The Chinese cosmetics industry –Effectiveness of several distribution
channels, influenced by China’s home country culture
‘What is the optimal distribution channel configuration for the Chinese cosmetics industry? To what extend has the home country culture of China influence on the relationship between distribution channel usage and its subsequent effectiveness in sense of
retail value?
The Chinese cosmetics industry –Effectiveness of several distribution
channels, influenced by China’s home country culture
University of Groningen Faculty of Economics & Business
Master Thesis International Business & Management June 12, 2015
Author: E. Oude Munnink K. De Vriezestraat 30
9711 AG Groningen
eline.oude.munnink@student.rug.nl
Student number: 2190540 Supervisor: P. Marques Morgado
ABSTRACT
TABLE OF CONTENTS
1. Introduction………..……….6
2. Literature review……….………10
2.1. The cosmetics industry………..10
2.2. China………..11
2.3. The Chinese culture………...13
2.4. Distribution channels……….15
3. Conceptual model………...18
4. Hypotheses………..19
5. Relevance………21
6. Methodology………...22
7. Discussion & Analysis……….………...23
7.1. The Characteristics of the Chinese consumer………..23
7.1.1 China and its several regions……….25
7.1.2 Consumer lifestyle trends in China………...31
7.1.2 Characteristics of the Chinese consumer (age/preferences)……….….33
7.2 Top three foreign players within the cosmetics industry………36
7.2.1 The L’Oreal Group…….………...40
7.2.2 Estee Lauder…….……….44
7.2.3 Procter & Gamble…….……….49
7.3 Distribution channels…….……….51
7.3.1 West, rural China………..51
7.3.2 East, city China……….56
7.4 Statistical analysis…….………..60
9. Limitations and further research……….70
10. References………...70
11. Appendix A – Timeschedule...………75
12. Appendix B – Resources…...………..75
1. INTRODUCTION -
Within the field of international business, emerging markets tend to have increasing priority among multinational enterprises. An emerging market can be defined as a nation’s economy that is on its way to become an advanced economy (Investopia, 2015). China is considered as one of those emerging markets, showing rapid growth in disposable incomes and expenditures among its population, offering massive opportunities for multinationals. Following findings of Euromonitor International, average annual disposable income increased with 87,5% from 2009 to 2014 (Euromonitor International, 2015) – illustrated by figure 1.
FIGURE 1
Annual disposable income China (Euromonitor International, 2015)
Whereas the government historically prohibited cosmetics, China is catching up rapidly with the rest of the world. Following findings of Euromonitor International, expenditures on cosmetics have more than doubled within every region China is considered with from 2009 till 2015 (Euromonitor International, 2015). China’s middle class is expected to triple their spending over the coming years, which will reach $6 trillion by 2020. Chinese women tend to spend 10% or more of their income on cosmetics (face creams, lipsticks and mascara), whereas in Shanghai – considered as the Paris of the Asian Pacific - women tend to spend 50 times more per capita on cosmetics than women do nationwide (Prasso, 2005). According to Jacques Pnhirin, a McKinsey partner who tracks retailing: ‘This is a market that was almost non-existent 15 years ago, and about 70% of it remains to be developed’ (Prasso, 2005). Because of this, international companies try to break into the Chinese market and cannot afford to overlook this growing important market.
However, since China is considered with a deeply rooted, collectivistic culture, which has its reflection on believes, preferences and needs of their citizens, breaking into this market is not that easy for multinationals. Simply replicating their strategies for other parts of the world will not cause them substantial profits. In order to be profitable, marketing strategies should be adjusted towards the specific needs of this emerging market. Marketing strategy can be defined as ‘the pattern an organization integrated that specifies its crucial choices in case of products, markets, marketing activities and the creation of marketing resources. It includes communication towards consumers and the delivery of products that are about to offer value for customers, through specific distribution channels (Varadarajan, 2010). Beside, nature of executed marketing strategies of multinational enterprises entering foreign countries influences the effectiveness and firm performance (Yang, Su & Fam, 2012).
Hofstede, 1980). These scholars are concerned fundamentally with explaining which strategy is most appropriate for which country, whereas their major concern is how to anticipate on specific cultural needs, taking into account cross-country differences in consumer attitudes toward multinationals (Geng, Hon-Kwong, Tsang-Sing, Annamma, 2012). As marketing strategy scholars have searched for which strategies are most effective for which country, they provided enterprises that aim to enter new host countries from directions to follow in order to be most profitable (Verhoef & Leeflang, 2009: Lhuillery, 2014).
However, taking previous mentioned executed research into account, implications concerned with corporate strategies, provided for multinational enterprises tend to be more general in nature, whereas specific advises for particular industries in particular countries are lacking. Moreover, effective implications for appropriate distribution channel configuration are lacking as well. Since the effectiveness, execution and importance of distribution channels greatly varies within different industries and countries (Balasubramanian & Kumar, 1990), industry, country specific international distribution channel strategy implications will be of great importance for multinational enterprises whereas expenditures on building and maintaining distribution channels consumes a substantial part of overall corporate budget.
Following findings of our research, we see that taking shortcuts on China’s several regions will not help you to become successful. China is considered with 1.3 billion inhabitants, divided over several regions. West China has experienced less economic development, is considered with a lower population density and has increased access to Internet only since two years. Compared to the eastern, coastal regions of China, we see major differences.
Luxury is a way of life and people are concerned with higher disposable incomes, they are less traditionally and culturally oriented since they have experienced influence of the Western world for a longer period of time. Since the dimension collectivism tends to be much lower within this area, people are less influenced by their environment.
These findings have their reflection on the most appropriate distribution channel configuration, whereas people from the west are much less educated in terms of cosmetics and have substantial safety concerns – something that is deeply rooted in the Chinese culture as well. This requires more one-on-one advice and the preference for specialist beauty retailers.
On the other hand, the more sophisticated Chinese population, living in big cities at the eastern, coastal areas, are interested in experiencing new things, are somewhat discriminatory towards western China and prefer high end luxury cosmetics, offered in luxurious department stores. We also found that the online channel may never be neglected due to its extensive growth during last couple of years. These differences will be outlined further, whereas we will take a closer look at three early, multinational entrants (the L’Oreal Group, Estee Lauder and Procter & Gamble).
