Rising Chinese Confidence
Chinese consumers were irresistibly drawn to Western brands in the 1990s and 2000s. Even today, a significant number of Chinese and Asian cosmetic brands uses French-sounding names (like Franic, Kosé, Laneíge and Mamonde). Consumers began to take an interest in Japanese cosmetics from companies like Shiseido (and its China-only brands like Aupres and Urara), which were perceived to be more knowledgeable about Asian skin and beauty, although historical animosity toward Japan and recent geopolitical tensions were a risk for Japanese brands.
Achievements such as sending astronauts into space, hosting the Olympic Games (Beijing 2008) and the World Expo (Shanghai 2010), building bullet trains and advanced planes, and the global success of firms like Haier, Huawei and Lenovo had made Chinese consumers increasingly proud of their nation. This had kindled an interest in products with a local heritage as well as boosting preference for domestic brands. For example, the 2008 launch of Shang Xia ()3, a Shanghai-based sub-brand of Hermès focused on furniture and decorative objects showcasing Chinese heritage and craftsmanship, was seen as a milestone in the rise of Chinese luxury brands. More generally, the reputation for quality, safety and the perceived R&D capabilities of Chinese firms had improved. This was particularly true of cosmetics, because many (including the international brands) were manufactured in China. Still, since most Chinese continued to associate luxury with foreign brands, it was unclear how quickly they would accept Chinese luxury brands.
Overall, Chinese consumers, especially those in the tier 1 cities like Beijing and Shanghai, were increasingly sophisticated about brands and products in the beauty and skincare categories. With more opportunities to shop abroad and wider access to information on international fashion trends, they could distinguish true premium brands from those simply aspiring to be perceived as such. A seemingly Western name and image were no longer enough to attract discerning Chinese consumers.
L’Oréal is the world’s largest cosmetics company, with worldwide sales of €19.5 billion in 2010. In that year, its sales in China exceeded €1 billion for the first time, an 11.1% increase over the previous year and a double-digit gain for the 10th consecutive year, making China the third-largest market for L’Oréal after the United States and France (vs. its seventh-largest in 2008). L’Oréal had vowed to acquire one billion new customers globally in the next decade, a significant portion of which will come from China.
L’Oréal is the second largest beauty and skincare player in China after P&G and No.1 in the luxury segment. It is present in China with almost all of its major brands, with the exception of Body Shop because Chinese regulations require cosmetics to be tested on animals. Five of its brands, including Lancôme and Maybelline New York, are No.1 in their respective categories.
The Luxury Product Division (LPD) manages premium brands such as Lancôme, Biotherm, Helena Rubinstein, Kiehl’s, Shu Uemura and Giorgio Armani. The Consumer Product Division (CPD) oversees brands such as L’Oréal Paris, Maybelline New York and Garnier. Other divisions oversee dermo-cosmetic brands (e.g., Vichy) and brands tailored for professional hair salons (e.g., Matrix).
L’Oréal has established a Research and Innovation Centre in Shanghai, and has manufacturing centres in Suzhou and in Yichang, where it produces most of its mass and professional brands. Luxury brands, with the notable exception of Yue Sai, are still imported. Yue Sai ()
Madam Yue-Sai Kan and the Pre-L’Oréal Years (1992-2004)
The first modern cosmetics brand of China, Yue Sai, was founded in 1992 by Madam Yue-Sai Kan,4 an Emmy-winning TV host, socialite and entrepreneur (see Exhibit 8), with the aim “to create, produce and sell the very best beauty and skincare products that we can offer to Asian women and to the world, and become the first global cosmetics brand from China.” Her key insight was that the standards of beauty in China were different from those of other cultures; there was no reason why Chinese women had access only to foreign products that had not been designed for their specific type of skin and beauty.
To promote the brand, Madam Yue-Sai Kan wrote the first book about makeup ever published in modern China, which became a huge best-seller. Battling myriad obstacles and local regulations, she secured distribution in department stores nationwide, personally trained China’s first beauty advisors, and developed a range of red lipstick and basic skincare products designed for Asian skin. The brand’s red lipstick became an icon in China.
In 1996, Madam Yue-Sai Kan sold the company to Coty, the New York-based cosmetics firm and world’s largest producer of fragrance, which outbid L’Oréal. Coty pushed the distribution of Yue Sai to reach more cities as well as less premium cosmetic stores. By 1998, Yue Sai had become the No.1 luxury cosmetic brand in China. Coty continued to focus on distribution rather than branding, and started focusing on its own brand, Lancaster. Yue Sai gradually lost relevance, straining the relationship between Coty and Madam Yue Sai.
