinese market. On the whole, the main competitive advantages of international competitors include their strong financial capability, extensive experience in brand management, strength in product research and development, advanced marketing strategies, and long-term commitment to the China market. In order to effectively compete in this lucrative market, more and more competitors are using market entry strategies of localized production, acquisition, and establishment of their own specialty stores and chain beauty salons. Heavy advertising is another important means they often use to expand their market shares.
B.2 Local Chinese Companies are Becoming More Competitive
As China's cosmetic market continues to expand, hundreds of domestic cosmetic makers have sprung up over the last decade and a number of them have become fast-growing companies. Examples of those companies include Beijing San Lu, Shanghai Jiahwa, Arche Group, Raystar, Samrana, Guangdong Aikai, Youngrace, Haodi, La Fong, etc. Presently, most of those companies are privately owned and produce low-end products with only a few making high-end products that can match their foreign counterparts. Although they are generally regarded as a little stronger in hair-care and skin-care categories, they are still facing many drawbacks in gaining competitive advantage over large multinational players. These drawbacks include weak financial ability, unequal status with state-run enterprises, lack of research and development capability, and lack of experience in brand management and marketing. Nevertheless, foreign cosmetic professionals still consider them potential threats because: 1) Chinese companies adjust themselves faster to market changes than many publicly-owned foreign enterprises; 2) Chinese private companies are expected to develop faster as China's  new policy allows them to gain access to bank loans and stock markets for business expansion; 3) Chinese companies are able to compete more effectively because they enjoy local advantages such as familiarity with Chinese laws and system, business environment, culture, and market.
B.3 Major Cosmetic Players by Product Sectors
Based on our research and interviews, the following list gives an overview of top 10 cosmetic players with their brands by product sectors:
Skin Care Products
Procter & Gamble (Olay, SK-II)
Avon (Anew, Solutions, Cleanwhite, Basics, Avon Entry, Cleansing Foam, Moisture

Unilever Group (Pond's, Vaseline)
Beijing San Lu Factory (Dabao)
Alticor Inc. (Amway)
Shiseido Co. Ltd. (Aupres)
Shanghai Jahwa Co. Ltd. (Maxam)
Raystar Cosmetics Shenzhen Co. (Mininurse)
Coty Inc. (Yue-sai)
Beiersdorf AG (Nivea)

Color Cosmetics
L'Oreal Groupe (Gemey, Maybelline, Jade/ Perfection)
Avon (Avon Color, Color Trend, Pop Top, Pop Love, FMG, Signature, Beyond Color)
Coty Inc. (Yue-sai)
Shiseido Co. Ltd. (Aupres)
Revlon Inc. (Revlon)
Mary Kay Inc. (Mary Kay)
Kose Corp. (Kose)
Alticor Inc. (Amway)
Cheng Ming Ming Cosmetics Co. (Cheng Ming Ming)
Shanghai Jahwa Co. ltd. (CHINF&CHINF, Maxam)
 
Hair Care Products
Procter & Gamble (Rejoice, Pantene Pro-V, Ascend, Head & Shoulders/Vidal Sassoon)
Unilever Group (Hazeline, Lux)
C-Bons Group (Slek, Maestro)
Kao Corp. (Sifone, Feather)
Alticor Inc. (Amway)
Chongqing Olive Cosmetics Co. Ltd. (Olive)
Wella AG (Wella)
Arche Group Co. Ltd. (Arche)
L'Oreal Groupe (Elsve, Elvive)
Guangdong Aikai Industrial Group Co. (Aikai)
 
Fragrance
LVMH Moet Hennessy Louis Vuitton (Ms. Dior, Amarige, Kenzo Parfum D'Ete,

Avon (Naturals, Women of Earth, Little Black Dress, Rare Gold, Aromatherapy,

Chanel SA (Chanel, Coco Chanel)
Coty Inc. (Yue-sai, Adidas)
Wella AG (Gucci Envy, Gucci Rush, Gucci Nobile)
L'Oreal Groupe (Dunhill, Polo)
Elizabeth Arden ((Red Door, Blue Grass)
Shiseido Co. Ltd. (Shiseido)
Beijing San Lu Factory (Dabao)
Gillette Co. (Gillette)
 
