China Cosmetics Industry Enterprises Survey Report Released

In the first half of 2021, 46 percent of Domestic beauty brands, manufacturers, raw material suppliers failed to see a year-over-year revenue growth. In addition, due to the rising cost of customer acquisition, registering cosmetic products, raw materials, and cosmetic packaging, the profits of many enterprises dropped.

On November 30, the 2021 China Cosmetics Industry Enterprises Survey Report was released at the China Cosmetics Industry and Commerce Summit and the 2021 Cosmetic Newspaper Annual Conference held in Wuhan. 

Since July 15, 2021, For 100 days, 18 journalists from Cosmetic Newspaper, CBO , and Weimei Gongjiang conducted interviews in central, south and east China as well as Shandong province. They covered stories of nearly 300 cosmetic ingredients suppliers, manufacturers and cosmetic brands, including Liby, OSM, Carslan, Marubi, Forest Cabin Cosmetics, Florasis, Yatsen, Nox Bellcow, PANG’S, Winkey, and Zhongke Optics Valley Green Biotechnology, during which they in total completed 255 reports and collected 145 valid samples. The following is the excerpt from the survey report. 

Sample Characteristics: Breaking Concept of Regions, Female Entrepreneurs Accounting for 8%

The data released by the National Medical Products Administration (NMPA) reveals that by November 2021 there have been 5700-plus cosmetics producing enterprises in China, including over 3,000 in Guangdong Province. Similarly, in terms of regions, enterprises based in south China account for nearly 70 percent. Meanwhile, cosmetics enterprises are breaking the concept of regions. For example, thanks to the advantages of global vision, advantages of talent,  and e-commercial business enjoyed by Shanghai and Hangzhou,these cities became popular cities for cosmetics enterprises to work “inter-regionally”. HMF, HELIUS and Nox Bellcow have recently set up branches or R&D and marketing centers in the Yangtze River Delta region.

Among the surveyed enterprises, half of them were established in the last 11 years. In China, in most cases, entrepreneurs with a cosmetics business under 10 years old will be more vulnerable to various challenges, and if the cosmetics businesses survive passed the 20-year mark, they would be considered time-honored brands by the public. From the perspective of the characteristics of the founders, on average, one out of 10 cosmetics enterprises were founded by the post-90s generation and a woman, indicating that the post-90s founders are emerging in the cosmetics industry. At the same time, although female consumers have been dominant in the cosmetic market, most cosmetic companies were founded by men. 

Business Performance: 46% Enterprises did not realize YOY growth in profits

In terms of business performance, in the first half of 2021 46 percent ofcosmetics brands, manufactures, raw material enterprises failed to register year-over-year revenue growth. In addition, among the companies that realized profit growth, their profits declined due to the rising cost of customer acquisition, launching new products, and raw materials and packaging. Take the rate of gross profit as an example. This year, due to  external factors such as price rise of upstream raw materials and packaging materials, the control of power usage, and the epidemic, the gross profits of some domestic cosmetics companies have dropped. As a whole, the gross profit rate of branded companies averages around 60 percent, and the figure for production-oriented enterprises is about 25 percent. 

In terms of cost of sales to revenue ratio and research & development (R&D) expense to revenue ratio, in the first half of 2021, as the Internet traffic dividend was going to come to an end and the costs of customer acquisition and commission rate jumped, the cost of sales to revenue ratio increased. The average cost of sales to revenue ratio of the surveyed enterprises stood at 40 percent, and the figure for production-oriented enterprises came to five percent. The R&D expense to revenue ratio of the surveyed production-oriented enterprises reached four percent, slightly higher than the three percent of brand enterprises. In general, as the market becomes more rational and transparent, cosmetics companies invest more to develop functional products,Therefore raising the R&D expenses. 

In terms of SKU, enterprises are faced with rising costs of new product development after new regulations require enterprises should provide evidence for their cosmetic efficacy claims. Now, many enterprises have taken actions ahead of schedule. For example, over 70 percent of brand enterprises plan to reduce SKUs. The whole industry is developing toward “cut down the number of products and improve product quality”.

In terms of the changes in channels and customer distribution, more than 60 percent of manufacturers have established cooperation with emerging brands or adopted the business model of livestream e-commerce. A person in charge of an OEM told us that in the first half of 2021, the cooperation with the emerging e-commerce brands generated the biggest revenue growth among the company’s various business segments. From the CS channel brands to the brands on platforms such as Taobao and WeChat and to today’s retailers selling through livestreaming, emerging e-commerce brands and OEMs have acquired  new customers in different periods and established different cooperation models. Nowadays, in order to meet the demands of launching new products by emerging brands at a faster pace, some manufacturers are streamlining internal communication processes and establishing a flatter organizational structure; or they began to explore into flexible supply chains; or they have established a deeper cooperative relationship with start-ups through becoming shareholders and investment.

