Documents
Resources
Learning Center
Upload
Plans & pricing Sign in
Sign Out

China _BRIC_

VIEWS: 1 PAGES: 8

									CHINA

Institutional-Based Considerations
FORMAL

As business opportunities have grown in China, many business leaders realized that China is a
very unique country to operate business in. However, not only businesses’ operations are
impacted by the formal institutional aspects, but also informal institutional ones.

The business culture has been influenced a lot by the historical events in China, as well as
communism, which still reflects in current practices. That is, Chinese government still controls
many businesses, still influences the everyday business of the privately owned firms, and the
bureaucracy level is still high. Some business may find it challenging to deal in China, and Avon
is no exception. Surely, Avon has a first mover’s advantage, as it entered the Chinese market in
1990s. However, this alone did not assure the smooth business in China and the company had
experienced some challenges.

First of all, Avon is famous for their “core competence” direct selling. By offering their products
to end consumers via direct selling, Avon managed to grow to be world’s largest direct-selling
company. However, Chinese government has challenged direct-selling and put a ban in 1998,
accusing direct selling companies “for ‘evil cults, secret societies and lawless and superstitious
activities.’” (Barboza). In 2006, Chinese government lifted the ban “after heavy lobbying from
American companies” (Barboza). Since then, direct selling has grown into an $8 billion industry
marketing a diverse array of product in this manner (Barboza). However, direct selling
companies in China have to comply with many regulations that are unique to China, and in some
way challenge the direct selling business model overall. Among some them are “The investor
should have sound business credit with no record of illegal operations during the past 5 years. If
the investor is a foreign company, it must have experience in conducting direct selling business
for at least 3 years outside China; (ii) The DSE must have a registered capital of not less than
RMB 80 million; (iii) A guarantee deposit, in the sum of RMB 20 million, should be paid into a
designated bank account at the time of establishment of the DSE; (iv) The DSE should establish
and maintain an information reporting and disclosure system”(Lo).
INFORMAL



In China, the importance of beauty goes back to the ancient times, and “the modern Chinese
standards of beauty often mimic those from thousands of years ago” (“Chinese Philosophy of
Beauty”). However, the Chinese women focus more on dealing with aging by changing their
lifestyles, rather than treating the aging symptoms with various products. For example,
“Traditional Chinese Medicine (TCM) targets the entire body and the factors that cause
wrinkles” (Young). “TCM strengthens…internal organs, freeing blood to move smoothly
to…face and distributing energy and fluid evenly through [the] body, [which]
nourishes…complexion” (Young). Thus, as China’s population is aging, there will be more
aging women as well, and hence companies that will be able to target and satisfy the needs of
these women most likely would experience growth in this industry. Additionally, the life
expectancy of Chinese population is increasing, which may suggest an opportunity for Avon in
terms of offering various anti-aging products.

Carrie Lennard in her article “BRIC Key for Future Growth” points out that “By 2013, China’s
urban population is forecast to swell by 200 million people from the level it was at in 2003. This
results in very high absolute growth in beauty of more than $10 billion 2009–2014”(20). That is,
as numbers of people, especially women, are migrating from the countryside to urban areas
beauty becomes more important.

Additionally, the same article points out some other important facts about the Chinese population
and the effects on the beauty industry. For example, “although China’s disposable income levels
are set to roughly double 2009–2014, the per capita spend on beauty and personal care will still
be just $22 per person per annum in 2014, far lower than the predicted $175 per person in Brazil.
This is due to China’s culture of children financially supporting parents in old age, and means
that even with a forecast value of $31 billion by 2014, there is much room for China to become
the largest beauty market in the world” (Lennard 20).

What is more, “the Chinese government is facing another serious problem, especially in the
context of the global economic downturn. Around seven million students graduated in 2009 from
the Chinese universities and it is estimated that the number would reach nearly 7.6 million in
2011. With ever-increasing numbers of students graduating from Chinese universities, the
government is expected to be extremely anxious about campus stability. Students spearheaded
the demonstrations in the pro-democracy unrest of the 1980s, including the protests in
Tiananmen Square. Decreasing employment opportunities in the current depressed market
conditions could spark widespread protests and fan political volatility in the country” (“China”).
This could be seen as an opportunity for Avon, as many of these educated students are looking
for employment, and being an Avon representative may serve a start for their careers.
David Barboza, the author of the article “Direct Sales Flourish in China”, indicated that Avon
recruits about 50,000 representatives a month, and at the end of 2009 had approximately a
million “agents”. So what makes Avon and their way of business so attractive to the Chinese
women? Barboza also points out that usually these direct selling companies provide jobs “often
for disadvantaged or poorly educated young women.” Women in China have very few
opportunities to open their own businesses in China, thus direct selling model of business to
some extent allows entrepreneurship.

