Exam Unit Specialist, MBA in Finance
Management Development Institute of Singapore in Tashkent
The Fashion Industry in China is one of the booming and the fastest growing industries. It is also known as “beautiful economy”. For the last 20 years Chinese cosmetics market has already obtained a great achievement. Chinese cosmetic market has become the largest emerging market in the world, and it has grown from small to big, from weak to strong using superior technologies.
Having a few domestic brands, which can compete, with international brands in China is excruciating experience for the whole Chinese skin care industry. Joining WTO and opening markets for international players made Chinese personal care market unavoidable. In the late 2007, due to encroaching foreign companies, Chinese skin care market turned into a fierce competition between multinational company (MNC) brands and domestic companies (DC) brands. (Belle Baby Official Website, 2010).
All famous foreign MNCs – L’Oreal, P&G, Estee Lauder, Unilever, Johnson & Johnson, Amway, Avon, Shiseido and Kose operated successfully in China and had many employers. For example, P&G and L’Oreal both employed more 7000 people. Some of them established research and development (R&D) centers which was supposed to study traditional Chinese herbs. However, no MNC launched a skin care product, which was based on traditional Chinese medicine (TCM) concept. Only Inoherb, domestic Chinese skin care product, occupied this part of the market.
Foreign MNCs targeted mid – to high-end market, while DCs only aimed to gain the mass market, which was mid- to low-end. Therefore, they could only offer low-end products, while foreign multi-national companies (MNCs) boasted a strong company reputation, brand image, product quality, marketing expertise and financial resources. This resulted in Chinese market being dominated by foreign MNCs. The fact that foreign brands earned 80 percent of the profit, although 40 percent of the market was accounted by domestic personal care companies in terms volume in the market, was another proof of foreign MNCs’ dominance in Chinese skin care industry. (Euromonitor, 2011). The further paragraphs discuss the strategies adopted by Chinese domestic company, and MNCs. As an additional evaluation of the degree of competitive environment of Chinese personal care industry – Porter’s Five Forces analysis is applied.
Corporate global strategies adopted by Shanghai Jahwa
Jahwa had focused on its strong Chinese heritage and gained market share by creating products, which were based on traditional Chinese Medicine (TCM). It took more than years to create and nurture Herborist that was strongly associated with the principles of Chinese medicine. Herborist was launched to target mid- to high-end market. Jahwa paid more attention on using principles and ingredients of TCM in its product along with Chinese essence and deep understanding of Chinese lifestyles.
In 1985, Shanghai-born Mr. Wenyao Ge was appointed as General Manager of small subsidiary factory in which he started to reorganize by streamlining production. He set up several product-based plants near Shanghai where labour was cheaper, tax incentives were offered and outsourced manufacturing to these partners. That strategy helped to reduce the Jahwa’s cost base and resulted in improving the quality of the product. Unlike other SOEs, hiring university-educated managers solved the problem of lack of modern management structures and processes and caused the dramatic growth from 1985 to 1990, which turned the company into market leader. Chinese market share for beauty and personal care products went up until 16 %. After being free from the control of the Shanghai Assets Administration Committee, Jahwa planned to match the managers’ salaries with the MNC within 5 years to gather and keep good managers by motivating in this way. One of the changes Mr. Wang applied in Shanghai Jahwa was to introduce penalty for poor performance as MNCs did.
One more strategy that was applied by Mr. Ge was targeting different markets by launching and relaunching several brands. That strategy was very effective indeed to target niche markets and not to compete on cost. In addition, it differentiated Jahwa form other competitors through unique positioning and product offering.
In 2014, Jahwa started to expand marketing by spending on media campaigns and TV advertising.
After launching Herborist, Mr. Ge wanted it to be benchmarked in terms price and positioning against the organic/herbal beauty and personal care company’s brands such as L’Occitane brand or L’Oreal. It was difficult to find reliable sales channel in Europe. Sephora seemed the best choice as it had all attractive attribute for Herborist. Sephora was the second largest beauty and personal care retailer with wide presence in Europe and it carried only first-tier brands targeting young fashion lovers. Although Sephora agreed cooperate with Heborist, first it did not believe in “Made in China” brand and suggested to start form non-skin care product such as foot massage products. However, Jahwa rejected that proposal and insisted on launching only skin care products and invited the special delegation from Sephora to R&D in China to ensure them in the quality of the product they were going to produce. At the end of 2007, Sephora and Herborist came into one conclusion to launch Herborist as personal care bran rooted in China and based on herbal ingredients and TCM, which positioned Herborist not competing brand with Sephora. Finally, in 2008 – after “a very tough two-year journey” Herborist products appeared in Sephora’s flagship stores and other 30 Sephora shops. In 2010, Herborist products were introduced in Italy and Spain by Sephora and total profit from those three countries were USD 2.8 million that comprised 1.3 percent of Herborist total revenue.