2. LITERATURE REVIEW 2.1 The Cosmetics Industry
The cosmetics industry is an interesting topic to consider within the field of international business and the influence of culture since it tends to be a worldwide industry, greatly influenced by cultural and institutional differences (Dimitrova, Kaneva & Gallucci, 2009). The cosmetics industry is considered with a few big global players, whereas we exclude brands that exclusively focus on mass cosmetics or body skincare since we focus on the mid- to high-end facial cosmetics industry (colour cosmetics and skin care). The American brand Olay (Procter & Gamble) tends to be number one, with a brand value of $11.8 U.S. dollars in 2012. Other big players are Avon, L’Oreal Paris, Estee Lauder, and Lancome (Appendix C, Forbes, 2012) – all based in the U.S. or France.
We see that all of the world’s most substantial brands are considered with enormous marketing expenditures each year. For instance, $5.93 billion for L’Oreal in 2013 (Statista, 2013), with an operating profit of $3.875 billion (L’Oreal annual results, 2013). Distribution channel configuration can be considered as part of the marketing strategy and as part of the overall corporate strategy. Implications are of great use due to the massive amounts of investments multinationals are considered with.
2.2 China
If we take a closer look at China, we see that the country was historically only seen for its cheap labour. In recent years, China has become a land of great opportunities because of their maturing economy and growing consumer market. As mentioned before, the cosmetics industry is viewed as China’s most dynamic market, whereas sales are only expected to climb.
However, Western marketing strategies tend to fail within China (Internship China, 2015) due to the extensive amount of challenges they are facing while operating in China. First, Chinese consumers like to buy domestic products, whereas cultural beliefs and rising national pride influences Chinese consumers’ attitude towards Chinese and Western luxury brands (Yang & Chandon, 2013). Second, due to cultural differences between the foreign company and the Chinese consumer foreign cosmetics company might not fully understand the needs and preferences of the Chinese consumer. A third reason might be that due to deeply rooted safety concerns, people experience mistrust towards multinationals (Euromonitor International, 2015).
If we take a closer look at the most substantial players within the cosmetics industry – globally and within China -, based in the United States and France, and compare their home country cultures, we see significant differences (Figure 2; Hofstede, 2012), whereas the collectivism – individualism dimension tends to reflect the most substantial difference between the three cultures (explained in the next section).
meet Western beauty aesthetics is a growing phenomenon, whereas surgeries for eye widening and a more prominent nose bridge are more popular than anywhere else around the globe (Prasso, 2005). Nevertheless, the desire for a more western appearance does not mean that desires like whitening or safety are diminished, whereas these are deeply rooted.
Despite findings about foreign failure within China, some foreign brands have made it in China. If we take a look at the top five cosmetic brands we see that two are Asian (Shiseido and Biore - ranked third and fourth) (Forbes, 2014) whereas the three largest foreign players within China (L’Oreal, Olay and Estee Lauder) are originally from the U.S. or from France – which indicates that American and French brands tends to be most profitable globally and within China (Avon Products Inc, Revlon Inc, Max Factor Ltd & Estee Lauder, 2007). Research suggests that corporate strategies tend to reflect cultural characteristics of the home country of the multinational enterprise (Pioche, 2011), which includes that business strategies emphasize national culture and nation and are greatly influenced by political and social backgrounds. Which would include that due to different home country cultures, the U.S. and France tend to differ largely in case of executed strategies (Weber, Capitant de Villebonne, 2002: Pioche, 2012).
other factors influencing the effectiveness of distribution channel configurations, whereas we will first discuss the influence of the Chinese culture.
2.3 Chinese culture
Compared to the American and French culture, the Chinese culture tends to be greatly different, which makes it harder for American or French international cosmetic enterprises to adjust their strategies towards the needs and preferences of the Chinese consumer (Hofstede, 2012). Factors like paternalism, group orientation, and confucianism (traditional hierarchical relationships between people, emphasizing close-knit or social structures, personal relationships, harmony and obligation), are of great importance and deeply rooted within the Chinese culture and tend to characterize the Chinese society. Beside, the Chinese society is concerned with a set of moral standards, which are recognized for a substantial period of time, including; benevolence, righteousness, propriety, wisdom and trustworthiness (Luk, Fullgrabe & Li, 1999). Another aspect of the Chinese culture is that people do not operate completely based on their own will, whereas a large body of relationships usually determines their actions and beliefs (Luk, Fullgrabe & Li, 1999). Subsequently, Chinese culture ‘regards people as members of colonies, not as individuals’ (Wang, 1986).
FIGURE 2
Hofstede’s dimensions – China, U.S., France (Hofstede, 2001)
Looking at the biggest foreign players in China, companies based in the United States and France, it is possible to conclude that home country cultures of these countries are almost contradicitng the Chinese culture. Despite the differences between the U.S. and Franc, we consider them both as Western cultures, and the most substantial difference between these Western cultures and the Asian culture lies – as stated before – in the dimension collectivism – individualism. For companies, entering the Chinese market, it is of great importance to recognize these differences in culture, and adjust strategies in such a way that they fit the preferences and needs of the Chinese consumer.
has experienced much less influence from the Western world than coastal, east China. This is expected to have its reflection on the most appropriate distribution channel configuration per region.
2.4 Distribution channel strategy
From several cases we can already conclude that the most profitable foreign brands within China already adjust their strategies in such a way that they reach a particular segment. If we look at, for instance, the American brand, Estee Lauder, we see that it tries to reach the younger segment within China with their sub-brand MAC, offering an experience of glam, in-your face modernity through department stores. In Shanghai, there are not many citizens remembering the precommunist days, whereas the great-grandchildren are starting from scratch (Prasso, 2005). Nevertheless, for foreign cosmetic companies, the threat of domestic and Asian brands remains to exist. Brands like Shiseido (Japan) are highly aware of the needs of the Chinese consumer and are concerned with a longer history of R&D in for instance the skincare department. Moreover, people have substantial safety concerns, and are expected not to act solely based on their own will. Still, early entrants have seen results within China, whereas they had the chance to build up market share (Fortune, 2014; Euromonitor International, 2015), the question is, what were the success factors and which actions caused failure?
world, are less profitable (Luk, Fullgrabe & Li, 1999). Within this section we will outline the distribution channels expected to be most effective, and the distribution channels with the highest potential within China, whereas we are curious about the optimal distribution channel configuration within China. We will not include grocery retailers, since they mostly sell low-end personal care products (shampoo, facial cleansers) (Fung Business Intelligence Centre. 2013), since the focus of this research is on colour cosmetics and skin care in the mid- to high-end segment. Research shows that cosmetic companies that get multi-channel retailing right, have the opportunity to enjoy larger margins than brands using one single channel (DeJohn, 2012). The same research reveals as well that especially for emerging brands, multiple channel usage tends to be of great importance. As stated before, we expect some substantial differences in distribution channel effectiveness between China’s rural areas and China’s urban areas – this will be explained further in the discussion section.
