China's Consumers Drive Global Beauty Demand

Chinese consumers are already a key driver of the global beauty industry and have made the country the world's largest beauty products market. Even so, a new report from Morgan Stanley Research finds that investors may still be significantly underestimating future demand in the country.

The report, created in tandem with AlphaWise, the proprietary survey and data arm of Morgan Stanley Research, suggests that China's share of the global beauty market could increase by 66% over the next five years, representing a sales increase of about US$38 billion—and nearly half of global beauty growth.

Despite questions about the sustainability of Chinese consumers' appetite for beauty products, the survey found multiple drivers that could support growth projections, including demographics, rising disposable income, increased brand recognition, the explosion of cosmetics in social media, online availability and an expansion of beauty routines.

This theme could be particularly resonant with investors, amid worries about global growth. Beauty products remain a fairly defensive consumer category in times of economic slowdown.

“The survey provides evidence that future growth will likely exceed what the market anticipates and could be more sustainable than the market is currently pricing into stocks," says Morgan Stanley equity analyst Dara Mohsenian.    

In 2018, China Became the Leader in Global Beauty Share
(% of World Beauty Euromonitor Retail Sales)

Beauty products growth in China has been on the upswing since 2016, with another 15% just last year. The premium products segment surged even higher in 2018, up 29%. Given this already impressive growth, the AlphaWise survey sought to examine the sustainability of Chinese consumers' appetite for beauty products, as well as what growth has already been priced into stocks.

The team questioned nearly 1,600 beauty-product users across China’s major urban centres, as well as smaller cities that have become growth engines of the Chinese economy. The survey found that demographics play a key role, since younger consumers are spending more at an earlier age. These consumers tend to have more disposable income and start with luxury beauty products, rather than traditional entry-level products. One reason: e-commerce and the power of social media.

Globally, e-commerce and social media have been a powerful engine for beauty products—and China is no exception. Roughly 89% of respondents to the AlphaWise survey had purchased beauty products online in the preceding year, vs. 69% in 2016. E-commerce allows consumers in remote areas of China to access beauty products that would otherwise be unavailable at their local retailers.

Social media has also created more sophisticated beauty consumers at a younger age. More respondents ages 16-24 are spending money on beauty products than older respondents did at that age, and those that do spend are spending more.

“Around 75% of those active on social media have started trying new or niche brands because of social media and buying a greater number of products," Mohsenian says. “Nearly a third of respondents also said that social media is currently the biggest influence on their purchasing decisions; two-thirds indicated that social media would have the biggest influence on their beauty-purchasing decisions in the near future."

Social media has also persuaded Chinese consumers to expand their beauty-care routines, including trends such as additional steps in skin care and cosmetics routines and the embrace of premium products. Nearly half of all respondents attributed their higher year-over-year beauty spending to more extensive routines, and nearly as many expect to do so in the coming year.    

Consumers Had Many Reasons for Increasing Their Beauty Spend
(Reason for Higher Spend vs. 12 Months Ago)

In 2018, premium products comprised 36% of all China beauty sales, compared with 23% in 2008, an increase that seems to reflect trends beyond economics. While 57% of respondents indicated they had traded up to more expensive brands because they were at the “right age" to use those products, only 4% indicated that premium products were too expensive for them.    

Most Chinese consumers are better off financially than they were a decade ago. About 78% of respondents said that their household income had increased over the past 12 months; 80% said that they expected it to increase over the coming 12 months. Indeed, China's middle class is expected to double in population in the next decade, adding US$5 trillion of global spending power.

As such, even as concerns grow over any potential slowdown in global growth, beauty products seem poised to perform. Respondents cited skin care as the category they would be least likely to cut spending in times of uncertainty. The broad growth of demand across consumer groups by age, income and locality also suggests strength and market resilience.

For investors, a final key takeaway is that larger brands are gaining share thanks to the “digital flywheel” effect of heightened beauty awareness, brand knowledge and availability. Japanese and European brands also seem to be gaining momentum, while preferences for American and Korean brands are slowing.     

For more on the beauty products in China, or a copy of our full report, “China Beauty: Skin in the Game", speak to your Morgan Stanley financial adviser or representative. Plus, more Ideas from Morgan Stanley's thought leaders.