J-beauty Meets its Waterloo in the Chinese Market

With the conclusion of Double 11 and the release of third-quarter financial reports by four Japanese cosmetics companies—Shiseido, Kosé, Kao, and Pola—the decline of J-beauty in the Chinese market has become apparent. As domestic brands gain momentum, J-beauty, similar to K-beauty products, is seeking new avenues for growth in the European and American markets.

The growth of J-beauty companies has encountered a bottleneck

As the world’s second-largest cosmetics market, J-beauty products have always been a significant component of China.

Over the past decade, imports of cosmetics from Japan and South Korea have consistently ranked in the top three in terms of value. In 2017 and 2018, South Korea became the largest importer of cosmetics to China, with France in second place and Japan in third.

From 2019 to 2021, within three years, Japan replaced South Korea as China’s top importer of cosmetics. In 2019, Japan’s exports of cosmetics to mainland China exceeded $3 billion for the first time, reaching $3.134 billion. In 2020, this figure exceeded $4 billion, reaching $4.292 billion.

With the rising popularity of Japanese dramas and culture in China, products from J-beauty companies like Shiseido and Kao gained favor among Chinese consumers. However, due to the lag in localization efforts by J-beauty companies in China and political reasons, the influence of J-beauty in China gradually waned. This change is also palpable in the financial reports of major J-beauty companies.

Shiseido, a representative of J-beauty, has long considered the Chinese market as one of its most important components. In 2021, sales in China increased by 16.5% year-on-year, achieving double-digit growth once again. Simultaneously, China officially surpassed Japan to become Shiseido’s largest market, a position it maintained in 2022.

However, in the first three quarters of this year, China is no longer Shiseido’s largest market. Shiseido’s cumulative sales for the first three quarters of the year were ¥722.417 billion, a decrease of 5.3% year-on-year. Its operating profit was ¥25.826 billion, down 27.6% year-on-year. In the same period, cumulative sales in the Chinese market reached ¥178.053 billion, a slight increase of 3.6% year-on-year. This accounted for 24.7% of Shiseido’s overall sales, trailing behind Japan’s 26.5%, dropping to the second-largest market.

Shiseido mentioned that despite China’s strong momentum in the first half of the year, significant challenges arose in the third quarter due to concerns about Japan’s products following issues such as nuclear wastewater discharge. People were hesitant to buy Japanese products, coupled with lower-than-expected inbound sales to Japan, resulting in an overall decline in sales.

Kao, the owner of Curél, reported a decline in its cosmetics business sales of ¥175.1 billion in the first three quarters of this year, down 1.7% year-on-year, with a core loss of ¥1.6 billion. Kao attributed this primarily to a significant drop in sales in the Chinese market, noting a slight growth in cosmetics business sales compared to the same period last year, excluding the impact from China. Curél, specifically, suffered a 30% sales decline due to the suspension of promotional activities.

For Kosé, its net sales for the first three quarters amounted to ¥218.961 billion, a 9% increase year-on-year. The cosmetics division recorded sales of ¥177.468 billion, marking a 13.7% increase, with operating profit growing by 0.3% to ¥15.7 billion. Kosé noted continued sales growth for DECORTÉ in Japan but faced challenging conditions in duty-free shops in Korea and China. Additionally, the discharge of Fukushima’s nuclear wastewater into the ocean in August this year significantly impacted sales.

Another J-beauty company, Pola, achieved net sales of ¥126.739 billion in the first three quarters of this year, marking a 5.9% increase year-on-year. However, its net profit attributable to the parent company plummeted by 28.7% to ¥9.284 billion, falling below ¥10 billion.

Pola indicated that the relaxation of pandemic control measures in China led to economic normalization. Despite signs of recovery, especially in service consumption with increased foot traffic, the pace of recovery remained slow due to uncertainties in employment. Moreover, the Chinese consumer backlash against J-beauty intensified following the incident of the Japanese government’s disposal of nuclear wastewater.

It’s evident that while domestic brands experienced steady growth in performance in the first three quarters, J-beauty companies encountered a certain growth bottleneck. In their financial reports, these companies attributed their declining performance to Japan’s government releasing nuclear wastewater. Indeed, the recent Singles’ Day revealed a gradual loss of confidence among Chinese consumers towards J-beauty products.