Department stores - Department stores offer a wide range of merchandises and
provide a full sensorial shopping experience to the consumer – which cause them to have an important role in brand building. Despite the fact that department stores tend to lose appeal to Chinese consumers due to poor differentiation and their market share dropped from 33.2% in 2007 to 28.7% in 2011 (Fung Business Intelligence Centre. 2013.), it still remains to be a substantial distribution channel, which should never be overlooked by any cosmetic company.
Specialist Health and Beauty Retailers – The second most substantial distribution
retail channel for cosmetic products in less educated areas (Fung Business Intelligence Centre. 2013.).
Internet retailing – Another distribution channel, growing in importance over the last
couple of years, is the online distribution channel, rising from 0.8% in 2007 to 5.0% in 2011. There are several types of B2C online retailing, for instance self-operating online platforms, third-party online platforms and applications for smartphones. Online retailing serves brand building and can be used for promotion purposes. Besides, it is expected to become more and more important over the coming years (Fung Business Intelligence Centre. 2013.)
Main question within this research is ‘what is the most effective distribution channel
configuration for the Chinese cosmetics market?’. We want to know how to reach the
population within China, through an optimal configuration of distribution channels, taking into account the Westernized and traditional population. In addition to this, we aim to find out which single distribution channel is most effective in order to reach the young women. Moreover, we are curious whether effectiveness of distribution channels is influenced by the cultural orientation of China – focusing on the dimension collectivism – individualism.
3. CONCEPTUAL MODEL
Following conceptual model explains the variables that will be investigated within this research. We will take a closer look at the relationship between distribution channel usage and the effectiveness of such strategy in sense of retail value, whereas we expect the Chinese culture to play a moderating role.
The problem indication of this conceptual model is concerned with the question which distribution channel configuration is most effective within the Chinese cosmetics industry.
Distribution channel usage –Department stores, specialty stores and Internet
retailing.
Chinese culture – Within this research we are curious whether the Chinese culture
plays are moderating role between distribution channel configuration and effectiveness in sense of retail value.
Effectiveness – Effectiveness of marketing strategies is measured through retail value,
whereas sales are used to calculate the value.
4. HYPOTHESES
Following hypothesis, based on general ideas, describe the expectations within this research, whereas we are aware of the fact that outcomes can vary. As mentioned in previous sections, the right combination of several distribution channels is vital in order to be most effective. Within this research, we expect that a combination of more traditional distribution channels (department stores and specialty stores) and a more modern distribution channel (online shopping) will be most effective in order to reach the Chinese consumer, whereas online and specialty retail stores are gaining in popularity, now making up 20 per cent of sales (Young, 2014) Through the combination of these distribution channels modernity and tradition are mixed, which is expected to be crucial since due to the collectivistic culture, the younger – more Western oriented - women, and the older – more traditional – Chinese women are both reached. Since people tend to be part of in groups, which causes that people are influenced by beliefs and choices of others, cosmetic companies should adopt a distribution channel strategy that satisfies both consumer groups – however, we expect on the other hand that optimal distribution channel configuration might vary across regions. Nevertheless, we purpose following hypothesis.
H1: A combination of Department Stores, Specialty Stores and Online Shopping are core to any successful distribution channel strategy.
Although online shopping contains only 5% of overall sales in 2012, it is expected to play a highly important role during the coming years, due to substantial growth. Beside, online presence of brands fosters the overall awareness, which might foster offline sales in return. We purpose following hypothesis:
Since the younger consumer within China tends to become more and more Western oriented, interested in characteristics of the Western world, we believe that the most effective distribution channel among China’s younger population is the online channel.
H1b: The most effective distribution channel among young consumer within China is the online channel.
As outlined in previous sections, department stores sales have decreased. Still, we argue and expect that this channel can never be neglected. Despite the fact that internet penetration rate has increased since two years due to government investment; compared to other parts of the world, it remains to be relatively low. Besides, we believe that there will always be a group of consumers that aims for the experience of offline shopping or requires personal advice. Based on these assumptions, we formed following hypotheses:
H1c: Although effectiveness of department stores is decreased, this distribution channel can never be neglected and should always be part of the marketing strategy.
As outlined in previous sections, the cultural orientation of China is in sense of collectivism – individualism highly opposite towards Western cultures. This cultural dimension is expected to influence the effectiveness of distribution channels since people are highly influenced by other in-group members and determines whether or not traditional values are transferred to others.
H2: The Chinese cultural orientation (collectivistic) affects the effectiveness of distribution channels.
believe distribution channel configuration should be adjusted to this and it would be a shortcut to distribute these segments through the same channels.
H3: Segments in facial cosmetics (colour cosmetics and skin care) require different distribution channel configurations due to their dispersed characteristics and consumer base.
As we mentioned earlier in our introduction section, we are aware of the fact that China is a highly dispersed country, whereas people from the western, inland tend to have different lifestyles, believes and values, compared to inhabitants of China’s biggest, eastern cities (Shanghai and Beijing for instance). We will take this into account by forming our implications, so implications regarding our hypotheses might vary across the regions.
5. COSMETICS IN CHINA – A GROWTH PLATFORM
not have the same in-depth knowledge about the Chinese culture and preferences of China’s inhabitants as domestic companies or for instance other Asian companies have. Within this research we will put light on the question how: ‘How to enter China, or how to expand your business within China’. Distribution channel configuration tend to be an important part of you overall strategy (DeJohn, 2012), whereas preferences for specific distribution channels vary across nations and across cultures (Sabiote, Frias, Castaneda, 2012). Taken these findings together, implications about the right distribution channel configuration may cause that strategies of multinationals will turn out to be successful instead of failing – which argues for the fact that these implications have value for multinationals in the cosmetics industry and multinationals in other FMCG’s industries (since characteristics seem to be comparable).
