25 July 2016
China’s Cosmetics Market
I. Market overview
The cosmetics sector on the Chinese mainland has been growing at a fast pace in tandem with the rapid development of the Chinese economy in recent years. Data from Euromonitor reveals that total retail sales of skincare products and make-up products in China reached RMB160.8 billion and RMB25.1 billion respectively in 2015, achieving year-on-year growth of 6.7% and 10.9% respectively. The table below shows the retail sales of cosmetic products of enterprises above a designated scale in the wholesale and retail trade in recent years.
Current structure of China’s consumer market of cosmetic products:
Skincare products: skincare products represent the fastest growing sector in the cosmetics market.
Shampoos and hair care products: the shampoo and hair care products market is becoming saturated and its growth has decelerated.
Make-up products: the make-up market is far from saturated, particularly in rural regions and inland cities. Sales of eye make-up products recorded significant growth in recent years.
Products for children: sales of cosmetic products designed for use by children continue to soar.
Sunscreen products: sunscreen products ensure sales in traditional quiet seasons.
Anti-aging products: cosmetic products that help consumers stay youthful and fight aging are increasingly popular.
Sports cosmetics: many consumers who love sports and pursue body fitness are keen to maintain an attractive appearance as well. They need sports cosmetics that can help prevent the loss of moisture and are anti-odour, anti-sweat, anti-bacteria and of compact portable size.
Cosmeceuticals: consumers have growing awareness of products which combine cosmetic and pharmaceutical features, namely “cosmeceuticals”, such as spot lightening cream, acne treatment lotion and acne ointment.
Green/natural cosmetics: these cosmetic products contain natural or nutritional ingredients such as aloe and vitamins.
According to China's Skincare and Cosmetics Market, a survey report published by HKTDC Research in 2016, women in China have gradually formed the habit of putting on make-up. This is particularly true for younger women (aged 20-30). Their proportion of putting on make-up (88%) is higher than that of more mature (aged 31-45) women (83%). On the other hand, men are also beginning to care for their skin. 63% of the respondents are using cleansing milk, lotion or face cream.
Cosmetic products for men: the men’s cosmetics sector exhibits strong growth, in particular skincare products for men. According to estimates by Euromonitor, the market of skincare products for men expanded by 7.6% year-on-year in 2015 as more and more male consumers are accepting skincare and make-up products for men. Figures from China Statistical Yearbook 2015 show that the male population accounted for 51.23% of the total in 2014. However, the share of cosmetic products for men in the overall cosmetics market is relatively small. Oil-control and cleansing are the two major concerns with respect to men’s skincare requirement. For men’s skincare products, while facial cleansers take the lion’s share in the market, demand for specialty products like masks, sun-blocks and those with whitening and moisturising functions is also on the rise, demonstrating that male consumers are paying more attention to skin conditions such as aging and coarseness.
Cosmeceuticals, especially Chinese herbal cosmetics, are opening up a new territory in the cosmetics market. It is understood that more than 170 enterprises have tapped into China’s cosmeceuticals market to date, and many of these players are renowned pharmaceutical companies in China, such as Tongrentang and Yunnan Baiyao. Cosmeceuticals only have a market share of about 20% in the mainland at present. In Europe, the US and Japan, cosmeceuticals have a 50-60% share of the local cosmetics markets. It is believed that China's cosmeceuticals market has much room for development. While cosmeceuticals have medical properties, they are classified as cosmetics since there is still no official definition for the term “cosmeceuticals” on the mainland. According to the Regulations on the Hygienic Supervision over Cosmetics, no medical jargons and wordings on the medical efficacy of products should be used in the packages and instructions of cosmetic items.
