Ms. Clarke

Spas, Health & Fitness

Chinese Spa Consumer Goes Up-market

By Jacqueline Clarke, Research Director, Diagonal Reports

It is widely known that the Chinese beauty and wellness market is very large and growing fast. The 370,200 salons and spas in the US are dwarfed by China's 1.72 million salons/spas with their 9 million employees. In addition, it has also been turning in double digit growth rates for many years now and is shortly expected to overtake France as a purchaser of cosmetic products.

Diagonal Reports recently examined the salon and spa sector in China to determine the behaviour of the Chinese spa user and to predict future trends. The large chain operated segment of the salon and spa sector is outperforming the market because these salons and spas attract the biggest spenders on beauty and wellness in China - the young, urban trendsetters who pay a premium for quality therapies and products. While the entire beauty market sector is positive, annual growth rates of more than 12% are forecast in this particular segment.

Care for the face and the body is the backbone of the salon and spa sector in China as elsewhere. However, the particular menus of beauty and wellness treatments offered in these salons and spas indicate the most popular services in China. Beauty services for the face are typically skin care (e.g. cleansing, anti-ageing, blemish removal, problem skin treatments, skin whitening), and for other body parts depilation, manicures, pedicures and nail varnishing.

In addition, these larger chain operated salons and spas routinely offer services which are associated with the medical channel elsewhere. These specialist services include cosmetic laser treatments. body shaping (slimming), anti-cellulite treatments, body building, image makeover, health care therapies, Traditional Chinese Medicine, massage therapies and hydrotherapy.

The salon membership system which skincare spas in particular operate is peculiar to China but also some other Asian countries. This membership system encourages client loyalty and boosts retention rates. Under the system a client makes an advance payment in return for a discount which can be limited to specified locations, and may not apply throughout a chain. Variations on the system include that some chains are only open to members, others are open to non-members. Some allow memberships to be shared, others restrict use to the original purchaser.

These salons and spas have been the main beneficiaries of strong market growth because they provide higher quality standards which Chinese consumers are now demanding. Their size - 15 employees and over 200 m2 per unit - is much larger than the average salon or spa in the country. Their ability to invest in staff training contrasts with the wider professional beauty sector where almost half the employees lack professional qualifications of any type.

It is also significant that these salon and spa chains are almost the only domestic (that is Chinese) companies operating at the top end of the beauty market nationally. For example in the skincare retail or mass market foreign brands could represent almost three quarters of sales.

The reputation and high quality of these salons and spas products is a key factor in explaining their success. Chinese consumers are concerned about unhygienic beauty services and low quality products. Cases of skin disfigurement and hair loss which result from bad practices are reported in the media while the beauty industry accounts for a disproportionate number of complaints to the China Consumers Association.

Chinese Spa Market

As beauty businesses look to expand in China they need to consider market specific consumer concerns. A major source of information about these are the biggest beauty salon/spa chains. They can also represent something of a barrier to competitors, and to new entrants but this can pass unnoticed because their market importance -and even existence- can be under recognized outside of China.

China is the world's largest professional beauty market. The scale of the market is staggering, the 1.72 million salons/spas have 9.4 million employees, this compares to 370,200 such units in the USA. If the other businesses that provide beauty and related services were included in the count would rise to over 2.7 million units, see the Table below.

China's beauty product market (skin care, hair care, colour cosmetics, and perfumes) is ranked at number three in the world, and at number two in Asia; it is the China's fifth largest consumer market -- ranked only after real estate, automobiles, electronics, and travel.

China professional beauty market is very positive, forecast annual growth rates are 12.5% for the period 2008 to 2011 -- at least in the large chain operated segment. This growth rate contrasts with the much slower rates forecast for the USA and many countries in Europe. Some experts argue that China will overtake France, currently Europe's biggest cosmetics buying country.

The fundamentals of the beauty market in China are strong. They include the economy, demographics, lifestyles, social attitudes, and official government policy.

Social attitudes, particularly of young urban consumers, are an important market driver. As beauty therapists often note, consumers can be very open about the fact that they spend on grooming to boost their own social and career prospects. The linking of grooming and career is hardly surprising given that job advertisements can make mention of "appropriate appearance." Further, many of those who compete for much desired middle class jobs can be unfamiliar with the appearance codes prevailing in those workplaces. The links between appearance and jobs makes the beauty market relatively recession proof -- when people worry about their future during a recession, many invest more in appearance.

TABLE 1 Businesses providing beauty/spa services

Source: Diagonal Reports China Salon/Spa Market 08

The table lists the number of salons/spas and the other types of businesses that can provide beauty and personal appearance related services.

The professional beauty sector in China is unique in terms of the market share enjoyed by the biggest salon/spa companies. The importance of these chains can be under recognised outside of China, for a number of reasons, among which that most are domestic (they are Chinese owned and operated.) companies, and tend not to feature in any English language media, including web site searches, and their restricted sales and data collection practices.

The top ten companies combined operate over 14,000 units across China. These salon/spa companies include (unranked) Balncan Bio-Tech, Kelti / Chlitina, Natural Beauty, Routing, and Sliktons. Routing the largest company self-identifies as having 5,000 beauty salons across China. Because most of these companies are privately owned they do not disclose business data.

The top ten beauty chains have an estimated 50% share of the professional market, at least in the most developed coastal cities of China. These cities could account for about 60% of the market in some beauty categories.

