China, as the second largest economic entity of the world, has the biggest population over the world. As the increased living standard of Chinese people, the consumption on fashion and cosmetics is enhancive since last decade. According to Goldman Sachs report, China has increased its position from being hardly noticed to the world’s third largest consumer of luxury goods, accounting for 12% of global sales. (Bialobrzeski, 2011) According to Datamonitor (2010)’s forecast, the Chinese make-up market grew by 6.8% in 2009 to reach a volume of 129.5 million units (Figure 4). The market is forecast to have a positive development of 169 million units by 2014 with an increase of 30.5% since 2009. This enormous market growth rate is due to increase of income and continues changed life attitude in China.
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Furthermore the traditional points of views of women and men have changed with regard to cosmetics application. Particularly, women who live in the urban areas of China spend a lot of money on luxury beauty products – for example in Shanghai it accounts for about 10% of the income. In China the main consuming power comes from middle and upward class .By now, about 150 millions of Chinese out of 1,3 billions, are considered to belong to the middle-class, while it is forecasted that in year 2020 the middle-class of Chinese population will grow up to about 400 millions. The Chinese cosmetics market is still an emerging market. The dynamic development will continue in the future, offering excellent opportunities for the European cosmetic companies to successfully enter the market.
Considering above necessary factors, it is clear that China has a great demand of high-end cosmetic brands of foreign brand. And until now many of them are already available in China. The brand awareness is constantly growing because in addition to the high quality, the presentation as well as the image plays a significant role in consumers’ purchasing decisions.
The purpose of this paper is to obtain a detailed understanding of luxury cosmetic sector in China market through analysing external and competitive environment of several major market leaders in this industry relative to their business. Necessarily, PEST analysis and Porter’s Five Forces will be used in the following context.
In luxury beauty segment, several competitors such as Lancome, SKII, CD, and Estee Lauder will be analysed in this paper. Actually these famous brands have built up a world class reputation for excellent quality and prestige in China. Moreover, Estee Lander and Lancome are the beauty brands which earliest entering China in early nineties. Till now, they have gained a large market share in luxury skin care sector.
PEST Analysis of High-end Cosmetic Industry
PEST or PESTEL analysis provides a framework of macro-environmental factors to study the external environment (Johnson G, Scholes K and Whittington R, 2006). It serves as a basic analytical tool for understanding market growth or decline. The framework evaluates the impact of regulatory, economic, social and technological factors on the business environment. It analyzes how the external environment may create opportunities or threats for an organization.
Tariff and taxation system
As reported, over ninety percent of China high-end cosmetic products are foreign brands and mainly imported from Europe or Japan. From 2004, in the light of lowered tariffs, many Europe brands are flowing into Chinese market. Today, most world class top brands have been presented in China’s market.
To penetrate the business into China, the priority is dealing with the complex and frequently changed taxation system in China. In the beginning of 2007, China raised its import tax on overseas cosmetics from 20% to 50 % which led a barrier on foreign cosmetics consumptions (Wu J, 2007). For a long time, the process of importing raises the challenge for cosmetic companies, including a series of difficulties in terms of tax treatment (Consumption Tax) and customs duty. (KPMG, 2007) Moreover, consumers in the consumption of imported luxury cosmetics took on too much tax, so that some choose to go abroad purchasing products. However, recently, the local government are considering reducing or cutting the high consumption tax as the claim of extremely high rate of tax added on luxury goods.
Tightened regulation and Import block of EU cosmetics
To safeguard consumption, the Government has tightened the regulations of cosmetics in recent years. The Regulations for the Administration of Cosmetics
Labeling promulgated by the General Administration of Quality Supervision, Inspection and Quarantine (AQSIQ) came into effect on 1 September, 2008. Ingredients labelling requirements are tightened. Under the regulations, cosmetics labeling on packages must include a full list of ingredients; and the method of labelling and requirements must comply with the stipulations in the corresponding standards. Exaggerating functions, making false claims, indicating explicitly or implicitly that the product has medical efficacy, using product names that can easily mislead or confuse consumers are prohibited.
In early 2002, Chinese government imposed the ban of contamination of cosmetics by animal by-products that might transmit the human variant of bovine spongiform encephalopany. This action brings a huge affect on luxury skin care imported from France or other EU countries at that time. Recently, after negotiation between China and EU, the ban is getting released to some extends.
GDP increase and development of coastal regions
As table 23 shows that the GDP of china from 2005 to 2009 has experience an increase of 12.5% on average. Wealthier coastal regions in China have long been the major markets for cosmetic players. The urban areas such as Shanghai, Beijing, Jiangsu, Guangdong, Zhejiang and Shandong together accounted for over 55% of the national sales in cosmetics. However, in the follow years, the rate of consumption among those areas will slow down, because they have been mature in luxury market. Therefore, the luxury cosmetic companies will seek the opportunities in second-tier cities. In the past, China’s wealthier coastal regions are the must-win battlefields for high-end and luxury cosmetics players; as wealth trickling down to other regions, lower-tier cities begin to play on screen.