6. METHODOLOGY
nature of the development of these firms within China and are suitable for a deep and detailed investigation of the best distribution channel configuration. These case studies will be complemented by cross-sectional, archival research, based on data derived from Euromonitor International. This database tends to be the best-informed database in case of worldwide economical development, whereas it holds a massive amount of valuable research about consumers, markets, industries, statistics and countries. Archival and case study designs will be complemented by statistical analyses on relationships between colour cosmetics, skin care and distribution channel value in sense of retail sales, in order to confirm or complement our findings from secondary data research. Previous mentioned statements outline our choice for secondary and primary data collection.
7. DISCUSSION & ANALYSIS
We will start this research with an explanation about China and its several regions, highly varying in disposable income, economic development, lifestyles, preferences and cultural orientation of the citizens. We will discuss the trends within these regions in order to provide appropriate implications about distribution channel configuration for beauty companies. Second, we will outline the influence of the Chinese culture and differences among several age groups and their response towards different brands and distribution strategies. Third, we will discuss three foreign companies (the L’Oreal Groupe, Estee Lauder and Procter & Gamble) that have been present in China for a significant period of time and are mostly active in the mid and high-end personal care and beauty segment. Fourth, we will outline the best distribution channel configuration for skin care and colour cosmetics through secondary database research and primary statistical analyses.
7.1. The characteristics of China, its culture and its consumers -
China is a country with over 1.3 billion citizens, and is concerned with an increasing annual disposable income per capita (figure 4). As stated in previous sections, their beauty industry is their most dynamic and booming industry, which is illustrated by figure 5 (In-cosmetics, 2014). Within this figure we can see that China is ranked high in sense of value growth concerning the cosmetics industry. In figure 6 we can see that mass cosmetics have the highest share within China, compared to other parts of the world, their share in premium beauty and personal care is relatively high as well (In-cosmetics, 2014).
FIGURE 4:
FIGURE 5:
Industry dynamics; performance per country
FIGURE 6:
7.1.1. China and its several regions –
Since China has over 1.3 billion citizens it might not come as a surprise that there is a lot of distance between its regions, which causes distance in believes, values, cultural orientation and overall orientation. Besides, due to substantial differences in welfare, disposable incomes vary to a great extend – something of great importance for beauty companies, whereas the three companies of interest are all operating in the mid- to high end segment. Following figure (figure 7) outlines the absolute differences in sales of beauty and personal care by region. These absolute differences are contributable to inequality in population and welfare rate between inland, rural and coastal, which polarises the consumer market and makes it difficult for companies to expand effectively.
FIGURE 7:
Sales of Beauty and Personal Care by Region: 2009 – 2014
over 2 million inhabitants) (Nations Online, 2015). Moreover, economic development, GDP and job chances are substantially higher in eastern, coastal areas, causing differences in relative and absolute value growths.
TABLE 1:
Relative growth of sales in Chinese regions 2009 - 2014
Region % growth 2009 - 2014
East China + 63,25%
Mid China + 52,60%
North and Northeast China + 64,07%
Northwest China + 49,72%
South China + 63,08%
Southwest China + 48,21%
China + 59,80%
However, despite the absolute differences between the several regions, based on the relative growth, it is possible to conclude that whatever your place in the social environment is, beauty and personal care have become more and more important.
FIGURE 8:
On the other hand and despite the fact that relative growth shows the importance of beauty in every region, it is impossible to neglect the differences between the regions, and the fact that you should effectively anticipate on these differences. The enormous spread of wealth has major influence on strategy in China (Walker, 2013; Euromonitor international, 2014). Above, in figure 7, you can see that retail sales of cosmetics, personal care and beauty in Mid, Southwest and Northwest China summed up to 77.397,6 million dollars. Even if you add these three regions together, you can see that sales are still less than in east China (84.722,6 million dollars). Despite their lower population density, mid, northwest and south China are expected to be the next growth frontiers for beauty companies since they still offer a substantial consumer base. Nonetheless, beauty companies that have gained substantial foothold in east China and have expanded to these second-tier cities have lost some of their stake in coastal, east China. The reason is that people from east China are somehow discriminatory towards people from the inland. This trend is most visible in the high-end consumption patterns, whereas rural workers from the inland are rejected from upmarket hotels, shopping malls and restaurants.
Following findings of Euromonitor’s executive summaries about developments in the beauty and personal care segments from 2014 and 2015 (Euromonitor International 2014; 2015), it is possible to outline some differences between preferences, needs and trends among the several regions within China.
East China:
1) Men’s grooming increasingly important, demand was shaped through consumer education in physical stores.
2) Innovations and new products were highly important.
3) Internet retailing enjoyed rapid development due to its convenience and low price. 4) Domestic players offering free skin services through beauty specialist stores.
5) Within 2015, the entire BPC market sustained to their steady growth, despite China’s economy decreased in growth.
6) Increased competition in 2015 among domestic and foregin players.
7) Quality, premium and luxury as key factors, low price sensitivity within this region. 8) Open attitude, less influenced by traditional cultural beliefs.
Mid China:
1) Economic slowdown and on-going inflation rate in 2014 and 2015. 2) Price sensitive consumers.
3) Traditional oriented region, dimension collectivism is highly present.
4) Organic and traditional herbal ingredients are demanded. Safety of ingredients is key.
5) Less educated consumer base, due to later development of the market.
6) Beauty specialist retailers, department stores, supermarkets and hypermarkets as main channels.
North and Northeast China:
1) Slowdown of purchasing power, rising inflation rate and the stagnant growth of personal disposable income (2013).
2) Stable growth due to increased acceptance of beauty products (2014).
3) Supermarkets and beauty specialist retailers most important distribution channels; whereas beauty specialists are gaining popularity.
4) Significant growth in Internet retailing due to improved logistics; applications are key drivers due to convenience.
Northwest China:
1) Least developed region in the country, efforts of government resulted in steady growth of BPC industry.
2) High share in mass segment; despite tiny review base, premium registered stronger growth than entire market (due to product scarcity and increased awareness). 3) Tendency to spend increase in disposable income on cosmetics.
4) Acceptance of BPC increased.
5) Health and beauty specialist retailers most important for high end BPC, supermarkets and hypermarkets leading in mass.
6) Internet retailing shows impressive performance due to investments in logistics. 7) ‘Korean Wave’ has substantial impact; Korea is known for its traditional
healthcare as well – fits cultural orientation.
