Not making-up

In February French cosmetics chain Sephora celebrated the opening of its largest store in China. The flagship outlet, encompassing 54,000 square feet and five floors, is located in Shanghai’s Nanjing Road and boasts two levels of retail space, a training academy, and two floors for Sephora China’s new corporate headquarters. “I think we’ve only fulfilled a small fraction of what’s possible in this market. We are quite inspired by the huge passion of Chinese woman to learn about beauty, be it skincare, make-up or fragrances,” commented Chris de Lapuente, Sephora’s chief executive.

Despite the fanfare, Sephora, a unit of LVMH, is struggling to compete in China. The company recently closed some of its stores in the country after sales of perfumes and other cosmetics slumped. The reason? Shoppers go to Sephora to sample products and then buy them from internet retailers like Jumei.com and Lefeng.com.

Sales of beauty and personal-care products, including cosmetics and shampoo, are being bought less and less in shops. According to market research firm Euromonitor, the percentage of cosmetics purchases online increased to 9% in 2011 from 4% in 2010 – grabbing share from retail outlets (which still accounted for 74% of spending, the remainder being from direct sales). The research firm is bullish on the prospects for this e-commerce channel – it forecasts China’s online cosmetics sales will reach Rmb120 billion ($19.34 billion) by 2015 compared with Rmb37.2 billion last year.

Why the success? Online cosmetics retailers are quickly gaining ground in China by selling a wide range of brands at big discounts. Cosmetics site Jumei, for instance, offers discounts of up to 15% on about 45 different high-end cosmetic labels like Dior and Lancôme. The company told Southern Weekend that revenue in 2012 reached Rmb2.5 billion and is expected to reach close to Rmb10 billion this year.

“Direct sales and department stores are outdated,” is the blunt assessment of Chen Ou, chief executive of Jumei.

But competition between cosmetics websites is heating up too. Recently two of the country’s largest cosmetics e-tailers engaged in a price war to lure shoppers. It started in late February when Lefeng offered over 300 products on the site at discounts of as much as 70% off. In one day, the company recorded Rmb122 million in sales.

Not to be outdone, Jumei launched its own three-day “anniversary sale” on March 1. Even though the site was down for the majority of the first day – Jumei explained that the site was under hacker attack – it did little to dampen consumers’ excitement. The company claims that it recorded Rmb1 billion in sales during the sale period.

The online price war soon escalated into a war of words. Jumei’s Chen took to his personal weibo to insinuate that Lefeng was behind the hacking attack. Even more serious, a person who claims to be a former employee at Jumei published a blog post on Tianya stating that 90% of the products the site sold were fake. Jumei responded by issuing a statement saying that all of the products it carries are genuine (the person who spread the rumour was subsequently arrested).

“The root cause of the dispute is that the two sites both sell cosmetics so after they reach a certain scale it is inevitable that they will fight over distribution, promotion and other resources,” former vice president of Jumei Kan Hongyan told China News Net.

But using underhanded tactics to gain a competitive advantage will only backfire, says Li Junhong, a lawyer in Guangzhou. He told Southern Weekend that the antics of both e-tailers to smear the other will only hurt the online cosmetics industry as a whole. After all, if consumers are worried that the products they buy online are counterfeits they may shy away from buying on any sites.

Interestingly, this presented Sephora with a rare opportunity. The beauty chain told the Wall Street Journal it will launch a new website for its Chinese consumers this year. The site will focus on teaching customers about products and trying to persuade them that they should pay a premium for products at Sephora because of the authenticity of their merchandise.

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