INDUSTRY OVERVIEW - HKEXnews
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THIS DOCUMENT IS IN DRAFT FORM, INCOMPLETE AND SUBJECT TO CHANGE. THE INFORMATION IN THIS DOCUMENT
SHOULD BE READ IN CONJUNCTION WITH THE SECTION HEADED “WARNING” ON THE COVER OF THIS DOCUMENT.
INDUSTRY OVERVIEW
The information in this section has been derived from an independent report prepared by
Frost & Sullivan. The industry report prepared by Frost & Sullivan is based on information from
its database, publicly available sources, industry reports, data obtained from interviews and
other sources. We believe that the sources of such information are appropriate sources for such
information and have taken reasonable care in extracting and reproducing such information. We
have no reason to believe that such information is false or misleading or that any fact has been
omitted that would render such information false or misleading. The information has not been
independently verified by us, the Sole Sponsor, the [REDACTED], the [REDACTED], the
[REDACTED], any of their respective directors, officers, affiliates, advisers or representatives,
or any other party involved in the [REDACTED]. We, the Sole Sponsor, the [REDACTED], the
[REDACTED], the [REDACTED], any of their respective directors, officers, affiliates, advisors
or representatives, and any other party involved in the [REDACTED] except for Frost &
Sullivan make no representation as to the completeness, accuracy or fairness of such information
and accordingly such information should not be unduly relied upon.
SOURCES OF INFORMATION
We commissioned Frost & Sullivan, an independent market research and consulting company,
to conduct an analysis of, and to prepare a report on, the beauty product distribution industry in Hong
Kong and the PRC. We paid Frost & Sullivan a fee of HK$690,000, which we believe reflects market
rates for reports of this type.
Founded in 1961, Frost & Sullivan has 40 offices with more than 2,000 industry consultants,
market research analysts, technology analysts and economists globally. Frost & Sullivan’s services
include technology research, independent market research, economic research, corporate best
practices advising, training, client research, competitive intelligence and corporate strategy. Frost &
Sullivan has been covering the Chinese market since the 1990s. Frost & Sullivan has four offices in
the PRC and direct access to the knowledgeable experts and market participants in the construction
market and its industry consultants, on average, have more than three years of experience.
RESEARCH METHODOLOGY
Frost & Sullivan’s independent research consists of both primary and secondary research
obtained from various sources in respect of beauty product distribution industry in Hong Kong and
the PRC. Primary research involved in-depth interviews with leading industry participants and
industry experts. Secondary research involved reviewing company reports, independent research
reports and data based on Frost & Sullivan’s own research database.
BASIS AND ASSUMPTIONS
In compiling and preparing the research, Frost & Sullivan assumed that the social, economic and
political environments in the relevant markets are likely to remain stable in the forecast period from
2021 to 2024, and the forecast of 2020 is based on the latest information of the impact of the
COVID-19. In addition, Frost & Sullivan has developed its forecast on the bases and assumptions that
the beauty product distribution industry in Hong Kong and the PRC is expected to grow based on the
key industry drivers including favourable government policies and higher acceptance to colour
cosmetics.
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INDUSTRY OVERVIEW
EXCHANGE RATE OF JAPANESE YEN
Exchange Rate of Hong Kong Dollar against Japanese Yen, 2014-2020
JPY/HK$
21
18
15.4 15.5 15.1
14.4 14.1 14.0 13.8
15
12
9
6
3
0
2014 2015 2016 2017 2018 2019 2020
Source: Hong Kong Monetary Authority, Frost & Sullivan
Note: The historical exchange rates from 2014 to 2019 are the annual average published by Hong Kong Monetary
Authority. The exchange rate of the 2020 is the latest exchange rate available published by the banks in Hong Kong.
Bank of Japan (Nichigin), the central bank of Japan implemented loose monetary policy in 2013,
which brought moderate inflation to domestic market of Japan. The moderate inflation led to the
devaluation of Japanese yen from 2013 to 2015. But after 2015, the inflation expectation towards
Japan of the global market reached the highest point, after then the Japanese yen appreciate against
the Hong Kong dollar again.
OVERVIEW OF BEAUTY PRODUCT DISTRIBUTION MARKET
Classifications of beauty products
Beauty products refer to the products that are usually used with the purpose of skin care,
beautifying the appearance, improving personal image, etc.
Beauty products are commonly classified under three main categories:
1) Skin Care: Includes products such as moisturisers, toners, essence anti-ageing products,
sunscreen, acne products, facial washes, body washes, bubble baths, scrubs, and masks.
2) Colour Cosmetics: Include products such as foundations, lip sticks, blushes, eye shadow,
eye liner, and mascara and nail care products.
3) Accessories: Include 1) fragrance, such as perfumes, colognes and body splashes, body
sprays, etc.; 2) other beautifying and cleansing products, including the hair care products
(hair cleansing, styling, perming etc.); and 3) personal care products (oral care products,
etc.).
According to both Census and Statistics Department of Hong Kong and the General
Administration of Quality Supervision, Inspection and Quarantine of the PRC, the word “cosmetics”
covers all the major beauty products, while the word “colour cosmetics” refers to the colorants and
cosmetics ingredients.
Industry value chain analysis
The diagram below describes the value chain of beauty product distribution industry in Hong
Kong and the PRC.
