L’Oreal in China: Marketing Strategies for Turning Around Chinese Luxury Cosmetic Brand Yue Sai
Best Marketing Case
AFM-CCMP Competition 2014
Maybe it was that eighth glass of baijiu that he had downed to show respect to the department store manager and her team, or their joke that they were honoured to see him but hoped that the head of Lancôme would join him at their next meeting, but all of a sudden doubts assailed Stéphane Wilmet, the new general manager of Yue Sai. Stéphane had always been passionate about China – teaching himself Chinese as a teenager – and had looked forward to coming back to China after an assignment with L’Oréal USA. But the challenge ahead was enormous. Yue Sai was one of the very few brands that had managed to lose volume and money in China’s booming cosmetics market – a sore point for L’Oréal. While politely engaging in small talk with his hosts about the superiority of the local cuisine, Stéphane’s mind kept returning to what was needed to turn around the situation and strengthen L’Oréal’s reputation in China.
The Chinese Cosmetics Market
China has one of the world’s oldest civilizations with a history dating back 5,000 years, and is the most populous nation on the planet with over 1.3 billion people. Thanks to its consistently rapid economic development since the late 1970s, it is now the world’s second largest economy in terms of GDP (see Exhibit 1). The World Bank has projected that it will surpass the United States as the world’s largest economy in the coming decades. Given an enormous increase in disposable income, Chinese consumers increasingly desired more sophisticated, premium products in many categories, including beauty and skincare.
Procter & Gamble was the first multinational to enter mainland China’s beauty and skincare market, with Olay in 1989. With the exception of Estée Lauder which waited until 2002, the other multinationals quickly followed: Shiseido in 1991 with Shiseido, L’Oréal in 1997 with L’Oréal Paris, and Unilever in 1998 with Hazeline. They introduced extensive portfolios of high-quality brands and products, and brought marketing expertise, financial resources and cutting-edge R&D (which were soon localized by establishing local research centres). Initially, they drove out weak local brands, replacing them in the most desirable department stores.
As of 2010, the top five companies in the beauty and skincare market (including personal care) were all multinationals: P&G, L’Oréal, Shiseido, Unilever and Amway. Yet they still only accounted for 40% of the €18 billion market, and now had strong local competition. Firms such as Shanghai Jahwa and Jala had experienced extremely strong growth and their brands were available everywhere, from high-end department stores to local cosmetic stores, presenting a formidable challenge.
Specificities of the Chinese Cosmetics Market
When multinationals first entered China, premium cosmetics were almost exclusively distributed via department stores (see Exhibit 2). As in department stores worldwide, brands rent floor space and sometimes pay a sales-based commission to the department store. They are then free to create a store-within-a-store (or counter), staffed with their own beauty
assistants, with total control over sales and merchandising (but not, by law, on price). A legacy of the absence of other channels is that, even today, mass-market brands like L’Oréal Paris, Maybelline and Olay have counters in department stores in tier-2 and tier-3 cities (see Exhibit 3). In 2010, there were over 4,000 department stores in China, with a minimum of 6,000 m2 of retail space. They were stratified into three classes: class-1 stores carrying brands like Lancôme, Chanel and Dior were only present in the largest cities. Hefei, the capital of Anhui Province, a city with 5.7 million people and the world’s fastest growing metropolitan economy,1 only had a class-2 department store.
The second distribution channel consisted of beauty store chains like Watsons and Manning (see Exhibit 4). These employed their own beauty assistants who could sell any brand, but they also had smaller spaces dedicated to mass-market brands like L’Oréal Paris, Olay and Vichy, with assistants employed by the brands in the largest stores. The positioning of the LVMH-owned Sephora chain is more upscale, allowing it to carry brands like Estée Lauder and Lancôme (and, of course, Dior). The third channel consisted of countless small local cosmetics stores selling exclusively beauty and personal care products without the help of beauty assistants (see Exhibit 5).
New channels of distribution, such as TV-based direct selling and ecommerce portals were rapidly emerging. Over half a billion Chinese consumers had access to the internet. Traditional media (e.g., TV, newspapers) were losing their appeal as the younger generation spent a significant portion of time texting, surfing the web, and using social media such as Weibo (a Chinese fusion of Twitter and Facebook). Internet-based retailing was thus likely to have a significant impact on existing channels in the near future.
Attitudes to and Usage of Cosmetic Products
For decades, cosmetics were seen as “counter-revolutionary” and were virtually non-existent in China. Generations of Chinese women grew up without ever learning about cosmetics from their mothers. This absence of inter-generational norms meant that cosmetic companies— starting with Yue Sai in 1992—had first to educate Chinese consumers about beauty products and routines. But it also created a market of open-minded consumers free of the preconceptions prevalent in many countries: for example, Chinese men were more open to skincare than their European and American counterparts.2 China alone accounted for 70% of the worldwide sales of the Men Expert line of L’Oréal Paris. Chinese women were less interested in colour cosmetics than Europeans or Americans, not to mention Japanese and Korean women, who have the most sophisticated beauty routine in the world.
Only 10-15% of the beauty products sold in the Chinese market were makeup products. Many Chinese women viewed makeup as superficial, unnecessary and potentially harmful to skin, and heavy makeup as socially undesirable. The perfume market was tiny in China. Perfumes were more often bought as gifts than actually used. China was therefore primarily a skincare market (as can be seen by the relative space devoted to skincare and makeup at Sephora in Exhibit 4). In China, the younger generation was significantly more receptive to cosmetics products than older consumers. The average cosmetics consumer was in her mid-20s (vs. early-50s in Europe). Most were raised as an only child (or “little emperor”), had significant disposable income, and liked novelty. For them, another “generation” meant people who did not overlap at university or were separated by a decade at most (not parents and children). Whereas European and American women associated a brand’s longevity with heritage and prestige (particularly for luxury brands), ‘old’ had negative associations among Chinese consumers.
Paradoxically, in parallel with the Chinese focus on novelty, there was a renewed interest in China’s ancient history, traditions and cultural heritage. Popular computer games and television shows were set in ancient China. Cultural beliefs pertaining to food, health and medicine had never been lost, and held true across all age groups.
Most Chinese have some knowledge of traditional Chinese medicine (TCM; ) and apply its basic principles, if only because they feel it could do no harm. TCM refers to a wide range of ancient medicinal practices, including herbs, acupuncture and massage, to prevent and treat ailments and enhance health. Common ingredients such as glycyrrhiza uralensis (), lonicera japonica (), “silver ear” mushrooms () and wolfberry () can be purchased in most grocery stores and are cooked with food or made into tea. Other more specific and expensive ingredients (TCM has over 1,800 ingredients) like angelica (), cordyceps (), ginseng (), and notoginseng () are typically bought in special TCM pharmacies (see Exhibit 6).
However, China’s economic development and rapid urbanization had come at a price. The country’s environment had deteriorated significantly and a large number of Chinese cities suffered from smog and polluted air and water, prompting a growing number of consumers to use skincare products to protect their skin. The pitfalls of industrialization and some high- profile food safety scandals (e.g., melamine-adulterated milk) had also boosted demand for products made with natural ingredients.