Introduction
“Natura’s mission is to promote ‘bem estar bem ‘, the well-being and being-well. In Natura’s philosophy, everything is connected. The Natura experience is all about building the relationship of yourself with others and the nature,” our Natura host Jimena Berlanga opened the introduction of the company passionately by talking about the meaning behind the brand. I immediately sensed the similarity between this idea and the concept of “Tian Ren He Yi” in ancient Chinese philosophy.
Well-Being and Being Well
Well-being is the harmonious, pleasant relationship of a person with oneself, with one’s body. Being well is the empathetic, successful, and gratifying relationship of a person with others, with nature and with the whole . Natura’s mission is to help people achieve both at the same time.
“Tian Ren He Yi” – Harmony Between Man and Nature
One of the basic concepts in ancient Chinese philosophy is that mankind and nature are integrated. In the phrase “Tian Ren He Yi”, “Tian” means the universe and nature, “Ren” means the human being, “He” means being integrated with respect of each other, and “Yi” means one piece. Since the famous ancient philosopher Chuangcius raised this idea in about 300 B.C., it has become an important theory in Confucianism. It warns us that the idea of using technology to conquer nature is not appropriate as human beings are part of nature and are closely connected with it. It asserts that the harmony between a person’s mind and the body, and the harmony between a person and the world around him/her should be the basic belief of the human being.
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The opportunity: Bringing Natura to China
When I learned during the presentation that Natura currently operations in Latin America and France and there is no presence in Asia, it suddenly came to me that Natura should expand to China as I’m sure this Brazilian brand’s view of balanced relationships between mind and body and between self and others will resonate among the Chinese consumers. I got very excited about this idea.
However, I was cognizant of the common pitfall of equating an idea to a viable opportunity. Would this be a true opportunity that’s “attractive, durable, and timely”, and “creates or adds value for its buyer or end user” ? Also, I had a doubt on whether the direct selling channel would work in China as I knew it had been banned by the Chinese government due to its close resemblance to multi-level (or pyramid) direct selling. These questions prompted me to conduct more research to assess it and determine if it was a viable business opportunity after returning home from the unforgettable trip.
Evaluating the Opportunity Using the Timmons Model
Market Demand
Euromonitor International analyst Virginia Lee discussed five trends impacting the global skin care market, one of them being the growing awareness of health and wellness. Consumers are focusing more closely on what they put in, on, and around their bodies. Increased knowledge about the harmful effects of chemicals has led to consumer desire to avoid pesticides, growth hormones, preservatives and artificial colors. This has led to strong demand for organic foods and beverages in many developed countries. Many of these same consumers are now seeking to reduce exposure to chemicals in cosmetic products .
The interest in natural and organic product has become a global phenomenon and the emerging countries are witnessing this trend with no exception. In Brazil, Natura launched the Natura Ekos line in 2000 that features natural ingredients discovered from traditional communities in the Amazon area with scientifically proven benefits such as guaraná, mate verde and cocoa.
In China, natural herbal medicine has a strong impact on the day to day life, and now it is also beginning to influence personal care products. A marketing research report recently showed that there is a distinct preference in China towards skin care products with natural ingredients. Chinese consumers fear the risks of chemical products and are strongly convinced that natural products are more efficient than chemical ones . In addition, according to Euromonitor’s “Beauty and Personal Care – China” report, the emergence of ‘LOHAS’, a consumer group seeking lifestyles of health and sustainability, among middle-class consumer groups in big east coast cities such as Shanghai will further support the penetration of natural products over the next 5 years. Euromonitor predicts that herbal/traditional ingredients will continue to be hot topics over the forecast period from 2010-2014 and brands grounded in local traditions have started to capture market dynamism .
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Besides the preference toward natural products, Chinese consumers associate beauty with the experience of being happy and consequently spend more and more money on beauty products that can bring them happiness thanks to the fast growing economy and consequently the increase in disposable income.