The chains' share of the professional channel in China compares with the USA where Regis Corp. (www.regiscorp.com), "the largest salon company in the world," has a 2% market share, with Japan where the ten largest chains have 1% of hair salon turnover, and with Germany where chains are 11% of hair salons.

The chains' share of the professional beauty market is due to their strong presence, that is, the number of units operated, the numbers of staff, a geographical coverage that reaches almost every important city in China, business plans tailored to different markets, the relatively large size of the units that they operate, the use of a client membership system, along with a strong quality focus and significant investment in professional training. These factors explain why chain operated salons and spas attract the biggest spenders on beauty in China, the millions of young, trendsetting, urban women and men willing to pay a premium for quality therapies and product formulations.

The menu picks offered in these chains indicates the most popular services with the most important consumer segment in China. Chain operated beauty salons/spas offer much the same services as their counterparts in any other part of the world, such as care for the face and the body. Beauty services for the face are typically skin care (e.g. cleansing, anti-ageing, blemish removal, problem skin treatments, skin whitening), and for other body parts depilation (hair removal), hand and foot care (manicures, pedicures, nail varnishing).

Chain operated beauty salons/spas in China often offer services that in other countries are offered in other types of businesses, for example, health or slimming clinics. While a list of what they offer would include some or all of the following: cosmetic laser treatments. body shaping (slimming), anti-cellulite treatments, body building, image makeover, health care therapies, Traditional Chinese Medicine (e.g., aromatherapy, acupuncture, herbal remedies), massage therapies (e.g., reflexology or foot massage, stress relieving massage) and hydrotherapy (e.g., water treatments).

Treatments for body parts other than the face are offered only in the larger sized salons/ spas. This is because they require a bed and even a shower.

Chain operated salon/spa units are larger than the "average" salon in China, for example, the 15 employees and over 200 square metres per chain unit compares to the 5.5 employees and ten square metres in the average salon. Chains' investment in training contrasts with a salon sector where 46% of the 9.4 million employees have no professional qualifications. Training schools are certified by the national Occupational Skill Testing Authority-OSTA (www.osta.org.cn).

The membership system that salons operate encourages client loyalty and boosts retention rates. Under the system a client makes an advance payment in return for a discount which can be limited to specified locations, and may not apply throughout a chain. Variations on the system include that some chains are only open to members, others are open to non-members. Some allow memberships to be shared, others restrict use to the original purchaser.

The chains' market dominance is set to increase. Individual companies have ambitious expansion plans. The larger multi unit salons will be a beneficiary both of the growth and maturation of the beauty market, that is as consumers continue to invest in quality upgrades. Spending upgrades can be significant, for example, prices in the mid and upper end salons are many multiples of those in the low end salons.

The chains are among the best placed companies in the beauty market to benefit form official policy to develop the industry and to raise quality standards. The government focus on the beauty and services industries --beauty product manufacturers, beauty salons, barbers, bath houses, massage clinics, hotel and lodging venues-- are due to their economic importance (i.e., as employers, generator of taxes).

The central planks of the policy for salons/spas:

• support the closure of units that are unable to meet standards
• introduce a quality rating system
• tighten supervision of facilities
• establish a "blacklist" mechanism to identify and report illegal practices. Examples of which would include unregistered units, businesses that are licensed as a beauty salon but are really a front for gambling or prostitution, the use of counterfeit products, the provision of unauthorized services such as invasive surgical procedures (i.e. cosmetic surgery, liposuction). The chains are something of a barrier to competitors not just in professional beauty services category but also in beauty product category. The chains are important as consumers and retailers of beauty products - they use products in the salons/spas they operate, and they retail products over the counter (OTC) to consumers. Though chains can use many brands, their core brands are own label lines. That is products made exclusively for the chain. Own labels are generally professional exclusive lines, that is brands that are restricted (or meant to be restricted) to salons, and are not available in the retail (mass market) channel. The professional brands are not always included in reports on the beauty products market.

Chain salons/spas are potentially a significant competitor in the beauty products market in China, particularly in the middle to upmarket segment. Indeed the chains are almost the only domestic (Chinese) companies in the up market end of the beauty market in China. own labels in domestic chains contrasts with the wider beauty market in China where foreign brands dominate. For example, in skin care foreign brands could represent 70% of sales.

The big chains have established a reputation for the high quality of their own label products. This is an important consideration for consumers in China who are worried by the many media reports about threat to consumer health, and safety from beauty services and products (e.g., skin disfigurement, hair loss, allergies, infections from unhygienic facilities and tools). The beauty industry is among the three causes of complaint to the China Consumers Association-CCA (www.cca.org.cn/english).

Further chains continue to use their salons and spas to showcase their brands, and to build client loyalty to those brands. The millions of skilled therapists employed in these salons can use their professional status and expertise to build a relationship with clients, and to advise them on suitable products.

Research director of Diagonal Reports, Jacqueline Clarke has designed and developed the company’s professional beauty market research programme. She directs the Global Salon Panel (GSP) series which analyses and synthesises intelligence on the beauty and well-being markets. Ms. Clarke knows the global market and identifies and tracks key sector trends globally. Ms. Clarke's global expertise covers the largest beautycare/wellness markets worldwide, including the US, Latin America, Europe and Asia. She has worked with some of the largest beauty companies in the US and Europe. Ms. Clarke can be contacted at +353-4695-49027 or dreditor@eircom.net Extended Bio...

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