L'Oréal and Yue Sai in China

• L'Oréal in China focuses on understanding the marketing strategies needed to turnaround Yue Sai, a Chinese luxury cosmetic brand.

Background

• Stéphane Wilmet has been assigned the role of general manager of Yue Sai.
• Yue Sai performed poorly in China's booming cosmetic market.
• Wilmet is tasked with turning around the brand and strengthening L'Oréal's reputation in China.

The Chinese Cosmetics Market

• It has a history dating back 5,000 years and is the most populous nation with over 1.3 billion people.
• China is the world's second-largest economy in terms of GDP due to its economic development since the late 1970s.
• The World Bank projects China will surpass the United States as the world's largest economy.
• Chinese consumers increasingly desire more sophisticated, premium products, including beauty and skincare products, due to increased disposable income.
• Multinationals entered China's beauty and skincare market, starting with P&G's Olay in 1989.
• Shiseido in 1991, L'Oréal in 1997, and Unilever in 1998 quickly followed, introducing extensive portfolios, marketing expertise, financial resources, and R&D.
• Multinationals drove out weak local brands, replacing them in department stores, and by 2010, the top five companies were multinationals.
• These multinationals only accounted for 40% of the €18 billion market, with firms like Shanghai Jahwa and Jala providing strong local competition.

Distribution Channels

• Premium cosmetics were almost exclusively distributed via department stores when multinationals first entered China.
• Brands rented floor space and paid a sales-based commission to the department store, creating a store-within-a-store staffed with their own beauty assistants.
• Mass-market brands included L'Oréal Paris, Maybelline and Olay who have counters in department stores.
• In 2010, there were over 4,000 department stores in China with a minimum of 6,000 m² of retail space.
• Class-1 stores carried brands like Lancôme, Chanel, and Dior and were only present in the largest cities.
• The second distribution channel consisted of beauty store chains like Watsons and Manning, selling any brand with smaller spaces for mass-market brands.
• LVMH-owned Sephora chain is more upscale and carries brands like Estée Lauder and Lancôme, and the third channel is small local cosmetics stores that sell exclusively beauty and personal care products without the help of beauty assistants.
• New channels of distribution, like TV-based direct selling and ecommerce portals, are rapidly emerging, with over half a billion Chinese consumers having access to the internet.
• Traditional media is losing its appeal, with the younger generation spending a significant portion of time texting, surfing the web, and using social media.

Attitudes to and Usage of Cosmetic Products

• Cosmetics were seen as “counter-revolutionary” and virtually non-existent for decades.
• Cosmetic companies first had to educate Chinese consumers about beauty products and routines and the absence of inter-generational norms created a market of open-minded consumers.
• Chinese men were more open to skincare than their European and American counterparts, and China accounted for 70% of worldwide sales of L'Oréal Paris' Men Expert line.
• Chinese women were less interested in colour cosmetics than Europeans or Americans, and only 10-15% of beauty products sold in the Chinese market were makeup products.
• Many Chinese women viewed makeup as superficial, unnecessary, potentially harmful, and heavy makeup as socially undesirable, so China was primarily a skincare market.

Rising Chinese Confidence

• Consumers were initially drawn to Western brands in the 1990s and 2000s and Chinese and Asian cosmetic brands still use French-sounding names.
• Consumers began to take an interest in Japanese cosmetics as they were more knowledgeable about Asian skin and beauty.
• Achievements like sending astronauts into space, hosting the Olympic Games and the World Expo, and the success of firms like Haier, Huawei, and Lenovo made Chinese consumers increasingly proud of their nation.
• This pride kindled an interest in domestic brands.
• Chinese consumers, especially in tier 1 cities, were increasingly sophisticated about brands and products, requiring brands to be perceived as truly premium and not just aspire to be so.

L'Oréal China

• L'Oréal is the world's largest cosmetics company, with worldwide sales of €19.5 billion in 2010.
• Sales in China exceeded €1 billion, an 11.1% increase, which made China the third-largest market for L'Oréal.
• L'Oréal vowed to acquire one billion new customers globally in the next decade, with a significant portion from China.
• L'Oréal is the second-largest beauty and skincare player in China after P&G and No.1 in the luxury segment, present with almost all its major brands.
• The Luxury Product Division (LPD) manages premium brands like Lancôme, and the Consumer Product Division (CPD) oversees brands such as L'Oréal Paris.
• L'Oréal has a Research and Innovation Centre in Shanghai, and manufacturing centres in Suzhou and Yichang, where it produces mass and professional brands, but luxury brands, except for Yue Sai, are still imported.

Yue Sai (羽西)

• It was founded in 1992 by Madam Yue-Sai Kan to create beauty and skincare products for Asian women and become the first global cosmetics brand from China.
• Madam Yue-Sai Kan wrote the first book about makeup ever published in modern China and developed red lipstick and basic skincare products for Asian skin which secure distribution in department stores.
• In 1996, Madam Yue-Sai Kan sold the company to Coty which pushed distribution which led to Yue Sai gradually losing relevance.
• L'Oréal acquired Yue Sai in 2004 to add an established Chinese brand like Yue Sai and L'Oréal acquired Mininurse the same year.
• After acquisition, L’Oréal acquired a brand with wide distribution, historical strength in makeup, a few good skincare products and packaging, and a factory and R&D facility, however the brand was associated with older consumers, sales were fading, it had lost its marketing and R&D innovative edge, and it was unclear how it fitted into L'Oréal's brand portfolio in China.
• Yue Sai was assigned to the consumer-product division (CPD) of L'Oréal China, where they applied L'Oréal Paris’ marketing strategy - a mix of scientific improvements, celebrity-driven glamour, and wide accessibility.
• In 2006, Yue Sai was transferred to the Luxury Product Division (LPD), which promoted Shu Qi to re-establish the brand's luxury image.
• L'Oréal's Shanghai Research and Innovation Centre created products like the Vital Essential line with ganoderma mushroom extract. Further they repositioned Yue Sai as “the first brand to stand for Chinese women's beauty”.

Turning Around Yue Sai

• Alexis Perakis-Valat, became CEO of L'Oréal China in 2010, wanted to continue to move the company to be No.1.
• Yue Sai's lacklustre performance hindered the company, as since its integration, it had never turned a substantial profit.
• Perakis-Valat needed to move fast with a strategy alongside Stéphane Wilmet and Ronnie Liang.

Strategic Decisions

• It had an uncertain business model, ageing consumer base, and the positioning had become unclear.
• Yue Sai needs to decide to be positioned as the brand of “confident, modern Chinese women”, or to be positioned as a Chinese luxury icon symbolizing the nation's history, or to adopt a more affordable value proposition, or to try something totally different.
• It is essential to decide aspects of the brand that should be retained or discarded.
• Yue Sai must decide if it should make its association to L'Oreal explicit to consumers.

Marketing Mix Decisions

• Yue Sai needs to decide the current TV and press campaign, by potentially replacing the current representative with a celebrity.
• They also need to determine if the communication budget proportioned toward skincare over makeup products should be changed.
• There need to be a determination of the resources to allocate to brand communication versus improving in-store presence.
• They must decide how Yue Sai should be priced within L'Oréal's brand portfolio and have to determine if they should charge more for certain product lines than others.
• One of the most important decisions will be to select the right channels of distribution based on the market tier(s) Yue Sai should pursue and the consumers it should target.