Mid-range Market Offers Enormous Potential

For 12 out of the past 14 years, the growth rate of cosmetics sales in China has exceeded that of the overall economy, with the highest annual growth rate reaching 63%. According to forecasts made by the Economist Intelligence Unit, China will become one of the world's fastest growing cosmetics markets and will expand at an average 10% a year over the next five years. International cosmetics giants such as L'Oreal of France, Proctor & Gamble and Estee Lauder of the US, and Shiseido of Japan have long recognised this potential market and established their footholds in the mainland. Their sales growth is much higher than that of China's overall sales and their market shares are continuing to increase.

With their strong capability in production, R&D and marketing, international cosmetics firms primarily target the high-end market in China. They enjoy an obvious advantage over their Chinese counterparts in the high-end market, practically squeezing the latter out of competition. As China has entered the so-called moderately well-off stage in recent years, the mid-range cosmetics market has posted robust growth, attracting more international cosmetics brands to make a foray into this market. For instance, Maybeline is one of the brands under L'Oreal targeting the mid-range market. At present, L'Oreal and Shiseido each offers 14 brands in China, some of which are targeted at the mid-range market. In addition to foreign suppliers, some large domestic manufacturers such as Dabao of Beijing and Jiahua of Shanghai, riding on their upgraded production technology and accumulated know-how, have also started to launch products targeting the mid-range market. These Chinese companies have a number of competitive advantages, including products with their own characteristics (especially Chinese characteristics), R&D capability, access to sales network, and understanding of the market. Meanwhile, the low-end market is flooded with small-scale players who pay little attention to product quality. These players are unlikely to survive over the long term.

Skin Care Products Market More Promising

China's hair care products market was worth about Rmb12 billion in 2003. Despite its large size, it is generally recognised that the market is approaching saturation. Furthermore, many consumers have developed the purchase pattern of switching between several known brands, making it difficult for new brands to enter the market.

The make-up and perfume markets are worth over Rmb3 billion and Rmb1 billion respectively. Although market size is relatively moderate, demand for make-up has posted double-digit growth every year over the past five years and is expected to further increase thanks to the growing number of female workers in the business and other service sectors. Make-up requires a higher level of production technology and strong marketing support such as publicity and packaging. Hong Kong companies do not yet have a niche in this market. Meanwhile, the perfume market is rather small in scale and growth has been slow because only a very limited number of mainland consumers use perfume, with most of them being light users.

Among the various beauty products, Hong Kong companies should stand a better chance of success in the skin care products market. In 2003, the mainland skin care products market was worth an estimated Rmb14 billion. During 1999-2003, the market expanded at an average 13.4% a year. Despite this rapid growth, the penetration rate of skin care products remains relatively low. Hence, the market has good potential for growth. Apart from general skin nourishing products, skin care products also cover products with special functions such as whitening, freckle removing, anti-wrinkle and moisturising. Besides, different products are developed to meet the needs of different age groups and skin types. The product range is therefore wide and consumers are also more receptive to new brands. In 2003, the combined market share of the top 13 skin care brands in China was about 30%. This low brand concentration presents more opportunity to new entrants. The skin care products market is also an arena where domestic brands compete neck and neck with foreign brands. In recent years, several top-selling domestic skin care brands such as Dabao, Yumeijing, TJOY, Longliqi and Liushen have achieved sales comparable to foreign brands. According to surveys conducted by International Market Insight (IMI), "well known brand", "right price" and "product feature" are the major considerations of consumers when buying skin care products.

Apart from traditional sales channels such as those selling daily use chemical products, Hong Kong companies may also consider entering this market through beauty salons. Unlike consumers in general, the customers of beauty salons are more concerned about the effectiveness and safety of the product than the price. At up-market beauty salons in the mainland, the beauticians often offer skin analysis service to the customers and professional beauty products are used. While it is difficult for ordinary beauty products to enter up-market beauty salons, the rapid expansion of this market segment has prompted some Hong Kong companies to seek distributorship of high-end skin care products and cosmetics targeting beauty salons. Meanwhile, mid-range beauty salons that have mushroomed across the mainland in recent years have a strong demand for highly effective and hygienic cosmetics, this should bring about an important market for Hong Kong companies.

Strong Demand for Beauty Services

China's beauty services sector has been expanding at an annual rate of 15% over the past two years. In 2004, the burgeoning sector posted an output value of Rmb220 billion. At present, women aged between 20 and 50 are the major customers of beauty salons in China. Although currently the penetration rate of beauty services only stands at 20%, the practice of having facial treatment and massage once a week has become the habit of many female consumers. Young women with higher education and income levels tend to be more receptive to beauty services. They are more willing to spend and try out new and different types of services. Hence, beauty services have grown rapidly in recent years. The average spending per beauty treatment currently stands at Rmb118.3.

At present, mainland-funded beauty salons form the backbone of operators in the market. Together with their Hong Kong- and Taiwan-funded counterparts, these beauty salons offer a wide array of services including beauty treatment, body shape-up, make-up, image design, body slimming and weight loss, eyelash extension and hair removal. Although high-class beauty salons are available in the market, their price tag of Rmb1,000 per treatment is off-limits to the general public. At the other extreme, low-end beauty salons offer no quality guarantee. As the people's income levels continue to rise, demand for low-end beauty services is set to decline. On the other hand, government supervision of the beauty sector is expected to tighten, further squeezing the low-end operators out of the market.

Right now, the demand of most people for beauty services is largely unmet. According to market surveys on the mainland, consumers are dissatisfied with beauty services currently available in the market. In general, consumers look for beauty salons that offer a clean environment, classy ambience, guaranteed service quality and reasonable price. Hence, mid-range beauty salons have excellent growth potential. Their target customers are white-collar workers and housewives with a disposable income of Rmb1,000-Rmb5,000 per month. This group of consumers are highly receptive to beauty services but they can only afford to pay a hundred to several hundred yuan per visit.

Hong Kong Beauty Services Well Received

To tap into the promising mid-range beauty market in the mainland, individuals from Hong Kong can either set up salons in the form of foreign-invested operations or as individually-owned businesses providing beauty and health care services under CEPA (Mainland-Hong Kong Closer Economic Partnership Arrangement).

As beauty services are a kind of personal service, the skills and quality of the service provider are very important. Beauticians in Hong Kong usually possess internationally recognised qualifications such as certificates issued by ITEC and City and Guilds of the UK and by other overseas organisations. Apart from professional qualifications, beauticians from Hong Kong also have rich experience and excellent service attitude, which add to their advantages in the mainland. Consumers in the mainland are highly sensitive to trends and go after imported products and services. As an international metropolis, beauty services provided by or via Hong Kong appeal to mainland consumers and are even considered superior.

Industry players reckon the key to success in China's beauty market is word of mouth. To achieve this, in terms of hardware, a beauty salon should offer a pleasant environment and be located in a convenient place with good supporting facilities. And in terms of software, the services provided should be well designed and comprehensive, and the beauticians should have good skills and professional manners. Word of mouth coupled with appropriate marketing strategies can help the business of a beauty salon expand quickly in China.

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