In the Cosmetics & Toiletries (C&T) market in China, foreign brands got the lion’s share with 60% of the total volume and 90% of the total revenue and profit . The positioning of these brands, however, seems to all focus on the external appearance or the outer beauty and none of the brands promotes the idea of the balance between the outer beauty and the inner beauty (i.e., a peaceful mind) which helps one achieve holistic health and beauty.
Several domestic health and beauty companies in China, on the contrary, have used the ancient philosophy of “harmony” to guide their product development and marketing and have launched natural skin care products (e.g., Shanghai Jahwa’s Herboist brand) and dietary supplements (e.g., Tai Ai Tai’s Seven-Day Beauty drink) that integrate traditional Chinese herbs into modern technology and market to consumers with a message around the essence of the Chinese culture of “harmony is beauty” and the experience of happiness brought by the balance between mind and body.
These firms’ market share, although growing (e.g., Shanghai Jahwa’s new Herborist range of TCM-based skin care products saw 67% growth in 2008), is still tiny due to the lack of experience in branding and consumers’ perception that foreign brands are usually superior.
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The current market situation has created a gap in the landscape for Natura to fill. Chinese consumers are looking for a strong foreign brand that can satisfy their unmet emotional needs of having a natural and balanced beauty experience.
Target Customers
Natura adopts a multi-brand strategy and offers a line for every skin type, age, lifestyle and need. Its Chronos product line targets four distinct female segments: 1) consumers in the 20’s who just start forming the daily routine of skin care, 2) consumers in the 30’s and early 40’s wanting to minimize early signs of aging, 3) 45+ wanting to diminish the signs of aging, and 4) 60+ wanting to repair the aging damages .
In China, Natura will target the middle-class female consumers between the age of 30 and 55 with its high-end product lines. These consumers are not only beauty conscious but also pay special attention to a balanced beauty experience that contributes to happiness as a result of their focus on the quality of life. Furthermore, this group has more disposable money to spend on beauty products than the 20-29 college students/young professionals and the 55+ retiree segment. For this segment, purchasing high-end natural beauty products provides a strong psychological gratification, and they are willing to pay higher price to get high quality products and service.
Besides targeting the female segment, Natura will also tap into the men’s segment, a segment that had been ignored until recently. Men’s skin care, growing from a very small base of US$ 746 million in 2002 has reached US$1.5 billion in 2007 and was leading the growth in the skin care category, the largest C&T category. The metrosexual fad and an upsurge in new product development were responsible for this growth .
China is also experiencing a strong growth in men’s toiletries. According to a report from Euromonitor, the value growth in male toiletries had a 23% CAGR during 2003 – 2008, far outperformed men’s shaving with a 5% CAGR in the same period. With value sales of US$180 million in 2008, men’s toiletries is still in its infancy, but sales have tripled since 2003 and are set to double again by 2013 to reach over US$412 million. In addition to the overall interest in the category from younger generation X and Y males in China, new launches from multinational players such as Kao and Unilever are contributing to the steep rise in sales, especially in men’s hair care .
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In cities such as Shanghai and Hangzhou, male demand for skin care is likely to be not only limited to cleansing poducts, but also looking for products with added-value benefits such as moisturising, anti-wrinkle, or tanned appearance. This new trend will further stimulate the overall value growth of men’s skin care in this region over the next 5 years .
Market Structure
Timmons suggested that a fragmented, imperfect market or emerging industry often contains vacuums and asymmetries that create unfilled market niches . China’s C&T market is characterized as one where there are a few large multi-national players and lots of small to mid size companies and where even the big players have stiff competition among them. Exhibit 1 and 2 show the market share of the skin care and color cosmetics sectors. A report by Access Asian summarized the prospect of the market well. It states that “fragmentation, along with rapid consumer market growth are producing a sustained strong growth in new demand for C&T products, at all levels” . In the current market condition, new entrants may start on a small scale and operate with a particular niche, such as the anti-aging segment with the emphasis on the use of natural ingredients in the product’s formula.
Market Size and Growth Rate
According to Timmons, an attractive new venture sells to a market that is large and growing (i.e., one where capturing a small market share can represent significant and increasing sales volume).
A minimum market size of over $100 million in sales is attractive.