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INDUSTRY OVERVIEW
Value Chain of Beauty Product Distribution Industry in Hong Kong and the PRC
Industry Value Chain
Process Raw Material Production Beauty Products Production Sales and Consumption
and Distribution Distribution
Retail Channels:
• Department store
Beauty Products Direct Sales
• Hypermarket &
Raw Material Brand Owners
Supermarket
Key Participants Suppliers and Distributors: • Multi-brand
Distributor • Import & Specialty Store
OEM
Export • Brand Store
Manufacturers
• Domestic • Online Retailing
• Others
• Major raw material
suppliers and distributors • Not all beauty products brand • Distributors are authorised by brand
are concentrated in East owners have the capability to owners to distribute their products;
China and South China. typically, they do not involve in
produce all the products
Description • They provide raw materials
themselves. They design the manufacturing. Meanwhile, direct sales
such as glycerol, emulsifier, to customers including B2B business,
talcum powder, etc. to OEM
formulation and outsource part of
production to OEM companies. online retailing and physical self-owned
manufacturers and beauty
products brand owners.
stores are also adopted by brand owners.
Source: Frost & Sullivan
Market size of beauty product distribution industry in Hong Kong
Market size of beauty product distribution industry
The revenue generated by the beauty product distribution industry in Hong Kong grew gradually
from HK$21,919.8 million in 2014 to HK$22,718.9 million in 2019 at a CAGR of 0.7%. Affected by
the 2019 Hong Kong protests which is also known as the Anti-Extradition Law Amendment Bill
Protests, the total retail sales in Hong Kong has decreased dramatically since July 2019 and the total
retail sales of beauty product has also been affected negatively. The impermanent recession of beauty
product retail will further affect the beauty product distribution in Hong Kong in 2020, as the visitors
in the PRC will not rebound immediately for safety reasons. Additionally, the depreciation of RMB
against USD as a result of the Sino-U.S. trade war and potential economic downturn of Hong Kong
also affected the growth of the beauty product distribution industry in 2019. Furthermore, the
COVID-19 will affect the beauty product wholesale market in 2020, as the number of tourists from
the PRC is expected to decrease dramatically in 2020.
The expected downturn of the beauty product distribution industry in Hong Kong in 2020 is
mainly due to the outbreak of COVID-19 and anti-extradition bill protests. Nevertheless, these two
factors are not expected to affect Hong Kong in long run. In relation to the outbreak of COVID-19,
according to the latest interview of Dr. Wenhong Zhang, one of the senior advisors of epidemiology
for the PRC government, the global epidemic of COVID-19 is expected to last until the end of 2020
or the early 2021, and the resurgence of COVID-19 in Hong Kong in July 2020 has under control in
August 2020. The 14-day Universal Community Testing Programme (UCTP) concluded successfully
with a total of around 1,783,000 people registered at the community testing centers for COVID-19
testing. It had effectively identified asymptomatic patients in the community and cut the community
transmission chain. Additionally, the daily number of reported cases had gradually decreased in the
end of August 2020. Furthermore, according to the Hong Kong government, Hong Kong will develop
a local health code system to facilitate people traveling between Hong Kong and the PRC, which is
expected to help boost the recovery of local business activities. In relation to the anti-extradition bill
protests, as the national security law for Hong Kong was approved by the National People’s Congress
Standing Committee on 30th May 2020. The new national security law is intended to restore
prosperity and peaceful environment of Hong Kong, so as to protect the key interests of local
businesses in Hong Kong, including the retail sector. According to the Hong Kong government, the
life and property, basic rights and freedoms of the overwhelming majority of citizens will be
protected and all relevant law enforcement will be conducted strictly in accordance with the law as
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INDUSTRY OVERVIEW
well as statutory powers and procedures. Additionally, the peak of the protests was in 2019 and is
expected to fade gradually with most suspected violent protesters being arrested. Based on this, the
revenue generated by the beauty product distribution industry in Hong Kong is expected to gradually
rebound in 2021. The revenue generated by the beauty product distribution industry in Hong Kong
is expected to reach HK$28,301.2 million in 2024, at a CAGR of 4.5%. The skin care segment
aggregated the largest proportion in the total revenue of beauty products distribution withrevenue of
HK$13,633.7 million in 2019, recording a CAGR of 0.7% from 2014 to 2019. And the colour
cosmetics segment enjoyed the fast growth in the past five years: it increased from HK$3,187.4
million in 2014 to HK$3,465.2 million in 2019 at a CAGR of 1.7%. The major growth drivers for the
beauty product distribution industry in Hong Kong in the forecast period includes (i) the expected
growth of GDP in Hong Kong in the post COVID-19 period, as according to the International
Monetary Fund, the GDP growth of Hong Kong from 2020 to 2021 is expected to reach 5.9%; (ii)
the estimated further integration within Guangdong-Hong Kong-Macau Greater Bay Area due to the
establishment of Hong Kong-Zhuhai-Macau Bridge and Guangzhou-Hong Kong High-speed Railway,
which has a traffic flow and passenger flow of 20 million and 80 million per year, respectively; and
(iii) the recovery of market demands from the residents of the PRC in the post COVID-19 era. All
of these growth drivers will boost the market demands for beauty products in Hong Kong.