L’Oréal acquired Yue Sai in 2004. L’Oréal CEO, Jean-Paul Agon, declared that adding an established Chinese brand like Yue Sai alongside European brands like L’Oréal Paris, American brands like Maybelline New York, and Japanese brands like Shu Uemura fitted perfectly with L’Oréal’s “beauty for all” mission. That same year, L’Oréal also acquired Mininurse, a Chinese brand targeted at the mass market. Given the enormous potential of the Chinese market, coupled with L’Oréal’s stellar track-record at integrating and developing brands (24 of its 27 major brands were obtained through acquisitions or licensing deals), the future looked bright for Yue Sai under L’Oréal management.
The Consumer Division Years (2004-2006)
The post-acquisition years were less smooth than anticipated. On the positive side, L’Oréal had acquired a brand with a wide distribution (more than 1,000 stores across different channels), strong sales (€39 million in 2006), historical strength in makeup, a few good skincare products and packaging, and a factory and R&D facility. On the other hand, the brand was associated with older consumers, sales were fading, it had lost its marketing and R&D innovative edge, and it was unclear how it fitted into L’Oréal’s brand portfolio in China.
Because Yue Sai had such a wide distribution and a moderate price, it was first assigned to the consumer-product division (CPD) of L’Oréal China. CPD tried to apply the marketing strategy that had proven so successful worldwide for L’Oréal Paris, a mix of scientific improvements, celebrity-driven glamour and wide accessibility. Yue Sai was priced slightly below L’Oréal Paris, new products were launched annually, and the brand continued to be distributed in a variety of channels. Communication focused on technology, featured beautiful Chinese actresses and models (see Exhibit 9), and was inspired by the L’Oréal Paris ads (see Exhibit 7).
The Luxury Division Years (2006-2010)
But the “Chinese L’Oréal Paris” strategy did not produce the intended results and the brand lost sales and awareness, while at the same time L’Oréal Paris was booming (see Exhibit 15). To provide the brand with a new strategy and new set of eyes, Yue Sai was transferred from the CPD division to the smaller Luxury Product Division (LPD) in 2006. LPD immediately promoted Yue Sai featuring a famous Taiwanese movie star, Shu Qi (), to re-establish the brand’s luxury image (see Exhibit 10).
To deliver Yue Sai’s longstanding brand promise that “Nobody knows Chinese skin better than Yue Sai,” L’Oréal’s Shanghai Research and Innovation Centre focused on creating products specifically designed for Chinese skin. For example, the Vital Essential line () launched in 2007 incorporated extract of ganoderma mushroom (), a traditional Chinese medicine ingredient believed to foster internal balance and boost internal energy, with a fragrance evocative of the distinctive smell of traditional pharmacies. This product was the most-liked of the Yue Sai line-up, with above-average repeat purchase scores.
LPD then hired a reputable Paris-based branding agency and together they chose to reposition Yue Sai as “the first brand to stand for Chinese women’s beauty”. They built on the insight that modern Chinese women were radically changing, were proud and self-confident, and had a clear vision of their future and their new role in society. Although they treasured their families, they wanted to build for themselves a new professional, artistic and cultural environment.
To communicate the new “modern Chinese women” positioning, L’Oréal invested in a major television and print advertising campaign featuring Chinese supermodel Du Juan (). These ads used such lifestyle taglines as “I hold my future in my hands” () and “I look forward to every day with confidence” (,) to bolster the image of Yue Sai as the brand for modern Chinese women (see Exhibit 11 and Exhibit 12). Consistent with the new positioning, Yue Sai’s prices were notched higher than L’Oréal Paris.
LPD tried to compensate for the volume decline brought by higher prices (see Exhibit 14) by entering new distribution channels such as Sephora (see Exhibit 16), while pushing for better deals with distributors in order to enter more cosmetic stores. Meanwhile, the increasing number of foreign premium brands entering the Chinese market led department stores to push Yue Sai’s counters further back in the stores, reducing their visibility and exposure to traffic. Some department stores even delisted the brand.