In the cosmetics market, consumers’ attitude has changed drastically. Nowadays, consumers are more independent in making decisions. Instead of being influenced by advertisement or promotional campaigns, they gather information through different channels and consider various factors before picking the products that most suit their needs. Besides, there are changes with consumer groups as well. Consumers can be grouped into three major tiers, namely upper, middle and lower, based on their preference for brand, quality, price as well as their own purchasing power. Buyers of imported brand products in the high-end market are mostly high-income earners in large and medium-sized cities. Most of them are young and middle-aged women who prefer famous cosmetics brands from Europe, the US and Japan, etc.
People are increasingly aware of the safety issues of cosmetic products. A series of problems arising from unsafe products have put consumers, manufacturers and regulatory authorities on the alert. It is believed that the promulgation of the Hygienic Standard for Cosmetics and the Hygienic Standard for Cosmetics Production Enterprises can help regulate the behaviour of cosmetics manufacturers and protect the rights of consumers.
The authenticity of cosmetic products, particularly those purchased from online sources, is also an issue of wide concern. According to the China Consumers’ Association, 2,628 cosmetics-related complaints were received in 2015, of which 1,404 involved quality problems.
All-natural DIY cosmetics are gaining popularity in recent years. Consumers purchase ingredients themselves and tailor-make cosmetics and skincare products with their own formulas. DIY cosmetics were intended for individual use to achieve self-sufficiency. Today, they are increasingly commercialised, mass-produced and sold through e-commerce platforms like Taobao.com and Tmall.com. Nevertheless, DIY cosmetics for online sales generally have quality problems. They do not meet the requirements stipulated in the Regulations on the Hygienic Supervision over Cosmetics and have not applied for cosmetics production and sales permits.
According to Euromonitor, sales of antiperspirants – classified as sports cosmetics -- amounted to RMB680 million in China in 2015, registering 5.1% year-on-year growth. The younger generation is the major consumer group for these products. In general, consumers prefer scented formulas. Antiperspirants with Chinese medicine or fruit extracts are favoured by females. Those featuring mineral ingredients and cooling effects are more popular with male users.
II. Market competition
According to China Food and Drug Administration (CFDA) statistics, the number of enterprises qualified to produce cosmetics in China as at the end of November 2015 was 4,542. Looking at the cosmetics market as a whole, domestic brands mostly concentrated in the mid- to low-end segments, while foreign-invested enterprises and joint ventures dominated the high-end segment. It is understood that foreign brands account for nearly 60% of the total sales of cosmetics in China, with sales value making up nearly 90%. The rapid development of domestic cosmetics companies boosted the growth of domestic brands at a rate of about 10-15% in 2014. The market share of domestic brands is growing gradually, posing competition to their foreign counterparts. Reportedly, foreign brands like Revlon, Garnier and Episteme announced in 2014 that they would pull out of the mainland market. Despite the accelerated expansion of the domestic firms, the dominance of multi-national brands in the China market is unlikely to be greatly affected in the short-term as they have strong research and development teams and enormous resources.
Although there has been negative news about the quality of cosmetic products from world-renowned brands, mainland consumers are still fond of international brands. They believe that these well-known enterprises have been producing cosmetics for years, and so even though problems have been reportedly spotted in individual products, the overall quality is still reliable. Besides, some young women consider it trendy to use cosmetic products of famous brands.
A number of mainland cosmetics producers such as Chinfie, CMM, Houdy, Longrich, Herborist and Chando are catching up fast with their international counterparts and have built up reputations in the domestic market. Meanwhile, some long-established domestic brands like Pechoin, Maxam and Bee & Flower are also actively carrying out research, rejuvenating existing products or developing new ones to meet market needs. They aim to regain their turf by re-launching these upgraded and repackaged items at much higher prices. In the past, domestic brands emphasised value-for-money and mostly target second and third-tier markets. Today, some large domestic companies start to develop high quality products, aiming to meet the demands of increasingly discerning consumers at the domestic mid and high-end markets.
Currently, the greatest competition is seen among foreign brands such as L'Oréal, Shiseido, Mary Kay, Estée Lauder and Olay. While these global giants are engaging in oligopolistic competition, the low-end market is divided by domestic SMEs.
