Editor's note: China is one of the key drivers of growth in the global cosmetics and toiletries industry. Euromonitor International predicts China's cosmetics sales are expected to rise in excess of 18 billion yuan (US$2 billion) by 2008. Following is Euromonitor's report on the Chinese cosmetics industry based on research conducted into L'Oreal's expansion in China.

China's recent impressive economic development has not only raised the standard of living but also boosted disposable incomes.

This has allowed the nation's cosmetics and toiletries industry to enjoy significant growth last year, with total sales reaching 53.5 billion yuan (US$6.4 billion).

Functional cosmetics and toiletries account for the lion's share of this figure, with daily-use products such as skincare and haircare being the two largest sectors representing more than 50 per cent of total sales.

Although these sectors are the most lucrative, they are close to saturation point.

Given the 60 per cent of the Chinese population live in rural areas, and thus have low incomes, the Chinese market is geared towards low-end mass products.

Major cosmetics multinationals are therefore focusing their efforts of grabbing a slice of the low-end market, where great development potential exists.

Global cosmetics behemoth L'Oreal expects to secure a five-fold rise in its annual sales in China within the next five years.

A L'Oreal research and development centre will open its doors in Shanghai in June this year, being just the fourth - following Paris, New York and Tokyo.

L'Oreal's commitment to China both in the near and long-term is clearly illustrated by its decision to invest in such a centre in the nation.

L'Oreal acquired two well-known Chinese brands in late 2003 and early 2004 - Mininurse and Yue-Sai. These purchases have allowed the cosmetics giant to consolidate its presence in the already saturated haircare and skincare sectors.

L'Oreal is also expected to benefit from the success of the Mininurse brand, which has a considerable mass-market presence.

And the nation's relatively underdeveloped southwestern and northwestern regions have benefited from recent price wars among cosmetics firms.

They now have the fastest growing markets in all of China, accounting for 11 per cent of the nation's cosmetics sales.

L'Oreal is now shifting from its traditional focus on the major cities of Shanghai, Beijing and Guangzhou, and is looking towards developing markets in China's other cities.

Acquiring Mininurse gave L'Oreal access to a massive network of around 280,000 outlets enabling it to extend the reach of its brands throughout the country and consequently boost its sales.

Other international brands, such as Maybelline and Garnier, have also benefited greatly from L'Oreal's move, exceeding their growth forecasts.

Substantial opportunities are offered by both the babycare and male grooming sectors. Despite having tiny shares of the market, the growth forecasts are very high for these two sectors

L'Oreal needs to bear these demographic trends in mind if it plans to remain in China once economic growth slows down.

If L'Oreal simply relies on organic growth, there is little chance of it achieving its target of five-fold growth in five years. It should instead turn its attention to rapid growth, moderate value sectors for possible acquisitions.

The beauty giant should definitely set its sights on snapping up some babycare brands, and to develop a strong distribution network that will facilitate the roll out of its leading babycare brand L'Oreal Kids.

Although male grooming's value base in China is currently only around 431 million (US$50 million) yuan, Chinese men are becoming increasingly aware of their appearance and the sector's annual growth rate is currently forecast to increase to around 6 per cent by 2008, but could be far higher.

Asian manufacturers such as Shiseido and Mandom are already increasing their presence in this sector, contributing to the accelerated growth rate, and meaning that L'Oreal should roll out its new Men Expert brand to win a larger share of the Chinese market whilst the competition remains in check.

(China Daily March 18, 2005)