The Chinese cosmetics industry is something of an untapped goldmine for Western brands. It is the second-largest market behind the US, with projections like a $61.249bn value for the skincare segment alone by 2025. When it was announced on May 1 that compulsory animal testing for imported cosmetics was ended, many a (cruelty-free) brand owner was likely to jump in jubilation for the financial opportunity that lies ahead—but it turns out there is some fine print that still presents hurdles for companies looking to enter the market. BeautyMatter spoke to Dr. Ken Marenus, president of Independent Beauty Association, and Allies of Skin and PSA founder Nicolas Travis, about the challenges and corporate realities of the ruling.
Previously cross-border operations, aka shipping through Hong Kong, was one option for bypassing regulations. Creating a domestic product by shipping bulk to China and assembling the product there was another, as homegrown brands don’t need to undergo animal testing. Regardless, entering the Chinese market also means entering an arena of stiff competition from homegrown brands with enticing price points, as well as prestige heritage brands which have decades of hype building behind them. For indies, it is challenging terrain to navigate. “The work ethic and intelligence in China is strong. If we’re going to be competitive, we have to step up our game quite a bit,” Marenus states.
While the recent ruling presents a huge leap forward, animal testing still isn’t completely out of the picture, and there are further legislative hurdles at the border. “If you can get an official government agency to sign off that your product was made by Chinese GMP, the Chinese government will let you bring that in. But the US is pretty handicapped because we don’t even have a federal standard for GMP. Even if you get into China, there’s a risk of them taking your product and putting them through animal tests,” Dr. Marenus explains.
Active ingredients present another challenge. Formulations must adhere to China’s lists of permitted and non-permitted ingredients, the so-called blacklist and whitelist. For example, China only allows a maximum of 6% Alpha Hydroxy Acids in any product (a level inadequate to produce results in peel products), does not recognize moringa extract or bakuchiol, matriyxl peptides or crosslinked hyaluronic acid, and doesn’t allow the word probiotics, repair, or brightening on packaging. For founders such as Travis, it means intense timely and financial commitment. He is relocating to Shanghai to oversee the reformulation and repackaging of the brand’s products. “We pretty much had to go back to the drawing board,” he comments. “We started the process about a year ago and still have some formulas that aren’t done. It’s been a really big investment.”
At present, niche brands make up 30% of total beauty consumption in the country, offering lucrative business for indies that can bear the capital brunt of upfront costs. “Right now, the time is so primed for entry in China, there is a huge appetite for cult and imported brands. But it’s a whole different ball game: you don’t need a Sephora to make it, you need a good direct-to-consumer strategy, distributor, and enough capital and connections. Everything is paid for play, if you want organic [growth], forget it,” Travis explains, elaborating that a live stream with a top influencer can translate into selling a minimum of $600,000 worth of inventory in 20 minutes. However, these live streams also have very high return rates (he cites percentages as high as 40%).
For other brands looking to tackle China, Travis notes minimum upfront costs of $300,000 for inventory, plus a monthly influencer budget of $50,000. “For a small company, it can be hugely expensive to run two formulas, two labels, two packages, two safety tests. It becomes more than they can deal with,” Marenus adds.
One could also say there are underlying politics at play. By making it difficult for foreign brands to enter their market due to animal testing, it lessened outside competition for Chinese brands. Even with those barriers gone, the required reformulations are slowing the speed of market entry.
Given the huge potential of the market, PD departments are wise to formulate and package with Chinese regulations in mind. “If I were starting a business, I would formulate globally so I can send those products anywhere in the world. There are no borders in cosmetics anymore, it’s really a matter of regulatory barriers, but there’s so many ways to work around them,” Marenus comments.
The pendulum swings both ways, with a large influx of C brands due to hit Western markets as well in the near future. As Marenus puts it, “The first cycle was Japanese product coming to the US, then K-Beauty. Wait till you see the Chinese tidal wave coming our way.”