In addition to cosmetics manufacturers, against the backdrop of e-commerce boom, among the surveyed brand enterprises, the number of the brands focusing on online channels has become close to that of those focusing on offline channels. Currently, the online channels turnover of the popular domestic brands like OSM, PROYA and MARUBI has temporarily surpassed the revenue from offline channels.

Apart from changes in business share, e-commerce is also changing the business logic of cosmetics companies and the category patterns of the industry. On the one hand, under the long-tail effect, the internet maximum exposure increases the demand for niche products, and this is beneficial to the development of subcategory products such as perfume and makeup remover, which are less competitive in the offline channels.

On the other hand, with the flattening of the market and the emergence of low-price competitors, traditional business models is in need of update. In the past, there was a eight-percent law circulating in the cosmetics industry. If the cost of a product is eight yuan, the retail price must be at least 100 yuan to ensure a profit after accounting for all expenses incurred during the links of manufacturing, branding and distribution. This phenomenon is most obvious in the CS channel which has focused too much on the business pattern of “remitting, stocking up, and collection of payment”.

Nowadays, CHANDO and Marie Dalgar are advancing the reform of “one-stop-shop”, weakening the role of distributors in warehousing and logistics, sending goods directly to terminal stores, and improving the flow of products in CS channels and the efficiency of consumer insight through digital means.

In addition, under the DTC model, the most typical window for enterprises to face consumers is to introduce themselves through livestreaming. A person in charge of a brand told us: “Huge traffic brought by a celebrity sales anchor can quickly build up brand awareness, but it is not conducive to controlling product prices.”Therefore, store self live streaming is favored as it is more stable and controllable. Not only new emerging brands are having self live streaming; some traditional brands such as CoolBetty and REPAND also are starting to launch their own live streaming studios, seek live streaming talents and enable customers to have direct communication with their beauty sales.

It is worth noting that in addition to brand enterprises, cosmetics manufacturers like Bawei, AIRLAND and PANG’S are also doing self live streaming. They are seeking to establish channels to communicate with consumers by means of 5G and AI, and try to be transparent with their viewers through also doing self live streaming of the manufacturing process, a move to achieve their transition of M to C, which not only deepen their understanding of the market demand, but also make consumers have more faith in their products. 

Buzzwords in Cosmetics Industry: 

New, Expensive, Rational and Involution

In addition to quantitative analysis, the team of CBO journalists   sorted out conversations in the 255 interview reports, in an effort to more accurately capture the subtle changes in the sentiments of the cosmetics industry. Through text analysis,the team identified the top four buzzwords that appeared most frequently. They are: new, expensive, rational, and involution.

1. New: New Brands, New Factories, and New Regulations

Since 2020, the financing in the beauty & cosmetic industry has expanded. The number of financed projects increased from 54 in 2017 to 93 in the first three quarters of 2021, with the total investment amount growing from less than 2.5 billion yuan in 2017 to over 20 billion yuan in the first three quarters of 2021. Undoubtedly, more capital pouring into the industry provides a stronger impetus for cosmetics entrepreneurs, but meanwhile creates a more relaxed environment for the start-up brands to grow. In addition to new brands, some well-established companies such as AIRLAND, Qiancai, Carslan, and LIJI PACKAGING are also spending hundreds of millions yuan to build new factories to further stabilize their supply chain advantages and enhance their market competitiveness.

2. Expensive: Higher Costs of Raw Materials, Registering Cosmetics Products and Customer Acquisition 

The new Chinese cosmetic regulation, the Cosmetic Supervision and Administration Regulation (CSAR), entered into force on 1 January 2021. The Standard for the Evaluation of Efficacy Claims of Cosmetics also took effect as of May 1, 2021, marking that an era where cosmetic notifiers or registrants shall submit a summary of efficacy evaluation to the online platform specified by the NMPA during the notification and registration process has arrived. Meanwhile, this requirement also brings up the costs of registering relevant products. Apart from the rising costs of registration and raw material costs, the packaging costs also increased. As a whole, the rise of upstream costs has generally brought about two effects: On the one hand, it imposes more pressure on small and medium-sized enterprises that are less competitive ; on the other hand, the advantages of large enterprises in resisting risks and internal digestion will be more prominent.

Responding to the surging cost of launching new products, more companies have become more focused and this has resulted in higher chance of high quality products being launched. Companies such as Proya, OSM, WINONA are all planning to launch “classic hit single products”. 