The cosmeceuticals market is dominated by foreign brands. At present, major cosmeceutical brands that fill the shelves of large drugstores include VICHY, La Roche-Posay, Freeplus and Simple. Domestic brands like Tongrentang, Herborist and Sanjiu have also ventured into the cosmeceuticals market and are gradually recognised by consumers.
Children’s skincare product is a market of huge potential. Frog Prince, Haiermian, Mentholatum, Yumeijing and Johnson & Johnson are major players in the children’s market. According to estimates, Johnson & Johnson takes up more than 50% of the children’s toiletries and skincare products market on the mainland. More and more international childcare heavyweights are eyeing the China market and competition is becoming intense.
III. Sales channels
Major sales channels of cosmetic products on the mainland include wholesale markets, supermarkets and department stores, dedicated counters, specialty chain stores, drugstores, beauty parlours and direct selling. Online shopping channels also recorded significant growth in recent years. Currently, department stores, supermarkets and specialty stores are the top three sales channels. It is estimated that retail sales of cosmetics through these three major channels account for approximately two-thirds of the whole cosmetics market.
Dedicated counter is a major traditional sales channel for cosmetics, adopted by most world-renowned cosmetics brands. Dedicated counters generate great return in terms of word-of-mouth publicity and are thus highly effective in establishing brand image. Top global brands such as Lancôme, Estée Lauder, Chanel and Dior dominate the sales of cosmetics through dedicated counters on the mainland. Just a few domestic brands like Herborist are able to compete with these giants.
Some brands expand their business by opening specialty stores, mainly in the formats of directly-operated specialty stores and franchise stores. For directly-operated specialty stores, since they can better display brand image, ensure the quality of service management and enforce unified, stable pricing, many multi-national cosmetics giants prefer to adopt such sales format. On the other hand, compared with other sales formats, opening franchise chain stores is regarded as the most effective format with the least input and highest rate of success.
Direct selling is a means to sell cosmetic products through distributors’ personal networks. Direct selling companies will award the distributors according to the quantity of goods they sold through their respective networks. Avon was the first brand to engage in a pilot programme after the Regulations for the Administration of Direct Selling were promulgated in 2005. Subsequently, the authorities also granted direct selling licences to Amway, Perfect, Longrich and others.
Selling cosmetics through drugstores has become a major feature in China’s cosmetics market. While the cosmeceuticals market is now dominated by foreign players, a number of local pharmaceutical companies have already set foot in this territory. Domestic brand Longrich, for example, has adopted a two-pronged approach. Apart from distributing through shopping centres and supermarkets, it also launches its products in local pharmacies.
Cosmetic products can also be distributed through various types of beauty parlours, such as traditional, pampering and therapeutic beauty parlours; large and medium-sized high-end beauty spas; franchise chain stores; and grooming and hairdressing parlours, etc.
The retail concept of “cosmetics supermarket” or “one-stop shop” is gaining attention, with the entry of players like Watson’s, Sephora of France and Sasa.
Online cosmetics shopping has seen rapid growth and some mainland consumers are beginning to buy cosmetics and skincare products online. According to HKTDC Research's China's Skincare and Cosmetics Market 2016, 69% of the female respondents and 65% of the male respondents would buy skincare products and cosmetics from "online" stores mainly because "online shopping is convenient/offers delivery service". The survey also found that female and male consumers spent RMB2,158 and RMB1,681 respectively on online purchases of skincare products and cosmetics on average in the past year.
Many foreign brands have entered the mainland market by acquiring domestic brands and making use of the latter’s distribution networks. For example, MiniNurse and MG were acquired by L'Oréal, TJoy by Coty for some time, and Dabao by Johnson & Johnson.
IV. Import and trade regulations
Since the reorganisation of the State Drug Administration (SDA) into the China Food and Drug Administration (CFDA), food, health and cosmetic products have been incorporated into the regulatory regime of pharmaceuticals. Under new trade regulations, the supervision on cosmetic products has shifted from the health regime to the pharmaceuticals regulatory system.
