Chinese

South Korea’s high-end cosmetic brands such as Sulwhasoo are making a big impact in Chinese market.

Asian Beauty Secrets meet High-End Cosmetics American and European brands may have been the traditional leaders in a majority of luxury goods sectors, but in high-end cosmetics, Asian brands, led by Japanese and South Korean companies, is making its presence known. By Zhou Ying

When it comes to choosing cosmetics, (which ended in March of 2014), 50.5% of and , makeup, sunscreen, the first decision most Chinese people face the group’s $5.53 billion in revenue came and beauty supplements. is deciding whether to go with American from foreign markets and by the middle of Quite a few Chinese consumers’ first and European or Japanese and South January of this year, the group’s market experiences with high-end cosmetics start- Korean cosmetics. value had reached $5.5 billion. The quintes- ed with . The flagship brand of the ’s Shiseido Group, led by its cos- sential example of a comprehensive cos- group’s international business, Shiseido metics brands Shiseido and Clé de Peau metics group, Shiseido’s brand positioning products are sold in 89 countries and Beauté, has long held a place as one of the covers the high, mid-range and mass con- regions around the globe. No matter if it’s in world’s top 10 giants of the high-end cos- sumer groups, while its range of products the US, Europe or Asia, the Shiseido brand metics industry. During the 2014 fiscal year extends into a number of areas such as skin can be found in high-end retail stores such

Emerging Markets Insight 3 Chinese Cosmetics as Nordstrom, Harrods, Neiman Marcus and awareness, business models, market share Lane Crawford right alongside Lancôme, and profitability. Dior, Sisley and other big-name American and European brands—a testament to its Makes Waves influence in the industry. As for , for While the Shiseido brand has long been a the past seven years, Shiseido has continu- familiar face at high-end retailers around ally won a place among the top-10 in New the world, it has a new Asian neighbor and Fortune magazine’s Annual Survey of the competitor in the form of South Korean Best Loved Luxury Products in Capital brands. Represented by Sulwhasoo and Circles. Whoo, this South is currently Of course, it’s obvious that whether it’s sweeping through the international high- the global stage or the Chinese market, end cosmetics market. European and American brands still possess Sulwhasoo is one of AmorePacific’s top- overwhelming advantages over their tier products, whereas Whoo comes from Japanese and South Korean counterparts South Korea’s LG Group. It’s said that LG when it comes to aspects such as brand designed Whoo specifically to compete with Sulwhasoo, while the name, which means “empress” in Korean, brings to mind images of regal beauty and the beauty secrets of empresses past. It’s easy to see the impact this South Korean wave has had around the world. For Shiseido’s brand positioning instance, visiting Lane Crawford in Hong covers the high, mid-range Kong’s Harbour City shopping mall and heading to the beauty section, one can find and mass consumer groups. Shiseido brand products occupying six sec- tions (three of which are specialty counters; the other three located at perfume coun- ters), while three sections are the domain of AmorePacific, the group’s namesake brand. South Korean products. Additionally, of the A new rising star, AmorePacific has yet to be 10 makeover rooms at Lane Crawford, listed among the other brands on the digital except for the one room that is open to all, screens at Lane Crawford or on the map of three rooms are taken by Shiseido, Clé de stores at Harbour City. Peau Beauté and Sulwhasoo, another three The spot it currently takes at Lane belong to , Sisley, Ceanelove Crawford originally belonged to Fresh—the and the last three are shared by / American-born brand that made its name SK-II, /Dior and Lancȏme/Helena with brown sugar masks. Acquired by Rubinstein. luxury giant LVMH in 2000, Fresh’s annual Even if this doesn’t explain why Sulwha- sales currently sit at more than $20 million. soo is able to encroach on the territory of Looking at the 25-square-meter counter cosmetic brands such as Shiseido and area where AmorePacific now stands, it’s Represented by Sulwhasoo Lancȏme, it clearly sends an important easy to see why Fresh moved: It needed message to consumers: Sulwhasoo’s the space. Fresh now sits right across the and Whoo, this South Korean AmorePacific has the money and the ambi- walkway from its old location, probably giv- wave is currently sweeping tion to try and stand eye to eye with tradi- ing AmorePacific the hope it can benefit through the international high- tional European and American brands. from Fresh’s popularity to get a few extra end cosmetics market. In addition to Sulwhasoo and Whoo, customers, or maybe someday reach the other South Korean brands at Lane point where it too will have customers that Crawford include Sulwhasoo’s sister brand are willing to wait in line half an hour just to

