Will the Flooding of Imported Cosmetics Change the Competition Pattern?

Gu Jun

Yuanzhi PHPC Consulting Co., Ltd., China

Introduction

With the economic development and growth in living standards, imported cosmetics have been increasingly popular with domestic consumers, and the sales volume of imported cosmetics has increased by more than 20%every year. The year of 2015 saw the outburst of imported cosmetics. From January to July of 2015, the sales volume of imported cosmetics was 41,000 t, with an increase of 52.2% compared to that of previous year, while in the corresponding period, the value of imported cosmetics was USD 1.674 billion, with an increase of 36% on a yearon-year basis. From the point of view of Guangzhou—the base of cosmetics, customs statistics shows that in 2015, the sales volume of imported make-up cosmetics and skin care products in Guangdong was 7,500 t, with an increase of 40% compared to that in 2014, and the value of which was RMB 1.5 billion, with an increase of 30% on a year-on-year basis. From the point of view of importing countries, Korean cosmetics are particularly prominent. In March 2015, the export amount of Korean cosmetics was USD 277.46 million, the maximum amount since the publishing of related statistical data by Korean Customs Service started from January 2000, where the amount of exports to Mainland China was USD 118.89 million, ranking as first place. In 2014, Korean brands developed by 46% amid from large-sized cities to medium-sized cities of China. From January to July of 2015, Korean cosmetics accounted for 22.1% of shares in Chinese market, allowing Korea to become the second largest cosmetics importing country followed by France.Korean cosmetics are favored by the consumers due to the rapid launch of new products, the public positioning of products and the higherperformance ratio, which is highly attractive for young consumers.

Policy support—tariff reduction

The blowout of imported cosmetics also benefits from the implementation of a series of policies in China. On June 1, 2015, the import tariff of skin care products was reduced from 5% to 2%; in July 2015, the price of Estee Lauder, Shiseido and L’Oreal was also reduced; in October 2015, the Korean cosmetics price was also reduced. Take Estee Lauder 15mL ANR Eye Synchronized Complex for example, the selling price was RMB 490 in Mainland counter after price reduction, while its selling price in the Hong Kong counter was HKD 500 (RMB 400).Shiseido Group mainly reduced the price of essences. The recommended retail prices of six star products in three main brands of the Group were reduced by 8%～19%.Such price reduction was implemented in channels such as department store, airport duty-free shop, E-commerce platform and other channels since August 1, 2015.

Generally speaking, the price of imported cosmetics includes the tariff, 17% VAT and 30% consumption tax. In 2006, consumption tax of skin care products was canceled.If the import price of a skin care product is about RMB 50,consumers shall pay a tariff of RMB 2.50 (calculated by the previous 5%) and a VAT of RMB 8.30, totaling RMB 11.43,and if calculated by the reduced tariff rate of 2%, the total tax is RMB 9.67, actually reduced by RMB 2.00. The import price plus some taxes, customs charges, warehouse logistics fees, discounts for suppliers and admission fees and channel fees of superstores, constituting the cost of imported cosmetics. Actually, import tariff accounts for 0.4%～6.5% of the market retail price, it is obvious that the tariff reduction would not have a significant effect on reduction in the retail price of imported cosmetics.

Despite the limited effect of the import tariff adjustment policy on the retail price, tariff adjustment would just give the foreign-funded cosmetics enterprises a reason for price reduction under the pressures of performance decline and brand aging.

Rise of cross-border E-commerce

The executive meeting of the State Council held on July 15, 2015 deployed six specific measures for promotion of foreign trade, which could be summarized for alleviating the burden of foreign trade enterprises and increasing the customs clearance efficiency. The latter strongly supports the new business model of foreign trade, particularly favoring the development of crossborder E-commerce. Premier Li Keqiang presented a tax adjustment scheme at the meeting, including the opinions on adjustment of import tariff and consumption tax.Expansion of domestic demand has become a powerful tool for steady growth in the case of continuous low demand for export, so the attraction of consumption to flow back from abroad was still the important direction of expansion of domestic demand. Therefore, various E-commerce platforms started to engage in cross-broader E-commerce competition in 2015.

Domestic E-commerce platforms had high aspirations for cross-broader E-commerce, and websites abroad were also not to be outdone. The cosme website of Istyle Group was the largest comprehensive beauty website in Japan;Cosme, launched on a regular basis was the cosmetic ranking list selected by consumers, which was deemed as the guidance for selective purchasing of cosmetics by many people. Istyle selected the largest E-commerce platform in the field of Chinese cosmetics—Jumei.com,and settled down in Tmall.com, utilizing cosme to introduce and sell popular commodities to the Chinese consumers.

