Cosmetics Giants Segment the Global Cosmetics Market

The worlds best-known cosmetics companies are setting their sights on a lucrative new market segment: the emerging middle classes in countries such as Brazil, Russia, India, and China. For example, the Chinese spent $10.3 billion on cosmetics and toiletries in 2005; that figure has doubled in the last few years. Not surprisingly, marketers at LOreal, Procter & Gamble, Shiseido, and Estee Lauder Companies are moving quickly. William Lauder, president and CEO of Estee Lauder, calls China a $100 billion opportunity.

Noting that there is no one-size-fits-all ideal of beauty, cosmetics marketers pride themselves on sensitivity to local cultural preferences. As Jean-Paul Agon, chief executive of LOreal, explains, We have different customers. Each customer is free to have her own aspirations. Our intention is just to respond as well as possible to each customer aspiration. Some want to be gorgeous, some want to be natural, and we just have to offer them the best quality and the best product to satisfy their wishes and their dreams. For example, many Asian women use whitening creams to lighten and brighten their complexions; in China, white skin is associated with wealth. LOreal responded by creating White Perfect; Shiseido offers Aupres White.

You cant just import cosmetics here. Companies have to understand what beauty means to Chinese women and what they look for, and product offerings and communication have to be adjusted accordingly. its a lot harder than selling shampoo or skin care.

Daisy Ching, regional group account director for Procter & Gamble, Grey Global Group

Market research is critical to understanding womens preferences in different parts of the world. According to Eric Bone, head of LOreals Tokyo Research Center, Japanese women prefer to use a compact foundation rather than a liquid. Humidity here is much higher and the emphasis is on long-lasting coverage. Armed with this knowledge, LOral devotes more development time to compacts rather than liquids. The researchers have also learned that the typical Japanese woman cleanses her face twice a day.

In China, LOral and its competitors have an opportunity to educate women about cosmetics, which were banned prior to 1982. Each year, LOral observes and films 6,000 Chinese women applying and removing makeup. Alice Laurent, LOrals skincare development manager in Shanghai, says, In China, the number of products used in the morning and the evening is 2.2. At its Shanghai Innovation Centre, LOral is also studying how to incorporate traditional Chinese medicine into new product lines.

LOral offers a wide range of products in China, including both mass-market and premium brands. The company pursues a localization product strategy, with more than 80 percent of its Asian products developed specifically for the region. LOrals Lancme luxury brand is typically sold in exclusive shopping districts that have upscale shops and luxury malls. LOral has also capitalized on the opportunity to target a new demographic: Chinese men. The Chinese market for mens skincare products is growing much faster than the market for womens skincare. Many of the purchases are made by women during shopping trips when couples go out together. Increasing numbers of Chinese men view appearance as a key to success, with skincare products playing an important role in male grooming.

Although mass-market cosmetic lines are exhibiting slow growth, the demand for luxury cosmetics is growing rapidly. This is especially true outside of Chinas main metropolitan centers. Consumers in Tier 1 cities such as Beijing and Shanghai have the highest incomes, but these cities represent only about 9 percent of Chinas population. As these markets become saturated, LOral and other cosmetics marketers are targeting Tier 2 provincial capitals such as Nanjing. Tier 3 cities such as Zhenjiang are typically prefectural centers; China has approximately 260 such cities, with a combined population of more than 200 million people. An additional 300 million people live in Tier 4 and Tier 5 cities. Notes Stphane Rinderknech, a LOral general manager based in China, Three-quarters of Chinas urban population live outside Tier-One and Tier-Two cities and they account for two-thirds of retail sales.

Este Lauders focus is on expensive prestige brands such as Este Lauder, Clinique, and MAC, which are sold through upmarket department stores. Like its competitors, Lauder is achieving growth in China by targeting new cities. As a company spokesperson explained, More of Este Lauders growth is expected to come from expansion and awareness-building in tier-two and three cities as tier-one cities begin to mature.

One research analyst cautions that Este Lauders targeting and positioning may be too narrow for China. According to Access Asia, Este Lauder is in danger of becoming too exclusively placed at the top end of the market and it may have to reposition itself more in the mass market to compete for a larger part of the Chinese market.

