Wen | Chen Chang, a weekly magazine of Finance and Economics
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With the improvement of Chinese people's consumption intentions and capabilities, the expansion of consumer groups, and the maturity of the supply chain, China's cosmetics market has risen rapidly. On January 17, 2022, Shanghai Shangmei Cosmetics Co., Ltd. (hereinafter referred to as "Shangmei Group"), which has been focusing on cosmetics for 20 years, submitted a Hong Kong stock prospectus to sprint to the capital market.
Shangmei Group originated in 2002, the main business includes skin care, masks, mother and baby, washing and other categories of production and sales, its has a number of well-known brands, the most famous of which are Han Shu, Yiyezi and Red Baby Elephant.
In the past 20 years, as a domestic cosmetics company, Shangmei Group must not only continuously innovate itself to meet market changes, but also take out the strength to cope with the menacing trend of cutting-edge brands. What is the secret to what keeps it standing to this day?
Multi-brand strategy, contributing 3.4 billion annual revenue
Looking at the international big-name cosmetics groups, L'Oréal, Procter & Gamble, Estée Lauder, Shiseido, etc., operating multiple brands is a common feature.
Through a multi-brand strategy, cosmetics companies can expand their business areas more effectively and grasp the opportunities that arise in categories outside their existing product portfolios, which also enables them to develop in a balanced and dynamic manner and have the resilience to cope with the economic downturn.
Since its establishment, Shangmei Group has also been continuously laying out a multi-brand development strategy.
Han Shu, Yiyezi and Red Elephant are the three core brands of Shangmei Group, and their merger contributed 86.6%, 91.8% and 91.1% of the company's total revenue in the first three quarters of 2019, 2020 and 2021.
(The three main brands of Shangmei Group, source: company prospectus)
Among them, Han Shu was first launched in 2003, positioned as "scientific anti-aging", and the customer base mainly includes women aged 25 to 40; Yiyezi was launched in 2014, positioned as "repairing the skin barrier", mainly for young female consumers aged 18 to 35; Red Elephant, as an additive-free natural maternal and child care brand, was launched in 2015.
In the prospectus, Shangmei Group made it clear that the company's continued success and growth depend largely on its ability to maintain and promote its core brands in existing markets and new markets that are interested in entering.
From the current performance point of view, the three main brands are also enough to drive the company's overall performance to achieve sustained growth. In 2020, the company's revenue reached 3.382 billion yuan, an increase of 17.6% year-on-year, and gross profit reached 2.187 billion yuan, an increase of 25.0% year-on-year.
(Shangmei Group's revenue by brand, source: company prospectus)
According to the Frost & Sullivan report, in 2020, Shangmei Group is the only domestic cosmetics company with two skincare brands with annual retail sales of more than RMB2 billion – in 2020, Han Shu retail sales were RMB2.9 billion and Yiyezi retail sales exceeded RMB2.2 billion.
Behind the product sales, it reflects the wide recognition of consumers' brands under the Shangmei Group. According to the information released by Kantar Consumer Index, Han Shu and Yiyezi were ranked among the top ten preferred brands in the annual consumer skin care category in 2019 and 2020, and the Han Shu Red Capsule Series won the "2021 German Red Dot Product Design Award". In addition, the red baby elephant also ranks in the forefront of the retail sales of domestic brand maternal and child care products in the Chinese market.
In order to meet the different needs of the ever-changing market, Shangmei Group continues to incubate and develop new brands for different consumer groups, and the product portfolio has expanded from the original relatively broad skin care, mother and baby to sensitive skin care, mid-to-high-end pregnancy skin care and shampoo product categories.
In 2019, Shangmei Group launched the public sensitive skin skin skin care brand "High Muscle Energy", and the pregnancy muscle sensitive skin care brand "Amil", and in 2021, it also launched the wash brand "Jifang".
In addition, the company expects to launch a professional skin care brand "An Min You" for sensitive skin in 2022, a Chinese baby and child efficacy skin care brand "One Page" focusing on baby sensitive skin, and a high-end anti-aging brand of the same name launched in cooperation with scientist Yamada Farming.
In its prospectus, Shangmei Group also stressed that the multi-brand strategy has been the key to its sustained success for about 20 years, and it has also become a necessary condition for it to build a world-class cosmetics company.
R&D builds scientific and technological barriers
In the complex and diverse cosmetics market, Chinese consumers' brand choices are increasing, and the requirements for products are also increasing; carefully studying and understanding the ingredients and technologies before purchasing cosmetics has become the habit of many consumers. This also poses a huge challenge to the R&D capabilities of cosmetics companies.
As a product in close contact with the skin, the research and development of cosmetics is not an easy task, it involves life sciences, chemistry, skin science, plant science and other cross-field applications and research, requiring the company to have more research and development experience, master more funds, talents and resources.
Since 2021, a series of domestic regulatory regulations and regulations on cosmetics have been promulgated, and the registration and filing of new products should be submitted together with product formulas or full ingredients. The tightening of the regulatory environment has also made independent research and development capabilities a higher barrier for cosmetics companies.
