Global beauty giants stumble as Chinese brands surge

LVMH subsidiary Sephora is laying off hundreds of employees in China as it struggles to turnaround its loss-making operations. Approximately 10% of Sephora China's workforce of over 4,000 employees, including office and store staff, are impacted, with some senior executives also departing. Despite its global success, Sephora has encountered stiff competition in China, where local beauty brands have surged in popularity amid slowing market growth. The retailer suffered heavy losses in 2022 and 2023, as consumers increasingly opted for more affordable domestic products. “The proliferation of domestic and international beauty brands, coupled with increasing market segmentation, reflects the growing demand for personalized, high-performance, and sustainable products,” says Jiang Han, Senior Researcher at policy research body Pangoal Institution. “While Sephora has access to a vast range of brand resources, it has struggled to meet these evolving consumer needs, especially amid a challenging market environment, which has placed pressure on its performance,” he adds. Sephora is not alone. International beauty brands cut staff A wave of layoffs has swept through the global beauty industry this year, affecting major players like Estée Lauder, Shiseido, and Unilever, all of whom ranked among the top-10 global beauty brands in the first half of 2023. For instance, Estée Lauder plans to cut 3% to 5% of its global workforce, affecting up to 3,000 employees, while Shiseido announced early retirement for around 3.7% of its workforce. These cuts are often tied to sliding business performance, industry downturns, or internal restructuring. Japan’s Shiseido faced a significant blow last year due to the country’s controversial decision to release treated nuclear wastewater, which sparked a backlash that dented the company’s performance. Its 2023 earnings report revealed an 8.8% YoY drop in net sales, while operating profit plummeted 39.6%. Estée Lauder similarly cited weak demand in China’s luxury beauty market and a downturn in Asian travel retail, leading to a 2% YoY decline in global sales for fiscal Q2 2024. The company also announced the retirement of CEO Fabrizio Freda in June 2024, after nearly 16 years at the helm. China sales cooling The Chinese cosmetics market’s growth rate has steadily slowed, posing challenges for international beauty giants. In June this year, cosmetics retail sales contracted by 14.8% YoY, the sector’s worst performance in recent years. L’Oréal has responded by raising prices to mitigate the financial impact of the sluggish market. As of September 1, the company has implemented its third price hike of the year, raising the price of Helena Rubinstein products. The move follows similar increases in February and July across brands such as Lancôme, Armani, Shu Uemura, and Kiehl’s. L’Oréal CEO Nicolas Hieronimus projects that the global beauty market will grow 4.5% to 5% this year, down from an earlier forecast of 5%, with the downward revision largely attributed to cooling sales in China. In Japan, Pola Orbis Group also reported weaker 2024 first-half earnings – revenue dropped 2.3% drop and profit declined 18.4%, primarily due to slowing demand in China. Since January 2022, Estée Lauder’s share price has plunged nearly 75%, and the company now anticipates annual sales to either decline by 1% or grow by just 2%, falling short of analyst expectations. The prestige beauty segment remains under pressure, with no signs of recovery in China, where even traditionally resilient categories like lipsticks and fragrances are struggling to regain traction. Local brands emerge as winners While global brands are grappling with these headwinds, Chinese beauty brands are gaining momentum. Chicmax Cosmetics, the parent company of Kans, reported stunning 120.7% YoY revenue growth in the first half of 2024, with profit up 308.7%. Kans, which posted a 184.7% increase in revenue, capitalized on its strong presence on platforms like Douyin and Tmall, emerging as the top beauty brand on Douyin. Similarly, Proya, another domestic leader, saw revenue expand 37.9% YoY to 5 billion RMB ($704 million), fueled by its diversified product portfolio and aggressive online strategy. At this pace, Proya is on track to become the first Chinese beauty brand to surpass the 10 billion RMB ($1.1 billion) revenue milestone this year. “In recent years, domestic brands have dominated the market. Western brands have been absent from Chinese social media due to Covid-19,” says Davy Huang, director of business development at Chinese e-commerce strategy agency Azoya. “[Young generations] don’t share older generations’ collective memory of poor-quality domestic products. Born and raised in cities, they’re used to high-quality items and perceive modern Chinese brands as comparable to international ones, but much cheaper.” Mastering product scenarios “The rise of online shopping platforms, particularly livestream e-commerce and social media marketing, has significantly transformed consumer shopping habits,” says Jiang. This shift has dealt a substantial blow to traditional brands and their brick-and-mortar stores. In light of this, domestic beauty brands have leveraged substantial marketing budgets, creating viral content and partnering extensively with livestream influencers and online personalities. They have successfully captured consumer attention and market share. Younger consumers, raised in an era of domestic brand growth, do not shun local brands in favor of international names; instead, they prioritize effectiveness and value, areas where local brands often excel. That said, premium skincare remains an exception, where international brands still hold a clear advantage, a segment they continue to invest in. International brands are keenly aware of the growth of e-commerce and livestreaming. However, maintaining exclusivity while appealing to a wider audience remains a delicate balancing act, as seen in recent missteps like YSL’s ill-fated collaboration with livestreamer “Crazy Little Yang Brother,” when discounted prices and a “vulgar” performance damaged the brand’s premium image. In contrast, domestic brands have mastered the art of using product scenarios to create a sense of need among consumers. Global brands can learn from this approach without compromising their prestige, by elevating the scenarios they present and articulating a higher-end narrative. Despite consumers turning more rational, the vast Chinese market still holds untapped opportunities. As living standards rise, international brands should focus less on cutting jobs and more on how to leverage their strengths to align with the evolving needs of consumers. E-commerce platforms provide valuable consumer data, which global brands can use to craft more resonant stories and localize their brand narratives.

Global giants stumble, Chinese brands surge

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Global giants stumble, Chinese brands surge

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