A Snapshot From Meredith Sun
China Cosmetics - Sales Solid, South Korean Brands Recovering in China

June 20, 2017     View full Note online  »

090430 KS, 4911 JP, EL, OR FP

Sources: 9 Chinese sources, comprising 8 department store managers and 1 distributor
Increasing sales of makeup along with tax and price reductions of international brands boosted sales of cosmetics in China, and sales of South Korean brands are recovering as the impact of THADD diminishes.

China’s overall cosmetic sales improved yy during 2017 to date, mainly driven by tax and price reductions of imported brands and robust growth in online sales. But cosmetics sales in brick-and-mortar chains, especially department stores, only recovered slightly during 2Q17; four of nine department store managers reported yy increases, one was flat, and the other four were still decreasing yy. Ecommerce was the major reason for the relatively slow recovery of sales in department stores, followed by the continued fall-off in store traffic. One source said, “Almost all the high-end international cosmetics brands were reported having 60% to 100% sales growth on their flagship stores on [Alibaba Group Holding Ltd.’s] Tmall during holiday promotions, but in our store, the strongest brand’s sales was only up 20% [yy]. All these brands are focusing more and more on ecommerce. Although brick-and-mortar still represents the majority of their sales, ecommerce represents the future.”

During 2Q17, sales of Shiseido Co. Ltd. (4911 JP) and The Estée Lauder Cos. Inc. brands were the strongest among major cosmetics groups, with Shiseido brands up low double digits to low teens yy for most sources. Shiseido benefited from easier comps and took some market share earlier in the year from high-end South Korean brands that suffered because of political tensions between China and South Korea over THAAD (Terminal High Altitude Area Defense, also see OTR Global's March 1 snapshot). But more importantly, the company revised its marketing strategy to adapt better to the overall trend of Chinese consumers increasingly buying high-end cosmetics. Global Shiseido and Clé de Peau Beauté achieved the highest sales growth among Shiseido brands. Estée Lauder brand sales were up in the 11%-15% range for three sources and flat yy for another three. Estée Lauder brands mainly benefited from tax and price reductions and incremental sales coming from makeup; Bobbi Brown and MAC outperformed within the group of Lauder brands. One said, “Estée Lauder’s sales increased by around 15% [yy] during 2Q17 because more and more young consumers are interested in makeup products, including eye shadow, mascara and foundation. These young consumers have gained more purchasing power and are able to afford high-end cosmetics brands like Estée Lauder.” 

L’Oréal S.A. sales were mixed; five of nine sources were up yy during 2Q17, and three were down. L’Oreal’s mid-level brands, led by the L’Oreal namesake brand, decreased quickly because of competition from local brands. But high-end brand Lancôme remained strong, and the newly introduced and younger consumer-focused brands YSL and Kiehl's were also trending, aided by marketing through social media. One said, “YSL and Lancôme performed the best. Chinese customers are crazy about YSL lipsticks — we have several products that are out of stock. Social media exposure on YSL's lipstick products did help increase brand awareness. Lancôme has a solid brand reputation already. Sales are always stable, growing.” 

Amorepacific Corp.'s (090430 KS) sales were up low single digits yy for most sources during 2Q17, with Innisfree having the strongest growth. Most sources said Amorepacific brands' sales were affected by THAAD during 1Q17, as some department stores had to reduce the size or even hide product at their counters, but most said sales did not drop significantly, since many young consumers are not highly sensitive to politics; six of nine sources said any impact from THAAD was diminishing quickly, and a full recovery was expected. One said“Our South Korean brand sales were affected by THAAD in Q1. Some of our counters narrowed the South Korean brands' spaces; some even hid the South Korean brands' products. This wave passed quickly. As I know it, the most sensitive period lasted for about 10 days, and then all sales went back to [normal].” Another said, “The impact of THADD on South Korean cosmetics’ sales during 2Q17 has gotten smaller compared with 1Q17. This kind of political incident is very normal in China, and the effect of these incidents usually diminishes over time. I believe the sales of South Korean cosmetics products will likely pick up after some time.”

Contributors: YaQin Chen, Joyce Hong, Butch Lee, Bruce Li and Jennifer Yang
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