So Much Has Changed in Beauty. How Can the Big Cosmetics Companies Still Be Doing Fine? | The 2015 Rejuvenation Series

This industry seems to exist to help people fight the damage that time and the environment do to them. Now the companies have to solve that problem for themselves first: how do you stop aging?

Before we talk about change, consider a few questions:

How do people choose a shampoo these days?

Who is keen to buy Chinese-made cosmetics?

How did Korean products rise?

Sephora missed its chance to grow. Can e-commerce save it?

The WeChat sellers who push face masks and diet products annoy a lot of people. Will they get big?

Have men really started wearing makeup?

And will so-called organic skincare be the industry's next opportunity?

You may not believe it, but on these questions the big companies may know little more than ordinary consumers. They make decisions based on market research firms and the work of certain internal departments. They can't move fast, and they can't aim very precisely. Catering to the tastes of the great mass of consumers is still their first priority.

But when we set out to ask "what actually changed in the beauty industry this year," we found that the various signs all point to a problem many industries face at once: new sales channels and the rise of niche brands have drawn away large numbers of the big companies' customers. Bloated and slow, the big companies were caught off guard, and their only answer has been financial moves such as acquisitions. In beauty, where the old model of "spend heavily on ads, reap heavy sales" is about to break, the companies look especially passive and lost.

Take Procter & Gamble. In 2015, P&G sold 43 of its beauty brands, spanning fragrance, hair care and cosmetics, to the fragrance maker Coty. They included Max Factor, Cover Girl, Wella hair care, and fragrance brands such as Gucci and Hugo Boss. P&G kept Pantene, SK-II, and Olay, a brand with more than US$1 billion in sales.

"P&G did not keep pace with the way this industry has been renewing itself," Oru Mohiuddin, a London-based analyst at Euromonitor, told Bloomberg earlier. According to P&G's financial reports, Olay still holds 8% of the global beauty market.

We'll come back to what exactly went wrong at P&G. What you need to know is that P&G is not just a cosmetics manufacturer. After more than 100 years (about 30 of them in China), it is at heart a powerful sales company. Its sales network reaches across the world like capillaries, and its products turn up everywhere, from small street shops in Tibet to big supermarkets in New York. The whole company therefore revolves around these channels: how to buy the most efficient advertising, how to stack promotional displays in supermarkets, how to build out layer upon layer of distributors.

P&G's target audience is everyone. True, its brands make different pitches to different consumers, but its production system makes all of them mass-market brands. That is what young consumers now call, with a slight sneer, "drugstore stuff."

It is a cutting term. It hints at sorting people into classes, though there is no need to dig into that. It simply expresses the superiority that comes with being in the know: I know those better-value small brands, I've used them, and I won't be fooled by TV ads anymore.

What P&G needs to find out is how these consumers drifted away, why they stopped loving it, and where they actually are and how they now pick a shampoo. If they are all online, is there a faster way to reach them? Can the vast channel empire it built turn around and move online? What would that cost, and how much patience do consumers have?

What happened to P&G is also happening to Shiseido, L'Oréal and Estée Lauder. The beauty industry built today's oligopoly through mergers and acquisitions. More than a hundred years on, things are due to change a little.

This industry seems to exist to help people fight the damage that time and the environment do to them. Now the companies have to solve that problem first: how do you stop aging?

1. Korean Makeup Is So Hot. What Can Its Success Tell Us?

South Korea is now China's second-largest source of imported cosmetics, behind only France. According to the latest figures from the Korea International Trade Association and the cosmetics industry, China imported US$370 million of Korean cosmetics from January to July 2015, up 250.6% year on year. Korean cosmetics held 22.1% of the Chinese market, up 12.3% from a year earlier.

Look at Amorepacific alone. In 2014 the group's revenue was about 25.4 billion yuan, and its sales in China came to about 2.52 billion yuan. In other words, China bought nearly 10% of everything Amorepacific sold.

An ad Song Hye-kyo made for Laneige

An Innisfree ad

How did Korean products catch on? One big factor was Korean TV dramas.

In 2014 the Korean drama My Love from the Star became a hit, and Amorepacific cleverly placed several of its star products in it. Viewers tracked down every cosmetic Jun Ji-hyun used on screen, from eyeliner to cushion BB cream to lipstick, and each one became a best seller: IOPE's cushion BB cream and its No. 44 Forever Pink lipstick, for example.

In fact, Korean cosmetics now set global makeup trends, a role Western cosmetics makers once played. After the Korean drama Missing You aired, Yoon Eun-hye's signature "bitten-lip" look took off. This style, with "the flush of color lips get after being bitten, sexy in a vulnerable way," has become a model look. Revlon promptly followed with a "bitten-lip" product line.

Laneige, for its part, launched its "Super Electric Velvet Two-Tone Lipstick," under the slogan: lips done in 5 seconds. Laneige also said the lipstick's two contrasting colors, in a 2:1 ratio, finish the look with a single horizontal swipe, so it is easy to apply one-handed and to touch up on the go. Clearly, Laneige wanted to sell not just the cosmetic but the idea that putting on makeup could be easier.

