Beauty companies may need to evaluate their reliance on China as a hyper growth market.
For the past few years, many major beauty conglomerates have relied on China’s booming beauty market to drive sales, relying on increases there to offset slowdowns in other geographic regions, including Europe and the U.S.
Sales in China have more than made up the difference. In 2020, retail beauty sales there were more than $75 billion, according to Euromonitor, and they rose to $88.8 billion 2021. In the U.S., on the other hand, sales dipped in 2020, to $92.7 billion, and rebounded in 2021, to $102.6 billion, according to Euromonitor. China is the second largest beauty market in the world.
That swift growth has made China “the sole focus” for major beauty players, said Jefferies analyst Steph Wissink, who noted that L’Oréal’s Shanghai-based analyst day a few years ago underscored the market’s ascent.
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“They set the tone for the idea that China could be as large or larger than the U.S. in a handful of years,” Wissink said. “It went from this nascent, closed-border, inaccessible market, to Tmall Global creating a gateway and the ability to reach billions of consumers really quickly because you didn’t have to go through the decadelong infrastructure build out.”
That shift helped turn China into a major driver of beauty sales, and big companies including L’Oréal and the Estée Lauder Cos. benefited from the market’s acceleration. But recently, both of those companies recorded slowdowns in China. During the holiday quarter, analysts attributed the moderation to COVID-19 lockdowns as well as the Chinese government’s goal to slow down the country’s rampant economic growth.
“It did slow,” said Stifel analyst Mark Astrachan. “It was at least partly comparison driven. The China numbers in the December quarter last year were up 65 percent — really big, and bigger sequentially on a growth basis than the September quarter, so it’s at least partly that,” Astrachan said.
But, with continued lockdowns, the slowdown has now persisted well beyond the holiday period.
China’s beauty sales dipped 6.3 percent in March, according to Wissink, who said she expects ongoing weakness through the spring as COVID-19 lockdowns persist and tourist travel is limited.
Procter & Gamble saw declines during the first quarter, with SK-II’s business in China “under pressure,” executives told Wall Street in April. L’Oréal, too, acknowledged the pressure of lockdowns in China on the business, though the company said it has been able to navigate the climate to find growth in the most recent quarter.
Lauder’s sales in the Asia Pacific region dipped 4 percent for the quarter ended March 31, due to reduced retail traffic as well as limited distribution capacity at its Shanghai facilities, which were subject to COVID-19 restrictions. “We are confident that our business in China will rebound when COVID-19 abates,” said Lauder president and chief executive officer Fabrizio Freda when the company released the latest earnings report.
HSBC analyst Ciara Oshea wrote in a note that Beiersdorf is also facing uncertainty in China going forward. “The clear challenge Beiersdorf will face in the second quarter is in China. La Prairie’s China sales are still 75 percent offline, meaning lockdowns in Shanghai and reduced travel to Hainan will have a pronounced effect — albeit history suggests this should prove temporary,” Oshea wrote.
Beauty is not the only category in China facing a slowdown, Wissink said. “The government has implemented some considerations with respect to premium and luxury spending in an effort to elongate the economic outperformance, so instead of a shorter cycle with higher growth, you have a longer cycle with more managed growth,” Wissink said.
For companies that have relied on beauty sales in China to propel growth, impress Wall Street and drive stock prices, the slowdown could pose a problem and create the need to accelerate growth across other markets.
“The concern right now is that China was such a power driver for these companies,” Wissink said.
“Europe and the U.S. were floundering, and China was the power source for growth,” Wissink continued. “We used to talk about Estée Lauder almost like a jet plane, with these two enormous engines that were lifting the body up into the sky — it was travel retail and China. And then travel retail went down and was replaced by direct-to-consumer.”
Julian Reis, CEO of distributor SuperOrdinary, said that in addition to COVID-19 lockdowns and other factors, incoming indie brands are taking share away from more established brands in the market. Plus, customer acquisition costs are rising in China, too.
“If you’re spending the same amount of investment in marketing and you’re not willing to spend more, you will probably see a decline in sales,” Reis said.
In the long term, growth remains viable in China, Reis and others agreed — but as it slows, big players may want to turn to other markets to drum up sales. Reis suggested companies consider an increased focus on Singapore, Malaysia and Thailand, markets that he says have major potential.
“The infrastructure is really strong there, the social classes in each of those economies is very wide,” Reis said. “These are big marketplaces, and these are marketplaces where the consumer’s looking to try more and more products.”
“Those consumers are already very, very vibrant. They’re looking for more brands,” Reis said.
Reis advises brands entering China to think long term, five or 10 years out, rather than focus on month-to-month sales. “We’ve seen brands fail because you’re living for the revenue rather than building the brand,” Reis said.
“The markets are still going to grow, the consumers have proven themselves to continually purchase product especially in beauty, even in tough times. As a category, we’re more insulated than luxury,” Reis said.
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