Emerging Markets Insight 4 Chinese Cosmetics

With its 40% market (Figure 1) share in the South Korean going up Over the past five years, AmorePacific stock cosmetics market, prices have far outpaced the the AmorePacific Group is Estée Lauder Group and the L'Oréal Group the largest cosmetics group (As of Jan. 30, 2015) 1000% AmorePacific

in South Korea. Estée Lauder L'Oréal 800%

600%

400% buy a stick of like they do at Fresh. website, in October of 2010 it became the All in all, the shops are located in a good first South Korean cosmetics company to 200% area. Nearby is the main entry way that be admitted to the Dow Jones Sustainability 0% leads to Lane Crawford’s beauty and cos- World Index (DJSI World), an indication of 2011 2012 2013 2014 2015 metics section and the main escalator that the group’s position in the global market. Source Google Business leads to the apparel department down- However, taking a closer look, of the group’s stairs. five skincare brands that have already With its 40% market share in the South entered the global market place (according (Figure 2) Korean cosmetics market, the AmorePacific to the group’s 2013 fiscal report, Amore- low profitability Compared to Estée Lauder and L'Oréal, the Group is the largest cosmetics group in Pacific had yet to enter the Hong Kong mar- profitability of Japanese and South Korean South Korea. Owners of a diversified brand ket), only and Sulwhasoo have cosmetics enterprises falls a bit short. portfolio, in addition to the group’s 13 skin- entered the American market (the former in 20% care brands that range from high-end to 2004 and the latter in 2010), leaving the affordably priced, AmorePacific’s reach also rest of the group’s brands to focus mainly 15% extends into daily-use products such as on Asian countries. toothpaste, perfume and hair and body From an overall viewpoint, the AsiaPacific care, leading to a total of more than 30 Group’s annual sales volume is roughly one- 10% brands under its purview. third that of the Estée Lauder Group and it Many of these products have been is still quite a ways from that of the L’Oréal 5% extremely successful. For instance, since Group. Additionally, the group’s 12% oper- hitting the market in 1997, cumulative sales ating margin is only higher than Shiseido’s of Sulwhasoo’s First Care Activating Serum, 6.5%. Compared to the more than 15% 0 Amore- Shiseido Estée L'Oréal Coty Inter one of the group’s heavyweight products, operating margins enjoyed by Estée Lauder Pacific Lauder Parfums has reached more than 1 trillion won and L’Oréal, the profitability of Japanese Source Company financial reports, New Fortune (approximately $930 million). With roots and South Korean cosmetics enterprises fall tracing back to 1932, over the years a bit short (Figure 2). AmorePacific has become a global cosmetic luxury market wouldn’t be what it is today, powerhouse. Led by Sulwhasoo, Laneige, The Strength of Chinese Money nor would Shiseido and AmorePacific have , and makeup brand Even though Shiseido and AmorePacific achieved such growth and success. , the group’s sales for the 2013 may still lag their contemporaries in the US Only reaching China in 2006, in less than fiscal year reached approximately $359 mil- and Europe, their rapid progress in the high- 10 years, Whoo has established more than lion. Additionally, over the past five years, end cosmetics and even the entire cosmet- 100 stores throughout the country, reach- the group’s stock prices have grown at a ics industry has been evident for all to see. ing as far as Gansu, Qinghai and Xinjiang in rate of more than 800%, far outpacing the This is no truer than in China, the world’s the west. Currently, Jiangsu Province sits at Estée Lauder Group and the L’Oréal Group second largest cosmetics market. To a cer- the top with 18 stores. (Figure 1). tain extent, if it weren’t for the enormous The power of mainland money is clear. According to the AmorePacific Group spending power of Chinese consumers, the One of the main reasons Whoo and