So at bottom, Korean cosmetics are popular because of product innovation. Consumers want to be beautiful, but they don't want the hassle. With no alternative they put up with it, but that only means a huge market lies empty. The Koreans saw that market.

"Last year I went to Korea, and I was surprised by how advanced the Korean market's ideas and technology in cosmetics are," Lancôme creative director Lisa Eldridge told BoF earlier. "Lancôme has also made a cushion foundation. We were the first Western brand to make a product based on Korean cosmetics thinking."

2. You Can't Find Korean Makeup in Stores, and People Don't Buy the Brands You Can Find There

Where do consumers actually buy beauty products? Ask different people and you will likely get different answers. Everyone has their own view of products and channels, and this market has no single path.

At bottom it comes back to what we said earlier: consumer demand keeps getting more varied.

We noticed something interesting. Open the beauty pages of Jumei or Mogujie, and a sizable share of the brands on display can't be found in physical stores. Most are Japanese and Korean cosmetics from small brands with youthful packaging: Douji yogurt masks, Kelaisi, Clio, Mimeng Liquid Lab, and It's Skin's aloe anti-acne toner and lotion for sensitive skin, for example.

In fact, apart from Amorepacific's more mass-market brands, you can't find these interesting Korean cosmetics in physical stores in mainland China. Have & Be Co, in which Estée Lauder has taken a stake, has star products, Dr. Jart+ and Do The Right Thing, that can't be bought in Chinese stores.

Sephora, another multi-brand cosmetics retailer, gathers top cosmetics such as Dior, Estée Lauder, Guerlain and Lancôme, but it barely sells Korean products. The only one on its shelves is Laneige.

But consumers never wait. Cross-border online shopping and proxy buying have taken off, and a large share of what people buy this way is beauty products.

In August, Taobao Global published a Ten-Year Cross-Border Shopping Report based on a survey of nearly 5,000 cross-border shoppers. It found that in 2015 more than half of them bought makeup and skincare products, though Estée Lauder, Innisfree and Kiehl's were still the most mainstream beauty and skincare brands bought this way.

This is a problem many big companies want to solve. Because of tariffs, their products cost far more in China than overseas. Prices were adjusted this year, but "proxy buying is cheaper" has become part of how consumers think. Japan's Shiseido, South Korea's The History of Whoo, Taiwan's Dr. Morita, and Dance Legend, the Russian nail polish that recently went viral, are all favorites of online shoppers. And their popularity rests largely on word of mouth.

3. Posts About How to Look Beautiful Are Everywhere. How Much Do Big Companies Know About Word-of-Mouth Marketing?

Cosmetics companies have always relied on traditional advertising. TV commercials and street light boxes are not yet obsolete, but by now companies should realize that a big poster is no longer what really drives consumers to buy.

You know without our telling you that on Zhihu, Douban, Taobao Community and Baidu Zhidao, people everywhere are discussing whitening, skincare and makeup. Threads titled "Which Japanese Products Are Worth Buying?", "How Do I Choose a Lipstick That Suits Me?", "Lipsticks for a Natural Look That Make Your Skin Look Fairer" and "What Are the Little-Known Secrets of Cosmetics?" pop up fast and in great numbers, and the discussions among users run deep and frequent. They do seem far more effective than the recommendations of fashion magazines' beauty editors.

Another trend is literally "judging by looks."

This September, CoverGirl launched a new foundation aimed at the social media crowd. Put simply, it makes you look better on a phone screen. To promote it, CoverGirl also ran a test called the "iPhone Challenge."

After spotting the potential value in all the selfies on Pinterest and Instagram, Sephora built its own beauty photo-sharing site for customers, "the Beauty Board." The Pinterest-style platform, with its scrolling grid of photos, lets users tag the beauty products they used in their pictures.

We have written before about Dose of Colors, a makeup brand with 910,000 Instagram followers founded by the well-known makeup artist Makeup By Anna. After it showed off a black-rose matte lipstick on Instagram, the lipstick "sold out within a few days" at the beauty chain Ricky's NYC.

4. How to Handle a Sense of Ethics, or Rather a Sense of Crisis

When did you first hear that you should buy silicone-free shampoo?

Many people care about more than the cosmetics themselves. Public issues such as animal testing, cosmetic ingredients and worsening urban pollution have naturally come into view. Some beauty influencers on social media also discuss these contested topics with consumers as a matter of course.

The Weibo account "Beauty King and the Chemist," which has 550,000 visits, does more than post makeup tutorials like "One Lipstick, a Week of Different Commuter Looks." It also runs a series called "Skincare History Trivia," which asks, for example, what the radium once added to cosmetics actually did, and how well vanishing cream made with stearic acid, alkali and polyols worked on the skin.

Just as they pay attention to what type of skin they actually have, today's consumers would rather be informed, and they favor healthy, safe skincare. This is probably also why organic cosmetics keep getting more popular.

