Focus On: Qiaowei Shen

Estee Lauder’s New Skin Care Brand in China: The Potential for High-risk, High-reward

Posted on October 15, 2012

Can Estee Lauder Companies make “Osiao” a household word in China’s luxury skin care market?

The New York-based manufacturer of skin care, makeup, fragrance and hair care products is banking that Chinese women will buy a new high-end brand tailored specifically for them, designed to promote what Estee Lauder’s scientists say Asian women want most in a skin care product — “natural radiance.”  

Already known for such brands as Bobbi Brown, Clinique, MAC, Origins and La Mer, among others, Estee Lauder’s decision to launch a whole new brand — rather than simply a new product — suggests the company is confident that an initiative begun more than five years ago will expand Estee Lauder’s footprint not just in China, but throughout Asia. The Osiao product line is expected to sell for between US$45 and US$190.

The venture is not without risk. Osiao — which is being introduced this month in only two department stores in Hong Kong and on some Cathay Pacific Airways Hong Kong flights – already faces competition from other Asian skin care products. In addition, its success depends to some extent on continuing strength in the high-end luxury market, despite weakening in the Chinese economy overall. And some observers question whether a hybrid product like Osiao will appeal to Chinese women. According to a New York Times article, Osiao will use English labels but its formulas will contain such ingredients as ginseng, Asiatic pennywort and ganoderma.

Wharton faculty familiar with the Chinese market are generally optimistic about Estee Lauder’s venture, while also noting the challenges that any new brand faces. “As part of the Estee Lauder family, Osiao can and should leverage the high brand equity of Estee Lauder in the Chinese market, at least in the initial stage,” says marketing professor Qiaowei Shen. “Brand name is still a very important element when Chinese consumers are choosing their skincare products.” While it probably won’t be hard “to convince some consumers to try the new brand, the difficult part [will be] to convert them to loyal customers. The true quality of the product is ultimately the key.”

The concept of using Chinese herbs as ingredients in skincare products is not new, Shen adds. “A brand that claims to specifically cater to Chinese or Asian skin types does not necessarily win market share. Many brands originating from Korea and Japan, which are designed for Asian skin by nature, already have products with ginseng or other Chinese plants as ingredients. How is Osiao different from these?”

The market “is there [and] the brand will enjoy a glow from the [reputation] of the parent company,” says Shen. “But in the end, whether consumers are going to repeat their purchase and spread positive word of mouth depends on whether the product quality lives up to their expectations.”

A More Sophisticated Market

Estee Lauder, founded in 1946, is experiencing strong growth in China. The company reported a rise in fiscal fourth quarter earnings of 25% and a 9.2% increase in revenue, to $2.25 billion. According to an article in The New York Times, fiscal 2012 is the first year that sales in the Asia Pacific region exceeded $2 billion. The company sells its products in more than 150 countries and territories mainly through limited distribution in, for example, high-end department stores and perfumeries, and specialized retail stores. China, with sales of $500 million, is its third largest market, behind the U.S. and Japan.

Wharton marketing professor Barbara Kahn gives Estee Lauder high marks for “understanding how important skin care is to the Chinese consumer. One of the key differences between China – and Asia, in general — and the U.S. is the importance of skin care products. If you look at a typical drugstore, even a Sephora in Asia versus one in the U.S., you will see a larger percentage of the store devoted to [those items].” Kahn also points out that Chinese consumers think of the skin care process “as a multi-step regime, and they take it very seriously. They are generally more sophisticated in this category than the typical American consumer.” Given the importance of the skin care category “and the amount of money consumers are willing to spend, this strategy of developing a new local brand makes a lot of sense.”

Estee Lauder’s initiative is “brilliant [as well as] risky,” according to Wharton marketing professor David Reibstein. In China, he says, a number of trends come into play: “A strong desire to be beautiful, with a heavy concern about skin care; a desire to be on the leading edge of fashion and skin care [as shown by] designer clothes, shoes and cosmetics all coming from other parts of the world; and a desire for, and intrigue with, foreign brands [as shown by] the popularity of some of the most visible fashion brands.”

The fact that Estee Lauder understands “the Chinese market, the skin care needs of the market, premium positioning and branding, and how to gain distribution” suggests the new brand will be a “winner,” Reibstein adds. The risk for Estee Lauder is that “it’s a crowded market…. The big question is whether there is room for both La Mer [another premier skin product from Estee Lauder] and Osiao.”

Wharton operations and information professor Marshall Fisher – who was in China recently teaching a global supply chain management course — breaks the scenario into two questions: Will a high-priced product sell in China, and how much should the company adapt the product to Chinese tastes?

The answer to the first question “is clearly ‘yes,’ if you look at the number of successful luxury brands that have entered the country,” Fisher says. “The reason is that even though average disposable income in China is below [that in] the West, it is such a big country that the top of the income pyramid is huge. This has made China a prime target for luxury brands.”

