Morgan Stanley
  • Research
  • Nov 4, 2016

Beauty in the Eye of the Chinese Consumer

China is set to become the world's largest market for beauty products, with burgeoning demand for premium cosmetics that knows no borders. Companies, retailers and investors are taking notice.

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If there's one thing that even a tenuous economy can't shake, it's consumer spending on beauty products. The global beauty industry has grown at a steady 5% rate annually over the past decade—even through the past recession.

While steady progress is certainly enviable, the rise of China's consumer class has presented something even more promising for beauty brands and their investors: a massive, fast-growing market of people who increasingly want to buy expensive products.

China is on pace to become the world's largest beauty market this year, according to a recent Morgan Stanley Research report. And the companies that can offer premium brands sold via online channels stand to capture the hearts and wallets of these discerning beauty-product consumers. Beauty brands, retailers and investors around the world have taken notice and are trying to figure how they can tap into the growth from this promising demographic.

China Is Set to Become Largest Cosmetic Market in the World

Source: Euromonitor, Morgan Stanley Research

Beauty Without Borders

What makes China’s appetite for beauty products particularly notable is its global flavor. Domestic purchases of cosmetics in China have actually been declining since 2014. But that only belies the reality of China’s modern beauty-products consumer, who increasingly buys makeup and skincare items while traveling abroad or shopping online. Add these sales, and overall cosmetic spending by China’s consumers grew 15% from 2014 to 2015, according to Kelly Kim, the lead analyst on the report, “Playing the World's Largest Beauty Market.”

“Interestingly, we have witnessed some cosmetics companies' non-China sales achieving strong performances backed by Chinese shoppers, especially in China's neighboring markets," notes Kim, who covers the Korea consumer sector.​

Cosmetic Spending Breakdown for China's Consumers

Source: AlphaWise, Morgan Stanley Research

With Chinese travel primed to increase even more, overseas cosmetics spending could become a major factor in global cosmetics companies' performance. For example, cosmetics accounted for 20% of the purchases that Chinese travelers made in Korea last year, and 7% of the items they bought in Japan. The main driver of this spending is the quest for lower prices, something even high-end shoppers appreciate, the Morgan Stanley research reveals.

Pursuing Premium Brands

The preferences of Chinese consumers are changing as the country's middle class grows. A generation ago, most Chinese consumers bought almost everything at local state-owned stores, where both selection and supply were limited. Today, they not only have access to a wider selection of local retailers selling product from around the world, but also online retailers available at the touch of their smartphones. With rising incomes, Chinese tour groups are now ubiquitous in the shopping meccas of the world, from Paris and Milan to New York and London. People want, and increasingly can afford, fancier things—from haut couture to microbrews.

More Chinese Are Traveling Overseas

Note: Individual travelers may account for multiple trips
Source: AlphaWise, Morgan Stanley Research

When it comes to beauty products, this means a shift toward premium brands. In Morgan Stanley’s propriety AlphaWise survey of Chinese consumers, 84% of respondents said that they planned to buy more expensive or similarly priced skincare brands in the coming year. Respondents reported similar plans for makeup purchases.

Chinese Consumers Are Likely to Buy More Expensive Brands

Net score (% buying expensive brands minus % buying cheaper brands over the next 12 months)
Source: AlphaWise, Morgan Stanley Research

Who is primed to take advantage of Chinese consumers' growing love affair with beauty products? Certainly, companies that cater to higher-end tastes, as well as those that can maintain a basket of distinct brands to accommodate changing styles and fashion trends.

Where companies choose to sell their products, whether online or in stores, will also determine who wins hearts and yuan. “The most notable trend in channel dynamics is rising online sales," Kim says. According to the Morgan Stanley report, online channel sales of beauty products grew from 3% in 2010 to 19% in 2015 in the domestic market. Add in cross-border eCommerce—online sales from outside of China—and that figure jumps to 26%.

Much as shoppers in developed countries around the world, Chinese consumers appreciate the convenience of online shopping, the ability to easily compare prices, and most importantly, the opportunity to save money.

Price Is Top Criteria for Choosing to Buy Cosmetics Online

Source: AlphaWise, Morgan Stanley Research

All of this bodes well for online retailers, and conversely, may prove challenging for companies who rely on supermarket and department store sales of their products. Regardless, the power of Chinese consumers promises to remain a going economic concern, as they become the largest force driving the global beauty market.

For more Morgan Stanley Research on China’s consumers and the beauty-product market, ask your Morgan Stanley representative or Financial Advisor for the full report, " Playing the World's Largest and Fast-Evolving Beauty Market” (Oct 7, 2016). Plus, more Ideas.