So-called organic skincare is not simply the same as all-natural. First, "organic" products still contain plant ingredients, but these must be extracts from certified organic plants. Of course, the products cannot contain ingredients harmful to skin, such as artificial fragrances, colorants and petrochemicals, and they must disclose their full ingredient list. Most important, they cannot be tested on animals during manufacture.

According to a Grand View Research report, the market has grown by an average of 20% a year over the past decade, and the organic skincare market will reach US$15.98 billion by 2020, up from US$8.43 billion in 2013.

LUSH on Instagram

The British skincare brand LUSH, which finally entered mainland China this May with an official flagship store on Tmall, is now one of the hottest organic skincare brands.

This "natural beauty brand," whose roots go back to the 1970s, adds no preservatives to its products, so they have a short shelf life. They are said to be made entirely by hand from natural ingredients gathered around the world, such as rare, fresh organic fruit, vegetables, flowers and herbs, and fine aromatic oils. LUSH also rejects all animal testing.

Aesop, another brand with a gender-neutral image, is also quite popular. Unlike the "anti-aging, anti-wrinkle, whitening" claims most cosmetics advertise, Aesop's products aim at "keeping the skin in a relatively healthy and balanced state."

Today LUSH has more than 900 stores in more than 50 countries, and both it and Aesop are hot items for proxy buyers.

5. Finally, Let's Look at Looks

In the beauty industry, spending huge sums on advertising and expensive packaging is still the norm. Givaudan, the Swiss fragrance and flavor company, has told the media that packaging can make up 30% of total cost. In 2011, L'Oréal Group spent 6.3 billion euros on advertising and promotion, 31% of its annual revenue, while R&D accounted for 20%.

Despite the huge spending, many big brands' cosmetics designs lack personality (again, to cater to the mass market). Niche products, by contrast, have to improve their packaging to stand out from fierce competition.

We have mentioned Aesop's store design many times. All of the brand's products come in amber-brown bottles bearing a single label that lists the main ingredients and what each does. To promote its travel sizes, Aesop once printed "City Map A to Z" on the packaging, naming the cities around the world where Aesop has stores.

Aesop

Marc Jacobs packaging that won a Pentawards prize.

The 2015 Pentawards, an international prize for outstanding packaging and design, had just been announced, and Marc Jacobs made the list. Its latest cosmetics line was praised for its clean shapes. The packaging has a smooth, sleek metallic finish; the slightly chubby lip pencil looks cute and feels good in the hand.

As consumers increasingly want their purchases to show off their taste, packaging, along with how well a product works, will weigh on what they buy.

While we're at it, a word on the packaging of men's beauty products. We once wrote about how more and more men are considering basic cosmetics to make themselves look more attractive. But choosing at the counter feels awkward, because cute, pink or overly colorful designs put them off. That is why beauty brands with a cool, minimalist style are especially popular with them.

So who says the cosmetics market is saturated? Plenty of consumer demand is still unmet. And the sluggish big companies can start moving.

Timeline

February 2015: @cosme, Japan's largest beauty review site, enters China and opens an official flagship store on Tmall.

May 2015: Sephora partners with JD.com and becomes the largest beauty flagship store on the platform. It is the first time Sephora has worked with a general e-commerce platform anywhere in the world.

May 2015: The face-mask brand MG adopts a new logo designed by Kenya Hara, a world-renowned designer, professor at Musashino Art University, and art director of Muji.

June 2015: The Tariff Department of the Ministry of Finance announces that from June 1 the import tariff on skincare products will fall from 5% to 2%. Estée Lauder and Shiseido soon issue statements saying they will adjust their prices in China.

June 2015: Unilever acquires three high-end personal care brands in half a year: the American personal care brand Dermalogica, the British high-end skincare brand Ren, and the American independent skincare brand Kate Somerville.

July 2015: P&G announces it will merge its professional salon hair care, retail hair color, cosmetics, fragrance and some hair styling businesses with Coty. The deal has an initial value of US$12.5 billion and is expected to close in the second half of 2016.

August 2015: L'Oréal's China mass-market cosmetics division reorganizes its sales teams. The L'Oréal Paris and Maybelline teams are merged, and the division now runs three sales teams, one for each distribution channel: department stores, modern retail, and cosmetics specialty stores.

September 2015: The German fragrance giant Symrise acquires the American natural ingredients supplier Pinova for US$397 million.

October 2015: Estée Lauder makes its first acquisition of a low-to-mid-priced brand. Estée Lauder invests in the Korean cosmetics company Have & Be.

October 2015: Shiseido reshuffles its China leadership for the second time in a year, and Masahiko Uotani travels to China to "steady morale" and lay out a new strategy.

October 2015: Fast-fashion brand H&M launches 700 beauty items, including lipstick, nail polish and eyeliner, in 700 stores worldwide. It will not enter the Chinese market for now.

Cover image and in-article images from: 4.bp.blogspot.com, static.tumblr.com, fashiongonerogue.com, instagram@lush.