()
2.2 Legal System
China follows civil-law jurisdictions which means “in civil-law countries, companies are formed by contract between two or more parties, who are fully liable for the actions of the company”. (Keegan & Green, 2003, pg 186)
Although more than 300 laws and regulations have been established since 1979. China’s legal system is speculated take another 50 years to match with the West. & http://afe.easia.columbia.edu/china/gov
2.3 Major Potential Risks in doing business in China
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The threat of civil disorder, war and ethnic conflict can create a potential risk such as the tensions between Mainland China and Taiwan.
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China’s differences across the regional markets reveal regional disparities and heterogeneity among consumers. Each regional market has its unique cultural heritage, geography, economic base and infrastructure, consumer purchasing power, political, social, distributional channels and operating conditions. Chinese consumers in all regional markets differ in consumption patterns, attitudes, media use, “income, values, lifestyles, and extent of contact with the outside world”. (Geng Cui, Qiming Liu, 2000, pg 55-72)
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Pushing investors to invest in the direction of interior provinces by the Chinese government - this step forcing investors away from the costal provinces will make the business face huge regional differences, trade barriers and local protectionism as “the further one goes from the coastal strip the more difficult it is to get about. The north west region – including the occupied country of Tibet – is big on mountains and deserts but lacks decent roads, railways and airports”. (Cui & Liu, 2000, pg 55-72)
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China’s infrastructure poses a risk to business development and investment opportunities. The transport situation being insufficient in terms of quantity and quality in certain regions would provide barriers to the business. Therefore “transporting energy, raw materials and semi-finished products over large distances” would be difficult in the hinterland regions. Supply of energy in certain regions is unreliable as well. (Jagersma & Gorp, 2003, pg 27 – 35)
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Employing Chinese in management positions of the company may create communication risks and problems as “most have little acquaintance with areas such as marketing and entrepreneurship, both essential management tools”. (Jagersma & Gorp, 2003, pg 27 – 35)
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Economic risks arising from devaluation of the currency in China poses a threat of increased exchange controls on foreign manufacturers. “The danger of an economic “hard landing” and the rising price of raw materials”. http://www.accenture.com
- Current inconsistent and underdeveloped legal and regulatory system in China can provide a risky and uncertain environment for the business. Despite the vital progress in improving the legal framework for intellectual property rights, protection in china still remains ineffective, inadequate and weak. Widespread copyright infringement practices will cause the business to compete with local counterfeit products. http://www.export.gov
- Existing cosmetic and toiletries manufacturers and products in the Chinese market pose risk due to competition.
2.4 Risk Reduction Process Model
The Model below illustrates how factors influence the Risk Reduction Process in International Marketing (adapted accordingly).
(Cateora & Ghauri, 2000, pg 52)
2.6 Summary of Political Risks
“The level of political risk is inversely related to a country’s stage of economic development. All other things being equal, the less developed a country, the greater the political risks as illustrated by the diagram below”. (Keegan & Green, 2003, pg 178)
INCOME VERSUS POLITICAL RISK
(Source: diagram taken from Keegan & Green, 2003, pg 178)
China according to Keegan & Green is a high risk lower-middle income country. Whereas, according to Estee Lauder China currently provides low risk in terms of fiscal and monetary policy, currency, inflation, macro-economic issues, political situation as it provides a stable environment for foreign investment.
Evaluation of political risks has led to adopting the ‘joint-venture strategy’ as the market entry approach in China.
3. COSMETICS AND TOILETRIES INDUSTRY
3.1 Market Size & Growth
The beauty industry in China has been growing rapidly, “…into a $7.9 billion market.” (Prasso, 2005, pg.6) It is expected to climb to “$9.6 billion by 2009, according to market research firm - Access Asia”. (Prasso, 2005, p.6)
Despite a steady growth, the market is still relatively underdeveloped, compared to similar markets around the world. ( )
Growth in disposable income coupled with an increased exposure to cosmetics and toiletries “on the back of rapid retailing development continued to be key sales drivers in China”. ()
3.2 Main Sectors & Products
The main products and sectors are classified in the following table:
The highest growth occurred in men’s grooming, which grew to 76%. (). This is the result of “growing awareness for personal grooming, as well as manufacturers’ incessant education on men's skin care needs…” ().
