China cosmetics retails sales growth
Insights from the Sixth UBS Evidence Lab China Beauty Survey
UBS Evidence Lab surveyed 1,200 women in tier 1-4 cities in China on 15-27 April and the results suggest likely moderate deceleration in make-up spending, with 14% saying they will spend less on make-up in the next 12 months vs. 1% in the Aug 2019 survey and "trade-up to premium" dropping from the top reason to change the make-up brand used to No. 5. We think this is due to regular use of masks, as well as the improved product quality, marketing and perception of local brands. Meanwhile, skin care demand remains resilient, with more focus on product effectiveness and wellness/self-care. The survey showed that consumers are more interested in trying something new and influenced by social media and promotions, suggesting increased competition with the rise of the online channel. We think these trends bode well for companies with large brand portfolios or unique brands with strong digital marketing ability.
Online channel importance amplified during COVID-19; market implications
We estimate online share increased ~5-10ppt, on average, in Q120, based on company commentary. The UBS Evidence Lab survey also showed online usage increased from 50% to 60-70%. We believe online share will remain elevated and gradually increase as consumers continue to avoid offline stores and look for better promotions, with increased social media influence. Growth in the online channel is likely to: 1) intensify competition in the mass segment, particularly in make-up; but 2) allow faster growth of prestige brands in lower-tier cities; 3) help collect customer data with personal communications (including livestreaming) in hopes of increasing repeat purchases and loyalty; and 4) place more focus on core SKUs. During the pandemic, companies with strong digital ability quickly re-allocated offline resources to online to utilize livestreaming and social media for customer engagement and to drive sales. Thus, companies with higher online and premium segment exposure outperformed the market.