Part II Fundamentals of Strategic Planning
10 Shiseido Marketing in China
10.6 Competition with Western Brands
Foreign brands are widely popular in the Chinese market. Foreign cosmetic manu-facturers have a higher reputation for quality and reliability than domestic manufac-turers, and foreign manufacmanufac-turers, primarily P&G, Shiseido, L’oréal, and Estée Lauder, are competing for market share. For example, Estée Lauder has introduced its MAC and Bobbi Brown brands into the market, and P&G has done likewise with its SK II brand. Johnson & Johnson, L’oréal, and Shiseido have all created R&D centers in Shanghai. The cosmetics market in China is known to have several local brands, but the quality and brand name of those brands is in no comparison to for-eign brands, leaving Shiseido to compete, for the meanwhile, with global western fi rms such as L’oréal, Estée Lauder, and P&G (Tables 10.8 , 10.9 , and 10.10 ).
P&G primarily manufactures and sells detergents, toiletries, and cosmetics, and is the world’s largest consumer products company. The company entered the Chinese market in 1988 with sales of its Rejoy shampoo, and in 1989 with sales of its Olay brand skin care products. Rejoy enjoys approximately 40 % market share in China’s shampoo market, while mass-market Olay brand cosmetics are among the top ten in the Chinese market.
Estée Lauder, headquartered in the US, manufactures and sells cosmetics, skin care products, hair care products, and perfumes. It entered the Chinese market in 1993 with its fl agship Estée Lauder and Clinque brands. It primarily imports high- end cosmetics. In February 2010, Estée Lauder’s CEO, Fabrizio Freda, remarked,
“We currently sell in 40 Chinese cities, and are considering the sale of our products in 600 cities in the future. We will be making further investments in our skincare division, which is our most profi table business.”
The L’oréal Group, headquartered in Clichy, France, is the world’s largest cos-metics company. The company focuses primarily on coscos-metics, hair coloring, skin-care, and perfumes; however, it is also active in the fi elds of dermatology and pharmaceuticals. The company entered the Chinese market in 1996, following P&G and Estée Lauder, and is rapidly gaining ground by acquiring local fi rms. It is dis-tinctive in its wide range of products, from its high-end Lancôme cosmetics to the mass-market Maybelline brand. In 2003, it acquired the local cosmetics brand “ Yue Sai ,” which sold its products in 80 department stores. In 2004, it expanded its
10.6 Competition with Western Brands
Table 10.8 Profi tability of global cosmetics manufacturers (units: USD million)
L’oreal SA Estee Lauder P & G Shiseido Total assets
2005 28,180 3,886 61,527 5,698
2006 32,676 3,784 135,695 6,265
2007 33,920 4,126 138,014 6,785
2008 32,009 5,011 143,992 6,142
2009 32,375 5,177 134,833 6,173
2010 33,422 5,336 128,172 8,335
2011 37,332 6,274 138,354 8,902
Revenues
2005 18,085 6,336 56,741 5,935
2006 19,830 6,464 64,416 5,941
2007 23,718 7,038 72,441 6,355
2008 24,383 7,911 79,257 6,897
2009 24,287 7,324 76,694 7,025
2010 27,099 7,796 78,938 6,924
2011 28,277 8,810 82,559 8,066
Cost of sales
2005 4,879 1,426 25,920 1,326
2006 4,978 1,491 30,850 1,348
2007 5,869 1,570 33,667 1,400
2008 6,651 1,749 39,261 1,434
2009 7,175 1,882 38,690 1,748
2010 7,918 1,829 37,919 1,721
2011 8,134 1,937 40,768 2,029
SG&A expenses
2005 9,180 3,998 18,010 3,962
2006 10,163 4,066 21,278 3,926
2007 11,985 4,512 24,180 4,160
2008 13,314 5,103 24,017 4,604
2009 13,529 5,024 22,630 4,769
2010 14,932 5,177 24,998 4,661
2011 15,567 5,784 25,973 5,503
Net profi t
2005 2,454 406 7,257 128
2006 2,588 325 8,684 216
2007 3,640 449 10,340 311
2008 2,865 474 12,075 194
2009 2,495 218 13,436 197
2010 3,116 478 12,736 362
2011 3,393 701 11,797 154
Source : S&P Compustat Database (global version)
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presence in China by acquiring the mass-market “Mininurse” brand, which had 280,000 sales outlets for its cosmetics in bulk retailers and other channels.
The Chinese cosmetics market is concentrated along coastal regions such as Shanghai, accounting for 90 % of cosmetic sales in China. Western cosmetic manu-facturers spend vast sums on advertising centered on large cities, promoting their brands in sales channels such as department stores, drugstores, supermarkets, hypermarkets (stores that combine supermarkets and department stores), and gen-eral stores. For example, in 2004, P&G bid the highest price to advertise during China’s Central Television’s prime time.
