Supply Chain Strains, Shifting Consumer Habits Evolve China Beauty Market Post-lockdown
SHANGHAI — Shanghai‘s extended COVID-19-related lockdowns in April forced beauty brands to halt production for at least a month, sending shockwaves through the industry.
“Supply chain capability was a much bigger differentiating factor than the first time around,” said Melinda Hu, senior analyst at Bernstein. “Shanghai was negatively impacted on countrywide sales, both online and offline.”
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With warehouses near Shanghai, Estée Lauder and Shiseido “had severely restricted their distribution operations,” said Hu. “However, for L’Oréal, which had a broader set of distribution assets across the country, the impact was less severe.
“Domestic brands with headquarters in Shanghai, such as Shanghai Jahwa, Jala Group, Shanghai Chicmax and Percaline saw significant declines. With the lifting of the lockdown in Shanghai, we expect to see recovery for these brands, but recovery likely won’t kick in until the third quarter,” said Hu.
As one of China‘s most important beauty manufacturing hubs, 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 the factories.
Intercos, a cosmetics contract manufacturer at the Oriental Beauty Valley with more than 80 factory workers in the system, saw its production capacity return to 60 percent by late May.
By resuming production as early as April, local beauty brand Judydoll and its sister brand Joocyee managed to stock up enough products in May for the 618 shopping festival.
“By June, we were able to start launching new products to market even though the launch calendar was disrupted by the lockdown,” said Stefan Huang, group strategy head 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, and so did Judydoll. “I think this is the biggest takeaway from this ‘black swan’ incident is supply chain risk management,” said Huang.
For many beauty players, supply chain strains also created challenges for product development during the lockdown, which often relied on imported raw material stuck at Shanghai’s port.
According to Bozhi Liu, a senior engineer at Shanghai Zizhuo Cosmetics, “the delivery period of raw material is much longer. The time has doubled or tripled to two to 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 requested anonymity. But this also means delaying product releases for up to a year.
Liu said there are some limitations to replacements for ingredients in the China market. Silicone-based materials or powders are of ample supply in China, but “oil-based substances or active ingredients still relies on imports,” said Liu. “It will take time before the quality from local suppliers can be as good as foreign ones.”
For Phas, a nascent Chinese clean beauty brand that launched in late July, a gap in clean beauty raw materials meant the brand has to stick with global suppliers for the near future.
A product release was delayed from April to September due to delayed shipping of a mono-material pump from South Korea.
“Germany and South Korea were the only two options we had, but we are also seeing four big Chinese manufacturers competing to develop a similar pump model,” said Hong Zeng, general manager at Phas. “This means clean beauty is trending in the Chinese market and suppliers are catching up.”
For a masstige brand like Phas, which sells a 255 renminbi, or $37, concealer, Zeng thinks unless raw material prices double or triple, issues such as geopolitical tension or currency rates won’t effect margins as much as delays in shipments. “After all, cosmetics is a relatively high-margin industry,” he said.
Many local skin care brands have been investing in research to lessen their dependence on imported raw materials.
Yige Cosmetics has been working with the American company Active Peptide on developing antiaging products for a new brand OGP. Zhuben, a Chinese makeup removal brand, has been working with local suppliers on a cleansing formulation.
“If we don’t solve the problem of the monopoly of certain raw materials, we might not be able to go too far,” Zhuben’s founder Qianfei Liu told a local media outlet.
As lockdown flare-ups all over the country continued to dent consumer enthusiasm, retail sales of cosmetics goods from January to July totaled 216.1 billion renminbi, or $31.2 billion, down 2.1 percent from the same period last year, according to data from the National Bureau of Statistics.
According to data from Citic Securities, gross merchandise value, or GMV, for cosmetics brands dropped 13 percent on Taobao and Tmall in July.
Data from Ecdataway, a third-party data platform, shows that cosmetics sales dropped 20 percent year-over-year on Taobao and Tmall to 4.35 billion renminbi, or $628.9 million, in July.
When top Tmall livestreaming star Austin Li disappeared from the internet for the lack of political sensitivity on June 3, a different kind of “black swan” incident shifted marketing dynamics.
Li, the “lipstick king,” triggered China’s censorship system as he promoted a tank-like ice cream product a day before the 33rd anniversary of the 1989 Tiananmen Square protest.
“The lack of ‘super livestreaming anchors’ was one of the factors hurting skin care products’ sales,” Shanghai Jahwa wrote in its latest half-year report. Category sales dropped 34.84 percent year-over-year to 813 million renminbi, or $117 million in the first half of 2021.
With the absence of Li or other top-notch livestreaming anchors on Tmall, brands have been migrating to Douyin. GMV increased 109 percent on the platform in July, according to Citic Securities.
For Joocyee, Douyin helped the brand achieve 17.8 million renminbi, or $2.5 million, in sales for a Japanese anime collaboration makeup set within a week and propped up organic search metrics on e-commerce platforms like Tmall and Xiaohongshu.
The shift in promotional tactics might also explain a “consumption downgrade” trend in China’s beauty market as consumers began to trade down.
But according to Hu, consumers remain sticky to premium brands, such as Estée Lauder, L’Oréal and Shiseido, although they now buy lower ticket-price items from these brands.
“Despite the year-to-date double-digit growth in the prestige segment, we note that the growth is largely driven by volume,” said Hu.
“Premium brands can sustain growth through mitigation strategies to preserve volume growth, at the expense of average selling price. We think this is due to packaging sizes, product mix shifting toward lower-priced skus, samples and promotions,” Hu added.
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