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INDUSTRY OVERVIEW
Market Size of Beauty Product Distribution Industry, by Revenue (Hong Kong), 2014−2024E
CAGR 2014-2019 2019-2024E
Colour Cosmetics 1.7% 4.9%
Skin Care 0.7% 4.7%
Fragrance -3.8% 4.9%
HK$ Million
Others 1.4% 3.4%
30,000 Total 0.7% 4.5% 28,301.2
26,829.8
25,463.9 4,409.5
24,795.2
25,000 4,132.0
21,919.8 21,510.0 21,497.4 22,681.2 3,853.6 22,718.9 21,428.1 3,850.1
3,465.2
20,000 3,187.4 3,146.6 3,188.6 3,458.4 3,454.1
15,329.1 17,137.6
15,000 14,695.1 16,107.0
15,492.2 13,633.7 2,402.1 12,324.6
13,173.0 13,018.5 12,920.1 13,529.8
10,000
8,983.6
1,201.7 1,388.2 1,423.5
5,000 1,359.3 1,220.8 1,240.1 1,282.8 1,118.1 1,032.1
1,245.0
780.1
4,501.9 4,617.3 5,048.3 5,252.6 5,330.6
4,200.1 4,099.9 4,167.9 4,452.9 4,835.3 3,163.3
0
2014 2015 2016 2017 2018 2019 2020E 2021E 2022E 2023E 2024E
Source: Frost & Sullivan
Note: The revenue includes the revenue of the distributors from direct sales. The forecast of 2020 is based on the assumption
that, the raft of border controls in Hong Kong will be extended to early 2021. The forecast after 2020 is based on
the assumption that the impacts of outbreak of COVID-19 and anti-extradition bill protests will fade away after 2020.
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INDUSTRY OVERVIEW
Distribution Channels of Beauty Product Distribution Industry in Hong Kong
Penetration Rate of Online and Offline Channels of Beauty Product Retail (Hong Kong),
2014−2024E
CAGR 2014-2019 2019-2024E
Online 26.9% 17.7%
Offline -1.4% 3.2%
HK$ Billion Total -0.4% 4.5% %
60 14
Penetration of online
11.6% 11.5% 11.8%
50 11.2% 12
10.9%
43.9
39.9 41.8 10
40 36.1 38.4 5.2
34.9 2.2 35.3 4.8
34.8 33.1 4.3
0.7 1.0 1.6 2.3 32.1 8
1.3
30 3.5 38.7
37.7 34.1 37.0
6.5% 22.5 6
35.4 33.3
20 33.8 31.8 5.5% 2.6
33.0
4.6% 4
28.6
3.9%
10 2.9% 19.9 2
1.9%
0 0
2014 2015 2016 2017 2018 2019 2020E 2021E 2022E 2023E 2024E
Source: Frost & Sullivan
Note: The penetration of online refers to the percentage of online sales to total sales.
Online Retail Channels of Beauty Product in Hong Kong
The market size of online beauty product market increase from HK$0.7 billion in 2014 to
HK$2.3 billion in 2019, representing a CAGR of 26.9%, and it is expected to increase to HK$5.2
billion in 2024, representing a CAGR of 17.7%.
In terms of revenue, the penetration rate of beauty product distributed by online channels was
relatively low in Hong Kong: it was only approximately 1.9% of the total beauty products distributed
in Hong Kong in 2014. At that time, the citizens in Hong Kong preferred to purchase beauty products
at physical stores for the sake of convenience. Many people in Hong Kong only used the internet for
market research on new beauty products and comparing prices, but usually they prefer to go to the
offline stores to buy the products. As the retailer density in Hong Kong is the highest in the world,
the citizens of Hong Kong can buy beauty products easily. However, the penetration of e-commerce
continues to increase in accordance with rising internet penetration and digital literacy, with a shift
in consumers’ habits as online shopping is comparatively easier, more convenient, and price
competitive. The penetration rate of beauty products distributed via online channels has increased to
approximately 6.5% in 2019, and it is expected to grow to approximately 11.8% in 2024. To cater for
rapidly changing consumer preferences, players in this market will continue to invest in their online
channels to attract more consumers. The outbreak of COVID-19 is expected to promote the
development of online market, as parts of the retail market will transfer from offline to online. As
during the outbreak of COVID-19, consumers are generally avoiding public places including
shopping malls and other offline stores, retailors has opened their online shops for meeting the
demands for shopping.
Offline Retail Channels of Beauty Product in Hong Kong
In 2019, specialty cosmetics chains, department stores, and multi-brand shops are the three
major offline distribution channels for beauty and personal care products and cosmetics products in
Hong Kong.
With characteristics of providing a large variety of products with a wide price range that appeals
to broad market segments, the proportion of specialty cosmetics chains retailers grew steadily from
27.5% in 2014 to 29.6% in 2019 and is likely to develop further in the forecasting years.
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INDUSTRY OVERVIEW
Department stores are another main channel for selling beauty and personal care products and
cosmetics products; the proportion of this channel fell slightly from 22.0% in 2014 to 21.3% in 2019.
The proportion of multi-brand shops has increased from 21.3% in 2014 to 21.5% in 2019.
Offline Channels of Beauty Product Distribution, by Percentage in Total Revenue
from Offline Retail Channels (Hong Kong), 2014, 2019, 2024E
2014 2019 2024E
10.3% 9.5% 8.5%
5.9% 5.7% 5.8%
27.5% 29.6% 30.5%
12.4% 13.0%
13.1%
21.5% 21.9%
21.3% 22.0% 21.3%
20.3%
Specialty cosmetics chains Department stores Multi-brand shops
Drug stores/pharmacies Hypermarkets/Supermarkets Others
Source: Frost & Sullivan
Key drivers for the beauty product distribution market in Hong Kong
• Favourable government policies
There are no import duties on cosmetics, skin care products and other toiletries products in
Hong Kong, nor regulations in Hong Kong. This favourable market environment drives the entire
beauty product distribution industry as the operating costs are significantly lower. The lower cost will
subsequently lower the price of the products for consumers and attract tourists towards making their
purchase in Hong Kong.
