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Why Are Cosmetics Players Exiting China?

By: Trefis
Posted: 1/10/2014 1:32:00 PM
Referenced Stocks: AVP;EL;LRLCY;PG;REV

Recently, mass-market cosmetics manufacturer, Revlon ( REV ), announced its plans to exit the Chinese market. Revlon derives approximately 2% of its revenues from China. Revlon's direct-selling competitor, Avon Products ( AVP ), is facing similar weakness in sales in the Chinese mainland region. In recent times, many international retailers have considered closing shop in China to reduce costs and improve operational efficiencies. The latest announcement comes from cosmetics giant L'Oréal ( LRLCY ), which highlighted plans to end Garnier product sales within the Chinese market, citing a slowdown in the Chinese economy.

In this note, we analyse the current market conditions and trends shaping business performance for cosmetics companies in China. We have price estimates of $24 for Revlon and $33 for L'Oréal , against their current market prices of $25 and $34 respectively.

See Our Complete Coverage For Revlon | L'Oréal

Cosmetics Retail Sales Fall In China As Economy Slows Down

Retail sales for cosmetics in China for the year 2012 were estimated to be close to $22 billion (~RMB 134 billion), impacted by a slowdown in the country's economy and lower discretionary spending.  In comparison, cosmetics' sales in 2010 stood at approximately $24 billion, with skin care product sales accounting for more than 60% of total retail cosmetics sales.

This represents an 8.3% erosion in value over a span of two years. Combined with the fact that Chinese retail cosmetics sales witnessed explosive growth and tripled in value during the 2000-2010 period, the retail cosmetics market in China could begin to see a steady decline in product sales in the coming years. Reasons supporting this view on the market include:

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(Source: Euromonitor International, May 2013)

Going forward, we believe the ongoing shift of purchasing cosmetics online will intensify as digital penetration within mainland China increases. Furthermore, we expect existing mass-market cosmetics retailers such as Avon Products to continue facing downward pressure on sales with greater offtake of prestige and masstige products.

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