Furthermore, China is a collectivist culture, which means that social and family ties are very
important in forming relationships. Hence, representatives of direct selling companies have
better chances to approach and sell to those people that are “within their circle”.




Industry-Based Considerations
Overall, the Chinese make-up industry is dominated by a few companies, who control nearly
53% of the total market in terms of value (“Make-Up in China”). These companies “own a
variety of recognized brands and operate in various segments of the market, such as: eye make-
up, face make-up, lip make-up and nail make-up. Fashion is a major influence on the make-up
market, with consumers differentiating themselves quite strongly through the styles and brands
of make-up products offered. Therefore, buyer power is greater amongst larger retailers
(supermarkets/hypermarkets) as switching costs for buyers are not particularly high. However,
retailers often occupy a strong position in the supply chain, which allows them to negotiate
favorable contracts with manufacturers, thereby enhancing buyer power. The wide range of
brands available, with accompanying variations in quality and price, means that buyer power is
prevented from becoming disproportionately strong in this market. Supplier power is also
moderate, to the extent that the raw materials for the end product are commonly available. Entry
into this market would be highly dependent on the growth prospects and also on the size of the
existing players. Furthermore, make-up products have few substitutes wherein manufacturers
may face indirect competition from traditional cosmetics, such as henna or kohl. However they
are not likely to be a serious threat in the major markets. Rivalry in the market is assessed as
moderate with most of the companies being geographically diversified but relatively high fixed
costs.

Buyer power
Figure 7: Drivers of buyer power in the make-up market in China, 2009
Major manufacturers tend to advertise to consumers in order to build brand loyalty. Retailers are
positioned at the end of the value chain, which implies that they are obliged to offer buyers what
they want, in a market that is subject to unpredictable changes in fashion. This reduces buyer
power, as most retailers must stock popular brands in order to maintain their own sales volumes.
Moreover, fashion has a major influence on the make-up market. Consumers can differentiate
themselves quite strongly through the styles and brands of make-up products they choose, which
also weakens buyer power. However, retailers often occupy a strong position in the supply chain,
which allows them to negotiate favorable contracts with manufacturers, thereby enhancing buyer
power. Where brand loyalty exists, it is more likely that customer would prefer designer brands
over retailer brands, although some designer labels also have their own retail operations for
which a large market exists. Direct selling is possible: for example, Avon avoids the
conventional retail distribution network, by using a direct sales force. This is made up of third
party independent contractors (not employees), who buy Avon products at a discount and then
sell to end-users. This limits the power of contractors to set the prices, thus weakening the buyer
power. Overall, buyer power in the make-up market is moderate.

Supplier power
Figure 8: Drivers of supplier power in the make-up market in China, 2009
Make-up products are typically manufactured using a range of chemical and mineral products,
such as essential oils, which are widely available from a large number of chemical companies.
Packaging is another significant input. The quality of many of the raw materials is important and
chemicals used in these products must be of a suitable standard for manufacturing consumer
products. Supplier switching costs are negligible for make-up manufacturers; inputs are typically
undifferentiated; and products can be made with a range of alternative raw materials, which
reduces supplier power. Suppliers are often small in scale compared to large manufacturers and
consequently their power is reduced, but this is offset by the fact that chemical producers gain
revenues from a wide variety of sources, reducing their dependence on cosmetics manufacturers.
Overall, supplier power with respect to the make-up market is moderate.