• Higher acceptance to colour cosmetics
Cosmetics have been increasingly popular within these few years as female consumers have an
increasingly high acceptance to a wider range of colour cosmetics. This is mainly due to the influence
from emerging international cultures especially from the Western and other Asian countries such as
Japan and Korea. The change in the overall shopping behaviour of the consumers having an
increasingly high acceptance to foreign make-up beauty culture will further promote the overall
beauty product distribution industry.
Future outlook for the beauty product distribution market in Hong Kong
• Increasing importance of marketing and advertising
Branding for beauty product retailers is increasingly important to promote their brands to
consumers. It is essential for them to implement effective marketing strategy through various
marketing and advertising channels such as social media, traditional billboards, TVC, etc. These
actions allow retailers to establish direct communication, hence creating relevancy between the brand
and its consumers. Effective branding and advertising strategies will aid the brand to generate
positive and healthy impressions on the public and strengthen their brand image, which would lead
to a growth in sales.
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• Increasing dependent on the usage of cosmetics
With the emergence of the Western culture, the females in Hong Kong have a changing
perception of beauty. The Millennial generation in Hong Kong have a higher consumption of
cosmetics in general, as they are often eager to create their own identity and style through the use
of cosmetics. This is also apparent in the female working force. The working females tend to apply
makeup for the purpose of making themselves feel more confident at work.
• Wider brand recognition
With the increasing purchasing power among female consumers in Hong Kong, they often sway
towards big international brand names (such as those from Japan, Europe, United States, etc.) on
cosmetics. This is mainly due to the perception that big brand names are usually more quality
assuring, aiding them to keep their look consistent throughout the day. Trendy Korean and Japanese
brands are more popular among the younger consumers as their major concern is often to obtain a
fashionable image, not necessarily needing good quality products. As consumers are becoming more
curious and experimental, it is seen that consumers are more willing to try new products developed
by niche brands, bringing a number of beauty brands into the Hong Kong market.
Cost Factor Analysis in Hong Kong
As traditional business districts, the average rentals of private retail in Hong Kong Island and
Kowloon were the highest in Hong Kong and were highly affected by the tourism industry in Hong
Kong. The average rentals of private retail in Hong Kong Island and Kowloon decreased from 2014
to 2016 before they rebounded in 2017. The average rental of private retail in New Territories
increased gradually at a CAGR of 1.6% from 2014 to 2019.
Average Rental of Private Retail (Hong Kong), 2014−2019
CAGR 2014-2019
Hong Kong Island -0.9%
Kowloon -1.8%
New Territories 1.6%
HK$/m2/Month
2,000
1,628.0 1,612.0
1,534.0 1,518.0 1,531.0 1,553.0
1,519.0 1,499.0
1,500 1,396.0
1,440.0
1,399.0
1,338.0 1,366.0 1,352.0
1,325.0
1,284.0 1,300.0
1,250.0
1,000
500
0
2014 2015 2016 2017 2018 2019
Source: Rating and Valuation Department, Frost & Sullivan
Due to the emerging e-commerce, the demand for warehouses in Hong Kong has increased in
the past five years. The average rental of warehouses increased from HK$144.0 per square metre per
month in 2014 to HK$188.6 per square metre per month in 2019 at a CAGR of approximately 5.5%.
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INDUSTRY OVERVIEW
Average Rental of Warehouses (Hong Kong), 2014−2019
CAGR 2014-2019
Average Rental of Warehouses 5.5%
HK$/m2/Month
200 188.6
180.7
169.3
157.3 161.3
150 144.0
100
50
0
2014 2015 2016 2017 2018 2019
Source: Rating and Valuation Department, Frost & Sullivan
Due to the implementation and periodic adjustments of statutory minimum wage policy since
2011, along with the shortage in labour supply faced by the local services industry, the level of wages
in Hong Kong has increased since then. Between 2014 and 2019, the median salaries per annum of
all occupations in the retail industry in Hong Kong increased at a CAGR of 4.9% from HK$132,000.0
in 2014 to HK$168,000.0 in 2019.
Median Salaries per annum in the Retail Trade Industry (Hong Kong), 2014−2019
CAGR 2014-2019
Median Salaries in the Retail Trade Industry 4.9%
HK$
180,000 168,000.0
161,700.0
160,000 154,500.0
144,900.0
137,700.0
140,000 132,000.0
120,000
100,000
80,000
60,000
40,000
20,000
0
2014 2015 2016 2017 2018 2019
Source: Department and Statistics Department of HKSAR, Frost & Sullivan
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INDUSTRY OVERVIEW
Market size of beauty product distribution industry in the PRC
Market size of beauty product distribution industry
Overall the beauty product distribution industry in the PRC demonstrated continuous growth in
terms of market size by revenue over the past few years, increasing from RMB176.5 billion in 2014
to RMB274.2 billion in 2019 at a CAGR of 9.2%. As the idea of skin care and make-up is becoming
widely accepted in the PRC by both male and female consumers, the skin care segment took the
largest market share in 2019 with a total revenue of approximately RMB139.8 billion. Meanwhile,
the segment of colour cosmetics registered significantly high growth rate from 2014 to 2019 at a
CAGR of 11.1%, increasing from RMB16.7 billion in 2014 to RMB28.3 billion in 2019, which was
mainly driven by the climbing purchasing power of young female consumers. Over the period from
2019 to 2024, thanks to the increasing demand for beauty products and favourable policies such as
Notice on Adjusting Consumption Tax on Cosmetics (the State Administration of Taxation, 1st
October, 2016) and Guidance on Promoting the Development of Cross-Border E-Commerce (the State
Council, 20th June, 2015), which have lowered the prices of colour cosmetics especially the imported
colour cosmetics in the PRC, and in return, encourage consumers’ spending on colour cosmetics, thus
the market size of beauty product distribution industry in the PRC is expected to grow at a CAGR
of 6.5%, and to reach RMB375.9 billion in 2024. The growth of the industry tends to be steady in
the future, as the demand for related products is expected to turn stable gradually with the daily
expenses of consumers in the PRC becoming stable in the coming five years.