C. End-User Analysis
C.1 Urban Residents of Large and Mid-Sized Cities Remain Most Active Consumers
As per China's  2001 statistics, there are a total of 662 cities in China, of which 625 have a population exceeding 200,000.  Also, of 1.28 billion people in China, 800 million are rural residents while 480 million are urban. In 2001, these urban residents earned three times more than that of rural people who received an average of only RMB2,366. Presently, China's 40 billion worth of cosmetic products are mostly considered luxuries to rural residents due to their low disposable income. But such products are becoming widely used in urban areas, particularly in large and mid-sized cities. Among those cities, Shanghai, Nanjing, and Hangzhou in eastern China; Beijing, Tianjin, and Dalian in northern and northeastern China; Shenzhen and Guangzhou in southern China; and Chongqing, Chengdu, and Xi'An in western China are generally considered the leading cities for China's cosmetic market. Other significant markets range from provincial capital cities, mid and small cities in coastal provinces, to inland provincial capital cities. As the disposable income of urban residents continues to outpace that of rural population, urban consumers in large and mid-sized cities will continue to maintain the most dynamic consumption force of China's cosmetics market for the foreseeable future.
 C.2 Growing Number of Potential Consumers from Underdeveloped Regions
Over the past 20 years, cosmetics consumption has mainly concentrated in big and medium-sized cities. As a result, the cosmetics industry has not paid enough attention to market development in underdeveloped small cities and towns at or under the county levels. China has 2053 counties and a huge number of towns at the township levels. As many coastal towns have already become relatively wealthy and an increasing number of towns in less developed regions are getting better off, there will be a large number of potential customers from small cities and towns in undeveloped regions joining the cosmetic consuming groups. This development trend is attributed to the following: 1) China's new Initiative of Great Western Development will contribute to narrowing the gap between coastal and less developed western regions; 2) The new policy adopted by the 16^th Party Congress to expedite urbanization is expected to lead to a rising number of urban population.
C.3 Expansion of Middle Class Will Play Important Roles in Consumption Growth
Among skin care, hair care, color cosmetics, and fragrances, hair care products are most commonly used by the majority of China's 480 million urban residents. However, no figures are available for the number of consumers in China for overall cosmetic products. A sample market survey conducted in 30 major Chinese cities showed that 37% of interviewees used color cosmetics. Another survey done in Beijing, Shanghai, and Guangzhou showed that 61-87% of females in these three cities use skin care products. As per beauty industrial professionals, the number of active Chinese cosmetic consumers (not including hair care products) are projected to range from 100 to 130 million. As China's new policy calls for expansion of the middle class, 200 million people are expected to join the middle class in the next five years based on the forecast by Chinese scholars. These groups of customers are generally well-educated and holding white-collar positions. Many of them were born during the 1970s?980s; they are the new generation reaping the benefits of China's open-door and reform policy introduced in the early 1980s. This rising middle class is becoming one of the most active consumer groups for cosmetics in the next 10-20 years.
D. Market Access
D.1 China Continues to Reduce Import Tariffs in Compliance with WTO Requirements
Before 1997, China's import duties for cosmetics were over 55% in addition to a 17% value added tax (VAT) and a 30% of consumption tax (CT). As China tried to join the WTO, import tariffs have been gradually lowered to the current levels of 15-22%, plus 17 % VAT and 8% CT for skin care products, and 30% CT for color cosmetics (see most recent import tariffs table below). It is expected that China will further reduce import duties on cosmetics to about 10% by 2005.

Source: Customs Import and Export Tariff of P.R. China
 
 D.2 Three Major Procedures for Product Certification in China
 The Chinese laws require that all cosmetic products must complete the following certification procedures before they are allowed to sell in the China market.
Safety and Health Quality Tests

Certificate for Imported Cosmetics

1. Samples of declared product;
2. Formula of declared product;
3. Flow chart of production process for declared product;
4. Quality standard of declared product;
5. Authorization letter from exporter (when using agent for registration);
6. Exporter's local sales permit for declared product;
7. Quarantine Certificate from exporter's government agency (BSE infected countries and territories only);
8. User's guide and usage warning for declared products.

