China after corona

COSSMA: In China, everyday life is getting back to normal. But the effects of the corona crisis can still be seen and felt. How is the Chinese cosmetics market doing now? What traces can still be seen?

Mei Gräfe: Now, China is slowly but surely recovering from the corona epidemic, but the Chinese economy was hit hard by the crisis. After decades of economic growth, China had negative growth for the first time with a loss in GDP 6.8% in the first quarter of 2020. Hotels, catering and retail have suffered most of the losses. The cosmetics industry was also badly affected due to the almost three month lockdown. Companies and brands that have relied heavily on traditional sales channels are faced with major losses. There are prominent brands and companies among the casualities. For example, the cosmetics specialist chain Space NK from Great Britain completely left the Chinese market after just two years. Eight stores were closed and online operations, including the Tmall flagship store that had been in existence for only a few months, were completely stopped. The corona crisis played a crucial role in this, but industry experts in China also address the late entry into online business and the lack of online brand communication as important mistakes. Another prominent example is the Sasa cosmetics chain from Hong Kong, which had to close 21 branches in Hong Kong and Macau due to the corona shutdown and the subsequent lack of tourists. Political instability in Hong Kong since summer 2019 has also contributed to the store closings. 

What problems is the cosmetics industry struggling with?

One can say that all levels of the cosmetics industry have been hit hard by the corona crisis. Over-the-counter retail suffers from months of business closure and high inventory levels. The epidemic broke out in China earlier this year around the time of the traditional spring festival, which is usually a month of high consumption. Many traders had prepared inventory for the New Year business. With the nationwide curfew, the dealers sat on this larger-than-usual inventory and had to continue to pay the rent of the business premises. The cosmetics manufacturers naturally suffer from manufacturing complications due to social distancing as well as other and must deal with other problems such as bottlenecks and price increases in the ingredients.

What has changed since the pre-pandemic period?

Of course, there are changes after such an unexpected and serious event. I think two of them are particularly noteworthy: First, the “Revenge Shopping” hoped for by many, with consumers indulging after the epidemic, did not materialize.

Perhaps one underestimated the severity and duration of the epidemic at the time. During the time of total lockdown, many people suffered a drop in wage even though they had to meet other obligations such as rent or loan payments, which is why people have become very careful about spending money. In terms of cosmetic products, basic skin care products such as face creams, face masks, hand creams and sun blockers are now being bought. Decorative cosmetic products are currently experiencing major difficulties across the country due to the curfew and the ongoing mask requirement. Mild and nourishing products for the “mask face” with redness, inflammation and itching had experienced a large increase in sales. Face masks for nourishing and pampering the face are experiencing a real sales boom. According to statistics, 57% more were sold in March than in February. In my opinion, the biggest change is the spread of online business and the digitalization of the entire cosmetics industry in China. Companies and brands that were digitally well positioned before the epidemic suffer less than their competitors. A positive example is the brand Dr. Yu from Shanghai Jahwa United, one of the oldest cosmetics manufacturers in China with many renowned brands such as Herborist, Maxam etc. The company has consistently implemented its online strategy over many years and is present on important sales platforms such as Tmall and JD. The brand Dr. Yu was designed based on TCM herbs and would be particularly suitable for the skin stressed by protective face masks. The brand was able to benefit from consumers buying online. Product sales increased 500% in the first quarter of 2020. As the brick-and-mortar stores remained closed for a long time, many brands and cosmetics stores were forced to seek direct contact with consumers through live streaming. In live streams, the products are explained in detail by the sales staff and the consumers were forwarded directly to the online shop. This digital trend is no longer only found in the B2C area but is also widespread in the B2B area. Many industry operators offer virtual solutions. For example, the China Beauty Expo scheduled for May will take place online. The organizer announced numerous online exchange and product presentation options and called this special event “CBE-Cloud- Plan”. Other industry organizers such as Qingyan Beauty Insight from Wuhan have already organized online B2B live streaming for the brand presentation and online discussion forums. The CEO and founder Mr. Chaoyan Cai summarized this trend during our exchange with two sentences: “The cosmetics business has changed from a gradual retail business to a much more direct business model, where the brands and manufacturers turn directly to consumers. That is a significant difference from the time before the outbreak of the corona epidemic.” Personally, I am very impressed by the quick responsiveness and resilience of many companies.

Many manufacturers obtain components for packaging or content from China. Are there any bottlenecks here?

The cosmetics production in China depends on imported ingredients. The global lockdown and unreliable transport links have caused material shortages and price increases for some ingredients on the market, such as carbomer and polypropylene. The narrower effects of these bottlenecks on product manufacturing and product prices can still be observed.

Roughly how long will it take for the market to stabilize again? What factors influence this?

In my opinion the market will stabilize again by the second half of the year, at the latest by this year’s Double Eleven Shopping Festival on November 11. The situation of global epidemic control is of course an important factor. The world is increasingly interconnected, and markets can no longer be viewed in isolation.

How do the Chinese industry players assess the situation?

Over the years Intergate Consulting has built up a large network in the Chinese cosmetics industry. Talking directly with Chinese industry experts is very important right now because, with the epidemic’s outbrake in Europe occouring after the outbrake in China. During the exchange with Ms. Li Liu, editor-in-chief of China Cosmetic Review, one of the oldest cosmetics journals in China, she said, “Although the epidemic is causing China to ‘degrade’ consumption, there are more options for products with clear functionalities and good value for money. Product sales and marketing are increasingly taking place online. As a result, Chinese brands have more home advantages than imported cosmetic products.” My own observations confirm this statement, which is why I think it makes sense for European cosmetic brands to work on their own USPs.

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