Beauty companies that do substantial business in China, from Shiseido to Estée Lauder to Amorepacific, are rattled. China’s crackdown on daigou — grey-market shopping agents who buy overseas for resale in the country — threatens a sector that has buoyed Asia’s travel retail for years. Fears over China’s slowing economic growth and an escalating trade war with the U.S. have also alarmed investors, sending beauty stocks tumbling.
For years, the daigou trade has helped to boost global cosmetics firms, which are able to tap the Chinese cosmetics market — now the world’s largest and fastest growing, according to investment bank Morgan Stanley — beyond their own home sales. But those days appear to be coming to an end. First, the stricter customs checks at China’s airports. Then a new e-commerce regulation (which goes into effect on January 1) stipulating that all daigou and online platforms must register with authorities and pay taxes. According to investment bank Goldman Sachs, the levy for premium skincare products, which can cost as much as $1,437 (RMB 10,000), will be about 30 percent.
As the much-anticipated end-of-year holiday season approaches — which, for many brands and retailers doing business in China, is the busiest time of year — it’s time to look at how cosmetics firms are adapting their business strategies.
China currently accounts for 17.5 percent of Shiseido’s total sales. Ahead of the holiday season, Katherine Melchior Ray, senior vice president and chief marketing officer for global prestige brands, said that the company was working on “fusing the customer’s Internet and real-world experiences” and “developing pop-up stores across Beijing and Shanghai” to raise awareness for some of their lesser known brands like Anessa and Elixir. “We’re also inviting local influencers to these events, where they can livestream. … The pop-ups will feature spaces for experiencing the products and photo walls,” she added.
Shiseido executives noted they’re not worried about a potential decline in Chinese demand. While consumption patterns may have changed, the overall trend is stable, said Ray. “So far this year we have done ¥140.5 billion (about $1.2 billion) in sales, which is ¥35 billion more than the same period last year. … The crackdown on daigou shopping has not affected us.”
Amorepacific, meanwhile, is preparing to launch exclusive gift-set products and limited-edition collections for the holiday season. It’s an important period for the company, said Changkyoo Lee, head of the group strategy unit at Amorepacific, which makes about 30 percent of its sales from Asia, including China.
“The fourth quarter is a peak season,” he said. “We also plan to expand online buzz with more content around seasonal themes and collaborating with influencers, conducting live broadcasts with them on Tmall.”
It’s an approach that makes sense: Tmall, after all, is China’s largest business-to-consumer e-commerce platform and counts over 500 million users at a time when China’s e-commerce market is forecast to hit $1.7 trillion in the next two years. Tmall, which is owned by Alibaba Group, currently offers more than 3,000 beauty brands, and adoption of the platform among premium beauty brands has risen to 84 percent in 2018 from 55 percent three years ago, according to research firm Garner L2.
It’s also a platform of choice for global firms like Estée Lauder. “We believe our double-digit growth in China can be sustained in the long term … [as] we continue to increase our investment in China, helping to recruit new young consumers and drive repurchase and loyalty,” said a spokesperson for the Estée Lauder Companies, which launched its Darphin brand on Tmall in March and Jo Malone in August. Several of its brands, including MAC, Jo Malone, and Clinique, also took part in this year’s Singles’ Day shopping bonanza, offering exclusive and limited-edition products, packaging and sets. As for a downturn in travel retail, she said: “We have not seen any real impact from stricter enforcement thus far.”
Meanwhile, at L’Oreal, which sells brands like Armani and YSL Beauty on Tmall, the e-commerce platform represents close to 20 percent of sales. Travel retail, which accounts for 10 percent of sales, remains a key focus of the business. “It’s growing very strongly, plus 27 percent. The growth is clearly coming from travel retail in Asia [and] it’s also coming mostly from Chinese travelers,” said L’Oreal Chairman and Chief Executive Jean-Paul Agon at the company’s latest earnings call. According to the executive, the company would focus on pushing more skincare products in the coming months. “Skincare is strongly accelerating in China. Of course, other categories are growing too, but skincare has become the priority.”