Emerging Markets Insight 5 Chinese Cosmetics

Sulwhasoo chose Harbour City’s Lane increase the Chinese market’s contribution tier cities. As it stands now, Lancôme can be Crawford for its Hong Kong location is to the group’s global sales from 10% to found in 170 cities across China. As for because that’s where a majority of main- 28% by 2020. growth, sales of the 11 brands that L’Oréal land tourists flock to when visiting the city. Compared to L’Oréal’s hefty 9.1% market has introduced to China double every four Appearing in the same space as Ceanelove, share in China, AmorePacific trails no small years, and the group predicts that over the Estée Lauder and other major brands sends distance behind with only a 1.2% share. next two years Chinese consumers will a clear message to Chinese consumers that become the largest supporting pillar of the these South Korean brands stand on the group’s cosmetics business. same level—a type of free advertising more Also working on establishing channels in valuable than many can imagine. Sales of the 11 brands that third-tier cities is Estée Lauder. Looking to Over the past nearly 10 years, the L’Oréal has introduced to make China its second biggest market after AmorePacific Group’s sales in the China China double every four years. the US, in 2012 the group followed in the region have averaged annual growth of footsteps of Shiseido’s Aupres brand by 47%, forming an important pillar for the establishing its own Osiao line of luxury group’s strong growth in overseas markets skincare products specifically designed for (Figure 3). During the first half of 2014, the the Chinese market. As it stands however, group’s total sales in the Chinese market Fighting its way into China’s high-end cos- it’s difficult to predict the brand’s potential reached $199.6 million, a year-on-year metics market 20 years ago, L’Oréal long as the group has currently only established increase of 26.5%. established itself in first- and second-tier two specialty shops, both of which are To meet the demands of this fast growing cities, and has already started fixing its located in Hong Kong, one in Lane Crawford market, the group spent a total of $120 mil- gaze on third- and fourth-tier cities. In 2012 in Harbour City and the other at the lion to open a production and R&D center in and 2013, the group brought its ace-in-the- Elements shopping mall. . Opened in October 2014, the hole, Lancôme, to 70 new cities across the Although there is room for expansion, center is all part of the group’s plan to nation; of these 33 were third- and fourth- China remains an important market for

Estée Lauder is trying to make China its second biggest market after the US.

Emerging Markets Insight 6 Chinese Cosmetics

The Chinese-led Asian- For luxury brands trying to get a piece of between other luxury items and cosmetics the cosmetics pie such as Burberry and is a bit like the difference in reputations Pacific market is fast Gucci, this is good news as they already between families from “old money” and becoming one of the world’s have well- established reputations. When those with “new money.” most important markets for Burberry skin cream or Gucci With this in mind, it’s easy to see how luxury cosmetics. makes an appearance at the cosmetics Japanese and South Korean cosmetics have counter, consumers’ familiarity with these earned their position in the luxury cosmet- brand names automatically make them ics arena. For instance, in 2013, the seem more valuable. extremely popular South Korean soap Looking at the money cosmetics groups opera “My Love from the Star” could be overseas cosmetics companies. Currently, spend on advertising can tell us a lot about seen on TV screens throughout Asia. In the the Chinese market accounts for 5% of how important branding is to these compa- Estée Lauder’s annual revenue and 7% of nies. Estée Lauder and Coty respectively L’Oréal’s. Worthy of note is that these num- spent $2.84 billion and $1.56 billion on mar- bers don’t include sales outside the main- keting during the 2014 fiscal year. This (Figure 3) land in , Hong Kong and Macau, nor includes different types of advertising, pro- depending on China China is an extremely important overseas do they factor in the multitude of mainland motions and product samples given free or market for AmorePacific tourists that buy cosmetics in shopping cen- with purchase of other products. By com- ($100million) ters and duty-free shops in Paris, New York parison, the two only spent $160 million 600 China Asia(not including China) or Dubai. If we were to include this into our and $67 million on R&D during that same Europe US 500 calculations, Chinese money most likely period, which means Estée Lauder spent accounts for as much as 15% of Estée 17.7 times the amount of money on mar- 400 Lauder’s annual sales revenue. keting than it did on R&D, while Coty spent