New entrants
Figure 9: Factors influencing the likelihood of new entrants in the make-up market in
The Chinese make-up market comprises a small number of brands, some widely recognized,
which have strong market position. Large firms benefit from scale economies which allow them
to compete more effectively on price, consequently, new companies entering the market may
find it difficult to compete. Retaliation by existing players, such as the launch of a price war, is a
possibility, especially where a new entrant moves into a more concentrated segment.
Furthermore, the brand strength of major manufacturers is considerable, which may negate much
of the effect of low switching costs. New entrants may be able to start on a small scale, operating
within a particular niche, such as make-up with anti-ageing components. However, product
testing and research would be both: time-consuming and costly. In addition, new entrants will
need to persuade stores to stock their products, and major retailers aware of their importance in
the distribution chain, may be unwilling to risk displacing existing brands for the sake of new
ones. Substantial funds are also needed to start a business in this market, with capital required for
investment in production, distribution, and also advertising (which is crucial for success in this
market). However, due to the high sales volumes of make-up products and low product
differentiation, it is common for the companies to enter the lower end of the make-up market.
Due to the high brand strength of leading make-up manufacturers, it is difficult for new
companies to develop their brands to compete at an international level. Overall, the threat of new
entrants with respect to the make-up market is moderate.

Substitutes
Figure 10: Factors influencing the threat of substitutes in the make-up market in China,
Make-up products have few substitutes as such. The conventional manufacturers may face
indirect competition from mineral make-up products. They are believed to be more natural, light
and allergy free as there are no chemicals, fragrances or preservatives in their contents. Mineral
make-up products are available in the form of foundations and loose powder. These claim to
remove the wrinkles which one gets due to aging process, acne, pimple scars or any other
blemish present on the skin. Overall, the threat of substitutes is assessed as weak.

Rivalry
Figure 11: Drivers of degree of rivalry in the make-up market in China, 2009
The Chinese make-up market is tending towards concentration, with the top three players
holding 52.8% of the total market by value. As many large players have their own production
facilities, fixed costs are relatively high, which serves to enhance rivalry. Retailers may be
unwilling to switch between market players, as their customers are likely to seek the leading
brands. The diverse product range offered by some major players, including skincare and hair
care products, reduces their reliance on the make-up products, and thus somewhat eases rivalry.
This diversification protects the company’s business against competitive pressures in any one
particular market. As most companies own large production facilities, the need to divest such
assets on exiting the global market constitutes an exit barrier and therefore a driver of
competition. However, most of these companies are geographically diversified which weakens
rivalry to some extent. Overall, rivalry in the make-up market is moderate.

LEADING COMPANIES
L'Oreal S.A.
Table 6: L'Oreal S.A.: key facts
L'Oreal is a France-based global cosmetics company, engaged in the production and marketing
of a range of perfume, make-up, hair and skin care products. The company operates in over 130
countries. It markets 23 international brands such as L'Oreal Paris, Garnier, Maybelline,
SoftSheen Carson, CCB Paris, L'Oreal Professional, Kerastase, Redken, Matrix, Mizani,
Lancome, Biotherm, Helena Rubinstein, Kiehl's, Shu Uemura, and Giorgio Armani. In addition,
the company has a financial stake in Sanofi-Aventis, a pharmaceutical company specializing
in therapeutic areas of cardiovascular, thrombosis, central nervous system, oncology, metabolic
disorders, internal medicine and vaccines. L'Oreal operates through three business segments:
cosmetics, the Body Shop, and dermatology. The cosmetics segment of L'Oreal functions
through four operating segments: professional products, consumer products, luxury products and
active cosmetics. The professional products sub-segment markets hair care products to
professional hairdressers, who use or sell these products in their hair salons. The sub-segment
offers differentiated brands to improve the quality of services in hair colorants, permanent
waves, styling and haircare. The professional products sub-segment comprises four brands:
L'Oreal Professionel, Kerastase, Redken, Matrix, Mizani, Shu Uemura Art of Hair and Keraskin
Esthetics. Play Ball and Texture Expert, two sub brands under L’oreal Professionnel and
Kerastase are extremely doing well in the US. Pureology is the leading color care brand in the
US. Redken 5th Avenue is the popular haircare brand in Latin American countries. The brands
L’oreal Professionnel, Kerastase and Matrix are the major growth drivers.

The consumer products sub-segment sells products through mass-market retailing channels. The
consumer products range includes hair care, skin care and make-up; and perfume products. The
leading brands in this sub-segment include L'Oreal Paris, Garnier, Maybelline New York,
Softsheen-Carson and Le Club des Createurs. Softsheen Carson is the major growth driver in the
South Africa.