Shangmei Group regards R&D capabilities as the pillar of growth, and began to lay out independent research and development in 2003 and began to invest in basic research and development in 2016. In the first three quarters of 2019, 2020 and 2021, the Company incurred R&D expenses of $82.9 million, $77.4 million and $71.7 million, representing 2.9%, 2.3% and 2.8% of revenue, respectively. According to statistics, in the first nine months of 2021, the company's independent research and development products accounted for more than 97% of the revenue contribution.
Up to now, the company has a R&D team of 227 people, whose members have different professional backgrounds in biology, chemistry, pharmacy and chemical engineering; Dr. Huang Hu, Dr. Hu Xincheng and other seven internationally renowned scientists have an average work experience in cosmetics-related fields of more than 30 years.
The R&D platform of Shangmei Group is based on the Sino-Japanese dual scientific research centers located in Shanghai and Kobe, of which the Hongdao Research Center in Kobe, Japan was established in 2016, making Shangmei the first domestic cosmetics company to build its own overseas R&D center.
(Shangmei Group's scientific research center in Kobe, Japan, source: the company's official website)
Shangmei Group said that in the research and development process, the company adopts a comprehensive research and development management system, combined with the strength of multiple departments, to make a rapid response to the rapidly changing market.
At present, consumer preferences are increasingly focused on products with better function and quality, and the good efficacy and quality skin feeling of foreign brands have always been derived from their basic research. Basic research refers to raw materials, interface chemistry, etc., which can be understood as "physics" in many disciplines, which is the foundation and the top priority.
Shangmei Group is also one of the few companies in China that pays attention to the basic research of cosmetics. The kobe research center was established in 2016 and began a basic research journey.
Shangmei Group has made research and development achievements in many fields, such as advanced research results or patented technologies related to TIRACLE (double bacteria fermentation, which can be used to deal with certain skin problems to achieve anti-aging, whitening and moisturizing effects), AGSE (active grape seed extract, which can be used for heat preservation and wrinkle removal) and Artemisia annua oil AN+ (artemisia annua extract, which can be used for anti-inflammatory).
Shangmei Group said that in the future, it will expand its independent research and development capabilities, strengthen cooperation with leading scientific research institutions, colleges and universities and commercial organizations, enhance professional knowledge and basic research capabilities, introduce advanced skin care technologies and innovative products, and increase investment in basic research on the core components of the hot market in the field of skin care. For example, further investment in the development of anti-aging technologies, skin barrier protection technologies, and research and development in the field of skin microecology will be further invested.
The rise of domestic products, facing the world
Cosmetic products can be divided into five main categories: skin care products, toiletries, makeup products, maternal and child care products and others. At present, the existing and pending brands of Shangmei Group are mainly skin care products and maternal and infant care products. The market prospects in these two major areas are particularly broad.
Skincare is the largest segment of the overall cosmetics market retail sales, accounting for 48.5% of the overall cosmetics market in 2020, and is expected to reach RMB661.9 billion by 2025.
The maternal and child care industry currently has a compound annual growth rate of 15.1% and has reached a market size of 46.5 billion yuan in 2020, and is expected to exceed 58.4 billion yuan in 2022.
The long-term adherence to the multi-brand strategy, as well as the strong R&D capabilities and retail distribution network layout, constitute the "confidence" for Shangmei Group to maintain the continuous growth of operating performance.
From a larger perspective, the competitiveness of a number of domestic beauty companies, including Shangmei Group, also determines the international status of Chinese cosmetics to a certain extent.
China has the world's second largest cosmetics market, and its market size has increased from 480.1 billion yuan in 2015 to 845.3 billion yuan in 2020 in terms of retail sales, with a compound annual growth rate of 12.0%, much higher than the growth rate of the global cosmetics market of 1.5% in the same period. According to the Frost & Sullivan Report, China's per capita spending on cosmetics will reach RMB 599 in 2020.
However, China's cosmetics market is still relatively scattered, international cosmetics groups occupy a large share, and there is still a huge room for development of cosmetics companies in major countries. In the local market, it is also urgent to produce a world-class cosmetics leader with international influence.
In 2020, Shangmei Group's retail sales reached 7.291 billion yuan, with a market share of 0.9%, ranking among the top three domestic enterprises. The company said in the prospectus that several major strategies to be adopted in the next few years include: consolidating the core positions of the three main brands and driving overall performance growth; developing new brands and improving the brand matrix and product portfolio; continuous investment in research and development to drive product innovation and rapid response to the market; strengthening and expanding retail and distribution networks to carry out overall marketing activities through innovative channels; accelerating digitalization and adopting advanced infrastructure to improve operations and production efficiency; taking root in China and facing the world; and continuing to attract, Cultivate and retain young and high-quality talents.
In the prospectus, Shangmei Group stressed that the company's vision is to be a world-class influential cosmetics company.
Some analysts said that on the basis of the existing market position, with more mature research and development strength and supply chain, production facilities and extensive distribution channels, Shangmei Group is expected to further expand its market share, thereby improving future market concentration.