According to Estée Lauder’s estimates, 23.3 times as much (Figure 4). 300 for every dollar that the group earns in To put it a bit more bluntly, cosmetics is

China, Chinese outside the mainland con- an industry that relies heavily on packaging 200 tribute twice as much. Even more important ideas and selling consumers a dream of is that the Chinese-led Asian-Pacific market beauty. This is even truer when it comes to 100 is fast becoming one of the world’s most the luxury cosmetics industry, which is far 0 important markets for luxury cosmetics. more demanding than other luxury indus- 2011 2012 2013 The region’s current 33.1% market share is tries when it comes to building an image Source Company financial reports nearly equal to that of Europe’s. and telling a story. No matter if we’re talking about handbags or watches, creating the The Power of Packaging type of brand recognition that Whoo did in (Figure 4) Marketing is important The rise of cosmetics in Asia is closely tied just 12 years (Whoo was first introduced in Marketing expenditures of cosmetics to the characteristics of the cosmetics 2003) is practically impossible outside the enterprises far surpass that spent on industry. No matter if it is watches, jewelry cosmetics industry. product R&D or leather apparel, what the luxury industry In other words, even if luxury handbag 30% Percentage spent on marketing values most is a brand’s historical heritage, maker Hermès or Swiss ultra-luxury watch Percentage spent on R&D cultural tradition and the exquisiteness of its maker Patek Philippe had never sold them- craftsmanship. However, when it comes to selves as luxury brands, since the quality of 20% the cosmetics industry, these factors play a their products would be tested and recog- lesser role since cosmetics have a much nized by the market, they would still have shorter consumption cycle. Basically, when become luxury items. However, when it 10% you come down to it, looking past the end- comes to cosmetics, it really doesn’t matter less explanations about how a particular how effective your product may be. So long 0 skin cream was developed or its effective- as you tell a good story and set your prices Estée Lauder Coty ness, what cosmetics are truly selling is a high, you’re already well on your way to Source Company financial reports, New Fortune brand. becoming a luxury brand. The difference

Emerging Markets Insight 7 Chinese Cosmetics show, South Korean actress and Hanyul chases. Additionally, in 2013, single-product benefited from a concept that has been brand cosmetics spokeswoman Jun sales of the IOPE Air Cushion XP that Jun becoming increasingly popular over the Ji-hyun’s character Cheon Song-yi could Ji-hyun used on the show broke past the past few years: Masstige. A portmanteau of often be seen using Hanyul and other $90.4 million mark to reach cumulative the words “mass” and “prestige,” it is a AmorePacific brands cosmetics in scene sales of 10 million units. marketing term describing the process by after scene. Currently, neither Hanyul nor IOPE have which high-end brands are extended down Statistics show that sales of Hanyul brand been introduced to markets outside of to the masses and mid-market brands are Gogyeol Rich Effect Hydration Essence South Korea. Selling for the equivalent of given a boost. Both Shiseido and Amore- Water and Ja Woon Dan Moisturizing Cure more than $160, IOPE products Pacific have these types of skincare brands Balm increased by 75% after appearing on fall at the high end of the luxury cosmetics that fill the gap between mid-market and the show. In February 2014, daily sales of spectrum, with Hanyul just slightly behind. super premium brands, becoming a force to the latter at cosmetics stores in Myeong- reckon with through sheer numbers. dong and Insa-dong, —two areas that Where Are the Chinese Brands Another thing that shouldn’t be over- are often visited by overseas tourists—were No matter if it’s long-established Shiseido looked is the geographical advantage that five times higher than January, with Chinese or the more recent rising star that is comes from Shiseido and AmorePacific’s tourists accounting for a majority of pur- AmorePacific, Asian cosmetics have also location in Asia—a natural advantage that sets them apart from their US and European counterparts. Research indicates that women in Asia use an average of eight different skincare products each day, while in France they only use three. This fact pro- vides Japanese and South Korean enter- prises the impetus to introduce a more var- ied line of products. The fact that the skin tone and complexions of Asian consumers in the three countries are very similar, as are ideas about beauty, is also helpful when it comes to managing products for the region. The question seems to be: Where are Chinese enterprises in all this? While maybe it’s understandable why Chinese enterprises can’t rival luxury consumer goods makers such as Louis Vuitton and Cartier, it doesn’t stand to reason that Japanese and South Korean cosmetics enterprises can take on their American and European counterparts and yet China can’t, since China possesses many of the same natural advantages. South Korean cosmetic brands go on about beauty secrets passed down through the ages; China has those as well, in addition to traditional Chinese medicine. With the world’s second largest cosmetics market as a local market, why do Chinese cosmetics seem to be missing from the picture? China is also weak when it comes to the China’s local brands are limited to global cosmetics market. While there have mid- and low-end markets. been a few Chinese contenders, from Yue