J-beauty brands experience overall slump on Double 11

During the 10.24 to 11.11 promotional period on Tmall this year, both Japanese and Korean beauty brands faced a slump. None of the top 10 brands in the beauty category included any Japanese or Korean beauty brands.

The social repercussions of Japan’s release of nuclear wastewater have sparked a wave of resistance against Japanese-origin materials and brands. Many J-beauty brands have suffered significant setbacks. According to data from Qingyan Intelligence, on the first day of the presale for Tmall’s Singles’ Day, the GMV (Gross Merchandise Volume) of the top 10 J-beauty brands, including Shiseido, CPB, SK-II, DECORTÉ, and Curél, all experienced declines. Eight of these brands saw decreases exceeding 50%. The decline in SK-II’s sales also impacted its parent company, P&G. Procter & Gamble mentioned that the organic sales growth of its skincare and personal care products in the first quarter of the fiscal year dropped to single digits due to the negative impact of SK-II’s sales decline, offsetting some of the growth from other products and price increases.

As numerous J-beauty enterprises and brands face a downturn, the rise of Chinese brands led by Proya has garnered considerable attention within the industry. The final Tmall Double 11 ranking also reveals that the market share relinquished by Japanese brands has been swiftly divided among several domestic brands, presenting a significant opportunity for growth for these Chinese brands.

According to data from CHAILEEDO Intelligence, the Chinese brand Proya secured the top spot in both Tmall and Douyin’s Double 11 skincare brand rankings. Tmall’s Double 11 beauty skincare brand ranking showcased Proya’s victory with a GMV of 22.19 billion RMB, surpassing the longstanding leader L’Oréal and claiming the top position. Additionally, another Chinese brand, Winona, made it to the top 10 list, securing the fifth position with a GMV of 12.86 billion RMB.

For J-beauty companies, the slowdown in growth during the third quarter, coupled with the lackluster performance during the crucial Singles’ Day promotion in the Chinese market, is expected to impact their performance in the fourth quarter as well.

Indeed, apart from sales figures, Chinese brands have surpassed the growth rates of leading J-beauty giant Shiseido in the Chinese market. From 2020 to 2022, Shiseido’s sales in China were ¥235.8 billion, ¥274.7 billion, and ¥258.2 billion, with a compound annual growth rate (CAGR) of 4.64%. Meanwhile, Proya, recently surpassing Shanghai Jahwa to become China’s top brand in the third quarter, reported revenues of 3.752 billion yuan, 4.633 billion yuan, and 6.385 billion yuan during the same period, boasting a CAGR of 30.45%. Proya‘s sales growth in China over the past three years has far outpaced Shiseido’s.

Additionally, apart from Proya, several other domestic cosmetic companies have maintained significantly high compound annual growth rates over the last three years. Companies like Jinbo Bio, Bloomage Biotech, with compound annual growth rates exceeding 55%, and Betaine with a 37.9% CAGR, along with Fuerjia, and SYoung Group, have all surpassed Shiseido in growth rates.

In reality, the downturn of J-beauty in China began showing signs in recent years, with Japan’s government’s release of nuclear wastewater accelerating this decline. The decline of J-beauty in China is essentially due to their products and marketing not resonating well with Chinese consumers.

The rise of J-beauty in China was influenced by the popularity of Japanese culture tourism and cross-border consumption. At its peak, reports indicated that millions of Chinese tourists flocked to Japan, enthusiastically purchasing J-beauty at duty-free shops.

However, in recent years, these once-enticing aspects for Chinese consumers have lost their appeal due to the rise of domestic Chinese brands. Crucially, J-beauty hasn’t evolved adequately in product innovation and marketing strategies to keep up with changing consumer preferences in China.

When J-beauty entered the Chinese market, the country’s cosmetics market was in its infancy, and Chinese consumers showed immense interest in foreign products. J-beauty was relatively affordable, aided by celebrity endorsements and cultural influence, swiftly penetrating the Chinese market.

In recent years, with the rise of domestic brands and the rapid development of the Chinese cosmetics market, Chinese consumers’ independent buying consciousness has matured. They no longer blindly follow trends but actively seek products that suit them. Additionally, domestic products now align better with Chinese consumers in terms of price, product efficacy, and marketing strategies. With the rapid influx of European and American brands, J-beauty is no longer the preferred choice for Chinese consumers but rather an optional brand. Hence, the decline of J-beauty in the Chinese market is a logical consequence.