The Detailed Rules for the Implementation of the Regulations on the Hygienic Supervision over Cosmetics provide that, for cosmetic products to be imported to China for the first time, foreign manufacturers or their agents must obtain and complete an Application Form for Hygiene Licence of Imported Cosmetics from the hygiene administration department above the local or city level of the importing place and submit their applications directly to the hygiene administration department under the State Council. Upon receipt of the application dossiers, the hygiene administration department under the State Council will set up a cosmetics safety panel to inspect the product in question. Products which have passed the inspection will be issued with an Approval Document for Hygiene Licence of Imported Cosmetics and the number of the approval document. The approval document will be valid for four years. Application for renewal can be submitted to the hygiene administration department under the State Council four to six months prior to the expiry date of the approval document and attachment of relevant information is not required.
Pursuant to the Administrative Measures on the Inspection, Quarantine and Supervision of Import and Export of Cosmetics, in addition to obtaining an Approval Document for Hygiene Licence, an importer must also apply for a Verification Certificate for Chinese Labelling on Imported Cosmetics before reporting to the inspection and quarantine department. Normally, an application for verification of labelling for imported cosmetics should be submitted to a designated examination body 90 working days before reporting to the verification department. Imported cosmetic products may use printed Chinese labels on a temporary basis and the whole label should be affixed onto the original sales packaging box. The names and addresses of the dealer, importer, agent and contact person on the mainland who have legally registered in China must be clearly shown on the labels of the imported cosmetic products.
With a Hygiene Licence, a Verification Certificate for Chinese Labelling and an Inspection Certificate on hand, an importer may obtain a Notice of Customs Clearance from the Commodity Inspection Bureau to proceed with normal customs declaration procedures. Customs clearance only means the Chinese customs allows a specific batch of cosmetic products to enter China, not that those products can be placed on shop shelves for sale immediately. Product samples will be selected for random inspection and testing. The imported products may not be offered for sale unless reports indicate that they comply with relevant requirements.
When assessing the mainland cosmetics market, foreign players should pay attention to relevant standards adopted by mainland authorities. Under the Standardisation Law of the People’s Republic of China implemented since 1 April 1989, standards are classified into four levels, namely national, trade, local and enterprise standards, in order of descending precedence. National standards are further classified into compulsory and voluntary standards, represented respectively by standard codes GB and GB/T. Likewise, trade standards are classified into compulsory and voluntary standards. The cosmetics sector, classified under the category of light industry, is represented by the standards codes of QB and QB/T. Local standards are compulsory within their respective administrative regions. Enterprise standards are applicable within the respective enterprises. Industry players may refer to the website operated by the China Academy of Machinery Science and Technology and the website of the Standardisation Administration of the People’s Republic of China to look up for the lists of relevant standards.
China adopted a new consumption tax policy on 1 April 2006, under which high-end skin care-type cosmetics (formerly classified as skincare and hair care products and subject to relevant tax rates) are classified under the heading of cosmetic products and hence subject to a consumption tax rate of 30% for such products. A State Council executive meeting decided on 28 April 2015 that China will fine-tune consumption tax policies on general consumer products such as garments and cosmetics and make overall adjustments in the scopes of taxation, tax rates and tax collection process.
China has slashed tariffs on various types of daily consumer goods, with import tariff on skincare products reduced from 5% to 2% since 1 Jun 2015.
The Hygienic Standard for Cosmetics (2007 version) was implemented on 1 July 2007. The Standard comprises five parts, namely General Principles, Methods of Toxicological Test, Methods of Hygienic Chemical Test, Methods of Microbiological Test, and Methods of Safety and Efficacy Evaluation in Human. Part One provides for the new definition for cosmetic products, ingredients banned from being used in and restricted substances allowed to be used in cosmetic products. Part Two provides for the toxicological test methods for new ingredients used in cosmetic products. Part Three provides for the hygienic chemical test requirements for banned and restricted ingredients used in cosmetic products. Part Four provides for the basic microbiological test requirements for cosmetic products and the test methods for several types of bacteria. The last part provides for the evaluation methods for the safety and efficacy of cosmetic products on the human body.
