Jeff Crowther03.01.10
Cosmetics have been around China almost as long as Traditional Chinese Medicine, which dates back some 5000 years. However, during the past several centuries, beauty standards and socio-political norms have changed the perception of what is beautiful. For example, during the Zhou Dynasty fingernails were dyed to establish social standing. In the Tang Dynasty, a variety of essential oils were used as perfumes and an abundance of colored lip balms and white facial powders were in fashion. And of course the Qing dynasty promoted feet binding. Not that the latter has any direct correlation with cosmetics, but it does illustrate an odd trend in the long history of beauty and fashion.
Fast-forward to modern China after the founding of the People’s Republic of China in 1949 and you will find cosmetics all but vanished for two major reasons. First, China’s economy was not in a position to have a consumer base, and second, Mao’s Cultural Revolution (1966-1976) attempted to make all equal, not only in abilities, but also in looks. Women wore drab gray outfits (similar to the men’s infamous “Mao Suits”), donned short hair and took up the cause alongside their Chinese brothers. In other words, there was not a lot of room in the equation for cosmetics. A little more than 30 years later, the perception of beauty has changed, along with what makes up the essentials of a great makeup table.
Going Crazy for Cosmetics
In June of 2005, one of China’s major newspapers, China Daily, wrote an article titled, “Chinese Women Go Crazy for Cosmetics.” This sums up the tone of the current environment in China. China’s consumer goods sales for the first half of 2009 totaled $860 billion. According to China’s National Bureau of Statistics, retail sales of consumer goods jumped 15% for that period. Interestingly, cosmetics outperformed the average and increased sales by more than 17%.
The Chinese Association of Fragrance, Flavor and Cosmetic Industry puts 2008 total sales of cosmetics at $19 billion, stating further that the industry has enjoyed a steady average growth rate of 15% during the last five years. The association also confirmed that the global economic downturn had no effect on 2009 industry growth and that figures should be similar to ongoing growth trends.
Regulatory Outlook
Cosmetics fall under the regulating authority of China’s State Food and Drug Administration (SFDA). Established in 2003, SFDA is a relatively new agency that didn’t take on the responsibility of regulating cosmetics until 2008, after the agency was reorganized under the Ministry of Health.
The agency is also responsible for regulating drugs, dietary supplements, medical devices and catering services, as well as issuing GMPs and a variety of other industry certificates to these industries. Current regulations have actually slowed the pace of growth. Registration procedures and taxation schemes are some of the areas that have held back the industry’s true potential in China. Like most other industries conducting business in China, the cosmetics industry is faced with burdensome and often redundant procedures with regard to market entry and product registrations.
There are two basic registration categories in China—non-special use and special use. The first category is made up of hair products, makeup, fragrances, skin care and fingernail/toenail products. The latter category includes products for the hair, such as removal, growth, perm, color, etc., as well as body contouring, breast enhancement, skin discoloration removal, sun blocks and deodorant. Registrations can take six to nine months to process and can cost $2000-$4000 per product depending on product category and tests required. At this point, all cosmetics go through animal testing regardless if they have been proven safe and have been selling in a foreign market for years. Foreign advocacy groups together with industry have been strongly encouraging China to discontinue this practice or at least seek alternatives. It is not only unnecessary and inhumane, but also falls out of step with today’s environmental and green initiatives. Waiting up to a year to get product approval really slows down market entry and product positioning strategies. Furthermore, if a product changes its name, place of manufacture, or adds an ingredient that has no effect on safety or function, the product must be submitted for re-registration procedures. SFDA just released new regulations on cosmetics, which are in the process of being implemented. It remains to be seen if these new regulations will improve some of these issues.
Taxation and tariff systems have also played a role in hindering progress. Currently, China imposes a 30% consumption tax on a variety of products, including cosmetics deemed “luxury items.” The American Chamber of Commerce’s white paper on the cosmetic industry recently noted that this tax in conjunction with VAT, shipping and registration procedures have increased retail pricing by as much as 40% when compared with other markets. In reality, 40% is probably a conservative figure. During a recent trip to the U.S. I stocked up on essentials for a family in Beijing, which included cosmetics. I paid $24 for a bottle of name brand moisturizing lotion—the same bottle retails in China for more than $80, which amounts to more than a 300% markup! This situation has recently caused the Ministry of Commerce to rethink the practicality of a luxury tax in an economy that is trying to increase consumer spending.
Players and Sales Channels
Foreign brands dominate China’s cosmetic landscape. According to the most recent SFDA statistics, there are 39,980 cosmetics registered, of which 34,764 are foreign imports, compared with 5216 domestic registrations.
Direct sales giants, such as Herbalife, Amway, Nuskin, Avon and Mary Kay, are all operating successfully in China. Of course, all the famous mainstream brands from the U.S. and EU can be found in the growing number of high-end shopping malls opening in the more developed areas, such as Beijing, Shanghai, Shenzhen and Guangzhou.
Outside of the direct sales and mainstream cosmetic companies, there aren’t many small to medium (SME) sized U.S. natural cosmetic companies that have made the leap into this market—and it is something they should reconsider.
New sales channels are beginning to develop through health food stores and high-end supermarkets that have a higher percentage of imported products and health and beauty stores. These are ideal locations for natural cosmetics. However, since most SMEs are not going to invest in a representative office or a wholly owned foreign enterprise in China, there are obstacles to overcome like trademark and website registration, partner search, product registration and distribution. These are all difficult things to manage from overseas, but certainly not impossible. The Natural Products Association’s office in Beijing collaborates with the U.S. Department of Commerce through the Market Development Cooperator Program and works closely with both the U.S. Department of Commerce in Washington D.C., as well as the U.S. Embassy in Beijing to assistant companies in their market entry endeavors. These entities could be the key to your next cosmetics launch in China.