Emerging Markets Insight 8 Chinese Cosmetics

Sai and Mininurse to the more recent TJoy low-end markets. Inoherb, Natural Beauty, and Mg Masks, these were soon bought up Chando and the Shanghai Jahwa Group’s by American and European cosmetic Herborist can be considered as some of the giants. This has been good for some China’s better-known brands. brands, but not so great for others. Yue Sai A new player in the Chinese and even and Mininurse were both purchased by Japanese cosmetics industry, Shanghai L'Oréal, but while the former has managed Jahwa has nine major brands which include to survive at its new home, the latter has the GF brand specifically for men. However, completely disappeared. Meanwhile, after With the world’s second when one-third of the market is dominated losing money after being purchased by largest cosmetics by L'Oréal, Proctor & Gamble and Shiseido, Coty, TJoy encountered a similar fate as market as a local market, and another third by other Western brands, Mininurse and was eventually abandoned. why do Chinese cosmetics this makes it extremely difficult for Chinese The number of local cosmetics brands seem to be missing brands to find a place in the market, leaving recognizable to a majority of consumers one to wonder just how long it will take for can practically be counted on two hands from the picture? China to come up with a standout interna- and are pretty much limited to mid- and tional brand of its own.

new trend

The Continued Rise of

Three years ago, metrosexual, a port- Kiehl’s, Ralph Lauren and Clarins have all manteau derived from metropolitan and introduced men’s skincare products. In heterosexual, was still very popular in the 2012, SK-II also entered this growing common vocabulary. However, while market, while Tom Ford Beauty began metrosexual men have already made introducing men’s skincare and for men known as Manstudio, which not way for China’s so-called sunshine boys— products just three months after begin- only sells Laneige and Hera brand men’s men who are considerate, positive and ning to work with Estée Lauder in 2013. products, but also has beauty consul- show respect towards women—cosmet- In South Korea—the world’s largest tants on standby to help men find what’s ics aimed at fashionable men willing to consumer market for men’s cosmetics— right for them. spend money to look good are becoming , oils, eye cream, foundation and Also in Asia, Lab Series, Estée Lauder’s increasingly popular. When it comes right are basic necessities that every Aramis brand men’s care cosmetics line, down to it, women don’t have a patent fashionable man needs, while some will chose a high-end mall in as on beauty and no matter if you’re a met- even use eyeliner and . the location of its first flagship store. rosexual man or a sunshine boy, wanting For this reason, it’s easy to understand L'Oréal’s followed close behind, to look good is part of everyone’s nature. why BB (blemish balm) cream has establishing its first stand-alone specialty Changes in social attitudes, increases become the leading force for a majority store at the same mall in 2013. Seeing in living standards and the influence of of men’s cosmetics brands in South the potential of this growing market, celebrity idols have all increased male Korea. Even Biotherm has introduced Estée Lauder has even established a demand for aftershave, , anti- men’s BB cream, in addition to its more men’s cosmetics department. aging products and even concealer. This than 70 other men’s cosmetics brands. It seems that the day that men market’s huge potential for growth has In order to better serve this male mar- become just as important to cosmetics inspired numerous brands aimed at men. ket, in 2011, the AmorePacific Group enterprises as female consumers may For instance, , Biotherm, Sisley, established a one-stop beauty shop just not be that far off.

Emerging Markets Insight 9