Despite the growth it made up only 1% of the overall sales in China, as it is an emerging market.
Skin care sales grew by 20%; its success attributed to the wide variety of products and product innovation.
Products in this sector include the following:
Sun care grew by 14% due to the increasing concern of the harmful effects of prolonged exposure to the sun. ().
3.3 Consumer Segments
3.3.1 Female segment
A major segment that remains mainly unpenetrated is rural China; companies with the best strategy for reaching these women, will inevitably gain the largest market share. (Prasso, 2005 p.156-162) Chinese women in the urban area spend over 10% of their income on cosmetics.
One key consumer characteristic is that Chinese women have a desire for “jade white” skin as Chinese tradition equates beauty with fine skin. Capitalising on such a segment for any company will be lucrative.
3.3.2 Male segment
Growing consumer awareness of personal grooming and new product launches, have led to “…the most dynamic growth”. ()
Economic growth has created a high-income male consumer segment, which is influenced by overseas trends; hence men take more pride in their appearance. In coming years it has the potential to achieve the highest growth. ()
3.3.3 Baby segment
Sales grew by nearly 9%; this steady growth is largely the result of growing wealth.
The one-child policy in China suggests that both parents and grandparents are more likely to pay whatever it costs, especially in urban areas where purchasing is greater. () This trend of "six wallets" concentrating their attention on one child, has led key players to hold their positions despite their premium prices. ().
Once again, increasing disposable income levels and improving living standards, have led baby care products to penetrate into more second and third tier cities, and even rural areas.
3.4 Major Companies
The major companies in the industry are considered in this section.
Table 5 Cosmetics and Toiletries Company Shares 2001-2004
% retail value rsp
Company 2001 2002 2003 2004
Procter & Gamble (Guangzhou) 12.5 12.9 13.5 14.5
Unilever China Ltd 8.1 8.0 7.7 7.5
L'Oréal China 2.6 3.3 4.3 7.3
Amway (China) Co Ltd 3.2 3.7 4.7 5.5
Avon (China) Co Ltd 2.5 2.9 3.2 3.7
Colgate (Guangzhou) Co Ltd 3.3 3.3 3.2 3.2
()
3.4.1 Procter & Gamble
The foreign companies in China represent a high proportion of the market, with P&G (Guangzhou) as the market leader with a 10% value share ().
In the past, P&G Ltd has adopted a high-price policy, due to brand loyalty from consumers. However when medium and low-level companies started to undercut prices, P&G counteracted by “cutting prices of its…brands to seek deeper penetration into the local mass market.” (, p.16)
3.4.2 Unilever
Though a key player in the market, Unilever was one of the few companies to show a decline in value share in 2004, whilst recording growth in its overall sales.
Flanked by strong brands such as Lux, Hazeline, and Pond's, Unilever captured shares in key cosmetics and toiletries sectors such as bath and shower products.
3.4.3 L'Oréal
By the end of 2004, L'Oréal China overtook Unilever and Amway (China) Co Ltd to take second place with a value share of almost 8%. This is largely the result of its acquisition of domestic brands, however L'Oréal’s own portfolio of brands have also doubled their growth rates.
Recognising the potential of the rural areas, L'Oréal China acquired Mininurse in 2004, “one of the most prolific domestic brands”. Thus allowing L'Oréal to inherit the extensive distribution reach, and further deepen the company's penetration in China. (, p.15)
3.4.4 Amway and Avon
Amway (China) and Avon (China) took fourth and fifth place respectively with 6% and 4% value shares. These companies have built their performance on single brand strategies by placing their brands under the Amway and Avon names. ()
3.5 Trends
3.5.1 Advertising trend
Chinese consumers continue to be exposed to product advertisements through different forms of media, as key manufacturers invest heavily to boost brand recognition.
