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Asia-Pacific: Stepping Up the Pace

By: Briony Davies, Euromonitor International
Posted: August 12, 2008, from the January 2007 issue of GCI Magazine.

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Although Japan is the largest market in Asia-Pacific, it is China that contributed the most to the region’s growth. Dynamism in China is not a new phenomenon, as European and American multinationals acquired Chinese companies and brands to enable them to benefit from high forecast growth. Events of the last two years have reaffirmed its status as a priority market with major players including Estée Lauder (introduced both MAC and Bobbi Brown), P&G (introduced Max Factor), L’Oréal (increased investment in its Shanghai research center) and Johnson & Johnson (opened its first R&D facility in Asia-Pacific in Shanghai) both increasing their brand portfolios in China while stepping up their efforts to better understand local consumers.

Retailers, including cosmetics and toiletries specialists Sephora and Sa Sa, also have their eyes on China with new store announcements on a frequent basis. Direct sellers such as Avon, Alticor, Mary Kay and New Skin are all salivating at potential to benefit from the Chinese government’s decision in December 2005 to lift the restrictions prohibiting the operation of sales agents that are not attached to a stand-alone store. All of these factors are likely to unite to enable manufacturers to push cosmetics and toiletries out of the primary economic zones to the majority of the population, boosting sales massively.

Conflict Warning

The big three multinationals—Procter & Gamble, L’Oréal and Unilever—all have played a critical role in developing the cosmetics and toiletries industry in Asia-Pacific, especially in the emerging markets of China, India and Indonesia. Their extensive advertising budgets, close alliances with retailers who also are expanding their reach and ability to adapt their standard formulations and packaging, sachets and smaller pack sizes for rural consumers, to suit their target audience has facilitated their encroachment on local manufacturers’ market share.

However, as the recent SK-II controversy in China highlights, they cannot afford to rest on their laurels. SK-II, which charges as much as $100 for a 25 gram jar of antiaging cream, accounts for more than 10% of Procter & Gamble’s skin care sales in the country and was the number two premium skin care brand in the market in 2005. Following a Chinese watchdog’s findings that the product contained potentially unsafe ingredients, P&G’s handling of the refund process caused uproar among consumers leading to a smashed window in the company’s office in Shanghai. This response backed up by a recent McKinsey survey that revealed the continued existence of a strong nationalist streak, with teenagers in particular preferring and trusting mainland brands over foreign ones, indicates that multinationals must tread carefully to protect themselves from a potential backlash. Local brands such as Shiseido, Kao and Kanebo already take the top spots in the Japanese market and, alongside others peculiar to each market, could easily capitalize on current levels of dissatisfaction with foreign brands in the region as a whole.