8) In-store purchases and purchases at beauty specialists are key drivers for sale due to one-on-one advice.
South China:
2) Strong growth: colour cosmetics and men’s grooming (increased acceptance and education).
3) Increasingly fierce competition, sophisticated consumer aims segmentation 4) Increased amount of wealthy people – increased demand for premium. 5) Less traditional, aim Western products.
6) Multichannel strategies showed profits.
7) Beauty specialist retailers important for premium products. 8) Demand for premium is expected to increase further.
9) Domestic players highly present in beauty specialists stores, showed substantial profits, multinationals expected to expand to these stores.
Southwest China:
1) Growth is stable, market with high potential.
2) Within 2014, department stores, supermarkets and hypermarkets accounted for 50% of retail sales. Especially department stores are important.
3) Rapid development of logistics and websites by 2014 – internet retailing as fastest growing distribution channel.
4) Highly traditionally oriented. Natural ingredients, traditional health care – popularity of domestic and Asian brands in the mass segment.
5) Beauty specialists and drug stores are expected (2015-2019). to be most important since people require personal advice.
7.1.2. Consumer lifestyle trends in China –
1. Older generation spends more – By 2015, the number of senior citizens will rise up to one quarter of a billion. A substantial part of this elderly group will continue to exhibit less conservative spending traits, as they had in the past. Among this group, a higher quality of life has great priority. They tend to spend money on health (of their skin), leisure and new experiences. An interesting finding as well is that the older segment is the most active online shopper due to decreased mobility.
2. Luxury – Consumers have become much more savvy, a brand should bring them something extra and is not considered as a luxury brand just by being expensive. The brand should fit in the created lifestyle and online a mark of a brand on a product is not enough. Brands that did not recognize this have failed in the past (Garnier and Revlon inc.) (Euromonitor International, 2013).
3. Safety – As stated before, safety can be considered as one of the biggest, perhaps even the biggest trend within China, due to distrust towards the government.. Every brand that does not recognize this trend will never ever be successful within the Asia-Pacific. Explaining this trend is quite simple.
4. Digital cultural awareness – China is famous for its deeply rooted culture, whereas culture tends to be king among lots of Chinese consumers today. However, Western media caused that cultural afflictions are gaining popularity among the young Chinese consumer in recent years. Young, urban Chinese people consider listening to Western music and lounging and coffee shops as a new – Western – culture. They are aiming and looking for new cultural experiences, substitutes for what is regular for them. 5. Online consumer society - A substantial concern among the younger Chinese segment
from their parents, are willing to make changes and are much more confident to be vocal about their concerns. The Internet, a powerful channel to reach the younger, more sophisticated community, fosters this social movement.
FIGURE 9:
Consumer segmentation and population data 2000 – 2015 (Euromonitor International, 2013)
7.1.3. Characteristics of the Chinese consumer –
In order to complement previous mentioned regional and lifestyle trends, we will outline characteristics of the Chinese consumer, based on age and preferences. We already know that the Chinese consumer is more concerned with their looks, improvement of their appearance and maintenance of youthful complexions – even if they age.
took power and started to integrate significant economic reforms. At the same time the communist Party tended to loose foothold within China and subsequently control over the lives of inhabitants. At the moment Jiang Zemin, Li Peng and Zhu Rongji started to lead the nation in 1990s, serious improvements were made. The economic performances increased to a great extend, and the average annual gross domestic product growth rate exceeded 11.2%. The generation that was born before 1980 grew up with poor logistics, minimal influence from other nations, fear of the government and a very strict way of how to behave. We expect this to have an influence on their cultural orientation, values, believes, norms and preferences. They are less educated in case of cosmetics since the government for a substantial period of time prohibited these, are less familiar with the economic growth (they remember the communist days), and probably are still a bit anxious towards the Western world. These characteristics should be taken into account when adjusting strategies towards this age group. Moreover, we this trend is more visible in less developed, western regions, and has its reflection on the younger population as well since Internet penetration rate was relatively low before 2012.
opportunities are much less in rural China. This group is familiar with wearing make up since they did not experience the days it was prohibited and adopted new products at an early stage. Since we expect that age has a significant influence on cultural orientation, education, values, believes and preferences, due to previous mentioned differences among the several age groups and China’s history, we expect this to have its impact on the preference for particular distribution channels. Following previous mentioned assumptions; it is useful to outline the differences in age distribution among the several regions and districts China is concerned with. This difference in age distribution is mainly contributable to the urbanization trend.
From 2002 to 2012 the urbanization rate in China rose up from 39% to 53%. This caused in 2011, that for the first time in history, the urban population in mainly east China surpassed the number of rural inhabitants (Statista.com, 2013). The reason Chinese inhabitants migrate to eastern, coastal cities is that there are obvious variations in the level of possible development, future perspective and job chances for the youth among the districts (Euromonitor International, 2013). These groups consist out of people in their twenties and thirties, seeking for better employment, education and a economically better future. Previous mentioned trends cause that the mean age in these populous cities is relatively lower compared to rural and inland China (Figure 10).
rural population rates. On the other hand we can see that people in the amount of people in their twenties is substantially higher in cities than it is in towns or rural areas. This illustrates the group that came to China’s big cities for better job employment or to go to college. Around the age of 45 the major differences are starting to disappear. For this moment, this means that the amount of young people (20 – 40 years old) is relatively higher in cities. This means that implications for east China, where the biggest cities are situated, should be adjusted to younger people to a greater extend than implications for rural China.
FIGURE 10:
Age pyramids city, town and rural China (2010)
7.2. Top three foreign players within the cosmetics and beauty industry (China) –
FIGURE 11:
FIGURE 12:
7.2.1. L’Oreal Groupe
7.2.1.1 Company profile
Following findings of Euromonitor International, we see that L’Oreal’s market share has globally and within China increased over the last five years (figure 11 - 13) (Euromonitor International, 2015). In turn, taking a look at L’Oreal’s financials, we see that they achieved a growth of 5.2% globally and managed a growth of 9.7% in Asia Pacific in the last quarter of 2013 (L’Oreal Financials, 2014). Moreover, Asia Pacific accounts for approximately 20.6% of L’Oreal’s total sales (figure 14 – 16) – whereas China is considered to be the driving force of the continent. However, not all of L’Oreal’s brands have benefited from the increasing BPC market in China, fiercer (domestic) competition has led to the exit of Revlon and Garnier from China (Euromonitor International, 2014). After the collapse of Revlon and Garnier, the L’Oreal Group decided to focus on the mid- and high-end segments, whereas they had to admit that the market competition within the mass segment tended to be too fierce and profits margins were substantially lower (Euromonitor International, 2014; Yang & Chandon, 2013).