Market Size of Beauty Product Distribution Industry, by Revenue (the PRC), 2014−2024E
CAGR 2014-2019 2019-2024E
Colour Cosmetics 11.1% 7.2%
Fragrances 5.9% 3.6%
Skin Care 10.7% 7.3%
Others 7.0% 5.3%
Total 9.2% 6.5%
RMB Billion
400 375.9
356.3
335.1 40.0
350 37.8 4.3
312.6
35.6 4.2
290.6 4.1
300 274.2
33.0
3.9
254.1 30.0
28.3 3.7
250 234.2 25.8 3.6 199.1
214.2 23.4 3.4 187.1
194.2 21.0 3.2 174.2
200 176.5 18.6 2.9 3.1 160.7
16.7 139.8 148.4
2.7 128.8
150 105.9 117.8
94.2
84.0
100
89.8 96.1 102.5 108.5 115.0 121.2 127.2 132.5
50 73.1 78.5 84.2
0
2014 2015 2016 2017 2018 2019 2020E 2021E 2022E 2023E 2024E
74.0
Note:
The forecast of 2020 is based on the fact that the suspended logistics for online shopping in the PRC has recovered in the
end of February as the outbreak of COVID-19 in the PRC has under control, and more offline purchasing has transferred to
online. F&S also assumed that the purchasing of beauty products from overseas will transfer to the domestic due to the
outbreak of COVID-19 in other countries and regions.
Source: Frost & Sullivan
Distribution Channels of Beauty Product Distribution Industry in the PRC
The penetration rate of beauty products distribution via online channels was relatively high in
the PRC: it was approximately 41.3% in 2019. Young-aged internet-savvy consumers and rising
disposable incomes are the key growth engines of the online distribution channels of beauty products.
The availability of search engines to find the cheapest price and explore new products also increased
the percentage of beauty products distributed by online channels. Additionally, logistics costs are
relatively cheap in the PRC, therefore customers can buy beauty products online with relatively lower
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INDUSTRY OVERVIEW
prices than offline stores. Switching costs are virtually zero in online channels, and consumers
display a high tendency to switch, as they are price sensitive. This will bring opportunities to the mass
brands ultimately. The penetration rate of beauty products distribution via online channels is expected
to grow to approximately 55.5% in the total revenue in 2024. Additionally, due to the outbreak of
COVID-19, the penetration rate of online retail will increase dramatically in 2020, as online shopping
is much safer than offline shopping, consumers do not have to leave their residence and exposed to
risks of infection.
Penetration Rate of Online and Offline Channels of Beauty Product Retail (the PRC),
2014−2024E
CAGR 2014-2019 2019-2024E
Online 17.0% 12.8%
Offline 4.7% 0.6%
RMB Billion %
Total 8.8% 6.3% 611.3
600 579.0 140
Penetration of online 546.7
513.9
500 120
479.6
450.5
419.0
339.3 100
400 387.0 282.6 307.4
255.9
354.7 224.9
186.1
323.4 166.8 80
300 294.8 146.3
124.5
106.1 53.1% 55.5% 60
84.9 51.7%
46.9% 49.8%
200 39.8% 41.3%
37.8%
32.8% 35.1% 40
28.8%
264.1 271.6 272.0
254.7 258.0
100 217.3 230.2 240.7 252.2 264.4
20
209.9
0 0
2014 2015 2016 2017 2018 2019 2020E 2021E 2022E 2022E 2024E
Source: Frost & Sullivan
Note: The penetration of online refers to the percentage of online sales to total sales.
Online Distribution Channels of Beauty Product Distribution Industry in the PRC
The online sale of beauty products increased from RMB84.9 billion in 2014 to RMB186.1
billion in 2019, representing a CAGR 17.0%. Due to the increasing importance of online channels,
the online sale of beauty products is expected to increase RMB339.3 billion in 2024.
In terms of revenue, in 2019, Tmall.com was the biggest online channel for beauty product
distribution induction in the PRC: approximately 49.6% of the total revenue of beauty products from
online distribution channels in the PRC is generated via Tmall.com. Most beauty brands have opened
their online flagship stores on Tmall.com as it is the most influential online shopping platform in the
PRC.
JD.com is the second largest online shopping platform in the PRC whose self-built logistics
system is regarded as the most efficient logistics system among all the online shopping platforms. In
2019, it took approximately 31.3% of the market share of the total revenue from online distribution
channels of beauty products. Besides the online flagship stores opened by the beauty brands, the
platform itself also involves a self-run business of beauty products.
The other online channels includes the official websites of beauty brands and online shops
operated by traditional offline retailers such as Sephora.