However, in September 2006, products in the SK II lineup (owned by P&G’s Max Factor) were found to have banned substances in them, forcing the company to accept returns and halt further sales. This incident stemmed from chromium and neodymium, the use of which is banned in China, being detected in nine SK-II
Table 10.9 Shares of global cosmetic manufacturers in global market (%)
Company Country 2004 2005 2006 2007 2008 2009 2010 2011 Procter & Gamble USA 8.9 12.9 12.1 12.0 11.8 11.7 11.6 11.4 L’oreal Group France 9.7 9.7 9.8 10.0 10.2 10.0 9.7 9.7 Unilever Group UK 7.5 7.1 6.4 6.4 6.4 6.5 7.1 7.7 Colgate-Palmolive USA 3.9 3.9 3.6 3.7 3.7 3.6 3.7 3.8 Avon Products USA 3.3 3.3 3.0 3.1 3.2 3.3 3.3 3.2 Beierdorf AG Germany 2.9 3.0 2.9 3.2 3.3 3.3 3.2 3.1 Estee Lauder Cos USA 3.9 3.8 3.4 3.2 3.1 3.0 2.9 2.9 Johnson & Johnson USA 2.0 2.1 2.9 2.9 2.9 2.9 2.9 2.8 Shiseido Co JP 2.8 2.7 2.4 2.3 2.3 2.4 2.5 2.5
Kao JP 1.6 1.6 2.3 2.0 2.0 2.2 2.1 2.1
Source : Euromonitor International ( 2011 )
Table 10.10 Shares of global cosmetic manufacturers in Chinese market (%)
Company 2004 2005 2006 2007 2008 2009 2010 2011 Procter & Gamble (Guangzhou) 16.7 18.0 19.0 18.4 17.3 16.7 16.4 15.9 L’oreal China 6.2 6.8 7.0 8.1 9.2 9.8 10.5 11.0 Shiseido Liyuan Cosmetics 2.4 2.6 3.8 4.4 4.7 5.0 5.3 5.4 Unilever China Ltd 6.2 6.2 4.7 4.3 4.5 4.4 4.4 4.5 Amway (China) 5.8 5.1 3.7 3.6 4.1 4.3 4.0 3.9 Colgate (Guangzhou) 3.8 3.5 3.8 3.6 3.5 3.4 3.4 3.4 Hangzhou Mary Kay Cosmetics 1.5 2.1 2.1 2.2 2.4 2.9 3.1 3.2
Beiersdorf AG 0.8 2.9 3.0 3.1 3.1 2.9
Johnson & Johnson China 1.9 2.0 2.1 2.1 2.9 2.6 2.5 2.4
Estee Lauder 0.7 0.9 1.1 1.4 1.6 1.8
Avon (China) 3.8 3.4 2.8 3.1 3.0 2.7 1.6 1.1
C-Bons Group 2.2 2.0 1.6 – – – – –
Source : Euromonitor International ( 2011 ) 10.6 Competition with Western Brands
products, resulting in directions from the Chinese General Administration of Quality Supervision, Inspection and Quarantine (ASQIQ) to quarantine products imported from Japan (SK-II was originally a sub-brand of Japan’s Max Factor that was acquired by P products sold in China under this brand were thus imported from Japan). Finally, the Chinese government issued a statement that the chromium and neodymium detected in these products were originally in the products’ raw materi-als, posing no threat to the human body. Still, the damage was done on SK-II’s brand image. After the Chinese government’s directives were issued that September, there were incidents of refund-seeking consumers causing damage to certain stores, and the media calling P&G, which did not respond to requests for refunds, a
“Bàwáng,” or tyrant of the worst kind, which caused further problems.
This displays the necessity of heeding unforeseen risks caused by governments.
Quality inspections on imported cosmetics have recently become more stringent, and as a result, new product introductions into the Chinese market are said to be substantially behind schedule. The fault also lies with the complexity of permits and licensing systems. Counterfeit goods are also a source of trouble for manufacturers.
Shiseido has contracted with multiple law fi rms and to gather information regarding counterfeit products. After gaining suffi cient numbers, it contacts the appropriate bureaucrats and government agencies, thereby seizing counterfeit manufactured products.
Despite the Chinese market’s many issues, its scale as the world’s largest cos-metics market is also expanding rapidly. Shiseido perceives the Chinese market as a pillar of its overseas strategy and is in the process of securing itself as a global cos-metics manufacturer representing Asia, while confronting the risks posed by China.
Competing with western megabrands in the Chinese market can be perceived as a preliminary battle for business in other emerging nations, where much future growth in new cosmetics markets is expected.
10.7 Significance of This Case Study and Suggested