7.2.1.2. New direction and strategy
Due to changing lifestyles, increased competition and a convenience trend among the new Chinese generation, L’Oreal recognized that they should adapt their strategy. L’Oreal announced to target the next generation of Chinese, luxury consumers, whereas mainly product and distribution channel innovations should lead this new direction. Jean-Paul Agon, L’Oreal’s chairman and CEO stated: ‘Chinese consumers are at the heart of L’Oreal’s focus
portion of these consumers will be recruited by our Luxe brands, the segment where L’Oreal has historically led the market and where it will continue to influence the shape of its future’
( http://www.loreal.com/press-releases/loreal-invents-the-luxury-beauty-of-tomorrow-in-china.aspx).
In order to target the sophisticated, savvy, luxury consumer, L’Oreal is offering several brands (European, American and Asian) in order to anticipate on cultural orientation and other preferences. Moreover, they decided that it would be of great importance to build a research hub in Pudong, Shanghai, in order to be close to the consumer and understand their preferences for BPC products (L’Oreal press releases, 2013 – L’Oreal.com).
7.2.1.3 Distribution channel configuration
L’Oreal with Lancôme caused them to grow 1.3 times faster than the luxury market as a whole, and a subsequent number one position in the market.. L’Oreal Luxe is now physical available in 972 department stores, 140 Sephora stores, 6 boutiques and 68 airport retail spaces, moreover, they offer their products through e-commerce in over 700 cities (L’Oreal
Press Release, 2013 – Available:
http://www.loreal.com/press-releases/loreal-invents-the-luxury-beauty-of-tomorrow-in-china.aspx).
L’Oreal proves our expectation that a multichannel strategy is best to be successful. The company maintains to their physical stores for their luxury segment, but is aware of the fact that Internet retailing is expected to become a significant rival to this traditional channel due to its convenience and low prices. They recognized that physical stores have to put more effort in attracting consumers, using eye-catching product displays and for instance free services. However, this channel cannot be neglected since, following findings of L’Oreal, it improves consumer loyalty and a consolidated consumer base – something Internet retailing fails to do. Moreover, L’Oreal recognized that within mid-China (the region they aim to enter), domestic brands performed above average by penetrating the market in mid- and west China through beauty specialist retails and considers this channel together with online retailing as most promising.
FIGURE 13;
FIGURE 14:
Sales by operational division and geographic zone (L’Oreal, 2013). -- FIGURE 15:
FIGURE 16:
Operating profit per geographic region (L’Oreal, 2013).
7.2.2. Estee Lauder –
If we take a closer look at Estee Lauder, we see that the brand has experienced substantial growth within China over the last couple of years – with an almost doubling market share from 2009 – 2014. Estee Lauder is most present in the high-end segment, whereas they are considered with a market share of 25% (Euromonitor International, 2014). In figure 17 we see that Asia Pacific offers them most substantial year on year growth, fuelled by their presence in China.
FIGURE 17:
FIGURE 18:
Company share Estee Lauder (Euromonitor International, 2015)
7.2.2.2. Strategic direction
Estee Lauder first entered China in 1993 with two of its brands (Estee Lauder and Clinique), and realized early in the process that there is more China than Hong Kong, Bejing and Shanghai. Estee Lauder made sure they were present in the relatively smaller cities as well – nowadays within 90 cities. Following claims on their website, within 2009 they were the number one company within their department store distribution which was based on their annual sales (Estee Lauder Companies, 2010). In addition, they managed to open a research and development centre in Shanghai by 2005 in order to investigate the safety and efficacy of specific product ingredients and materials (Estee Lauder Companies, 2010). CEO Fabrizio Freda considers this wide presence as an edge over their rivals and believes this factor will cause the brand sustainable growth coming years (Fortune, 2014).
aspect mentioned in the interview of Estee Lauders’ CEO Fabrizio Freda with Fortune is that the explanation why expectations had to be lowered. He states that: “China is slowing down
as a luxury market but is still growing very solidly as a luxury cosmetics market, I would like to clarify. The reason (China) growth has slowed down is first, because the affluent group of consumers in the high end and middle class has reached a certain level of saturation (in the biggest cities). So the growth now comes mainly from the new consumers, while growth in
consumption by the affluent consumer has normalized.” (Fortune, 2014:
http://fortune.com/2014/11/04/estee-lauder-china/).
Estee Lauder plans to go deep into populations by entering cities that are less international and exposed to the rest of the world, in order become more local. They recognized that over 70% of the online sales in China are from the cities where there is no distribution yet, which offered Estee Lauder – following their CEO Freda, massive expansion opportunities (Fortune, 2014).
Due to the fact that Estee Lauder had an early entrance in China, they had the opportunity to track needs of the Chinese consumer on a regular basis for a longer period of time. They adjusted their strategy to Chinese safety concerns by opening an innovation institute in Shanghai – which caused them substantial success (Euromonitor International, 2014).
FIGURE 19:
Brand portfolio Estee Lauder (Euromonitor International, 2015)
7.2.2.3. Distribution channel configuration
Estee Lauder is known for distributing through limited channels in order to complement their image of being exclusive, whereas they consider high-end department and beauty specialist stores as their most important distribution channel (Wikinvest, 2009). We see that all of their brands are launched in high-end department stores and shopping malls in mainland China. Following findings of Thomson (2014), we see that Estee Lauder refused to develop extensive e-commerce in the past. Chri Good, Estee Lauder UK president, says this strategy will remain the same. He states that ‘the fast majority of our business is still done trough retailers; our
primary focus is with our existing retail partners. We really believe that they are tackling the challenges of the omnichannel environment – our mission is partnering with them in that process.’ (Thomson, 2014 p.1). However, Estee Lauder had to admit that offline sales are not
enough nowadays and was forced to set up online channels and to start the evolution to an omnichannel strategy. They decided not to cut back on service and tried to replicate in-store provided service into their online channel. Within 2015, all of Estee Lauder’s websites have facilities that enable live chat in order to offer personal advice (Thomson, 2014).
sales beauty counters in shopping malls and department stores in 9 eastern cities. Moreover,
they are available online (www.origins.com.cn). Just like the L’Oreal group did, Estee Lauder
adopted besides her official websites, also public shopping websites (www.loccitane.cn) in
order to reach their target market more efficient (Swiss Business Hub China, 2014).
