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Kiehl's case analysis

26/03/2021 Client: saad24vbs Deadline: 3 days

L’Oreal in China: Marketing Strategies for Turning Around Chinese Luxury Cosmetic Brand Yue Sai

Best Marketing Case

AFM-CCMP Competition 2014

Maybe it was that eighth glass of baijiu that he had downed to show respect to the department store manager and her team, or their joke that they were honoured to see him but hoped that the head of Lancôme would join him at their next meeting, but all of a sudden doubts assailed Stéphane Wilmet, the new general manager of Yue Sai. Stéphane had always been passionate about China – teaching himself Chinese as a teenager – and had looked forward to coming back to China after an assignment with L’Oréal USA. But the challenge ahead was enormous. Yue Sai was one of the very few brands that had managed to lose volume and money in China’s booming cosmetics market – a sore point for L’Oréal. While politely engaging in small talk with his hosts about the superiority of the local cuisine, Stéphane’s mind kept returning to what was needed to turn around the situation and strengthen L’Oréal’s reputation in China.

The Chinese Cosmetics Market

Brief Overview

China has one of the world’s oldest civilizations with a history dating back 5,000 years, and is the most populous nation on the planet with over 1.3 billion people. Thanks to its consistently rapid economic development since the late 1970s, it is now the world’s second largest economy in terms of GDP (see Exhibit 1). The World Bank has projected that it will surpass the United States as the world’s largest economy in the coming decades. Given an enormous increase in disposable income, Chinese consumers increasingly desired more sophisticated, premium products in many categories, including beauty and skincare.

Procter & Gamble was the first multinational to enter mainland China’s beauty and skincare market, with Olay in 1989. With the exception of Estée Lauder which waited until 2002, the other multinationals quickly followed: Shiseido in 1991 with Shiseido, L’Oréal in 1997 with L’Oréal Paris, and Unilever in 1998 with Hazeline. They introduced extensive portfolios of high-quality brands and products, and brought marketing expertise, financial resources and cutting-edge R&D (which were soon localized by establishing local research centres). Initially, they drove out weak local brands, replacing them in the most desirable department stores.

As of 2010, the top five companies in the beauty and skincare market (including personal care) were all multinationals: P&G, L’Oréal, Shiseido, Unilever and Amway. Yet they still only accounted for 40% of the €18 billion market, and now had strong local competition. Firms such as Shanghai Jahwa and Jala had experienced extremely strong growth and their brands were available everywhere, from high-end department stores to local cosmetic stores, presenting a formidable challenge.

Specificities of the Chinese Cosmetics Market

Distribution Channels

When multinationals first entered China, premium cosmetics were almost exclusively distributed via department stores (see Exhibit 2). As in department stores worldwide, brands rent floor space and sometimes pay a sales-based commission to the department store. They are then free to create a store-within-a-store (or counter), staffed with their own beauty

assistants, with total control over sales and merchandising (but not, by law, on price). A legacy of the absence of other channels is that, even today, mass-market brands like L’Oréal Paris, Maybelline and Olay have counters in department stores in tier-2 and tier-3 cities (see Exhibit 3). In 2010, there were over 4,000 department stores in China, with a minimum of 6,000 m2 of retail space. They were stratified into three classes: class-1 stores carrying brands like Lancôme, Chanel and Dior were only present in the largest cities. Hefei, the capital of Anhui Province, a city with 5.7 million people and the world’s fastest growing metropolitan economy,1 only had a class-2 department store.

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