Shifting their focus to the North American market

Faced with challenges in China, the J-beauty industry is shifting its focus towards markets like Europe and America.

Shiseido, representing Japan’s beauty sector, has begun redirecting its focus towards the North American market.

Shiseido purchased the American brand Drunk Elephant for $845 million in October 2019. Shiseido’s press release highlighted that by joining forces, Drunk Elephant would harness Shiseido’s worldwide network and assets to grow its presence in fresh markets, both domestically in the Americas and across global territories such as Europe and Asia.

“Today, the Americas region continues to be dynamic, resilient, and most of all, a compelling opportunity for growth,” said Ron Gee, president and CEO, of Shiseido Americas, and global leader, of M&A for Shiseido. “As a key strategic priority for Shiseido, we will continue to focus our energies on the Americas region, particularly among our marketing, commercial, and digital functions.”

Recently, another J-beauty brand, Kosé, introduced the Japanese best-selling makeup brand ADDICTION TOKYO in the United States, signaling a significant emphasis on the North American market by J-beauty brands.

Simultaneously, Kosé appointed Japanese baseball star Shohei Ohtani from the Los Angeles Angels of Major League Baseball as their brand ambassador in March this year. This two-time MLB MVP superstar appeared in advertisements for Kosé’s flagship brands Decorté and Sekkisei in the U.S., endorsing their lotions and sun care products.

Previously, actress Brie Larson was appointed as the muse for Decorté in 2020, as part of the brand’s increased efforts to gain a larger share of the North American market.

According to reports, the U.S. is at the core of Kosé’s growth strategy, with sales expected to double by 2026. Their financial performance in 2022 saw a net sales increase to ¥289.1 billion, marking a 7.1% growth from 2021, with North America contributing 13.9%. In the first three quarters of this year, Kosé’s sales in North America surged by 30.2%, significantly outpacing Japan and the Asian region.

In addition, Kao announced new leadership for its cosmetics business in Europe and the Americas at the end of last year. Effective January 1, 2023, the current Global President of Molton Brown, Mark Johnson, was appointed as the President of AEMEA Cosmetics Business, assuming additional responsibilities for Kao’s Jergens and Equipe businesses in the Americas, Europe, the Middle East, and Africa (EMEA). With an expanded scope of duties, Mark Johnson has also been appointed as an executive officer, joining Kao’s Global Management Committee based in Tokyo.

With Mark Johnson’s appointment, Kao aims to strategically align its cosmetics brands under one leadership, recognizing the growth potential of these brands in the AEMEA region, particularly in North America.

The shift of focus towards the North American market by J-beauty brands is a reactive choice due to the irreversible decline of their brand influence in China.

Between 2019 and 2021, Japan was the top cosmetics-importing country in mainland China. By 2022, France surpassed Japan to become the largest importer of cosmetics in mainland China. France’s cosmetics exports reached $4.551 billion, surpassing Japan’s $4.506 billion, accounting for 25.37% of mainland China’s total cosmetics imports.

For J-beauty, the Chinese market not only benefits from reduced supply chain costs due to geographical proximity but also shares some cultural similarities. Hence, Japan had natural advantages for developing its cosmetics market in China. However, the current shift of focus to the more distant and culturally different North American market reflects a sense of helplessness.

In reality, if the issue was merely about products not aligning with Chinese consumers, it could be remedied. However, a series of political events have caused irreversible repercussions for Japanese cosmetic brands in China.

Regarding J-beauty, the discharge of nuclear wastewater led to peak resistance among Chinese consumers. Some media outlets suggested that while the safety of J-beauty may not be in question regarding their products, the Japanese government’s disposal of nuclear wastewater was a betrayal to Japanese cosmetic brands amidst their already challenging situation in China. The impact of discharging nuclear wastewater significantly damaged brand image, far outweighing the products themselves. Furthermore, beyond products, the Chinese cosmetics industry also initiated a resistance against Japanese ingredients, presenting a substantial blow to the Japanese cosmetics industry.

In conclusion, the pivot of J-beauty towards the North American market is indeed a move borne out of necessity. Although J-beauty is striving to restore its image in China, such as Kao’s high-end brand Sensai opening its flagship store in Shanghai and Shiseido launching its first “Empty Bottle Recycling” program in China, the journey to repair brand image remains an arduous one.

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