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INDUSTRY OVERVIEW
Online Channels of Beauty Product Distribution,
by Percentage in Total Revenue from Online Distribution Channels (the PRC), 2019
19.2%
Tmall.com
49.6% JD.com
Others
31.3%
Source: Frost & Sullivan
Offline Distribution Channels of Beauty Product Distribution Industry in the PRC
In terms of revenue, in 2019, specialty cosmetics chains, hypermarkets/supermarkets,
department stores, and multi-brand shops were the four major offline distribution channels for
skincare and cosmetics products in the PRC.
The proportion of hypermarkets/supermarkets decreased from 23.4% in 2014 to 19.0% in 2019,
and it is predicted to keep decreasing in the future.
With the increasing investment in flagship stores, the proportion of specialty cosmetics chains
increased from 23.3% in 2014 to 27.3% in 2019 and it will keep growing in the future.
With characteristics of providing a large variety of products with a wide price range that appeal
to broad market segments, the proportion of multi-brand specialty retailers grew steadily from 17.2%
in 2014 to 18.6% in 2019, and is likely to develop further in the forecast years.
Department stores are another main channel for selling skincare and cosmetics, but the
proportion of department store decreased from 19.8% to 18.1%, as many department stores are
transferring to other forms of offline channels to cater the diversified needs of consumers.
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INDUSTRY OVERVIEW
Offline Channels of Beauty Product Distribution, by Percentage in
Total Revenue from Offline Distribution Channels (the PRC), 2014, 2019, 2024E
2014 2019 2024E
8.9% 9.1% 6.6%
23.3%
27.3%
16.9% 31.5%
19.0%
23.4%
8.4%
19.8% 7.9%
18.1%
7.4% 16.5%
20.1%
17.2% 18.6%
Specialty cosmetics chains Department stores Multi-brand stores
Drug stores/pharmacies Hypermarkets/supermarkets Others
Source: Frost & Sullivan
Key drivers for the beauty product distribution market in the PRC
• Increasing purchasing power
According to the National Bureau of Statistics, the gross national income per capita in the PRC
increased from approximately RMB47,173 in 2014 to approximately RMB70,892.0 in 2019,
representing a CAGR of 8.5%, indicating a higher purchasing power of the PRC consumers. As a
result, the expenditure per capita on personal care products in the PRC increased from approximately
RMB215 in 2014 to approximately RMB320 in 2019. Benefiting from the climbing income and
purchasing power of domestic consumers, the beauty products distribution market in the PRC is
likely to further flourish in the future.
• Favourable policies
As the PRC is moving towards becoming a more consumption-led economy and many foreign
brands flock to enter the market, there is large room for development in the distribution sector. Under
such background, the Central Government and local authorities in the PRC are also committed to
improving the regulatory environment for the beauty product distribution market. For instance, in
2016, the State Taxation Administration issued a notice that adjusted the consumption tax rate of
importing high-end cosmetics and high-end skincare products from 30% to 15%, and exempt other
cosmetics from consumption taxation. According to State Taxation Administration, the high-end
cosmetics and high-end skincare products refer to cosmetics with the unit price higher than RMB10
per milliliter (gram) or RMB15 per sheet. The products of the Company now can enjoy zero
consumption tax in the PRC. Moreover, the Shanghai Pudong New Area launched a pilot scheme
which allows the import of non-special use cosmetics on a “filing instead of approving” (審批改備
案) basis from 2017. This scheme was adopted nationally from 10 November 2018, under this
scheme, no sample of such products needs to be submitted before importation, and approval
procedures will be carried out during or after importation. Thus the import process of foreign
cosmetics will be greatly simplified, contributing to a lower cost of logistics and warehousing.
According to China Food and Drug Administration, the non-special use cosmetics refers to all the
cosmetics other than the special use cosmetics which are used for hair foster, hair dye, hair perm,
depilation, breast care, bodybuilding, deodorization, freckle dispel, sun block products. Most
cosmetics and other beauty products sold by the Group fall into the categories of non-special use
cosmetics. From the perspective of cross-border e-commerce, the government has intensively
introduced regulatory policies such as setting up a number of cross-border e-commerce
comprehensive pilot areas in 22 cities, with the aim to improve the cross-border e-commerce trading
environment, which is likely to further stimulate the development of cross-border e-commerce,
including cosmetics.
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INDUSTRY OVERVIEW
Future outlook for the beauty product distribution market in the PRC
• Popularisation of Japanese beauty products
The beauty product market in the PRC has been dominated by foreign brands, with Asian brands
including Japanese, Korean and Thailand brands having established strong market presences.
Influenced by the pop culture and fashion style of Japan, it is observed that Japanese beauty products
have gained increasing popularisation among the young generation in the PRC. Moreover, compared
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INDUSTRY OVERVIEW
with other beauty products, the quality of Japanese brands is generally perceived to be higher. As
consumers in the PRC are increasingly concerned about product quality than ever, the Japanese
beauty products are likely to gain more market share in the future.
• Expanding online channel
The online channel of beauty product distribution has witnessed rapid growth over the past few
years and the trend is projected to continue in the next five years. The increasing popularity of the
online channel of beauty product distribution is greatly driven by the advantageous word of mouth
that imported products have received compared with products imported via traditional channels.
Furthermore, Chinese female consumers on average hold more than four social media accounts where
they can directly purchase products based on the recommendation of friends or Key Opinion Leaders
(“KOLs”) and share their opinions of the beauty products, thus creating great opportunity for online
channel of beauty product distribution.