Este Lauders Carol Shen disagrees with that assessment. She views her companys brands as aspirational. Chinese consumers are price sensitive but at the same time are willing to invest in products that are relatively expensive versus their income levels because they are so confident about the future, she says. Shens views are shared by other industry leaders. As CEO William Lauder explains, The Este Lauder brand in China is exploding right now because it represents aspirational luxury but at a price thats much more affordable than Louis Vuitton. Nicolas Hieronimus, president of LOral Luxury, concurs: "Were not in the super-premium luxury world. We are not selling 10,000 watches, but 300 creams at best."

In India, LOral has recently shifted from a low-price, mass-market strategy to a premium-price, upscale strategy. Competitor Hindustan Lever rings up nearly $1 billion in annual sales by targeting the hundreds of millions of people who must live on the equivalent of $2 per day. This means body lotion priced at $0.70 and $0.90 bottles of perfume. Upon first entering India in 1991, LOral used a similar strategy. However, its low-priced Garnier Ultra Doux shampoo failed to catch on with consumers. Offering no particular advantage relative to local brands, it was, in the words of Alain Evrard, LOrals managing director for Africa, Orient, and the Pacific, an absolute flop. Some shopkeepers were stuck with unsold inventories.

In the mid-1990s, Evrard was determined to gain a better understanding of the Indian market. He noted several different trends. The number of working women was increasing dramatically, and consumer attitudes were shifting. Thanks to cable television, CNN and MTV were finding large viewing audiences. To learn more about womens preferences, Evrard spoke with advertising executives and fashion magazine editors as well as LOrals local employees. In doing so, Evrard arrived at a keen insight: Women in their twenties concerned about gray hair were not satisfied with existing do-it-yourself hair color products. Evrard responded by launching LOral Excellence Crme in India. An innovative but expensive product popular in Europe, Excellence Crme was priced at $9 and positioned as a luxury purchase. To gain support among shopkeepers, a local LOral staffer named Dinesh Dayal mounted an education campaign and went door-to-door to promote the product at local shops. Today, Excellence Crme is widely available in India. In 2004, after more than a decade of losses, LOrals Indian operations became profitable.

Brazil is another important market for the global cosmetics giants. On a per capita basis, Brazilian women spend more on beauty products than their counterparts elsewhere. Overall, Brazil is the third-largest global cosmetics market, after the United States and Japan. Natura Cosmticos, a Brazilian company, and Avon are market-share leaders here; traditionally, Brazilians have bought their cosmetics from sales representatives who go door-to-door. This creates a challenge for LOral and other companies that distribute their products through department stores, drug stores, and pharmacies.

Although LOral has operated in Brazil for decades, the focus has been on hair-care products. Worldwide, makeup and skin care represent about 50 percent of LOrals sales; by contrast, in Brazil these categories represent only about 15 percent of sales. To build its presence in makeup and skin care, LOreal has hired personal beauty advisors to offer shoppers in-store consultations about Maybelline and other brands. As LOreal CEO Jean-Paul Agon notes, Our big bet here is to create a makeup business in retail from scratch. The more the market develops, the less important direct sales will be.

Meanwhile, Shinzo Maeda, president and CEO of Shiseido, does not intend to stay on the sidelines as Western cosmetics marketers penetrate deeper into emerging markets. Shiseido is Japans second-largest cosmetics company; however, domestic sales are expected to grow only about 2 percent annually. Maeda notes, The need to globalize our organization has come at an accelerated pace. Throughout the region, consumers associate the Shiseido brand with a company that understands skin issues specific to Asian women. The company also has a reputation for advanced research and development in key areas such as anti-aging products. In China, Shiseido uses a selling strategy that has been extremely effective in Japan. Highly trained beauty counselors offer advice on color coordination, moisture levels, and related topics. As one beauty counselor said, Its a real delight to see my customers become happy.

How do womens preferences for cosmetics and beauty care vary from country to country?

Question

Give details of the Key Success Factors of LOral, which will make it globally competitive and HOW it can impact global sales in the chosen market.