The region’s historic performance has been somewhat marred by the sluggish growth exhibited in Japan that accounts for almost half of cosmetics and toiletries sales. However, as the report in the August issue of GCI magazine explained, the country cautiously heralded the end of its long deflationary era in 2005, with a number of positive economic indicators and the highest recorded cosmetics and toiletries growth in five years. When this is viewed in parallel with China’s emergence as an economic hotspot, high-ranking growth forecasts for the smaller markets including Indonesia and Thailand and the longer term potential in India, it explains the region’s draw.
As the industry strives to pull itself out of a slump caused by over reliance on the high-value but maturing markets of Western Europe and North America, Asia-Pacific alongside Latin America and Eastern Europe will be fundamental to future success. Euromonitor International analyses key sectors and markets within the competitive landscape, making recommendations for successful exploitation of the region’s potential.
Global Skin Care Leader
Asia-Pacific continues to be the most valuable region in the world for skin care, chiefly due to heavy usage in the large and affluent Japanese market, where beauty routines follow a more complex process than in the West. In Japan, skin care routinely will involve five or more stages of application, whereas in North America or Western Europe women tend to follow a three-step regimen. High-end brands are huge here, with more than half of all skin care sales being made in the premium segment. Asia-Pacific saw a moderate sales increase of 8% in 2005, with China, the second largest market in the region, being the largest contributor to growth. Skin care sales in China increased by 19% in 2005, underpinned by rising levels of consumer affluence, especially in the big cities. Like the Japanese, Chinese women attach considerable importance to the quality of their skin, and increasingly have the disposable income to purchase up-market goods.
In the dominant facial care subsector, growth was attributable to increased segmentation, with the development of technologically advanced products with whitening, moisturizing, balancing and antiwrinkle properties. A prime example of this strategy is Procter & Gamble, whose Olay brand offers a range of products with different functions. In 2005, Procter & Gamble expanded the Olay portfolio further to include Olay Nature Science, a new skin care range containing herb extracts, seaweed and fruit essence. The brand, endorsed by popular Taiwanese artist Angela Chang, targets lower-income and younger consumers.
Dermatologist-endorsed brands, such as Curél from Kao, are also gaining popularity and the stage is set for the entrance of so-called doctor brands. To tap into this market, manufacturers need to put careful consideration into their strategy—the decision to have a Western or Asian expert could make or break a brand. In-depth consumer research will be key to success. In contrast, the body and hand care subsectors remained comparatively underdeveloped in Asia-Pacific, accounting for 4% and 1% of total skin care sales respectively in 2005. Companies need to work hard to convince consumers of the benefits of body care. They are likely to have luck with advanced value-added products that have antiaging and anticellulite benefits than basic moisturizers.
Mixed Fortunes in Fragrances
In contrast, Asia-Pacific is one of the smallest regions for fragrances, accounting for less than 7% of global U.S. dollar value sales in 2005. With the exception of highly Westernized societies, such as Hong Kong and Singapore, where a high proportion of sales are made to expatriates, per capita usage remains limited due to the perception of fragrances as extravagant luxury items. In countries such as India, sales are further hindered by the wide presence of black market and counterfeit goods, as well as the enduring popularity of traditional indigenous perfumes, such as attar. In China too, counterfeiting is an issue. Fragrances are also a relatively novel concept to both China and Japan, where they have a somewhat unsavory image, due to their association with the elimination of body odor.
Sales of fragrances in Asia-Pacific grew by 5.2% in U.S. dollar terms in 2005, a slight improvement on the previous year. Growth was driven primarily by advances made in developing markets, such as China, Vietnam and India, underpinned by rising affluence, especially among white collar workers. In addition, enhanced media exposure, in the form of cable television and fashion magazines, raised consumers’ awareness of the various international premium fragrance brands while disseminating Western beauty norms.
Looking forward, the Chinese market will be a major source of growth in the region, driven by rising disposable incomes and improved distribution. International specialists such as Watson’s, Sa Sa and Sephora have all indicated their commitment to further expansion in China. In addition, the problem of counterfeiting is being taken seriously by the Chinese government, due to the lobbying efforts of leading manufacturers and the EU governments. Finally, the tariff on premium fragrances was reduced from 30% to 10% at the beginning of 2005, encouraging new brands to enter the market. One way to ensure success here, and in Asia-Pacific in general, is to follow the example of Yves Saint Laurent’s Young Sexy Lovely fragrance by creating products specifically for Asian tastes.
The BRICs become BRICITs
Manufacturers have been focusing on the opportunities offered by the BRIC countries (Brazil, Russia, India and China) for sometime. The news has improved for Asia-Pacific as Indonesia as well as Turkey recently have been added to the list of countries that are deemed fundamental to long-term marketing strategies. This is due to their forecasted economic development that will see them eclipse some of the world’s largest economies by 2050.
Indonesia has been one of the fastest-moving markets in cosmetics and toiletries globally with average annual growth of 12% since 2000. This high growth is expected to be sustainable to 2010 with plenty of opportunity for manufacturers. Players in premium cosmetics are likely to prosper as the country is among the top 10 most vibrant globally. The teen market also is ripe for exploitation —Indonesia’s adolescent population is larger than that of the U.S. Companies such as L’Oréal Group with its Gemey Maybelline Pure nonshine makeup for young consumers, and Unilever, whose Dove Campaign for Real Beauty is extending to include young girls, pre-teens and teenagers, are likely to fare well.
Cashing in on China
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.
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.