Competitive strategies of L’Oreal, and Procter and Gamble fashion industries
L’Oreal’s key arrangement to keep up an aggressive edge is through examination and development to create a maintainable future. The wellspring of their focused edge is the vitality and thoughts of their people and their quality lies in what they esteem: Customers, Quality, Integrity, Performance and Environment. L’Oreal trusts that utilizing these integrative systems will permit them to enhance better, quicker and prior. The whole life cycle of every item receives the tenets of Eco outline which incorporate select fixings, testing little amounts to decrease waste, re-utilizing by products, manufacturing forms requiring low levels of vitality and dangerous solvents and recyclable bundling. L’Oreal is focused on expanding the utilization of renewable crude material in its items. In 2010 40% of material in their portfolio were plant based, 26% follow green innovation and by the end of 2011 80% of crude materials with biodiversity issues will be tended to. Per completed item they will probably slice nursery outflows down the middle by 2015.
In 2001, P&G received a community advancement technique called "Associate and Develop." The thought was and is to permit P&G to distinguish and make overall organizations with colleges and foundations, sole innovators, rising organizations, little and medium undertakings, multinational companies, and contenders. Through these associations, P&G builds up a superior comprehension of shopper requests and their item reactions. For instance, the P&G and CircleUp organization was made to commonly advantage both P&G and startup firms. P&G picks up presentation to innovation that may coordinate its advancement needs. In the meantime, new companies increase profitable subsidizing to seek after new mechanical advancements. Because of the huge extent of P&G's business, it depends on associations with outsiders to play out certain capacities—suppliers, wholesalers, temporary workers, joint endeavor accomplices, or outer business accomplices, among others. P&G keeps up standard evaluating with its suppliers. As a huge client, it appreciates critical dealing power with its suppliers. Still, it ought to be noticed that even P&G is not insusceptible from more extensive business sector developments identified with item costs. Shopper staple items ordinarily have low request flexibility.
Although The Porter’s Five Forces is very simple, it is one of the most powerful frameworks that help to analyze the level of competition among rivals in the industry. Five Forces analysis includes Intensity of Rivalry, threat of new entrants, threat of substitute products or service, bargaining power of suppliers and bargaining power of buyers. Porter claimed that the objective of these five forces is help the enterprise to gain competitive advantage containing three successful strategic ideas, that is, cost leadership strategy, differentiation strategy and segmentation strategy(Porter, 2008).
- Intensity of Rivalry - High. The personal care market of the China is occupied by some MNCs, particularly top four leaders L’Oréal Group, Procter & Gamble Co Ltd, Shiseido Co Ltd and Mary Kay Inc. gaining 42 % skin care company market shares. (Yang Wei, Dong Liang, Hellmut Schutte, 2014). As China opened its market to foreign players, encroaching to this country’s market did not bear a problem for foreign MNCs. This made the competitive rivalry noticeably high. Comparing Shanghai Jahwa United Corporation a Chinese domestic corporation (DC) and L’Oreal Paris a French based multinational corporation (MNC) gives the fact that Shanghai Jahwa targets domestic market with different brands, only the brands such as Liushen and Herborist are major competitors of established western brands in China. Whereas, L’Oreal Paris, the world’s largest cosmetic and beauty product manufacturer operates globally and faces competition from domestic as well as international product brands across markets and thus faces greater complexities compared to DCs.