The development of mass media in China permitted manufacturers to target their consumers more effectively. Smaller players tend to advertise on local media channels due to budget limitations, whilst key players such as “Procter & Gamble… and L'Oréal China advertise on one of the most prolific – China Central Television (CCTV)…” ()
3.5.2 Population
Another important trend driving sales growth is the escalating middle class population. This reasonably well-off class tends to be more exposed to international trends in cosmetics and is inclined to lead the mass in accepting new products. Having said this, the acceptance of trends in less developed regions has occurred due to relaxation in information flow and logistics.
3.5.3 Increasing wealth and product availability
Growing wealth and increasing product availability continued to drive demand in 2004. This growth is largely “attributed to higher level of purchasing income and greater trading up to more specialised products…” ()
Foreign manufacturers such as P&G and L'Oréal have been reducing their product prices to narrow the price difference with domestic brands, to tempt consumers to trade up. Such a trend encouraged further trading up as new value-added products are priced at only a slight premium above their standard counterparts.
3.5.4 Men’s Grooming
A final trend was the increase in men’s grooming, leading to manufacturers aiming to capitalise on this segment. See section 3.4.2 for details.
3.6 Opportunity for Investment
The industry is made up of both domestic manufacturers and global beauty giants like P&G and L'Oreal; these key players dominate sales and market share. According to Jacques Penhirin (McKinsey Partner), “this market was almost nonexistent 15 years ago…70% of it remains to be developed.” (Prasso, 2005, p.156-162) Thus the market can be further penetrated by potential investors.
P&G’s success arose from their vast knowledge of the Chinese market. E.g. how much consumers are willing to pay for western styles. This is important because a potential investor must have sufficient knowledge of the industry and country to be successful.
According to The Economist (2005), Chinese consumers are wary of new products and prefer trusted brands. This is likely to affect new or emerging companies launching a product in this industry, as the relative uptake of the product may be low.
Furthermore, there is also increasing demand for foreign products, as consumers are focused on buying high quality international products, even at premium prices.
Added to this, the government supports the internationalisation process by:
- Lowering import tariffs to under 6% by 2006.
- Legal actions against copying & underhand practices are now commonplace.
- Flexible import approval for cosmetics.
- Support from Hong Kong for easier access to the Chinese market.
()
3.7 Trade/Professional Associations
The main trade association for the cosmetics industry in China include:
- China Beauty and Cosmetics Chamber (CBCC).
- China Association of Fragrance Flavour and Cosmetic Industry
- China Beauty Chamber of China Federation for Commerce
- China Beauty & Hair Association
- All-China Women Federation
- Asia Beauty and Hair Association
()
These associations provide invaluable information on topics such as:
- Market Entry Rules
- China Beauty Market Success Stories
- Legal Rights and Procedures & Intellectual Property Issues
()
4. MARKET ENTRY STRATEGY
4.1 Joint Venture Strategy
With living standards improving and spending power increasing “there has never been a better time to get involved in the Chinese Beauty Market!”
Given the risks and opportunities in China, the most suitable market entry strategy for Estee Lauder is an International Joint venture (IJV) (Cateora & Graham, 2005). This strategy usually involves “two parties that join forces to create a separate legal entity” (Cateora & Graham (2005) p.333).
IJV permits a company to gain competitive price advantage over imports. This is accomplished by manufacturing locally therefore avoiding high tariffs. IJV is most appropriate for this country and market as it allows Estee Lauder to benefit from low manufacturing costs and cheap labour. For example, an unskilled factory worker in rural china costs under $1 per hour. ()
In the Asia-Pacific, cultural and legal unfamiliarities mean that companies opt to joint venture with a domestic company, rather than buying wholly owned businesses, as they are able to learn about the new market environment. Estee Lauder can also limit its financial risks as well as its political uncertainty. (Keegan and Green, 2003).
If successful, “it may later increase the level of commitment and exposure” (Keegan and Green (2003) p.331). It is important to maintain good relationships through agents, who possess the knowledge and contacts for success.
