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Why the Bottom Fell Out of China’s Luxury Beauty Market

After years of outsized growth in prestige cosmetics, consumers have pulled back on the typically recession-proof category.
Tourists purchase cosmetic products at CDF Haikou Duty Free Shop during summer vacation.
Tourists purchase cosmetic products at CDF Haikou Duty Free Shop during summer vacation. (Getty Images)

Key insights

  • Sales of cosmetics in China turned negative in July, falling 4.1 percent from a year ago.
  • A crackdown by authorities on daigou traders in the duty free hub of Hainan has dented beauty sales overall.
  • Beauty shoppers have turned to discounts and promotions to afford their standard prestige purchases.

In times of economic distress, the conventional wisdom is that beauty, as an emotional and relatively still affordable splurge, will keep shoppers spending. But even though China is looking at a cloudy macroeconomic picture, its cosmetics sector is turning that advice on its head.

Chinese beauty sales tumbled in July, falling 4.1 percent year-over-year, and down from growth of 4.8 percent in June and 11.7 percent in May. Year to date, cosmetics have grown 8.6 percent but the category’s overall growth rate is far below market expectations.

After several years of strong growth in premiumisation driven by a middle class looking to upgrade, the beauty market has tilted. Analysis from brokerage firm Jefferies showed that in the first half of the year, China sales at LVMH’s beauty division were down 8 percent, the Estée Lauder Companies fell 12 percent. The company, which counts on China for one third of its business, has lowered its performance forecast three times in the past six months due to a slow recovery there. Coty, too, dropped 27 percent. Shiseido was the prestige name outlier gaining 3 percent year over year.

Beauty products aren’t providing a luxury respite as Chinese consumers are feeling the economic pinch in a multitude of ways. In July, the country’s consumer price index fell 0.3 percent on weak demand, after several months on the cusp of deflation. The property sector, which accounts for three fifths of total household wealth, is troubled by overleveraged developers. This month, rumours have swirled that Country Garden, one of the country’s largest property developers, may default.

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Meanwhile, unemployment for 16 to 24 year olds in June has reached a new record high of 21.3 percent. One Peking University professor theorised in Caixin magazine in March that the real jobless rate could be as high as 46.5 percent, more than double the official figure.

Part of the reduction of beauty spend is also tied to a pull forward of demand. During lockdown, people spent disproportionately on skin care, which tends to command a higher price point. With socialising and travel now possible, wallet share has shifted towards makeup again.

“Chinese consumers may have prioritised colour cosmetic products over skin care products as they resumed travelling and wanted to look their best while on the go,” said Jefferies analyst Ashley Helgans, who noted “that the cosmetic product market in China is highly competitive,” with emerging domestic brands vying for market share alongside established brands.

Duty Free Tightens

China’s beauty slowdown has been exacerbated further by customers going abroad to shop. Although overseas travel has only recovered to half of its pre-Covid 19 levels as of July due to limited flights and backlogs in visas and passports, those that are able to travel are likely to take advantage of shopping duty free goods.

This is all occurring while Hainan, China’s main duty free spending hub, has initiated a crackdown on daigou. Provincial customs data showed that July duty free sales fell by 34 percent in July compared to the same time a year ago, due to a crackdown on the grey market trade that began in April. Much of the travel retail sales there are driven by beauty, which has a significant impact on the country’s total cosmetics sales overall.

“In Hainan, however, there’s been a clear deterioration between the first and the second quarter… this has had a severe impact on industry-wide sell-out,” commented L’Oréal CEO Nicolas Hieronimus said on the company’s most recent earnings call in June.

A ‘Value’ Mindset

Although L’Oréal has fared well among its competitors, it too has observed softness in spending. “We see that consumers that probably take some time to see the confidence go totally back up, it’s picking up, but not yet at the pre-Covid level,” Hieronimus said, adding that “Chinese consumers are more rational about their beauty purchases than they were before Covid and they are really looking for efficacious products for performance.”

Beauty companies with a more mass portfolio like L’Oréal saw the largest gains in first half results; the world’s biggest beauty company gained 5 percent. Similarly, P&G beauty sales grew 19 percent and Beiersdorf saw a 4 percent increase in sales.

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The value mindset has spread across the entire consumer space. Hang Lung Properties, which owns a collection of high-end malls around China including Plaza 66, the most important luxury mall in Shanghai, reported a noticeable slowdown at the end of last month when they published earnings. The company noted that while mall footfall remains high, even consumers of high-end goods have pulled back in lower tier regions of the country.

“Chinese consumers are becoming more conservative due to macroeconomic uncertainties; hence they are saving more. Their expenditure is 20 to 30 percent less than before. It is not a matter of lacking money but adopting a ‘wait and see” attitude,’ said a recent note from brokerage Bernstein.

Daniel Zipser, the leader of McKinsey’s Asia consumer and retail practice, explains that when it comes to a cosmetics pullback, “the answer isn’t a simple ‘yes or no’. Only one fifth of consumers indicate they’re switching to cheaper brands, while premium and luxury brands continue to rise.”

“Around half of consumers suggest they buy from channels where they can find their preferred brands at lower prices or on sale,” he said, pointing to fierce competition among e-commerce players who are offering discounts to gain market share. Douyin and Pinduoduo have been competing more with more established platforms Alibaba and JD.com, offering substantial discounts to convert users and win market share. For instance, the average selling price of skincare on Tmall was 243 yuan ($33) versus 109 yuan ($15) on Douyin, McKinsey found.

“Net consumers aren’t necessarily shifting to cheaper brands, but are instead finding ways to trade up at a lower cost via different platforms, promotions, or by adjusting quantity or pack size in their purchases,” Zipser concluded.

Further Reading

Rethinking China’s Beauty Market

As global brands face headwinds in China, L’Oréal and Shiseido are betting on new investment funds targeting C-beauty companies to sustain growth.

About the author
Tiffany Ap

Tiffany Ap is Senior Correspondent at The Business of Fashion. She is based in New York and covers marketing and the critical China market.

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