Beauty & Wellness Briefing: What happened to China’s ‘revenge buying’ boom?

The country’s post-pandemic economic rebound has stalled amid issues with unemployment, a real-estate bubble burst and low consumer confidence. On June 19, the Chinese central bank cut key interest rates for loans issued by the state-controlled banking system to spur economic growth. Although the National Bureau of Statistics of China announced in May that China had achieved 4.5% year-over-year GDP growth in the first quarter of 2023, only the services sector, made up of various industries including warehousing and transport services, outpaced that first-quarter growth rate, showing China’s economic recovery remains slower and bumpier than anticipated and hoped for.

China’s total retail sales of consumer goods increased significantly in March, with a 10.6% year-over-year growth rate, marking the first double-digit growth since June 2021. Furthermore, retail sales grew 18.4% in April but then fell to only 12.7% growth in May, according to the National Bureau of Statistics. Qin Mei, a research associate and trustee chair in Chinese business and economics at the Center for Strategic and International Studies, cautioned in a June 1 report that this growth figure is dubious, given the “notably weaker” retail sales in spring 2022 when China confronted its biggest Covid-19 wave.

“Observers should focus more on the risk of an uneven recovery and its long-term impact instead of the good-looking YoY growth rate numbers,” wrote Mei.

Back in 2020 and since then, the beauty and fashion industries have been animatedly discussing the potential for revenge buying where Chinese consumers would, in droves, purchase products. But current conditions have hindered these hopes. Although China’s unemployment rate stood at 5.2% in May 2023, unchanged from April’s 16-month low, youth unemployment is high. The unemployment rate of the population ages 25-59 decreased to 4.1% in May from 4.2% in the previous month, while the rate for those ages 16-24 climbed to a record high of 20.8% from 20.4%, according to the National Bureau of Statistics of China. The Chinese real estate market is also reeling from a period of nonstop building that has glutted the market. According to The New York Times, the Chinese government turned to real estate and infrastructure spending during past downturns to jump-start the economy. But developers are saddled with debt, cities have plenty of empty dwellings and local government finances are depleted from years of paying for Covid-19 testing. More to the point, 70% of Chinese household wealth is in property, compared to 28.5% of U.S. household wealth, underscoring the vulnerability of millions of Chinese consumers and their hesitancy to spend.

“I’m still optimistic for the longer term that sales will recover. But I was wrong in the speed of recovery,” said Jean-Philippe Benoist, CEO of GED, a China-based distributor for beauty brands like Caudalie, Jouer and RéVive. “I thought that the Chinese would be tired of Covid-19 after two or three years of lockdown and would immediately [seize] the opportunity to go out to restaurants and shopping malls. But no, they did not; they have been very cautious.”

Benoist said that he has seen higher-end brands more insulated from some of the Chinese economic volatility and that foreign brands in the region need to be patient, pragmatic and persistent. RéVive is one such brand that feels the effects of the slower recovery but also girds itself with new market approaches. RéVive has grown its sales in China by double digits since it entered the market in 2019 and has forecasted low single-digit sales growth for 2023, said Elana Drell Szyfer, CEO of RèVive.

RéVive is only sold via cross-border e-commerce but is diversifying its retail channels away from Alibaba’s Tmall Global. RéVive has added platforms like Douyin to its roster and is working to register its products to sell in stores in mainland China since the country now offers some exemptions to its animal testing laws. Tmall now accounts for 35% of its sales in China, compared to approximately 45% previously, Drell Szyfer.

“Two things were happening,” she said. “One, it’s becoming more competitive [on Tmall] with and product promotions are more frequent and higher, et cetera. And two, the consumer has found other places that they prefer to shop. Our diversification is driven by where we see the consumer going.”

The impact of platform competition was noticeable during the recent 6/18 shopping festival. The event was named after the founding date of Alibaba-owned JD.com, but it’s now embraced by all local major e-commerce platforms, including JD.com, Tmall and Pinduoduo. According to Alibaba, 305 brands made over 100 million yuan ($14 million) on shopping sites on June 18. But JD.com said it would not release its gross merchandise product figures this year, only noting that sales hit a record — an expected milestone, reported Reuters. GMV is a common method to determine the performance of an e-commerce business. It tallies the total number of transactions and the average order value. Alibaba also stopped releasing GMV figures for its 11/11 holiday, also called Singles Day, in Nov. 2022 amid slowing sales.