Financial Crisis, Inflation
In 2008, during the time of recession, people are less likely to spend money on discretionary products and services, as they are not a necessity to survival. Cosmetic companies tend to watch the economy closely as most of their products fall within the category.
There are, however, signs of market slowdown recently amid macroeconomic downturn. Cosmetics retail sales growth slowed down to 23.6% in the first three quarters in 2008 and further declined to 14.5% and 16.3% in October and November. According to industry experts, high-end cosmetics sales were affected the most as consumers become more price-conscious and have the tendency to trade down to value brands and lower priced private labels. Despite the recent slowdown, China will continue to be one of the fastest-growing cosmetics markets. Hit hard by the financial crisis, cosmetics sales in many developed economies are expected to show flat or even negative growth in 2009; meanwhile, industry experts are confident that China’ s cosmetics market will maintain its doubled growth in coming years with government’s continuous efforts to boost domestic consumption. During the same period, French luxury cosmetics firm L’Oréal’s sales enlarged 1.4% globally, but grew by a increase of 13.9% in China.
Recently, the slow pace of economic recovery leads commodity inflation in China’s market. As the increased cost of productions and distributions, the large cosmetic companies claim to escalate the price of luxury cosmetics. However, the experts predict that the escalation will bring little effect on high-end beauty consumption, due to the affluent end consumers.
Undoubtedly, even though the rapid growth of China’s economy, only a little proportion of China’s huge population can afford to spend thousands of money on daily cosmetics. However, many experts still believe that China will become the largest luxury consumption market due to the large population bases. Kelly (2007) claims that China’s luxury market is optimistic due to its female population aged 16 to 45 nearly equals the entire combined populations of the U.S. and Japan.
China’s unique characters
China’s unique characters of luxury products consumption leave a great potential development for high-end cosmetic market.
In the emerging middle class, Chinese consumers who buy luxury goods do so to show off or to help define their identity. The Asian concept of face-or pride and dignity-is a key reason they invest in expensive brands. In a fast-growing economy, status symbols are the easiest way to demonstrate wealth and power (Bialobrzeski, 2011). To most of Chinese consumers, the knowledge of luxury product is rare to identify the value of luxury goods.
Counterfeiting is one particular character which only appeared in China’s market. While the Chinese luxury cosmetic market is rapidly growing, another equally fast growing segment of local industry is counterfeiting. As a manufacturing empire, China also produces luxury fakes. Counterfeiting has a tremendous negative impact on brand value, even worse, to harm consumer’s health. The luxury brand must fight to hold their brand identity against counterfeiting.
Key segment of luxury beauty sector
In addition, unlike the consumers in the West aged forties, China’s younger generation are inclined to spend money on luxury products. White collar is major customer for up-scale cosmetics. The expanding middle class has formed the loyal customer basis for this market, especially ladies. Their spending on cosmetic is outgrowing over other age level.
Higher-income working females and wealthy housewives are the major consumers of high-end and luxury cosmetics; these consumers are generally more brand-conscious and brand-loyal. According to the HKTDC, it is estimated that this group of consumers accounted for around 20% of the urban population.
The highly development of E-commerce varies the older distribution channel of high-end cosmetic consumption, such as luxury department stores and spas. Internet commerce is also an important marketing strategy that the company is focusing on. Estee lauder is a successful example who sells the produce on its website and believes that when consumers make their first purchase online, they will tend to go to the store the next time for the full experience. Also, there is array of beauty choices on the internet. They can also learn about beauty from the 300 sites with cosmetics content. It is estimated that the internet will eventually produce 5 percent of the $6.5 billion prestige beauty market in the next five years (Soap, Perfumery & Cosmetics, 2002).
As reported, nearly 60% of the consumers would like to access to the Internet gathering general information for luxury goods. Online buying is currently focused on foreign websites, but the proportion of total sales is still very low. The customers aged from 25 to 44 years old who are proficient in the network led the luxury online shopping patterns. These young consumers also found another great benefit of using the Internet, that in foreign countries such as Glamour-sales.com and other online discount website to find the best value and lowest price of products. (eastmoney.com, 2010)
Advanced high-tech innovation
In luxury cosmetic industry, skincare products can be high-tech and luxurious. These products typically deliver the best skincare ingredients in higher formulations designed for lasting results. Take Estee Lauder as an example, the star night cream named advanced night repair synchronized recovery complex is adopted Exclusive Chronoluxâ„¢ Technology to resist skin damage. The continuous innovation make the product life cycle short and bring the competitive advantage in the market.
