China Consumer

Cosmetic changes

Why two international make-up brands have decided to exit China

72268774

Endorses Maybelline: Qin Shupei

For years, L’Oréal has encouraged female customers by teaching them to say: “Because I’m worth it.” But after years of investment, L’Oréal has decided that the China market isn’t worth it for one of its brands, which will no longer be sold to Chinese consumers.

Last week L’Oréal announced that it will stop selling Garnier products, which accounted for about 1% of the French cosmetics group’s $2 billion in China sales in 2012. Instead, it will focus on selling products from its two other mass market brands: Maybelline, mainly make-up, and L’Oréal Paris, mostly skincare, make-up and haircare.

“Garnier’s exit is mainly due to the fact that its share in L’Oreal’s China business is too insignificant,” Li Zhiqi, a marketing consultant, told Beijing Times.

“As the cosmetics industry starts to slow and operating costs continue to climb, Garnier neither has scale advantages nor profit margin. It was only a matter of time before it exited the market,” he added.

Although the cosmetics market has grown rapidly in China – doubling in size between 2008 and 2012, according to research from the Fung Group ­­– competition for customers has been fierce. Garnier was priced head-to-head with P&G’s Olay but has come under attack from a slew of domestic brands like Chando and PehChaoLin, which have improved in product quality and expanded their distribution.

But Garnier isn’t the only cosmetics brand departing the market.

In December Revlon announced that it too will shut down in China, after 17 years. Like Garnier, Revlon’s market share is too small: it made no more than Rmb200 million ($32 million) a year in China, which is piffling for a brand with sales of $1.5 billion worldwide.

Another challenge for foreign brands is adjusting to rapid changes in how products are sold to consumers.

Traditional sales models – such as through department stores or direct selling – have been losing influence.

“Revlon doesn’t have any distributors in the country and its marketing team lacks experience. That explains why its products couldn’t be found in mainstream sales channels [the majority of cosmetics are sold either online or in supermarkets]. That only goes to prove that Revlon did not value Chinese consumers enough to invest in the market,” Peng Rulin, another industry analyst, told the Beijing Times.

CBN Weekly agrees that Revlon hasn’t done enough to adapt to the Chinese market.

For instance, the label has stuck with Hollywood starlets like Emma Stone and Olivia Wilde for its advertising campaigns across China, even though they are little known to Chinese consumers.

Its biggest rival Maybelline hired local model Qin Shupei to endorse its products, and better connect with local buyers.

There was further criticism that Revlon could have done more to tailor their products for the Chinese audience.

“Only selling what is available in your home market in China is not good enough,” Jason Yu, general manager of Kantar Worldpanel China, told the China Daily. “You have to understand local consumers and make products here according to their needs.”

Both of the departing brands compete in the lower-priced segments of the market. As Chinese consumers become more affluent, many are shunning the lower-priced brands they previously used to purchase.

One consumer told China Radio Net: “Garnier was something I used in my school days when I didn’t have much money… But after years in the workforce, I wouldn’t choose Garnier again. In first-tier cities, most people make at least Rmb10,000 a month; there are plenty of options to choose from.”

“Old brands are like bananas – basically products everyone recognises,” an industry insider added. “However, consumers today look for durians – that is, products that are differentiated. Brands like Revlon are stuck with making bananas so that’s why they are in the position they are in today.”

Might other foreign brands choose to exit China too? P&G said last May that it was losing market share in skincare, while Avon Products warned in October that potential fines from bribery probes might hit it profits. L’Oréal, too, admitted in its third-quarter earnings statement that the market in China was “slowing… but still dynamic”.

One response is more local acquisitions by the foreign giants and L’Oréal made headlines last year when it spent $834 million on Magic Holdings, one of China’s leading makers of facial masks (see WiC211).

“The next move of the big groups… is more concentration of the market, developing higher end products. For sure, there will be fewer players by acquisition. The big groups will focus on acquiring local brands and developing them,” Bernard Ternat from research firm Ipsos told the China Daily.

The retreat of the two cosmetics brands reminds investors that many firms still struggle to profit in China, despite years of growth in the consumer market.

For example, after years of losses, UK retail giant Tesco shifted its Chinese business into a joint venture with a local partner last year, rather than go it alone.

Germany’s Metro also closed its Media Markt electronics stores across the country.

“For too long all China investment has been seen as a good investment… but this has been more about perception than profits,” the Financial Times concludes.


© ChinTell Ltd. All rights reserved.

Exclusively sponsored by HSBC.

The Week in China website and the weekly magazine publications are owned and maintained by ChinTell Limited, Hong Kong. Neither HSBC nor any member of the HSBC group of companies ("HSBC") endorses the contents and/or is involved in selecting, creating or editing the contents of the Week in China website or the Week in China magazine. The views expressed in these publications are solely the views of ChinTell Limited and do not necessarily reflect the views or investment ideas of HSBC. No responsibility will therefore be assumed by HSBC for the contents of these publications or for the errors or omissions therein.