Taken it all together, we see that Estee Lauder invested heavily in their online (wholly-owned and public) and offline (department and beauty specialists) distribution channels, whereas they adjusted their brand portfolio and distribution channel configuration to the several regions they are active in. They accounted for safety concerns, and even aim to provide personal advice online. They offer more sophisticated brands for eastern China and try to reach the more traditional group by their brands Origins and Clinique. Through this strategy they account for cultural differences and try to overcome the risk of getting outdated in east China since you sell products to the inland.
7.2.3. Procter & Gamble (Olay) –
Procter & Gamble is considered to be one of the biggest companies in fast moving consumer
goods (FMC). In fiscal year 2007, they were ranked 74th on the Fortune 500 list of the world’s
the product. P&G failed to react properly, mishandled this failure and was forced into a costly product withdrawal (Euromonitor International, 2008). The SKI-II case is another situation that points out the importance of safety of product ingredients within China.
7.2.3.1. L’Oreal eats market share of P&G
China remains to be one of P&G’s largest country markets for personal care and cosmetics – together with toiletries China accounts for over 6% of the total company sales in 2004. Nevertheless, last years, despite the fact that P&G remains to be the biggest seller of beauty and personal care in China, their market share is on return. Whereas the other two discussed companies show increased market share, P&G’s market share dropped from 15.2% by 2009 to 12.7% by 2014. Today, P&G is even working with several advisors in order to sell or spin off some of their beauty brands in China, which reflects the struggle the company has with sustaining foothold in one of China’s fastest moving industries. Moreover, it shows how difficult it is to be successful in China’s cosmetics industry. Within the Chinese cosmetics industry, trends are changing all the time and extremely rapidly (China Daily, 2015).
FIGURE 20:
7.2.3.2. Distribution channel configuration
The problem with P&G is that they did not move the way the industry did, something Oru Mohiuddin, an analyst of Euromonitor International under scribes (China Daily USA, 2015). P&G’s most important beauty brand, Olay, is considered to capture the mature women, even though they tried to reach the younger female with specific lines like ‘Fresh Effect’, they did not manage to gain or even sustain market share. Moreover, P&G tried to break into the local market through outlets, and failed to make proper agreements with local specialist stores since they only offer 16% return (Want China Times, 2013), compared to 20-25% local brands and other foreign brands do. Due to these facts, P&G did not saw the same returns as other brands did through beauty specialist stores. P&G outlines that Olay needs to extend its presence in growing channels, whereas Internet retailing and beauty specialist retailers should have priority. However, analysts doubt whether they are not already too late (Euromonitor International, 2012).
This case shows us how important it is to have knowledge about the market and customize your distribution channels to your target consumer since it determines in turn your brand image. Moreover, we see again that a multichannel strategy is most useful and you should never take shortcuts on China’s safety concerns. P&G failed to approach China from different angles (Bloomberg, 2013), something L’Oreal took advantage of.
7.3. Distribution channel usage –
Since the penetration in west and inland China is much lower, it would be too easy to say that the same strategy should be followed for inland China. Due to differences in demographics, cultural and social orientation, we believe west, rural and inland China requires a different approach.
7.3.1. West, rural and inland China –
Taking a look at rural China, we see substantial differences compared to east China. Economic development is lower, there is less access to logistics and infrastructure is poor. Moreover, influences of the Western world are less notable due to less access to online devices and global television channels in previous years. This argues for the fact that west China used to be somewhat old-fashioned and more traditional.
Korean brands are mainly available through beauty specialists, whereas multinationals mostly invested in department stores.
Since two years, the Chinese government decided to invest in infrastructure and logistics, in order to provide west China from increased access to Internet (The Economist, 2013), (figure 21 and figure 22)
FIGURE 21:
Internet penetration rate 2010 (Euromonitor International, 2015)
FIGURE 22:
Taking previous mentioned findings into account, we see that in order to penetrate west China, there are lots of obstacles for a multinational. We consider creating and reinforcing knowledge about cosmetics and overcoming safety concerns as most important, since distrust will subsequently diminish. We argue for the idea that beauty specialist stores should be used in order to provide consumers from personal advice, free trials and to foster knowledge – something domestic and Korean players already recognized.
Since we are convinced of the fact, following earlier research from Dejohn (2012), that a configuration of distribution channels is best to capture the market, we believe that due to its rapid growth e-commerce should complement this channel. Due to government investments, the online channel reported the most substantial growth rates compared to every other channel. Since investments of the government are expected to continue, this growth will only be fostered. E-commerce is a broadly defined concept, which embraces several devices through which you are able to make purchases online. Following figure 23, we see some differences in mobile device usage between rural and city China.
FIGURE 23:
We see that rural China has substantial access to mobile phones (84.6%). This complements findings from previous sections whereas we stated that mobile applications are most desired for this area due to its convenience. In turn, beauty companies should develop applications for smartphones that possess the same favourable characteristics as their websites (personal advice through chat conversations). On the other hand, the development of websites adapted to preferences and needs of the rural population, should never be neglected, since the amount of people owing a desktop laptop or tablet is rising compared to a couple of years ago due to previous mentioned government investments and economic development (China Internet Watch, 2013).
Following figure is not specifically adjusted to the cosmetics industry and findings about elderly women shopping their cosmetics online should not be neglected, but is used to provide us insight in the overall trend. We see that the new generation from rural areas feels confident buying their products online. However, the highest percentage is 32%, which argues for the idea that the most substantial parts of sales are still achieved by offline channels.
FIGURE 24:
In summary, in order to penetrate west China, multinational beauty companies should build trust and educate its consumers through beauty specialist retailers. Moreover, websites and applications should possess the possibility to receive personal advice. As years will pass, and people become more educated, the next step would be to open (or re-open) department stores in order to further penetrate the market and to gain visibility among a larger consumer base.
