An ugly picture emerges for cosmetics makers in China

China accounted for 26% of Estée Lauder’s net sales in the latest fiscal year, down from 34% in the fiscal year ended June 2022, Photo: Tian Yuhao/China News Service/VCG/Getty Images
China accounted for 26% of Estée Lauder’s net sales in the latest fiscal year, down from 34% in the fiscal year ended June 2022, Photo: Tian Yuhao/China News Service/VCG/Getty Images

Summary

Once their most important market, sales are plunging, sending an economic warning signal.

Chinese consumers, who have for years driven the growth of global cosmetics makers, have tightened their purse strings as the country’s economy slows. Their shifting tastes toward domestic rivals add another wrinkle to the industry’s woes and bode poorly for other foreign brands that have pinned their growth hopes on China.

The share price performances of global cosmetics companies in the past couple of years are anything but pretty. Estée Lauder, which owns brands such as Clinique and La Mer, has lost three-quarters of its market value since early 2022. Japan’s Shiseido is down nearly two-thirds since 2019. L’Oréal, the world’s largest cosmetics company, has done relatively better, but its shares have also fallen 16% in the past four months.

China’s sluggish economy is the main reason. For the fiscal year ended June, Estée Lauder’s organic net sales dropped 2% year on year, driven by a 3% decrease in the Asia-Pacific region, which includes China. Shiseido’s organic net sales in China fell 7% from the previous year in the six months ended June. Retail sales of cosmetics only grew 0.3% year on year in China in the first eight months of the year, according to official statistics.

Apart from weaker sales in the country, beauty companies are also suffering from a plunge in revenue from so-called travel retail, which includes selling at duty-free shops in airports. That in turn also was driven by less spending from Chinese tourists. China’s outbound tourism has yet to return to the prepandemic. Arrivals of Chinese visitors in Japan in the first seven months this year are still 31% lower than the same period in 2019 and have almost halved for the U.S. Shiseido’s net sales from travel retail last quarter plunged 15% from a year earlier.

And as Chinese consumers become more price conscious, local brands have popped up offering value-for-money products to grab market share from foreign giants. They are also more adept at marketing and designing products that appeal to younger Chinese consumers.

Graphic: WSJ
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Graphic: WSJ

China’s imports of beauty and skin-care products in the first eight months of 2024 dropped 11% from a year earlier and 31% from their 2021 level. Among the top 10 brands of China’s mass beauty and personal care market, the share of domestic brands has risen from 15% in 2018 to 22% last year, according to Euromonitor International.

Shanghai-listed Proya Cosmetics is one of the domestic beauty companies that has been growing fast: Its revenue rose 38% year over year in the first half of this year. But even its stock isn’t immune to the economic downturn—it has dropped 25% since the end of 2022.

The Chinese market had been a driving force for the industry’s growth. For example, China accounted for 34% of Estée Lauder’s net sales for the fiscal year ended June 2022, from 13% four years earlier. In the latest fiscal year it was down to 26%. China’s economy, and its consumers, have long been gold mines or the great future hope for global brands. But the economic slowdown and the rise of competent domestic competitors have dented the hopes from automakers to coffee chains.

Beauty companies may just be the latest example.

Write to Jacky Wong at jacky.wong@wsj.com

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