China’s Startups Challenge Major International Cosmetic Businesses

China’s Startups Challenge Major International Cosmetic Businesses

Yeva Zhang, an 18-year-old Chinese student, used to exclusively have eyes for “Japanese and South Korean brands” but now the 18-year-old student has stocked her “vanity case with Chinese ones”.

She states she can “hardly tell the difference” between some of the greatest names in international beauty and less expensive local products, despite being enticed to buy by social media marketing and livestreamers.

Global brands like L’Oréal, Estée Lauder, and Shiseido are being challenged by local businesses in China, which is the second-largest cosmetics industry in the world in terms of sales. They have gained traction because to their astute use of social media and focus on less developed areas that foreign corporations tend to ignore.

According to data from Euromonitor, the domestic labels’ share of the 40 leading beauty brands’ online sales in China increased from 43.6 percent to 47.9 percent in the first ten months of 2023. According to the estimate, the market for color cosmetics in China, which include goods like lipsticks, foundations, and nail polishes, is expected to grow from Rmb71.6 billion in 2022 to Rmb111.3 billion ($15.6 billion) in 2028.

“It is the best of times for Chinese brands, as consumers’ level of openness for them has never been higher,” stated Miro Li, the creator of Double V Consulting, a marketing company with offices in Shenzhen.

The Chinese TikTok app “With support from General Atlantic, Shanghai-based Joy Group, the owner of two local cosmetics brands, Judydoll and Joocyee, has successfully reached a wider range of consumers, particularly younger people in lower-tier cities who are out of reach of traditional ecommerce sites like Tmall,” said Stefan Huang, head of strategy at Joy Group.

He stated that while some international businesses failed to follow the trend, Chinese ones succeeded. For instance, L’Oréal didn’t begin actively promoting on Douyin until 2023.

Social media sales are expected to grow even more significant. According to Goldman Sachs, a combined 37.5% of China’s e-commerce cosmetics transactions will occur on Douyin and its rival Kuaishou in 2025, up from 25% in 2021.

According to Mark Tanner, general director of Shanghai-based branding agency China Skinny, “many foreign brands, including [those in] cosmetics, took a hit during the zero-Covid years as many decision makers based outside of China became increasingly disconnected to a fast-changing China.”

According to Huang, local businesses also benefit from proximity to manufacturers and in-house marketing teams when compared to international firms.

“If I spot a lipstick shade that is losing momentum or a new trend that is about to take off, I can get to the factory within two hours and adjust the production within a month,” said Huang. “It normally takes a foreign brand four to six months to respond [to consumer preferences change].”

Foreign brands still have opportunities to expand. In a written response, Shiseido, which accounted for 26.4% of its sales in China in the first half of 2023, stated that it will raise its spending in China on “promotional activities” as well as “brand value building.” A request for comment from L’Oréal and Estée Lauder was not answered.

China leads L’Oréal’s sales in North Asia, which reached €11.3 billion in 2022—roughly one-third of the company’s overall sales—and increased 6.6% year over year even though the company’s sales in the most recent quarter were negatively impacted by strict zero-Covid lockdowns. Specifically in China, their premium luxury sector has been progressively acquiring market dominance. Due to modifications to China’s regulations on offshore daigou purchasing, sales in North Asia fell 4.8% in the most recent quarter from the prior year; however, mainland sales increased by 7.7% during the same period.

“We’ve gained very strong market share for luxury in China. The anecdote is that right now we have a market share for L’Oréal luxury in mainland China, which is above 30 per cent which is equal to the sum of its two next contenders — which is not bad,” L’Oréal chief executive Nicolas Hieronimus told the Financial Times in an interview last year.

According to Li from Double V Consulting, even as Chinese cosmetic enterprises grow, they run the risk of being caught up in a “vicious cycle” of serving as low-cost knockoffs of international names.

With a 6.8% market share, Florasis, a cosmetics start-up located in Hangzhou, is the biggest domestic beauty brand in the nation and has gained some traction in the premium market. Influencers like “lipstick king” Li Jiaqi have contributed to it in part. However, it faced criticism the previous year when livestreamer Li chastised a viewer for not making enough money to purchase Florasis’s Rmb79 eyebrow pencil. He apologized later.

The corporation claimed that its high packing costs and more than Rmb1bn in R&D investments justified its rates. “There’s no copycat of us in the market because it’s too expensive to make [our products],” stated Gabby Chen, Florasis’ president of worldwide expansion.

With a strong social media following and traditional Chinese themes, Florasis intends to expand into international markets such as the US, Japan, and southeast Asia. Additionally, Joy Group has established operations in Canada, Malaysia, and Japan.

“They have been raised in China’s hyper-competitive marketplace” so they may have an advantage in a “slower moving marketplace abroad”, said Tanner from China Skinny. “We saw this with [fast fashion brand] Shein, which didn’t do anything special by Chinese standards . . . There is no reason Chinese beauty brands couldn’t do this too.”