7.3.2. East, city China –
East China is considered with other trends compared to west China. People in this region are highly fickle, in case a product becomes widely used in other parts of China, they will refuse to buy it. Moreover, the younger generation, born after 1980 is oriented towards the Western world, developed their own habits and are less traditional. The dimension collectivism is less present since due to urbanization a substantial part of the younger generation in east China moved away from their parents. In addition, due to rapidly increasing disposable incomes, the aim for luxury products is fostered among every age group. Besides, wearing make up is accepted for a longer period of time and access to mobile devices and internet are historically higher, which all underlines the idea that this area is less traditional. Still, just like in west China, the safety concern is deeply rooted.
people are much more educated, the aim for beauty specialists can be neglected, they simply seek for the experience and know what they want.
The online channel, due to its rapid growth and convenience, should complement department stores. However, compared to rural China, there are some differences. Following findings of Euromonitor, we know that mainly the older consumer segment is purchasing their products online due to their decreased mobility. Since they are somewhat more traditionally oriented, but still searching for high-end cosmetics, websites should be adjusted to this. Moreover, relative to west China, whereas people experience websites as less safe and less convenient and prefer applications, eastern China is more familiar with purchasing online through websites since they have a longer history of better logistics and are more experienced online. Nonetheless, since 75% of the population has access to a mobile phone, applications should still be launched in order to reach as much people as possible. Another trend recognized within the digital world is the usage of China’s several shopping portals, for instance Taobao, MSN shopping and Sephora, and show massive growth (Swiss Business Hub China, 2014). Besides wholly-owned websites, multinationals should adopt this channel to target specific consumer groups. Estee Lauder and the L’Oreal group already recognized this and benefitted from using it (Swiss Business Hub China, 2014). The reason that this is not yet applicable for west China is that you do not have the opportunity to offer personal advice. In summary, especially for China’s east area, it is highly important to be constantly innovative, to show people your environmental concern, embrace their safety concerns and to be visibly present through high-end department stores. As L’Oreal and Estee Lauder recognized within this area, department stores should always be complemented with several online channels (websites, portals and applications), in order to embrace the entire e-commerce concept.
Distribution of beauty and personal care by format: % value 2008 – 2013 (Euromonitor International, 2014)
Distribution of beauty and personal care by sector: % value 2008 – 2013 (Euromonitor International, 2014)
In order to test our findings from our secondary, qualitative research, conducted through extensive research of several databases, we will execute quantitative analysis. Our statistical analyses are based on data derived from Euromonitor International. Within this part we will focus on colour cosmetics and skin care, since – following findings in previous sections – these segments are considered as the main segments in facial personal care within China and are promising growth markets for the future. Moreover, both colour cosmetics and skin care are offered by all of the three companies considered (the L’Oreal group, Estee Lauder and Procter & Gamble).
Figure 27 shows the dispersion in retail value per distribution channel for colour cosmetics and skin care. Forecasts of distribution channel values, except BPC non-grocery retailers, are based on a linear regression of the last three years, which are used as dependent variables in order to predict independent variables 2015 and 2016. Going further back will not improve the reliability of forecasted numbers since cosmetics are considered as fast moving consumer goods, which indicates that it is a highly dynamic industry. Forecasts BPC non-grocery retailers complement the total value of 100 since this channel has only significant presence in 2014, which makes it impossible to form reliable forecasts on three years. What we see is that (figure 28 – 30) spark lines of distribution channels for colour cosmetics and skin care are comparable. We see that in both segments health and beauty specialists, non-store retailing and other non-grocery retailers have increased (figure 28 and 30). Taking a look at their sub channels we see comparable trends as well, whereas the only differences are that distribution through chemists/pharmacies did not change for colour cosmetics, but decreased for skin care and pharmacies/drugstores decreased for colour cosmetics but increased for skin care. What we see is that BPC non-grocery retailers have massively increased within one year.
FIGURE 28:
FIGURE 28:
Sparklines of distribution channels (CC)
FIGURE 29:
FIGURE 30:
Sparklines of distribution channels (SK)
FIGURE 31:
Sparklines of distribution sub channels (SK)
FIGURE 32:
Visual map retail value distribution channels (CC)
FIGURE 33:
Visual map retail value distribution sub channels (CC)
FIGURE 34:
FIGURE 35:
Visual map distribution sub channels (SK)
channel configuration are appropriate. In addition, following tables 5 and 6 (appendix C), we see positive linear regressions for retail value of distribution channels from year to year. In case we exclude department stores from the sample, we see that the regression in highly dispersed. This includes that department stores have substantial impact on retail value of distribution channel. TABLE 2: Correlations CC and SK 2014 Correlations CC_201 4 SK_2014 CC_2014 Pearson Correlation 1 .880** Sig. (2-tailed) .002 N 9 9 SK_2014 Pearson Correlation .880** 1 Sig. (2-tailed) .002 N 9 10
**. Correlation is significant at the 0.01 level (2-tailed).
In turn, these correlations and regression analyses for colour cosmetics provide us from information about skin care as well because of their significant positive relationship. Following these findings, we consider department stores as the most important channel by 2014 for colour cosmetics and skin care. This finding is in line with findings from previous section. Today, the most substantial part of the cosmetics industry takes place in east China. We concluded from secondary data that this consumer segment seeks constantly for luxury and new experiences, through sophisticated department stores in famous shopping malls. However, we also concluded that based on forecasts and current trends, the online channel is expected to take away a part of department stores’ market shares, as we can see in figure 32 – 35.
core to any successful marketing strategy. We base this on the fact that department stores determine the linear regression between year on year sales, which indicates that in case you would exclude department stores, the correlation of your distribution channels in sense of retail value will substantially decrease. Despite the fact that this channel has lost some foothold, it can never be neglected (which in turn confirms hypotheses 1c). Moreover, combining findings from the secondary data section and this primary data section, we see that sales of beauty and health specialist are slightly increasing. We expect that this lays in the fact that multinationals are slowly expanding to mid and west China, whereas people are highly traditional and culturally oriented. Due to the fact that they are less educated and mistrusting towards multinationals, they aim for personal advice provided through health and beauty specialists. This assumption is fostered by the idea that Korean, Asian and domestic companies experience substantial popularity among this group and, in turn, offer their products through health and specialists stores. Based on primary and secondary data we can also confirm that the online channel becomes more and more important, and requires substantial investments in order to capture the market. We believe that, especially in the future, when Internet penetration rate and access to mobile devices will increase, this channel will only win market share, and in turn will be core to a successful distribution channel strategy.