Turning Around Yue Sai
Alexis Perakis-Valat, who became CEO of L’Oréal China in 2010 at the age of 39, had big ambitions. He wanted to make L’Oréal the No.1 cosmetics firm in China, and turn China into L’Oréal’s No. 1 market by continuing to push into smaller cities and introducing L’Oréal’s luxury brands, including Kiehl’s and Yves Saint Laurent.
Yue Sai’s lacklustre performance was spoiling the picture. Despite a booming market, it had never turned a substantial profit and sales had barely improved (€35 million in 2010 vs. €31 million in 2005). In Alexis’ own words, it was “the pebble in L’Oréal’s shoe”. Internally, it was becoming difficult to motivate talent to work on the brand. Externally, it blemished L’Oréal’s reputation as a masterful integrator of acquired brands and companies, which could hamper L’Oréal’s future acquisition endeavours.
Alexis and Stéphane, with the help of Ronnie Liang, Yue Sai’s new marketing director, needed to move fast and on all fronts.
Choosing the Right Value Proposition
When it was launched, Yue Sai was the uncontested premium Chinese brand. But today’s competitive landscape was very different. Yue Sai was not perceived as aspirational, unlike foreign brands such as Lancôme, Estée Lauder and Shiseido. It had an uncertain business model, an ageing consumer base, and an unclear positioning, the result of several years of trying various platforms. Yue Sai was not even the only Chinese brand owned by a large multinational company. Aupres (), a Shiseido brand launched in 1994, was developed specifically for and only available in Chinese department stores (see Exhibit 13), and had acquired a reputation for quality and a specific knowledge of Asian skin. The brand had been well managed and sales were around €100 million. There were indications that other multinationals would launch China-specific brands.
Chinese firms were catching up with the multinationals. Shanghai-based Jahwa group had recently launched Herborist () which already had sales of €70 million (up from €45
million in 2008) and was available at Sephora in both China and Europe. Its positioning was “blending traditional Chinese herbal medicine with modern biotechnology”. Herborist was unique in that it was distributed in department stores but also in small freestanding beauty stores which offered massage and spa treatments. Another Chinese mass-market brand, Chcédo5 (, owned by the Jala group) reached €165 million in sales in 2010. Its positioning was “Chcédo makes women blossom with natural beauty and charm.”
Given the situation facing Yue Sai and the current portfolio of brands of L’Oréal China, the critical issue is whether the brand should: 1) keep its new lifestyle positioning as the brand of “confident, modern Chinese women”, 2) be positioned as a Chinese luxury icon symbolizing the nation’s long history and rich heritage, 3) adopt a more affordable value proposition, or 4) try something totally different.
To choose the right positioning for Yue Sai, it is essential to decide which aspects of the brand should be retained and which should be discarded. For example, Yue Sai must decide whether to make its association with the L’Oréal group explicit to consumers by becoming a sub-brand (e.g., “Yue Sai by L’Oréal”) or by acknowledging L’Oréal’s ownership (e.g., by adding the tagline “Yue Sai, a Chinese brand of L’Oréal”).
Finally, Stéphane and Ronnie need to decide if they should follow Aupres, which has entered the Malaysian market, and expand Yue Sai internationally (but where?) Alternatively, should they consider extending the brand into other product categories (which ones?) or target other consumer segments (which ones)?
Marketing Mix Decisions
Advertising and Promotion
An important decision is whether to continue with the current TV and press campaign or to change it, at a time when media costs are climbing steadily and deteriorating sales limit the advertising and promotion budget. As more and more Chinese brands are relying on celebrities (actresses/actors, singers, athletes), should Yue Sai replace Du Juan with a celebrity or should they stay with a model? At the moment, 80% of Yue Sai’s communication budget is focused on skincare and 20% on makeup. Should this be changed? Further, should they change the current media plan or focus more on new media platforms like Weibo?
More generally, they need to determine what resources to allocate to brand communication vs. improving in-store presence, improving the product line-up, or changing distribution channels.
Pricing and Distribution
Stéphane and Ronnie must decide how Yue Sai should be priced within L’Oréal’s brand portfolio in China (especially in comparison with L’Oréal Paris). And whether all of Yue Sai’s products (see Exhibit 17) should be priced similarly, or should they charge more for some lines (which ones?)
One of the most important decisions will be to select the right channels of distribution based on the market tier(s) Yue Sai should pursue and the consumers it should target. How should Yue Sai deal with new distribution channels such as ecommerce portals? Should it engage in franchising to create its own stand-alone stores like Herborist?