The luxury products sub-segment markets premium products and services to consumers through
retail outlets, such as department stores, perfumeries, travel retail and the group’s own boutiques.
The company’s luxury products include skin-care, make-up and fragrances. With the acquisition
of YSL Beaute in mid 2008, the company enhanced its luxury products portfolio. The luxury
products portfolio includes leading brands such as Lancome, Helena Rubinstein, Biotherm, Shu
Uemura, YSL Beaute, and Kiehl's. The sub-segment also includes perfume brands: Giorgio
Armani, Ralph Lauren, Cacharel, Diesel and Viktor & Rolf.

The active cosmetics sub-segment sells dermo-cosmetic skin care products through pharmacies
and specialist retailers. Pharmacists and dermatologists also offer advice on using the company's
products at the point of sale. The brands in this segment include: Vichy, La Roche-Posay,
Inneov, Sanoflore and Skinceuticals. Aminexil Energy, a brand under Vichy is a popular brand
under premature hair loss product.

The cosmetics segment also comprises various product categories such as skincare (facial
skincare, body care and sun protection), hair care products, make-up, hair colorants, perfumes,
and other products. The company offers make-up products under the brand names L’Oreal Paris,
Le Club Des Createurs, Maybelline New York, Helena Rubinstein, Shu Uemura and YSL Beaute
among others.

L'Oreal took over The Body Shop International in 2006. The Body Shop operates a chain of
cosmetics stores specializing in skin and hair care products made from natural ingredients. The
Body Shop sells over 1,200 health and beauty products, across 59 countries. Its traditional
emphasis has been on shampoos, bath products, soaps, skin creams and conditioners made from
natural ingredients. The company also sells beauty and personal care accessories including
exfoliating bath gloves, mitts, body buffers, foot files, and muscle toning, relaxing and
invigorating massagers. In addition, it also markets men's toiletry ranges, perfumes and seasonal
products.

The dermatology segment includes dermatological and pharmaceutical activities of the company.
Galderma Laboratories (dermatological company), a joint venture with Nestle, specializes in skin
diseases such as rosacea, psoriasis, eczema, and skin infections such as acne.

LEADING COMPANIES
In China, the company operates through its subsidiary, L'Oreal China. In the region, the
company markets its products under the brand names such as L'Oreal Paris, Biotherm, Garnier,
Giorgio Armani, Helena Rubinstein, Kiehl's, Matrix and Lancôme, among others.
In September 2008, the company launched a new lipstick line under the brand name Rouge
Volupte. In the same month, Body Shop introduced mineral make-up range under the brand
Nature’s Minerals. In March 2009, L’Oreal Paris launched new make-up collection under the
Studio Secrets Professional brand name. In April 2009, the company's subsidiary, L’Oreal USA,
signed an agreement for the acquisition of Idaho Barber and Beauty Supply (IBB), a distributor
of professional products to hair salons in several states in the North West of the US, particularly
Idaho, Montana and Washington. Further, in December 2009, L’Oreal USA acquired Maly’s
Midwest and Marshall Salon Services, distributors of professional products to hair salons across
eight states in the US Midwest region.”
                                        Works Cited

Barboza, David. “Direct Selling Flourishes in China”.NYTimes.com. 25 Dec. 2009. Web. 2
      Nov. 2010.
      <http://www.nytimes.com/2009/12/26/business/global/26marykay.html?_r=2>.

“China”. DataMonitor .Mar 2010. Web. 25 Oct. 2010. <>.

“Chinese Philosophy of Beauty”. StudyInChina. Web. 1 Nov. 2010. <http://www.study-in-
      china.org/ChinaFeature/Custom/201071424196998.htm>.

Lo, Elaine Y.M. and Andy K. H. Yip. “Direct Selling In China Now Formally Regulated”.
       MayerBrown. 31 Oct. 2005. Web. 13 Nov. 2010.
       <http://www.mayerbrown.com/publications/article.asp?id=5000&nid=6>.

“Make-Up in China”. DataMonitor. May. 2010. Web. 25 Oct. 2010.

Young, Carly. “Asian Anti-Aging Secrets”. LifeScript. 16 Feb. 2007. Web. 13 Nov. 2010.
      <http://www.lifescript.com/Body/Looks/Fix-its/Asian_Anti-Aging_Secrets.aspx>.

								
To top