China’s cosmetics and toiletries (C&T) market has shown a strong growth and is predicted to continue to grow at a healthy rate. According to the “Cosmetics & Toiletries in China 2010” market report, the total C&T market in China reached a total value of RMB133.24bn (US$19.51bn) in 2009. This value was 11.4% up from the previous year, indicating continuing strong market growth, despite a slowdown in the economy since 2008, and an annual growth averaging 14.5% from 2003-2009. The CAGR from 2010 to 2014 is projected to be 9% (See Exhibit 3 for the projected growth in the forest period).
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By 2013, China’s beauty and personal care market will be worth over US$25 billion, as continued economic growth filters down to the population . The market has grown rapidly as a result of the continuing rapid increases in average salaries and consumer spending power across China, but particularly in the secondary and tertiary cities, along with the improved retail infrastructure that has raised the efficient supply of goods and market penetration, all of which have contributed to the strong growth.
In a word, this market is thriving and expansive. Avon, the biggest competitor of Natura in direct selling in the C&T market in Brazil, has a 3% market share in China’s C&T market as of 2009, or $600 million in sales. Factoring in Natura’s late entry, if Natura achieved 2% of the market share in China by 2013, it could reach $500 million in revenue.
The Competition
On the competitive landscape of C&T in China, Natura will occupy a market niche and fill a gap. Exhibit 4 shows the map based on two dimensions: target segment and customer needs. With its unique value proposition and properly selected revenue model, I believe Natura will have a good chance to hold a strong position in the China market. Below is a brief overview of the major competitors.
L’Oreal
L’Oreal China maintained absolute leadership in 2009 with a value share of over 33%. From the very beginning the company decided to adopt a multi-brand strategy in China in order to cover a wide range of price points. It also adopted different distribution channels according to the brand positioning in the market. The company almost offers a full range of products, covering low to high end, urban to rural consumers across the country, which allowed L’Oreal China to maximize its market share through tailored products for different consumers. L’Oreal Men Expert has grown so rapidly in recent years that it has become a major growth engine for L’Oreal China .
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Shanghai Jahwa
Headquartered in Shanghai, Shanghai Jahwa United Co is the first publicly listed domestic company in Cosmetics and Toiletries. It holds a strong position in the East China region in 2009. Its star brand Herborist recorded dynamic growth through ongoing expansion of its own retail outlets and also cooperation with health and beauty specialist retailers such as Sephora. The company positioned Herborist a mid- to high-end natural skin care brand, which has been well-accepted by consumers in East China, particularly in cities such as Shanghai, where natural skin care brands have been highly preferred by local consumers .
Avon
Avon is one of the two most established direct selling companies in beauty and personal care. China is an important market for Avon as it represents Avon’s highest growth potential. Avon went full throttle in China after it obtained the first license in direct selling in 2005. However, in 2009, Avon sales weakened in China, and although the company often offered promotions such as “30% off”, they did not help the company grow its sales. Trade sources indicated that the poor performance of Avon lies in its out-of-date displays and confusion price system . In April 2010, Avon’s shares dropped nearly 8% in midday trading as the company confirmed its ethics investigation of its China operation .
Proposed Business Model
Value Proposition
With its functional, emotional and philosophical benefits, Natura’s products possess not only functional benefits but also emotional and philosophical benefits. Its value proposition of bringing a natural beauty with a balance between body and mind will resonate with China’s middle-class consumers who are health- and eco-minded. Its ingredients extracted from the fruits and plants in the Amazon jungles will bring the mystique of Brazil to China and arouse an emotional need.
Product Lines
Natura has rich product lines ranging from color make-up, facial care, body care, and hair care. It will enter China with its skin care and hair care products first as there is not much difference in the skin type or hair type between Chinese consumers and the western consumers. However, due to the different skin tones and different color preferences, Natura will develop cosmetics products tailored for this particular market and launch its color product lines after it acquires more knowledge about consumer preferences in color cosmetics.