• Diversification of sales and marking strategy
The digital age has seen a shift in marketing strategy with the emergence of social media,
pop-up stores, KOLs and vending machines. Pop-up shops are temporary installations that allow
retailers to sell or showcase their brands and products. Typically, these installations are built around
major events or in shopping malls. KOLs are what consumers are gravitating towards in hopes to
filter the clutter that digital advertising has created. KOLs are seen as having more importance and
relevance than mass media because they are able to connect and relate to their audience via social
media. Recently, the vending machines are also becoming popular in the PRC, and now they can sell
nearly all consumers goods including beauty products. All these innovative methods coordinate with
social media.
Cost Factor Analysis in the PRC
The labour cost of beauty product distribution industry in the PRC surged during the period
from 2014 to 2019, with the average annual salary in the industry increasing from approximately
RMB33,984.0 in 2014 to approximately RMB48,164.0 in 2019.
Influenced by the slowdown in real estate market in the PRC, the average rental cost of
warehouses for the beauty product distribution industry in the PRC grew at a CAGR of approximately
4.8%, increasing from approximately RMB35.1 per square metre per month in 2014 to approximately
RMB44.3 per square metre per month in 2019.
Average Annual Salary (the PRC), 2014-2019 Average Rental of Warehouses (the PRC), 2014-2019
CAGR 2014-2019 CAGR 2014-2019
RMB Average Annual Salary 7.3% 2
RMB/m /Month Average Rental of Warehouses 4.8%
50,000.0 48,164.0 45.0 43.4 44.3
45,177.0 40.7 41.1
45,000.0 42,359.0 40.0 37.8
40,000.0 39,589.0 35.1
36,635.0 35.0
35,000.0 33,894.0
30.0
30,000.0
25.0
25,000.0
20.0
20,000.0
15,000.0 15.0
10,000.0 10.0
5,000.0 5.0
0.0 0.0
2014 2015 2016 2017 2018 2019 2014 2015 2016 2017 2018 2019
Source: National Bureau of Statistics of China, Frost & Sullivan
COMPETITIVE LANDSCAPE OF BEAUTY PRODUCT DISTRIBUTION MARKET
Ranking of colour cosmetics brands distribution market in Hong Kong
The colour cosmetics distributors are the main entrance channels of colour cosmetics products
in Hong Kong: they import colour cosmetics products from other countries and then sell the products
to local retailers or sub-distributors, such as specialty cosmetics chains, drug stores, department
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INDUSTRY OVERVIEW
stores, etc., or set up their own retail stores. Some of them may do branding and marketing work,
translating overseas marketing materials to fit and target the local market as they know more about
local consumption habits and understand the preferences, as well as the needs of local consumers.
There are over 100 colour cosmetics distributors in Hong Kong, acting as distributors and some
of them are also brand operators in Hong Kong. The estimated market share of the top five players
for the year ended on 30 June 2020 in Hong Kong in terms of revenue accounted for a market share
of approximately 46.3% in the total market. The company ranked 5th of the colour cosmetics
distribution market in Hong Kong.
Set forth below is the table with information of the top five players in terms of revenue of the
colour cosmetics distribution market generated from Hong Kong for the year ended 30 June 2020:
Estimated
revenue from
Colour cosmetic Official colour cosmetics
brands Online product Estimated
Ranking distribution players Main colour cosmetics brands Background Import source Channel distribution market share
(HK$ million) (%)
(for the year (for the year
ended 30 June ended 30 June
2020) 2020)
1 L’Oréal L’Oréal Paris, Maybelline New
It is a branch of France, UK, × 332.3 11.9%
Hong Kong York, Helena Rubinstein, L’Oréal in Hong Japan,
Limited Lancôme, Giorgio Armani, Kong for the PRC
(“L’Oréal”) Yves Saint Laurent Beauté,distribution and
Shu Uemura, Yue Sai marketing.
2 Shiseido SHISEIDO, MAJOLICA It is a branch of Japan, USA, √ 293.7 10.5%
Hong Kong MAJORCA, bareMinerals, Shiseido in Hong France
Limited Clé de Peau Beauté, Laura Kong for
(“Shiseido”) Mercier, NARS distribution and
marketing.
3 Estée Lauder Estée Lauder, LA MER, M.A.C, It is a branch of USA, France, √ 282.1 10.1%
Hong Kong Bobbi Brown, Tom Ford Estée Lauder in UK
Limited (“Estée Beauty, Clinique, Smashbox, Hong Kong for
Lauder”) Becca distribution and
marketing.
4 AmorePacific Sulwhasoo, Mamonde, It is a branch of Korea, the √ 230.1 8.3%
Hong Kong LANEIGE, Innisfree, ETUDE AmorePacific in PRC,
Limited HOUSE Hong Kong for France
(“AmorePacific”) distribution and
marketing.
5 The Company CANMAKE, FIANCEE, Mapepe, It is the exclusive Japan √ 153.7 5.5%
Astraea V., Riesling, distributor of
COUNTRY & STREAM, CANMAKE in
Ducato, Rosy Rosa, Chasty, Hong Kong.