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Porter’s Five Forces
After analyzing the external environment through PEST, the key drivers of luxury cosmetic sector are identified. During the severer global competition, Michael Porter’s theory of five forces analysis (Porter, 1980) will be used to exam the sources of competition on national level. In the following, we will analyze an China’s luxury cosmetic sector in terms of threats of new entrants, product substitutes and complements, buyer power, supplier power and internal rivalry,
Impact of High-end Cosmetics on Threat of Entry
Generally speaking, the threat of new entrances into China’s high-end cosmetic sector is relatively high. The Chinese prestige-beauty segment is growing fast with an increase of 30% per year and is very attractive for new firms to enter. (Scott, 2004) However, almost all major competitors have already entered into China market, such as Lancôme, Estee lauder and SKII are examples of companies selling products in China who have achieved a success and reputation among Chinese customers.
The capital requirement
Cosmetic business, a segment of chemical industry, requires a significant amount of capital investments, associated with research, development and testing, because a high level of direct contact between cosmetics products and human body. Chinese government imposes a strict and complex regulation to the launch of new products; therefore, a good suggestion for the new entrant is to build a product under a synergy and collaboration with giant cosmetics companies. Furthermore, the expenditures of advertising to build brand identity are tremendous. Most Chinese consumers are lack of brand awareness and brand loyalty in this emerging market, so that luxury brands are making a great investment on marketing to advertise their band and products to educate Chinese consumer about luxury.
Proprietary product differences
Product differentiation is a critical factor for high-end cosmetic companies which mean that the company must be able to determine the uniqueness of its products in comparison to competitors’ products (Sameer K, Cindy M and Michelle D, 2006) Taking Estee Lauder as example, it offers variety of products that are built exclusively for high end consumers, which finally allows the company to compete in the market on the highest level of price. The uniqueness of Estee Lauder’s products comes from a high technology and extensive R&D. These efforts make other competitors to have a hard time to imitate their products and also build up the entry barriers to the new comer.
Impact of High-end Cosmetics on Bargaining Power of Buyers
The bargaining power of the buyers is high because of the multiple options are provided to consumers. Within high-end cosmetic industry, price is not an important factor to gain the market share. Instead, the bargaining power of buyers is the main factor to competence for market share among other competitors. All firms are competing to attract consumer’s attention by providing the best quality, most stylish, and great price.
As mentioned before, the target consumers of high-end cosmetics more concentrate on brand identity rather than price. High-end cosmetics usually have a steady group of targeted customers and usually have less affect on prices.
Impact of High-end Cosmetics on Bargaining Power of Suppliers
Supplier power in cosmetic industry is relatively low. Owing to a lot of merging and acquisitions happened in China, the monopoly to gain advantage in capital in the cosmetics industry will be huge in the future. If the industry is becoming monopolized, therefore, suppliers will have low power, where they will compete tightly in order to get the biggest piece of share.
Products can be made with a range of alternative raw materials, which reduces supplier’s power.
Impact of High-end Cosmetics on Threat of Substitutes
In the mid-tier segment of cosmetic industry, the competition is also fierce. The well-known brands such as Olay, Za, NIVEA stand a large proportion of market share. Still, foreign companies are willing to enter the mid-end cosmetics market at this moment. Compared with buying character of high-end cosmetics, it is worth taking into account the facts that consumers in this segment are more price-sensitive and less brand identification.
Addtionally, economy slow-down is a good time for mid-tier to catch up market share. During the economic recession, a relative low price with a similar quality and service provided to customers will built up the brain loyalty as long as mid-tier cosmetics promoting a brand identity
The natural cosmetics have been formed a main stream of new cosmetic segment which promote their natural ingredients and target the young customer segment. In China, young and well educated people are in the trend of declaring environmental friendly and human rights. The brand concept of natural cosmetics is well fitted the trendy majority. The newly entered brands, such as The Face shop, Lush (allergy free, no chemicals, fragrances or preservatives added) have already captured a portion of market share. In the following ten year, China’s market share of natural cosmetic will be gained, especial for the entrance of The Body Shop into China.
Impact High-end Cosmetics on Rivalry
Foreign brands perform very well in China’s cosmetics market. The dominant proportion of the cosmetics market between foreign brands and home-grown counterparts is lopsided. Indeed, foreign players have dominated the high-end and luxury cosmetics markets. Over the past decade, cosmetics giants such as L’Oréal, Shiseido, Estee Lauder and Dior have made major commitments to cultivate success in these segments. Exhibits 9 to 11 figure out the market share of main cosmetic brands in skin care, colour cosmetics and fragrances sector in 2006 and 2007. Even two middle-low level brands Olay and Maybelline consist in a large amount of market share, the other high-end brands gain a considerable share and the growth movement is optimistic.