At present, the CFDA has completed the amendment of the 2007 version of Hygienic Standard for Cosmetics and renamed it Safety and Technical Standards for Cosmetics. The new version was approved for promulgation by the CFDA in December 2015 and will take effect on 1 December 2016 to replace the 2007 version. As an important basis for the safety management and supervision of cosmetic products, the 2015 version of Safety and Technical Standards for Cosmetics aims to further improve the regulatory system for cosmetics safety and technical standards. The new regulations will impose more stringent requirements for the safety of cosmetic products, raw materials and production processes.
According to the Regulations on the Administration of Cosmetics Labelling which went into force on 1 September 2008, a complete table of ingredients must be shown on the labels of cosmetic products. The provisions further clarify the labelling requirements for cosmetic products, including the content allowed or prohibited to be stated in the labels, and the format of such labels.
China is soliciting public comments on the draft of Administrative Measures for Cosmetics Labelling, which concerns the following aspects. Adding Chinese labels will no longer be allowed for imported cosmetic products and all cosmetic products targeting the China market should be packaged with product information in Chinese. In addition, labels for imported cosmetics must specify the name and address of the accountable entities, manufacturers and authorised manufacturers in China. An accountable entity in China shall take responsibility for product safety in the China market. The list of expressions forbidden for use has also been modified. To use terms such as “sensitive”, “nano”, “additive-free”, “absolutely natural”, “pure natural plant”, “ecology” and “organic" in cosmetics labels, sufficient documentation should be provided to substantiate such claims during registration or record-filing.
The Instructions for Consumer Goods - General Labelling of Cosmetics (GB 5296.3-2008) which became effective on 1 October 2009 provide that all locally produced cosmetics or imported cosmetic products to be registered for inspection and distribution on the mainland must truthfully indicate on the product package the standard Chinese names of all added ingredients in the cosmetic product.
According to the Naming Requirements for Cosmetics which was implemented on 5 February 2010, the name of a cosmetic product should be concise, easy to understand and in line with the customs of the Chinese language. Besides, it must not contain any content which may mislead or deceive the consumers. The Cosmetics Naming Guidelines which were issued to complement the naming requirements provide a list of expressions allowed or prohibited to be used when naming cosmetic products. Eleven types of expressions are forbidden for use in the names of cosmetic products, namely: arbitrary expressions, such as special effect, total effect, powerful effect, miraculous effect, super effect, extraordinary, skin renewing, wrinkle removing; expressions that falsely claim a product is “absolutely natural”; expressions that explicitly or implicitly indicate the medical effect of a product, such as anti-bacterial, bacteria-inhibiting, bacteria-removing, detoxifying, anti-allergic, scar-removing, hair-growing, hair-regenerating, fat-reducing, fat-dissolving, body-slimming, face-slimming, leg-slimming; names of “celebrities” in the medical field, such as Bian Que, Hua Tuo, Zhang Zhongjing and Li Shizhen; medical jargons; and six other types of expressions.
The new Administrative Measures on Organic Product Certification (AQSIQ Decree No.155) came into effect on 1 April 2014. This document is compiled in view of the Organic Product Certification Catalogue which took effect on 1 March 2012. According to this catalogue, cosmetic products no longer fall within the 127 product types listed in the organic product catalogue. Only for those products included in the catalogue can certification agencies accept certification requests from producers and processors. For products which were previously certified but now excluded from the organic product catalogue, their certificates will automatically become invalid upon expiry. Under mainland rules, products without organic certificates may not display such markings as “organic product” on their packages and labels. Cosmetic products, therefore, cannot be offered for sale as “organic” items.