1. Samples of declared products with intact package;
2. Formula of declared product;
3. Name of the active ingredients of the declared product, pertinent certifications and methods of inspection;
4. Quality standard of declared product;
5. Exporter's local sales permit for declared product;
6. Quarantine Certificate from by exporter's government agency (BSE infected countries and territories only);
7. User's guide and usage warning of declared product;
8. Certificate of legal business license for importers, distributors, and appointed representatives in China.

The contact information of AQSIQ is as follows:

As the above procedures are complicated and time-consuming, U.S. exporters that are unfamiliar with the Chinese business environment may want to consider authorizing Chinese certification agencies, or their distributors or representatives to undertake the certification process on their behalf. In South China, one of the specialized certification agency under the Guangdong Provincial Beauty Association has been providing such a service for a number of years. Its contact information is as follows:
Quality and Technology Certification and Consultation Service Center
1202B East Tower, Gang Feng Building
#286 Xi Hua Road, Guangzhou 510170, P.R. China
Tel: 86-20/8107-4301; 8197-4446; Fax: 86-20/81074255
E-mail: gdcentrecn@21cn.com
 
D.3 Department Stores Remain Major Sales Outlets While Diversified Channels Grow
There are several main channels for cosmetics distribution in China. They are wholesale markets, department stores, supermarkets, chain grocery stores, chain drug stores, specialty stores, and beauty salons or body beauty centers. In the past, most cosmetics were sold through department stores. As China moves from a planned to free market system, deregulation of commercial operations has resulted in more diversified sales channels. This change has gradually reduced market shares for department stores. By 1997, department stores only accounted for 72% of all cosmetics sales. This figure further declined to 67% by 2001. In spite of this, department stores are still the main channels for cosmetics sales although they are losing some of their business to other competing stores chains. In 2001, grocery chains gained 26% of the market, chain drug stores achieved up to 2% versus almost nothing a few years ago. These stores usually have their own centralized purchasing and supply system that allows them to operate more efficiently with lower costs. Their market shares are forecast to grow bigger in the years to come.
D.4 Trade Show Information
For those companies interested in developing the China market, one of the most effective ways is to attend cosmetic trade shows in China. These trade shows offer excellent opportunities for foreign companies to learn about the latest market development, to evaluate the market potential for their products, to explore and identify business opportunities, and to find and screen possible distributors or business partners. There are dozens of cosmetic exhibitions held in China every year. Following is the information about three major shows held in Guangzhou, Shanghai, and Beijing:
1) Guangzhou International Beauty Show (May 6-9 and Sept. 24-27, 2003 Guangzhou)
www.prc-cosmetics.com
One of most influential and well-recognized shows held twice a year in Guangzhou. The show started in 1989 and now attracts over 2,000 exhibitors from home and abroad including a number of international exhibitors from Germany, France, Italy, UK, Japan, Korea, etc. Over 50,000 participants (mainly wholesalers, distributors, beauty salon owners, retailers, and manufacturers) attend the show.
2) Beijing Beauty, Hairdressing & Cosmetics Exhibition (June 6-8, 2003, Beijing)
3) China (Shanghai) International Beauty, Hairdressing & Cosmetics Exhibition
(July 16-18, 2003 Shanghai)  www.sx-expo.com
 
For more information about the China cosmetic market, please contact:
Commercial Office
U.S. Consulate General, Guangzhou
14/F, China Hotel Office Tower
Liuhua Road, Guangzhou 510015
P.R. China
Contact: Eric Zheng, Principal Commercial Officer
Shuquan Li, Commercial Specialist
E-mail: guangzhou.office.box@mail.doc.gov
Tel: 86-20/8667-4011; Fax: 86-20/8666-6409
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