January 25, 2023

China’s biggest e-commerce players didn’t want to talk about Singles Day results this year.

Sales were generally lackluster, according to analysts, as the country’s Zero Covid policy kept many in lockdown and sparked some of the biggest protests in years. Beauty and personal care sales outperformed many other categories, but grew 3 percent year-over-year on Tmall, said Adam Knight, co-founder of Chinese consulting firm Tong Global, which works with brands such as Clinique, Charlotte Tilbury and Huda Beauty.

Still, major beauty companies are tempering their expectations. In their quarterly results released in November, The Estée Lauder Companies said full-year net sales would be down 6 to 8 percent from last year.

In November, after nearly three years of draconian Covid-zero restrictions, frustration after a deadly fire in a locked apartment building sparked nationwide protests. On Monday, Beijing announced it would ease policies in several cities, including Shenzhen and Shanghai. The Chinese economy is widely expected to grow at less than 3 percent this year, the lowest rate in decades.

Amid the uncertainty, brands are putting on a show of business as usual, with exclusive products, activations and packs timed to the holiday season at the end of the year, and upcoming celebrations like Lunar New Year and 5.20 Day (a local version of Valentine’s Day). But they are largely sticking to their long-term strategies for China, hoping this year’s turbulence will soon subside.

“China still remains the biggest growth opportunity anywhere in the world, but it has become a lot more difficult [to win]’ said Knight. “It’s a lot more expensive as a source of growth, but show me another market that has the same potential.”

Brands are hoping for stronger holiday sales, even as protests and Covid cases continue.

To entice shoppers, they encourage exclusivity and urgency with special gift wrap and holiday products. Labels like Helena Rubenstein, YSL, Dior Beauty, Christian Louboutin Beauty, for example, release hero products in popular advent calendar formats. Companies are also zooming in on popular gift categories such as fragrance.

“Most brands give consumers every reason to do so [gift]. Brands want to take advantage of the year-end bonus season where consumers have extra money to spend,” said Adrian Peh, general manager of fashion and beauty for Asian marketing and brand experiences company Gusto Collective, in an email. to BoF. Gusto Collective has worked with brands such as Rituals, Harrod’s and Stella McCartney.

Meanwhile, on its latest earnings call, Estée Lauder said it would put a renewed holiday focus on fragrance, which was up 18 percent across all regions from the first quarter of 2023. The conglomerate said it would shift its strategy to “the luxury of seasonal fragrances.” by highlighting the strongest perfume brands such as Jo Malone London.

In addition to novelties and seasonal promotions, companies are also reducing their direct risk.

After noting that October footfall fell 70 percent in China’s duty-free shopping giant Hainan — which has been beset by rolling closures since the start of the pandemic — Estée Lauder said it would lower inventory levels in the travel shop and Asia ( although it also opened a flagship store for the Estée Lauder brand in Hainan in November). The conglomerate, which relies heavily on travel retail for its revenue, expects organic sales to decline about 10 percent in the quarter ending December.

“This almost temporary pause does not diminish our deep conviction in Hainain for the long term as it is one of the best destinations to acquire new customers,” said Fabrizio Freda, CEO of Estée Lauder, during the Q1 2023 call of the company. .

Knight expects traffic to return to Hainan next spring. The Hainan region, Knight said, will continue to be especially important for international brands trying to recoup losses from Chinese shoppers abroad, but added that “it will probably never be where it was years ago.”

Conglomerates are building out their local infrastructure to strengthen supply chains. L’Oréal began construction of another fulfillment center near Shanghai in Suzhou, China, due to open in late 2023, and launched Shanghai Meicfang Investment Co., focusing on investments in new technologies, digital innovation, data, supply chain and packaging. Estée Lauder also reduced supply chain exposure by breaking ground on a new manufacturing facility near Tokyo in 2020. Freda said the company started producing a limited range of skin care products at the factory in the past quarter.

“Those investments are our reflection of the new world…you can’t continue to operate with a manufacturing map or supply chain map that doesn’t have facilities in the region,” said Accenture beauty leader Audrey Depraeter-Montacel.

The pandemic is not the cause of all the challenges faced by Western beauty brands in China. As broader nationalist sentiment has increased along with the successes of homegrown Chinese beauty brands such as Florsasis and Perfect Diary, global companies are finding it more difficult to connect with consumers and compete with local challengers.

“They used to compete on price, now on quality, on [being] closer to the consumer,” said Knight. “For major beauty brands, that’s a big concern.”

To compete, conglomerates introduce new business units to understand local preferences. Estée Lauder opened a research and development center last year to understand the needs of Chinese and Asian skin, and Shiseido launched a Chinese beauty investment fund to bolster its portfolio in the region.

These kinds of investments are necessary because missteps in the region can be costly. Last month, L’Oréal launched ‘Shihyo’, its new K-Beauty brand aimed at Chinese, Japanese and Korean consumers in East Asia.

Chinese netizens were quick to criticize the conglomerate for disrespecting traditional Chinese culture by calling the 24 solar terms of the traditional Chinese calendar “Asian” wisdom in its marketing, instead of acknowledging Chinese origins.

But brands can succeed with focused, localized strategies.

Coty has relaunched its Lancaster sun care brand in China with a product range specific to Asia and a number of store concepts in Hainan. On his recent earnings call, Coty CEO Sue Nabi highlighted the brand’s sales growth of 20 percent in the quarter, even with closures in Hainan.

“Most of these beauty companies are cautiously optimistic,” says Driscoll. “It’s still a huge market, and it will be a huge market for beauty and luxury in the future.”

China Decoded would love to hear from you. Send tips, suggestions, complaints and compliments to robb.young@businessoffashion.com.

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