Value Chain and Distribution
Besides its unique value proposition, Natura’s success in Brazil and Latin America also lies in its direct selling model which leverages the culture’s emphasis on relationship building. Natura’s beauty consultants are key to this model, as they are not only the first client of Natura, but also brand ambassadors who provide product education, build brand awareness and loyalty, drive sales, collect direct customers feedback and potentially change consumer behaviour. In addition, they are also excellent customer service personnel. The direct selling model helps the company capture more economic value by saving advertising expenditure and channel distribution costs charged by the various players along the traditional C&T industry value chain.
The Chinese culture focuses on personal relationships more than most of the Western cultures and therefore consumers have a greater affinity for direct sales than in many other countries. Direct selling in Cosmetics and Toiletries was introduced to China by global direct sellers such as Amway and Avon as early as 1990 as they had identified the potential of China’s C&T market. Companies in other industries started copying this business model due to its viability and big potential.
However, the government’s decision to ban direct selling in 1998 to crack down pyramid schemes employed by some of the direct selling companies, presented a huge threat. Amway and Avon quickly adapted their business models and opened standalone retail outlets to continue to expand sales coverage and maintain a significant brand presence. Seven years later, as a result of China’s entry to the WTO, an obligation to open up its economy to direct-selling companies led to the lift of the ban in 2005 and the first license was granted to Avon by the government.
Direct selling was considered to be one of the most important retailing channels in China during 2010 with total value sales rising to RMB52 billion (US $7.6 billion), a 50% increase from 2005. The C&T sector has a 35% market share in direct selling. The forecast period of 2010- 2015 will see a total growth rate of 63%, an increase from the 44% rate for the period of 2005-2010 (See Exhibit 5 and 6).
Direct selling companies continuously expanded their business in China in 2009. In addition to the two established companies Avon and Amway, other direct selling players such as Perfect (China) Co Ltd and Infinitus (China) Co Ltd have also sought further market growth in the beauty and personal care market through launching new lines in beauty and personal care .
The focus of the majority of direct selling players in China during 2010 continued to be on mid-priced to premium products, rather than relying on price cutting strategies. For example, leading players such as Mary Kay offered their products at higher prices than retail brands such as L’Oréal’s White Perfect in beauty and personal care products .
I propose that Natura use a combination of direct selling and free-stand boutique stores to sell in China. The personal retailing channel will ease Natura’s entry into China and accelerate its brand establishment because first, it relies on personal relationship which is a key elelment in the culture and offers consumers a better understanding of the benefits of the products, secondly, it frees up Natura from dealing with the complicated C&T distribution channels in China.
The free-stand stores will enhance its brand presence and serve two purposes – one as an education and service center for the beauty consultants and the other as a boutique store that sells high-end products to its premium consumers. Due to the regulation that new direct selling licence holders will mainly be limited to regional distribution licences initially, Natura’s initial launch will be focused in the Yangtze River Delta region that covers China’s economic center Shanghai and other fast growing 2nd-tier cities such as Suzhou and Hangzhou. This region is the fastest growing area with the most growing potential in China. In addition, consumers in this region are most conscious about natural ingredients, health and environment and often lead the trends in many domains.
Margin Analysis
In the C&T industry, firms targeting mid and high-end consumers generate healthy profit margins as a result of the premium prices charged for their high quality products. In 2009 Natura had an EBITDA margin of 27.5% and a net profit margin of 16.1% . Natura could achieve comparable or even higher margins in China due to the similar costs of labor and lower tax rate. However, Natura will need to import raw materials and package the products in China to avoid the high import tax on packaged C&T products. This will require them to use local talent and find local partners in C&T packaging. Since both cultures are relationship-based, the cultural barrier should not be an issue.
Conclusion
With its high quality and eco-conscious products, Natura’s value proposition to the Chinese consumers is to advocate natural beauty as a mindset, a healthy attitude towards life and a desire to create a harmony between oneself and the outside world. By using local beauty consultants to sell directly to its target segments and boutique stores for education/ service and serving its premium customers, Natura will establish a strong relationship between the brand and its customer base in China and consequently generate healthy sales and market share. The experience gained from developing the Chinese market can also become a key to Natura’s future expansion into other Asian countries.