Internal rivalry in the cosmetic industry is high. From the exhibits we can also find that the competitors are of roughly equal size. Therefore, the rivalry of China’s high-end cosmetic market is server.
Estee Lauder makes premium skin care, makeup, fragrances and hair care products and sells them through upscale department stores, perfumeries, and prestige salons and spas. These formats emphasize exclusivity, which helps defines them as luxury beauty and personal care products. The company competes with well-known companies like L’Oreal and P&G. Estee Lauder’s luxury brands include Clinique, La Mer. The marketing strategy inspired by the founder, Estee Lauder, is to provide high-quality service and products as a foundation for a solid and loyal consumer base. The marketing efforts focus primarily on promoting the quality and benefits of each product. Each brand is being positioned distinctively, meaning that it has to have a single global image, logo, packaging, as well as advertising. This allows Estee Lauder to be a truly global company. The reason behind this is to create a unique and distinct image of each brand from other existing brands, especially ones that come from competitors (Estee Lauder website).
The toughest competitor of Estee Lauder is L’Oreal which also contends several high-end brands under the group. However, L’Oreal’s position of luxury brand is less focused, compared with Estee Lauder. L’oreal has steadily become the leader in cosmetics by their ability to adapt their products to the global market and achieve a high level of efficiency. After finding the various kinds of demand in local market, L’oreal’s transnational strategy has allowed it to build a strong global structure while still leaving room for different adjustments that might be needed at a local level. It shows that L’oreal is willing to use different price levels in different regions or demographics.
In the foreign dominant market, some local brands such as Herborist and Mimocrys grab the lucrative opportunities due to the special character and particular product position. Herborist, with preference for natural products goes along with a strong attachment to Chinese Traditional Medicine are emerging though China’s market with a higher position. However, domestic brands still cannot compete with foreign luxury brands. Under the fierce competition, local brands have to invest on marketing the brand and increase the quality as well.
Evaluation of the two analysis tools and the limitation of the report
Kotler (1998) claims that PEST analysis is a useful strategic tool for understanding market growth or decline, business position, and direction for operations and helps to break free of unconscious assumptions, but we have to admit that it is only a strategic starting point, and has its own limitations due to emphasizing the need to test the conclusions and findings against the reality. Another potential disadvantage is derived from issues of validity, reliability and relevance with regard to collecting information from the secondary sources.
For Porter’s five forces analysis, though it is regarded as the seminal works in the business field (Kotler, 1998), it is convinced by some business analysts that the ever changing business environment requires more flexible, dynamic or emergent approaches to strategy formulation. (Jan,Y, 2002) Some critiques are put forward as follows:
First, when using this tool, some people tend to underestimate or underemphasize the importance of the existing strengths of the organization. In other words, the model does not address the possibility that an industry could be attractive because certain companies are in it. Secondly, the model was designed for analyzing individual business strategies but not for coping with synergies and interdependencies within the portfolio of large corporations. Finally, it may be possible to create completely new markets instead of selecting from existing ones sometimes.
As most of the statistics based on the economic and demographic situations by 2007-2009 and it is incapable of getting access to the internal financial reports of the some leading market players, the report needs further improvement in the next semester with more up-to-date information available.
After analysing the macro external and internal environment of China’s high-end beauty sector, the sustainable development of industry will keep dynamic in a relative long period of time. Both opportunities and threats exist at present time. The strength of luxury cosmetics are consist of the great potential of brand identity, high qualified product along with service, and a sense of differentiation provided to consumer. In addition, the tendency of young age of China’s end consumers will lead a long lasting development of luxury brand, because these young women, who will be 40 in 2020. At last, the emerging market in China brings a lot of target customers and opportunities, which is crucial to the success. However, the relevant challenges for luxury cosmetics still exist. The recession of economy, high barriers of import regulation and low brand awareness challenge the further success of luxury beauty sector. The luxury cosmetic company should invest on advertising and marketing because the critical factor for high-end band success is brand identity.
Estee Lauder is a strong company in the cosmetic industry as it is known for good quality products. It seems that Estee Lauder’s main weakness is that it is sold in high-end department stores. If Estee Lauder would advertise that Clinique is also an Estee Lauder company, they might be able to create more awareness in the company. All in all, Estee Lauder, L’oreal and P&G devoted to gain luxury cosmetic image in China’s market. The overcoming their weaknesses by their ability to anticipate the replacements of products that are not selling well in the market, communication with retailers and suppliers, high quality service and products as a foundation for a solid and loyal customer base and groundbreaking ingredients and friendly packaging are also needed.
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