3,Involution: Intense Price and Business Competition

At present, endless involution is putting the domestic cosmetics industry at the risk of slipping into a “monotonous but fierce” competition. The market entities are locked in low-quality competition. In spite of various business strategies, products are homogenized, and in terms of brand building, customer operations, supply chains, and industry standards, innovation is much needed.

For example, speaking of face masks, some companies sacrifice product quality and safety in exchange for short-term benefits, so the market is flooded with low-priced and low-quality products, finally undermining consumers’ trust in the face masks of all brands. Besides, some companies adopt the “capital + internet” business strategy. They acquire customers through saturation launch and even at the cost of click farming to expand market share, but they have no patience for continuous investment in providing customized services for users and streamlining supply chains. In the long run, such conduct will cause a decline of customer loyalty and even do harm to benign market competition.

4. Rational: More Transparent Channels, More Rational Consumers

In addition to the new regulations, the Internet has increased the extent of information asymmetry, and cosmetics consumption has become more rational. More customers pay more attention to ingredients and formulas. Cosmetics companies began to invest more in R&D and the use of exclusive raw materials, or improve the product development processes from the perspective of recruiting sales anchors and web celebrities. For example, in the survey, many brand companies revealed that they are seeking to cooperate with raw material suppliers, develop customized raw materials and require exclusive supply, and enhance their competitiveness through using exclusive core ingredients.

Suggestions from Media

In China, cosmetics is still a promising sunrise industry, but the encouraging data conceals some structural problems and misunderstandings. The following are four suggestions we give. 

1. Booming E-commerce Business Can’t Paint a Whole Picture of Chinese Market 

Undoubtedly, in the past ten years online channels have contributed to the biggest growth in the cosmetics market, and many brands have gained rapid growth in e-commerce channels. However, with the rising cost of customer acquisition on the Internet, the advantages of offline stores such as controllable costs, stable customer bases, and excellent in-store experience cannot be ignored. For example, During the survey, we found companies such as HMF who are rooted in offline channels still grew steadily despite the market growth rate slowing down. 

Experience from other industries also provides a vivid proof. Feihe Dairy, a domestic leader in infant and toddler formula production, reaps nearly 90 percent of its revenue from offline channels, 120,000 outlets consisting of maternity & baby shops, shopping malls as well as supermarkets. Therefore, we believe that the data curve depicting the e-commerce business and the online business boom cannot fully chart a course for the future development of the cosmetics industry.

2. High GMV ≠ An Outstanding Enterprise

Perhaps, in the early stage of brand building, it is one of the business strategies to pursue high growth rate at the cost of deficit. After all, facing intense market competition, it is difficult for a start-up to survive if it invests heavily in brand building in the early stages.Possibly e-commerce business does not need to spend much on brand building to pursue development in the early stages, because it can ensure a good outcome depending on the Internet traffic dividends.

However, the model of spending big money on customer acquisition is gradually becoming ineffective. In the long run, brands should seek a balance between the scale of development and the quality of development. They cannot always pursue high GMV at the expense of harming the life cycle of the brands and their users. Enterprises should pay attention to traffic, and more importantly they should pay attention to the users behind the traffic. After all, building a strong brand assets ensures long term protection for cosmetics enterprises.

3. Light Innovation ≠ Real Demand

Marketing is essential for cosmetics companies, and eye catching packaging and interesting design indeed play a big role.. However, if a company cannot innovate in the supply chain and R&D, it is difficult to tell the brand story for a long time. Therefore, constant innovation could not be achieved without polishing up the supply chain as well as investing in basic research and bottom-level innovation.

Nowadays, leading brands such as WINONA, OSM, and CHANDO all have best-selling products that are over 10 years old, and which have stood up through many iterations. These cases also indicate that when web traffic peaks and capital is sluggish, it is the brands with strong products foundation that can win out.

4. Whatever Challenges May Lay Ahead, continue hard work on the right path  and Efforts Will Finally Paid Off

From the historical lessons we have learned, the brand power of cosmetics companies must stand up to the test of time. It is more important for beauty and cosmetics companies to stay committed to their original aspirations and endure pressure when the economy is transitioning from a period of more rapid growth into a recession. It is undeniable that the standards, culture and systems in China’s cosmetics industry are deeply affected by Western countries, but behind the rise of each domestic brand is certainly the rise of the country. New generations of consumers with more national confidence have growing recognition of domestic brands. Domestic brands have huge room for development.

Meanwhile, the industry standards, business culture, and pricing system of overseas brands are no longer the price ceiling for domestic products. China cosmetics industry doesn’t need to play completely by the rules formulated by the West, and the domestic brands with Chinese characteristics and encapsulating the spirit of the times are not inferior to foreign brands.