“There’s been a reluctance to fight for market share and take losses at the bottom line,” said Jacob Cooke, CEO of WPIC, a full-service trade partner operating in Asia whose clients include LVMH, Tarte, NuFace and Patchology. “Three or four years ago, [brands] fought for as much market share as possible. Now, the focus is on expanding the profitable part of the business and growing slower but at a more sustainable level.”

He pointed out a trend among companies, such as Apple, of producing their own content for the 6/18 shopping event in lieu of enlisting expensive key opinion leaders like Li Jiaqi, known in English as Austin Li, who can command between $30,000-$50,000 per livestream slot. By building out their own audiences, companies can pad sales margins and even offer products on sale without impacting the bottom line. The 6/18 festival period was marked by steep discounts, with Alibaba’s various platforms offering billions of yuan in coupons and subsidies to entice Chinese consumers to spend.

Ulta-luxury brands, namely in fashion, have fared better than expected. In April, LVMH posted a 17% year-over-year increase in first-quarter revenue largely driven by sales in China. Hermès said sales in Asia, excluding Japan, were up 23% year-over-year for the first quarter due to the Chinese New Year. But ultra-luxury brands are historically somewhat insulated from economic volatility because their customers are high net-worth individuals, whereas premium and mass products have more price-sensitive consumers considering these products a splurge. Mass beauty, in particular, has faced competition from native brands like Perfect Diary and Florasis.

The Estée Lauder Companies’ most recent earnings report from May pointed to ongoing uncertainty in mainland China and Asian travel retail. Estée Lauder Companies reported that mainland China returned to growth in the third quarter of fiscal year 2023, with a year-over-year sales increase in the low single-digits. Double-digit sales growth is expected in the fourth quarter. However, Estée Lauder Companies lowered its organic sales and earnings per share outlook for the fiscal year, as the company reduced its implied fourth-quarter outlook, primarily due to Asia travel retail.

“The actual impacts to our business in Asia travel retail and China, to a lesser extent, have been far greater than we anticipated, given the prolonged challenges from the pandemic, including a slower-than-expected recovery of traffic and sales conversion in prestige beauty in these markets,” said Tracey Travis, evp and CFO of The Estée Lauder Companies, on the earnings call. “As the shape recovery for Asia travel retail comes into better focus, it is proving to be far more volatile than we expected and more gradual relative to what we experienced in other markets.”

Domestically, there are already signs of strong travel recovery, but foreign travel remains strained due to a backlog of visas and traveler hesitancy. During Chinese New Year in early February, there were 308 million domestic trips, generating almost ¥376 billion ($52 billion) in tourism revenue, according to McKinsey. Domestic travel volume has recovered to 90% of 2019 figures, and spending has bounced back to around 70% of pre-pandemic levels. But overseas bookings are still lagging behind short-haul trips. On the eve of China’s Labor Day holiday during the first week in May, more than half of Chinese travelers said they did not have set plans to go abroad this year, and 31% said no to international travel altogether, according to a survey published from Dragon Tail International. Meanwhile, four years ago, international tourists from mainland China were the world’s largest source of outbound tourists, making up 17% of global outbound travel spending, about $253 billion.

“We’re seeing huge changes in people’s behavior. Health and wellness are definitely a huge trend right now. People are also getting interested in new hobbies, like [spending time] outdoors, swimming, the gym,” said Cooke.

For now, the course of action for brands is limited and appears mostly a waiting game. Some brands have opted to leave the country altogether. Since 2022, Estée Lauder Companies-owned Too Faced and Glamglow, as well as Huda Beauty and South Korean skin-care brand The Face Shop, have all decamped due to stiff competition, changing marketing playbooks and the general economic headwinds, per Glossy’s previous reporting. But others have entered, in the meantime, including Tula, owned by P&G, and The Honest Co. Meanwhile, L’Oréal said it would help its newly acquired Aesop brand expand in the country.

“Americans want to have a vision and a plan so that they can strategize, make business plans, re-forecast, et cetera,” said the French-born Benoist. “I don’t do all this — I have my ears on the ground like everybody else, but I don’t mind because I know one thing for sure: [The economy] will restart one day and be back to what it was and even better.”

Inside our coverage:

Oddity, Il Makiage owner, files for an IPO.

Half Magic announced a round of funding.

Sisley-Paris opens a new standalone spa.

What we’re reading:

Kering acquires Creed fragrance as it builds up beauty division.

John Melo departs Amyris.

Cult Beauty plans to ban airbrushed models.