- Threat of potential entrants - High. Chinese beauty care products industry experiences new entry of DCs and MNCs annually. It does not take a lot of costly promoting to enter the business sector. Most Chinese purchasers depend on other individuals' encounters to choose whether to attempt an item and to change to another cosmetic brand. Although Chinese government banned direct sales to avoid Pyramid selling during the period from 1998 to 2005, now there are no any constraints of governmental rules for international player to enter the market. Everything they need to do is to register their companies, which takes time. As soon as Mr. Wenyao Ge, Chairman of Shanghai Jahwa Group, noticed the entry of many MNCs to Chinese mass market, Shanghai Jahwa attempted to avoid direct rivalry with other MNCs by accenting its products as herbal. In addition, unlike other DCs Shanghai Jahwa’s products was not just copy from foreign competitors. (Yang Wei, Dong Liang, Hellmut Schutte, 2014). Those strategies helped Shanghai Jahwa to sustain competitive advantage in skin care market where the threat of new entrant was high.
- Threat of Substitutes - Medium. Many MNCs had R&D centers where it was learnt traditional Chinese herbs to develop cosmetic products suited to Chinese skins. However, no one produced cosmetics based on TCM concept except from Shanghai Jahwa with cosmetic brand of Inoherb. Even though, there is no other brand to substitute the products of Shanghai Jahwa as it is the only company that uses TCM concept successfully. There are two more options, which make the Threat of Substitute medium. Firstly, phenomenon of “baby lotion” is very famous in China. To look younger, most girls are advised by their mothers to use Johnson’s Baby Lotion. The main reason of this lotion being famous is that it is designed for babies; it contains no damaging chemicals or preservatives, which makes it safer than other available skin cream. In addition, there is always an option of not using any cosmetics at all to avoid long-term skin damage, to save time and money. This substitute is usually common in low-income urban and rural areas. (Ostapenko, 2011)
- Bargaining Power of Buyers – High. There are so many personal care brands to choose from, which makes Chinese cosmetic market bargaining power very high. Most Chinese women are quite impressed by branded consumption that makes luxury cosmetic brands grow rapidly. In the case of Rejuvenating Shanghai Jahwa (Yang Wei, Dong Liang, Hellmut Schutte, 2014) in the period from 2007 to 2011 Shanghai Jahwa United Co. Ltd experienced increase in profit from 9 to 14 % and upward. However, the situation for P&G was not stable where it showed fluctuation between 7 to 9%. Although L’Oreal stood at the top with 12 % with profitability, it experienced sharp decrease in 2009 coming down to 7%. In 2011, it restored and gained 9 % profitability. Shanghai Jahwa developed new brand called Liushen (Six spirits) and positioned itself strongly in domestic cosmetic market. By focusing on refreshing line for summer use, Shanghai Jahwa occupied the half of the market, and achieved a high scale. That booming change and reputation brought a strong bargaining power to Shanghai Jahwa among its competitors (Yang Wei, Dong Liang, Hellmut Schutte, 2014).
- Bargaining Power of Suppliers - High. The main suppliers for cosmetic companies are the pharmaceutical/chemical industry, as well as the ingredient growers and processors/distributors. The products of Shanghai Jahwa are based on TCM concept and it uses mostly natural herb extract and its mixes in its cosmetics. Farms are most important suppliers as they grow harvest and process them utilized in conventional Chinese medicine. Due to the fact that the market for herbs is not very large and most personal care companies use Western style of producing cosmetics, the accumulation of herbs is competent, except for some extracts that are imported. Also, Shanghai Jahwa started to spend more money on R&D as it proved itself as a key of successful operation in cosmetic industry.
Personally, the case about Rejuvenating Shanghai Jahwa by Yang Wei, Dong Liang and Hellmut Schutte great amount of useful information. First of all it was amazing how this company and its Chairman Mr. Wenyao Ge broke the stereotype of low quality products of “Made in China” brands. It is no surprise that when a person goes shopping and sees the product with the label written “Made in China” on it, the first thing that person thinks is that the product is of low quality. However, while doing some research for literature of this case, I made sure that time by time Chinese industry was becoming more reliable and of high quality.
Most of strategies applied by Shanghai Jahwa were very effective and they helped to Shanghai Jahwa to enter developed European market, precisely French beauty and personal care market, which is the heart of fashion industry. Of course, it was not easy to achieve that result; indeed, it required hard working, decision making, and patience in order to be successful in Shanghai Jahwa’s history.
The most important thing I have learnt is right strategy applied in the right place and at a right time can develop even the lowest-income company.
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