China authorities finally announced to relax its travel restrictions starting January 8, 2023. As a result, travel is expected to boom in the coming few months.
On December 4th 2022, Morgan Stanley upgraded its recommendation for China stocks from Equal-weight to Overweight, a significant change for the first time in three years. Plus, China’s policy shift signals the country is accelerating to reopen the economy, with officials stating more policy support will be issued.
By reviewing the 2022 China International Import Expo (CIIE), which witnessed global groups’ presence, is it possible to find some clues about the future of the beauty industry in the world’s second-largest economy? Can the beauty industry expect a robust recovery in China, which is home to 1.4 billion consumers?
In this article, we predict and decode the key opportunities that matter for beauty players.
Demand for beauty products is recovering
In past years, brick-and-mortar stores and online retailers suffered from traffic limitations, and many consumers complained they could not successfully receive their parcels. However, some beauty leaders express hope. Even after recording a decline in sales for its China businesses, beauty conglomerate Estée Lauder stated the company expects to see its cosmetics division rebound in 2023 when China reopens step-by-step.
Although the offline scene has not recovered instantly, the loosening of China’s zero-Covid policy has lifted the spirits of merchants and consumers alike. After the gradual recovery of the logistics industry, plus smoother travel between provinces, beauty leaders like Estée Lauder will soon recover their previous rhythm.
The 2022 Singles Day shopping festival in China reflected economic recovery and consumption upgrade, as consumers traded up to comparatively premium products. In Hangzhou’s shopping mall, Intime saw its customer traffic double year-over-year. Before the store opened, many customers lined up at the door and many beauty counters sold out of merchandise that day.
Customers at Hangzhou's Intime shopping mall during Singles Day
An analyst from Barron’s commented that consumer sentiment shifts as China’s Covid strategy evolves. Customers’ consumption enthusiasm will be gradually unleashed.
McKinsey foresees that premiumization remains untapped and offers potential growth since affluent customers prefer premium over mass-market brands.
As such, international beauty conglomerates continue to see China as a growth engine, announcing plans to raise more investment funding to support their China businesses.
L'Oréal announced the launch of Prada's beauty business in China. Fragrance giant Coty is back on the skincare battlefield after 18 years with the launch of a new luxury skincare brand, Orveda. This ultra-high-end skincare brand is expected to arrive in China in 2023. Coty also plans to debut Lancaster’s new premium product line, Ligne Princière, scheduled to launch in China in March 2023. These moves highlight Coty’s bet on the luxury skincare sector in China.
The rebound of beauty spending may shed light on cosmetics. As consumers engage in more social activities, demand for makeup products may resume to pre-Covid levels.
According to a recent survey by the Oriental Beauty Valley, lipstick and foundation are still the most purchased categories, with nearly 80% of consumers buying these items in the past year.
Travel retail ready for the shopping frenzy
Evidence of a rebound in the travel retail business showed up earlier in Fall 2022. By the end of October 2022, a vast new duty-free shopping mall celebrated its grand opening in Haikou, the capital of the duty-free island Hainan. Spanning more than 3 million square meters, this new destination is the world’s largest single duty-free shop and an engine of domestic tourism to Hainan, according to China Duty-Free Group (CDF). Recent numbers have proven CDF’s assertion.
On the first day, this new mall recorded transactions exceeding 60 million RMB (US$ 8 million), with 2 million visitors flocking to CDF’s independent online mall.
On Dec 6th, the city of Sanya took the lead in lifting the travel limitations for visitors from other cities and announcing it will not implement a quarantine policy.
Once Sanya announced this notice, the travel market saw enthusiasm spike nationwide. According to Qunar, a domestic online travel agency, within one hour after the notice about Sanya was released, the search volume for inbound air tickets of the city increased by 1.8 times compared with the same period the previous day. Ticket sales increased by 3.3 times and Sanya hotel bookings tripled.
A rise in global, outbound tourism may be possible in the near future, as we are seeing Ctrip.com, Airbnb China, and other travel companies beginning to prepare for the recovery of the outbound travel market. When the limitations of outbound tourism are lifted, Chinese consumers who can afford to travel aboard will gradually appear in popular destinations, from Japan and Korea in Asia to Europe and the United States. This phenomenon is certainly going to occur, especially since many goods from popular overseas destinations remain unavailable in China.
Digitalization stands as the leading strategy in China
If Covid-19 has taught brands and retailers one thing, it is that digitalization is the key to approaching and engaging customers. The uncertainty of offline traffic accelerated the pace of digitalization, as companies embraced online sales channels and livestreaming e-commerce.
As new consumer trends emerge, beauty giants have continued to explore untapped potential. Beauty brands have flourished on China’s popular e-commerce and social media platforms, including Tmall, JD.com, WeChat, and Douyin (TikTok).
We are now witnessing unprecedented openness among technology companies. In 2022, Alibaba’s livestream arm, Taobao Live, recruited 500,000 hosts from other platforms. Many influencers are beginning to switch platforms or host multi-platform live broadcasts in order to gain more traffic and commercial value, instead of relying solely on one.
With the China livestreaming market expected to reach 4.92 trillion RMB (US$708 billion) by 2023, cross-platform openness is yielding a promising opportunity for brands and retailers.
A more open ecosystem has many benefits for everyone as the local livestreaming market develops. Brands, with their influential anchors and the ability to operate across different platforms, can now attract a larger audience.
New brands also stand a chance - as long as they show differentiation
Many foreign brands cannot ignore that they are feeling pressure from trendy and innovative brands based in China. Despite consumers’ growing concerns about the economy and their incomes, when they do spend, customers want more luxury and efficacious products that are more likely to be recognized for their ingredients and technology to pamper and reward themselves.
It is fair to say that international big-name brands are still leading in the beauty market, especially in the indie skincare and perfume segment. Their R&D technology-patented formulas and ingredients have entitled them to higher pricing. Simply, it is all about the product. Chinese consumers are getting more knowledgeable about the products they purchase.
The recovery of consumption will give the beauty industry huge opportunities for growth. People will pay more attention to “face value” consumption, as strict social distancing rules fade. On the life-sharing platform Little Red Book, over 90 percent of the ingredient enthusiasts are female, and it is still growing. There is a clear trend toward younger consumers. Top advanced skincare needs include: simplified skincare, precise skincare, and refined anti-aging.
Another key driver behind the opportunities could be consumers' enthusiasm for overseas travel. Overseas travel used to be the straightforward way for affluent consumers to search and shop for new brands and products unavailable in China. When China’s limitations on outbound trips eases, a growing number of new beauty brands will get discovered through travelers’ sharing of social media posts.
How beauty brands need to look ahead
1. Managing inventory levels is key. Due to a sharp drop in sales in 2022, brands are leveraging methods to reduce inventory levels. In the short term, the market is facing a huge amount of unsold stock, which could impact the profitability of retailers and brands.
2. Stay nimble and flexible. The volatility and uncertainty of the past years are likely to become the new normal in China. Beauty players need to stay tuned to consumer demand trends, and improve business agility by regularly reviewing and optimizing their strategies.
3. Establish a consistent strategy for loyal customers. Members with customer loyalty have become the main driving force of brand growth, and the question of “how to enhance customer loyalty” is more worthy of brands committing to relationships with consumers in China.
Disclaimer: This article is originally written by Queenie Yao, and published by Azoya.
Established in 2013, Azoya is a borderless e-tailing group with headquarters in Shenzhen, the 'Silicon Valley' of China. Azoya power global retailers and brands with digital commerce solutions and services to help them grow in China, having worked with over 50 clients from around the world.