Tex Mex, Foot Este, Profael
Top five total 1,291.9 46.3%
Total sales revenue 2,787.0 100.0%
Source: Frost & Sullivan
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The table below set forth the information of the top five players in terms of revenue of the
colour cosmetics distribution market generated from Hong Kong for each of the four years ended 30
June 2019:
For the year ended 30 June
2016 2017 2018 2019
Revenue Revenue Revenue Revenue
(HK$ Market (HK$ Market (HK$ Market (HK$ Market
Rank Name million) Share Name million) Share Name million) Share Name million) Share
1 L’Oréal 311.8 9.8% L’Oréal 359.8 10.8% L’Oréal 430.1 11.5% L’Oréal 422.3 10.9%
Hong Hong Hong Hong
Kong Kong Kong Kong
Limited Limited Limited Limited
2 Estée 310.1 9.8% Estée 339.0 10.2% Estée 391.2 10.5% Estée 372.1 9.6%
Lauder Lauder Lauder Lauder
Hong Hong Hong Hong
Kong Kong Kong Kong
Limited Limited Limited Limited
3 Shiseido 261.8 8.3% Shiseido 264.7 8.0% Shiseido 289.7 7.8% Shiseido 293.8 7.6%
Hong Hong Hong Hong
Kong Kong Kong Kong
Limited Limited Limited Limited
4 AmorePacific 223.4 7.1% AmorePacific 241.0 7.3% AmorePacific 262.9 7.1% AmorePacific 284.2 7.3%
Hong Hong Hong Hong
Kong Kong Kong Kong
Limited Limited Limited Limited
5 Dior Hong 117.2 3.7% the 119.6 3.6% the 148.2 4.0% the 170.3 4.4%
Kong Company Company Company
Limited
Note: Dior Hong Kong Limited is a retailer of skin care products, perfume, cosmetics and make-up products of an
international fashion brand in Hong Kong.
Source: Frost & Sullivan
Most brands of the other market players are established brands rather than newly introduced
brands in Hong Kong. They entered the beauty product distribution market of Hong Kong earlier than
our Company. L’Oréal entered Hong Kong market in 1979, Estée Lauder entered Hong Kong market
in 1961, Shiseido entered Hong Kong market in 1998 and AmorePacific entered Hong Kong market
in 2002. In comparison, the brand of our Company is relatively new to the beauty product distribution
market in Hong Kong with room for development. The business of our Company is growing on a
continual basis and therefore, it enjoys a higher growth rate in revenue, while the growth rates of the
other market players would be relatively lower due to their established market presence. Similarly,
for example, a Korean brand was introduced to Hong Kong in 2013 and the revenue of such Korean
brand in the colour cosmetics distribution market increased at a CAGR of approximately 72.6% in
three years since 2013.
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INDUSTRY OVERVIEW
Key entry barriers of the beauty product distribution market in Hong Kong and the PRC
• Business networks
In the position between the upstream beauty product brands and downstream retailers or
customers, distributors should have strong business networks to link the upstream and downstream.
They should establish close business relationships with the upstream brands to reduce cost so that
they can gain a higher profit. For most beauty product brands, they may not cooperate with their
authorised distributors on an exclusive basis, but they will prefer distributors with more retail
channels and years of experience. It is not rare for a beauty brand to rely on its distributors while
penetrating into a new market overseas. It will take efforts and years for new entrants to establish
trust between brands and themselves, and developing new retail channels is costly, especially for the
offline channels.
• Channel management capability
The management of terminal channels will greatly influence the revenue of distributors, thus the
channel management capability is one of the key competitive factors among competitors in the
market. The beauty product distributors should design the most suitable distribution systems for the
products they operate. It is vital for them to balance the online and offline channels; otherwise the
distribution system will be inefficient as conflicts between channels will arise. It will take time for
new entrants to explore the best portfolio of channels and alleviate conflicts of interest among
different channels.
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• Brand reputation
The brand reputation is crucial for beauty product distributors. For beauty products, the brand
awareness and reputation is one of the most influencing factors to attract the consumers. The beauty
product distributors will sponsor web stars and beauty bloggers to enhance the influence of the brands
they operate and expand their distribution channels by setting up online and offline flagship stores.
It will be expensive for new entrants to establish a brand image in consumers’ minds in a short time.
Competitive Advantages of the Company
• Conformation to tendency
Great deals of sales of colour cosmetics in Hong Kong and the PRC have been boosted by the
popularity of the Japanese beauty trend, which has put a strong focus on eye and lip make-up. The
trend has offered great opportunities to many brands from Japan to enter beauty product distribution
market in the Great China. As the general agency of the brand of Canmake in Great China, the
Company can seise market opportunity in Great China.
• Agile operation team
The Company has an agile operation team that achieves daily operation tasks quickly to enhance
the customer experience. The inventory stock is well monitored by the team, and they will adopt the
optimal replenishment decisions in a short time. The operation team members will also respond to the
feedbacks and inquiries from the customers swiftly to guarantee the high level of customer
satisfaction.
• Advanced marketing strategy
Recently, social media and the KOLs on beauty and fashion have been employed by leading
beauty brands to boost brand awareness and reputation. Popular make-up styles, as well as trendy
colours, encourage consumers to try more colour cosmetics. The Company has its own official
Facebook and Instagram accounts to attract the attention of the young consumers who are also the
main targets of the brands of the Company.
• Attractive product pricing
The product price of the Company ranges from HK$36 to HK$158, which is attractive to the
price-sensitive customers. The products of the Company are designed and produced in Japan with
high cost performance. As the vogue of colour cosmetics is changeful, the product price of the
Company is also attractive for the fashion-conscious customers.
• Well-established brand recognition
The brand which the Company exclusively distributes is Canmake, a leading cosmetics brand
in Japan with millions of fans in Asia. The brand won seven awards of the Cosme Best Cosmetics
Awards in different categories in 2017, and this was the first time in Japan’s beauty industry that a
single brand won so many awards in the most influential ranking system in Japan within a year.
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