Opening of Free Trade Zones (FTZ) for imported products

On April 21, 2015, Guangdong, Fujian and Tianjin Free Trade Zones were inaugurated in a unified manner.On June 1, 2015, Gao Hucheng, Minister of Commerce of China, and HE Yoon Sang-jick, Minister of Industrial Resources for Businesses of Korea, officially signed the Free Trade Agreement between the two countries in Seoul,Korea. According to the Agreement, the liberalization proportion of goods traded between the two parties shall exceed 90% tax items and 85% trade volume in terms of open level. The first integrated exhibition & trading platform of state-level was established in Shanghai Free Trade Pilot Zone—Australian National Exhibition &Trading Center has many cosmetics brands including Botani for sale at present. In addition to the on-line platform, the Center also plans to establish about 100 stores throughout the country in three years, providing experience opportunities for consumers.

Foreign-funded cosmetic enterprises are not highly favored

Although the sales volume of imported cosmetics in China was considerable in 2015, the performance of foreign-funded cosmetic enterprises in China were not as good as they wished. The data showed that the sales volume and profit of famous foreign-funded cosmetic enterprises in China were reduced successively.Meanwhile, the total sales volume of local cosmetics in China exceeded that of foreign-funded brands for the first time.

Which imported cosmetics were in high demand?Certainly, Korean cosmetics were thriving in the downturn.Many other countries also planned to bring their products to Chinese market, including Australian cosmetics known well by Chinese people but difficult to purchase and unique products without large scale at present in the market. Such products did not enter China in a large scale and had difficulties in forming their own outlets in Chinese market, or lacked sufficient strength to establish counters in department stores. With the FTZ establishment and tariff reduction, such products also gained opportunities.

Previously, foreign-funded cosmetics brands always took counters as the main position. However, it was difficult for new brands to enter because of the limited number of counters. Due to the competitive environment and pattern change, imported brands would also suffer from troubles such as environmental inadaptability,extensive service yet to be improved and high cost. Over a long time in the past, many enterprises focused on the breakthrough of a single channel from point to surface,thus forming a superior market, immediately expanding to multiple channels. However, nowadays, the entire whole industry has undergone great changes, and along with the high fragmentation of consumption time, the multi-channel and omni-channel marketing mode will also gradually become inevitable.

Popular in cS stores

Imported cosmetics are rare in CS channel of China.Presently, WeChat commerce and E-commerce only seize some shares of medium-end and low-end markets,imposing little impact on the high-end market. In recent years, the maximum impact on medium-end and highend imported cosmetics is purchasing agent. However, due to its limitation, purchasing agents cannot offer the trial of new products like stores, which can offer comfortable environment and service for customers. Cosmetic store manager cannot ignore threats or chase the trend blindly,but shall break through the weak link-service to accomplish its irreplaceable style. Along with the development of E-commerce and WeChat commerce channels in the past two years, consumers have been segmented, and the cost pressure of the store needs to be relieved by the brand with greater contributions for area-effectiveness.

Previously, franchise stores achieved the sales volume growth at a rate of 10% above every year, but the rate was reduced in recent years. Although suffering from the impact on shares, the franchise store channel is raising its position, and even increasingly tends to become the main-stream channel of cosmetics. It is urgent to seek for the brands and categories with differentiation and profit margin. Imported products with authentic international brand background, different selling point, high-quality effect guarantee, reasonable profit and professional team service have become the most rare and most highlighted brand in the market.

If a foreign brand wants to be recognized and accepted by consumers rapidly, it needs steady uniqueness, which has inevitable association with precise brand positioning,special concept and product individuality. A brand that allows consumers to have deep impression and even to establish loyalty should have its own distinct characteristics in the product soul, terminal display and marketing method.

According to the analysis, imported cosmetics entering into Chinese market could be considered as at an auspicious time but a wrong time. This is because that now it is the best opportunity for brand building, but the time for money grabbing has been ended. Many new imported cosmetics cannot build their own channels and counters due to capital and strength limitation, except for relying on the dealers and cosmetic stores for distribution. This will certainly damage the standing of imported cosmetics in the perspectives of consumers, but is it also a way for rapid expansion of market shares? At least, cosmetic storekeepers hope to form their store differently by virtue of such products, just like the boom of high-end shampoos in 2014.Predictably, it can be imagined that imported cosmetics will trigger a new round of storm in cosmetic stores in the near future.