Estee Lauder are more likely to be successful, if they follow what other foreign investors have done, and choose to either complete an acquisition of a domestic brand, or joint venture with a domestic brand again. For example, Procter & Gamble (Guangzhou) Ltd had terminated its joint venture with Hutchison Whasmpoa Limited. Since then, the company has become “a whole-owned foreign enterprise, indicating freedom for the company to pursue more flexible marketing strategies in China's FMCG industry.” . However this only occurred after the company successful market entry strategy to “set up a dozen joint ventures and wholly-owned subsidiaries…” ( )
It is useful to use the model below as a framework, to illustrate the market entry plan for a potential investor entering the Chinese cosmetics and toiletries industry.
Model illustrating the Factors Influencing Market Entry Strategy for Estee Lauder in the Cosmetics and Toiletries Industry for China
(Adapted from Cateora & Ghauri (2000) p.261)
4.2 Positioning
According to Euromonitor, the men’s grooming segment is expected to provide one of the biggest growths in the industry. Though still a relatively small segment, its potential for growth is high due to low penetration of emerging products. Estee Lauder should position its products in the skin cleansing and/or oil removal sector, as men’s products are mainly positioned here. There is also a potential for brand extensions due to male consumers having high brand loyalty.
4.3 Product adaptation
Male grooming products can be adapted by introducing whole product series including men's facial wash, post-shave, body wash, shampoo, etc.
4.4 Pricing
Estee Lauder has a good reputation and good quality products, and can afford to keep prices high, as Chinese consumers are more inclined to pay a higher price for a well known brand. E.g. “Johnson's Baby Bath retailed at RMB48 per 1000ml bottle while local brands such as Xiao Ding Dang Milk Bath cost about RMB20 per 1000ml.” ()
However this high price policy cannot be long term as there is a threat from medium and low-level companies who can undercut the prices. E.g. P&G counteracted by “severely cutting the prices of its cosmetic and toiletry brands to seek deeper penetration into the local mass market.” ()
4.5 Channel Selection
Estee Lauder should visit China in order to acquire a better perspective and understanding of the market and location. This is especially important due to China’s rapidly changing market, therefore a visit to China can provide a company great insight into the country, the business climate and its people.
It is also important that prospective investors note that China has many different regions and that each province has unique economic and social characteristics. One should be careful not to generalize about such a large country. Hence pricing issues should also be modified accordingly.
4.6 Customer Service
This is important in terms of where the foreign investors’ products are to be sold. The products should be available in the retail outlets that deliver the best service.
“Service at retail outlets in China is really amazing and is delivered at every type of channel, even at the mass channel”. These outlets encourage consumers to buy products and help them make more informed decisions about their purchases. (Prasso, 2005)
5. CONCLUSION
Although China’s cosmetic market has become highly competitive, there is still plenty of potential for Estee Lauder, provided that they adopt appropriate market entry strategy such as IJV, they find the right manufacturing and distribution partners, use effective marketing strategies and make suitable products for various customer groups at reasonable price points.
6. BIBLIOGRAPHY
BOOKS
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Cateora P. & Graham J. (2005): “International Marketing”, (International Edition) McGraw Hill, New York
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Cateora, P. & Ghauri, P. (2000): “International Marketing”. (European Edition) McGraw-Hill Publishing Company, England
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Keegan, W. & Green, M. (2003): “Global marketing”. (3rd Edition) Pearson Education Inc. Prentice Hall, New Jersey
REPORTS
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Euromonitor (September 2005) ‘Cosmetics and Toiletries in China’,
[www] accessed from
[Accessed on 27/01/06]
JOURNALS
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Cui, G. & Liu, O. (February 2000) ‘Regional market segments of China: opportunities and barriers in a big emerging market’. Journal of Consumer Marketing, Volume: 17 Issue: 1 Page: 55 - 72 [www] Available from:
[Accessed on 20/01/06]
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Jagersma, P. & Gorp, D. (October 2003) ‘Still searching for the pot of gold: doing business in today’s China’. Journal of Business Strategy, Volume: 24 Issue: 5 Page: 27 – 35 [www] Available from:
[Accessed on 18/01/06]
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Prasso S. (12 December, 2005) ‘Battle for the Face of China’. Fortune Magazine, 152 (12) 156-161 - New York [www] Available from: – [Accessed on 25/01/06]
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