While governments around the globe continue their work to contain COVID-19, many brands are facing unprecedented challenges as consumer sentiment and spending are changing drastically due to the record unemployment number (at almost 22 million) and quarantine. The impact on the color cosmetics market is immediately felt. Kylie Cosmetics, for example, has closed its fulfillment center and loosened its refund policy for orders placed on or after March 16th. While Glossier has closed all the stores temporarily and shifted its sales to entirely online. With layoffs and furloughs are happening across the board, the impact might be long-lasting for the sector. Fortunately, there are still pockets of opportunity during this challenging time. Read more to find out.
The tremendous and growing market
Over the past few years, the global color cosmetics industry has seen healthy growth at a CAGR of 5.4%, reaching $73.5 billion in market size last year. China, the second biggest color cosmetics market, surpassed the rest of the world in terms of growth. It achieved a CAGR of 15% in the past five years, and reached ¥45 billion (~$6.4 billion) in market size and 17% growth in 2019, outpacing other beauty and personal care categories, including skincare and fragrances. Brands such as Huda Beauty, Charlotte Tilbury, and Anastasia Beverly Hills (Anastasia) have already experienced the immense growth that may even exceed their expectations. Huda Beauty, launched on Tmall.com on March 25th, sold out their signature eyeshadow palette 'Mercury Retrograde Palette' in one second (yes, the measurement is correct). From January to March this year, compared to the same period last year, Charlotte Tilbury's sales increased by 900% while Anastasia grew 30 times in sales during the same period. Yet, there is still an enormous opportunity for growth in China, as both the average revenue per capita (ARPC) and the ratio of color cosmetics spending in the overall beauty spending still lag other countries such as the US, UK, Japan, and Germany substantially.
What is behind the growth?
Surge in demand
Demographics: Consumers with growing purchasing power and needs for beauty products have emerged in the past few years. Consumers born after 1990 have outnumbered the ones born in the 1980s. Gen Z consumers, who were born after 1995 and grew up with social media, shop mostly online, care about being trendy, sense of belonging, beauty (over 55% of men would buy beauty and skincare products), and personalization and value of the products more than any previous generations. They have been driving the considerable growth in the color cosmetics market, and this trend will continue.
A new segment of consumers: Formerly, brands typically focused on the consumers in the first and sometimes second-tier cities in China. However, as the market in these cities became oversaturated, the growth has slowed. Brands have since shifted their marketing efforts toward lower-tier cities, which accounts for half of China’s population. With the penetration of smartphones, along with the e-commerce platforms and social media apps, the consumers in these cities became the new waves that drove the growth in demand. E-commerce live-streaming, for instance, is an example of marketing that is hugely appealing to consumers in this segment as they usually like products that are more relatable to them, hence the emergence of KOCs (key opinion customers). Even though the income of lower-tier cities is generally lower than the first and second-tier ones, their cost of living is also significantly lower. Therefore, their purchasing power is not necessarily lower than the first and second-tier cities.
Evolving Trends
In the past couple of years, we have seen the increased penetration of e-commerce platforms like Tmall, JD.com, etc. and the growing popularity of social media applications for brand marketing and selling product purposes. E-commerce and social media platforms such as Tmall and Douyin (Chinese version of TikTok) played an essential role for brands to grow through facilitating marketing and promotional campaigns specific to the Chinese audience, including live-streaming, promotions by celebrities/KOLs/KOCs. Brands expanded their marketing efforts from traditional advertising to short-form videos and live-streaming services like Douyin, Kuaishou, Tmall to accommodate the changes in the purchasing behaviors of the consumers and improve the marketing coverage and conversion. Perfect Diary, a homegrown color cosmetics brand that experienced enormous success in the past few years, achieved ¥100 million (~$14.3million) in 28 minutes during the famous Tmall double 11 shopping festival.
Improvement on the supply side
Supply chain improvements: Another vital factor that is behind the growth in the color cosmetics market in China is high-quality and rapidly-developed new products. World-leading OEM/ODMs have empowered the high-quality product development in the past years. For example, to compete with leading international brands, Perfect Diary not only focused on products that are appealing to consumers but also partnered with the world's leading OEMs who also provide products to leading global brands such as YSL and Dior.
Will the trends continue?
Market growth: The market is expected to grow further at a high CAGR of 12.2% in 2020 and 9% for the next three years. From recent sales report from Tmall, we could see that the lip product sales might have been negatively impacted by the coronavirus in the past few months, yet the drop was offset by an uptick in the growth of the eye makeup sales. As mentioned above, the ARPC of color cosmetics in China, at $5, is still much lower than the range of $26-56 we have seen in countries like the US, Japan, the UK, and Korea. If we use these countries' ARPC range as a benchmark for spending ceiling, China still has the capacity to grow at least six-fold.
Preference for foreign brands: Chinese consumers' preference for foreign cultures and brands is still growing. Among the top 15 brands in the Chinese color cosmetics market, over 60% of the market share belongs to international brands. On the other side, some homegrown brands succeeded in introducing new products developed in collaboration with foreign brands and cultural influences.
New trends: With coronavirus, the clean beauty trend, which is already popular in other regions of the world, has become trendy among Chinese consumers. Farmacy, for instance, has already launched the Tmall store in China. We would expect more brands to enter and succeed in the space as we see a growing demand for products with natural and simple ingredients.
Luxury & mass-market brands: Currently, the mass cosmetics brands account for roughly 70% of the market in China, which presents great opportunities for brands such as Urban Decay, Nyx, Fenty Beauty, Anastasia, and even Jeffree Star. However, luxury brands still can expand in China as growing purchasing power unfolds in Gen Z and future generations, along with consumers from lower-tier cities. Maybe now is the time to get a piece of this pie while it still lasts.
What we can offer to help brands to get this pie?
While Chinese consumer groups’ preferences and behaviors might be hard for international businesses to tap into, as there are many China market-specific know-hows brands need to understand before entering the market, we are here to help. For access to more analysis, insights, case studies, and to learn more about the risks and opportunities in China, Chinese KOLs/KOCs, and buzzwords such as private traffic, please subscribe to our newsletter. We will cover all consumer spending sectors and offer consulting services for brands to enter the China market.
Sources: Euromonitor, Tmall.com, www. m.cbndata.com, www.perfectdiary.com
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