Supply chain tension, altered buying habits evolve the Chinese beauty market – WWD

Supply chain tension, altered buying habits evolve the Chinese beauty market – WWD

Supply chain tension, altered buying habits evolve the Chinese beauty market – WWD

SHANGHAI – Shanghai’s protracted COVID-19-related lockdowns in April forced beauty brands to halt production for at least a month, causing shockwaves in the industry.

“Supply chain capacity was a much bigger differentiator than the first time around,” said Melinda Hu, senior analyst at Bernstein. “Shanghai has had a negative impact on sales nationwide, both online and offline.”

With warehouses near Shanghai, Estée Lauder and Shiseido “severely limited their distribution operations,” Hu said. “However, for L’Oréal, which had a wider range of distribution activities across the country, the impact was less severe.

“Shanghai-based domestic brands such as Shanghai Jahwa, Jala Group, Shanghai Chicmax and Percaline have seen significant declines. With the lifting of the lockdown in Shanghai, we expect a recovery for these brands, but the recovery is likely not to start until the third quarter, ”Hu said.

As one of China’s leading beauty manufacturing centers, Oriental Beauty Valley in Shanghai’s Fengxian District was able to resume production by May. Workers had to enter a closed-loop production system, living and working in factories.

Intercos, a contract cosmetics manufacturer at Oriental Beauty Valley with over 80 workers in the system, saw its production capacity return to 60% by the end of May.

Resuming production as early as April, local beauty brand Judydoll and its sister brand Joocyee managed to stock up on enough products in May for the 618 shopping festival.

“By June, we were able to start launching new products on the market even though the launch calendar was interrupted by the block,” said Stefan Huang, group strategy manager at Joy Group, owner of Judydoll and Joocyee. “We were able to achieve high double-digit growth in July and August.”

To alleviate future distribution risks, Estée Lauder opened a distribution center in Guangzhou this August, as did Judydoll. “I think this is the biggest benefit of this ‘black swan’ incident is supply chain risk management,” Huang said.

For many beauty players, supply chain tensions also created product development challenges during the blockade, which often relied on imported raw materials blocked in Shanghai port.

According to Bozhi Liu, senior engineer at Shanghai Zizhuo Cosmetics, “the delivery period of raw materials is much longer. The time has doubled or tripled to two or three months ”.

Attempts to replace raw materials with local ones became “more aggressive” during and after the Shanghai lockdown, according to a former product development manager at a global beauty company, who asked for anonymity. But that also means delaying product releases for up to a year.

Liu said there are some restrictions on ingredient substitution in the Chinese market. Silicone-based materials or powders are widely supplied in China, but “oil-based active substances or ingredients still depend on imports,” Liu said. “It will take some time before the quality of local suppliers can be as good as foreign ones.”

For Phas, a nascent Chinese clean beauty brand launched in late July, a gap in clean beauty raw materials meant the brand had to stick with global suppliers for the foreseeable future.

A product release was delayed from April to September due to the delay in shipping a single material pump from South Korea.

“Germany and South Korea were the only two options we had, but we’re also seeing four big Chinese manufacturers compete to develop a similar pump model,” said Hong Zeng, Phas’ general manager. “This means that clean beauty is trending in the Chinese market and suppliers are catching up.”

For a mass brand like Phas, which sells a 255 renminbi corrector, or $ 37, Zeng thinks that unless commodity prices double or triple, issues like geopolitical tension or exchange rates won’t affect margins as much. how much delays in shipments. “After all, cosmetics are a relatively high-margin industry,” he said.

Many local skin care brands have invested in research to reduce their reliance on imported raw materials.

Yige Cosmetics has collaborated with the American company Active Peptide to develop anti-aging products for a new OGP brand. Zhuben, a Chinese makeup removal brand, worked with local suppliers on a cleansing formulation.

“If we don’t solve the monopoly problem of some commodities, we may not be able to go too far,” Zhuben founder Qianfei Liu told a local media outlet.

As lockdown flare-ups across the country continued to dent consumer enthusiasm, retail sales of cosmetics from January through July totaled RMB 216.1 billion, or $ 31.2 billion, down by 2.1% compared to the same period last year, according to data from the National Bureau of Statistics.

According to data from Citic Securities, the gross value of merchandise, or GMV, for cosmetic brands fell 13% on Taobao and Tmall in July.

Data from Ecdataway, a third-party data platform, shows that cosmetics sales fell 20% year-on-year on Taobao and Tmall to 4.35 billion RMB, or $ 628.9 million, in July.

When Tmall live stream star Austin Li disappeared from the Internet due to lack of political sensitivity on June 3, a different kind of “black swan” incident changed the dynamics of marketing.

Li, the “lipstick king,” triggered China’s censorship system by promoting a tank-like ice cream product one day before the 33rd anniversary of the 1989 Tiananmen Square protest.

“The lack of” super livestream anchors “was one of the factors that hurt sales of skin care products,” Shanghai Jahwa wrote in its latest semi-annual report. Sales in the category fell 34.84% year-over-year to RMB 813 million, or $ 117 million in the first half of 2021.

With the absence of Li or any other top-notch live streaming hosts on Tmall, the brands have migrated to Douyin. GMV was up 109 percent on the platform in July, according to Citic Securities.

For Joocyee, Douyin helped the brand reach RMB 17.8 million, or $ 2.5 million, in sales for a Japanese anime collaborative makeup set over a week, and supported organic search metrics across platforms. e-commerce such as Tmall and Xiaohongshu.

The shift in promotional tactics could also explain a trend towards “consumer downgrading” in the Chinese beauty market as consumers began to trade lower.

But according to Hu, consumers remain attached to premium brands, such as Estée Lauder, L’Oréal, and Shiseido, even as they now purchase lower-ticket-priced items from these brands.

“Despite double-digit year-to-date growth in the prestige segment, we see that growth is largely driven by volume,” said Hu.

“Premium brands can support growth through mitigation strategies to preserve volume growth, at the expense of the average selling price. We think this is due to the size of the package, the product mix that is moving towards low-priced sku, samples and promotions, ”added Hu.

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