Products entering China have adapted to varying degrees, Fisher adds. “Nike changed little, but KFC changed almost everything; their comment was, ‘All we brought from the U.S. was the picture of the Colonel.’ Both have been highly successful in China. Evidently, people who buy Nike buy it in part because it is a Western brand, and adapting it too much would destroy that value. I would guess that Estee Lauder is more like Nike than KFC.” 

At a dinner on the last day of their course, Fisher discussed this second question with the head of Starbucks in China. The Starbucks executive noted how the company eventually “tweaked Starbucks’ menu and flavors enough to make them appealing to Chinese consumers,” says Fisher. “His remark was that they finally figured out that consumers in China who buy Starbucks are looking for a Western experience, but one that is tuned to their taste buds.”

Competition from Other Brands

Fisher’s co-instructor in the global course was Edwin Keh, CEO of the Hong Kong Research Institute for Apparel and Textiles. He recalls a presentation at Wharton earlier this year in which he learned two things: First, that “Chinese consumers like lightly scented products and think a lot of Western products are too strong and overpowering. And second, that the Asian market sells [more] skin protection, skin tone lightening and moisturizers than the West, probably because the Chinese market is dominated by urban professionals who work in crowded and polluted environments.” Also, he noted, “light skin tone is considered a sign of beauty.”

Osiao “looks to be a very exclusive high-end niche brand” being launched at a top Hong Kong department store that is equivalent to Saks or Neiman Marcus in the U.S., Keh says. “The line can command a higher price point and probably will have fairly small volumes for the immediate future. This may be a good way to test the market and tweak the product.” But Keh, like others, points to the “significant brand competition from Japanese and Korean beauty brands, [which] align very well with the Chinese consumer and have near-market advantages.”

Beauty products and next-to-skin apparel “are tough to sell and expensive to market, especially in China,” Keh adds. “So a new brand will be high risk, high return. It will be interesting to see how this plays out.”

Although some observers express concern that Osiao could cannibalize Estee Lauder’s other brands in China, Shen does not see this as likely. “Given its pricing and positioning, it is targeting a different consumer segment from the average consumers of Estee Lauder and Clinique,” its two best-known brands in China. Instead, “the introduction of Osiao seems to explore the market opportunity with the ever-growing wealthy class in China. There is a segment of affluent Chinese consumers who are willing to spend a lot on skincare products. The economic downturn of China has little impact on the behavior of this segment.” Keh concurs: “The timing of the release could have been better, given the recent doom and gloom, but the rich Chinese consumer is still spending and there are still lots of rich Chinese. So I don’t see [the current economy] as an issue.”

Wharton marketing professor John Zhang describes why he thinks Osiao represents “a very far-sighted strategy. Up to this point, Chinese consumers worship anything Western, especially in cosmetics. However, at some point in the future, Chinese customers will become more rational, they will want to go back to their roots, they will value their own heritage and they will want the things that are good specifically for them. When that day comes, pure Western brands will lose their luster,” but Osiao may not.

Building a new brand from scratch is clearly expensive, he adds. “For that reason, starting in Hong Kong is a good way to test the water. In addition, it is also a good way to establish the high-end positioning. I believe that the success of the brand will depend on two things. First, there has to be solid science behind the new formulation. Without it, the brand will not succeed in China for long, and ginseng alone will not carry the brand for sure. Second, good marketing must balance modernity, tradition and science, especially in cosmetics.”

Featured Professors: , , , ,
Posted in Knowledge@Wharton Today | Tagged , , , , , , , , , | Leave a comment

The U.S. Demographic Shift: A ‘Tipping Point’ for Marketers

Posted on May 22, 2012

(Updated to include comments from Wharton marketing professor Barbara Kahn.)

The demographic makeup of America’s nurseries is changing — and marketers who ignore the shift will face serious challenges in the future.

A U.S. Census Bureau report released last Thursday estimated that as of July 1, 2011, minorities made up 50.4% of the nation’s population less than one year old, up from 49.5% in the April 2010 Census. The report defines a minority as anyone who is not single-race Caucasian and not Hispanic. The population younger than age five was 49.7% minority in 2011, up from 49% in 2010, the report added.

For marketers, this demographic trend creates a need to recast their products and strategies to reach non-whites. Smart companies have long followed such shifts and are already acting on them, according to Wharton marketing professor Yoram (Jerry) Wind, who specializes in market segmentation studies. But the Census data underscores the importance of continuing to design products for different ethnicities and producing marketing materials in the languages and media channels they favor, he says.

The growing importance of ethnic markets is not new, notes Wind. “For those who had ignored what was happening around the world, this might be a tipping point,” he says. Wharton marketing professor Qiaowei Shen agrees the changing demographic trends could mean new product opportunities for companies, and require them to adopt different segmentation strategies. “Companies have to be alert to the new trends, understand the needs and traits of different demographic groups and figure out the best way to reach the target segments,” she says. “For example, the most effective advertising messages and media channels could be very different for minorities, and companies have to tailor their marketing strategies accordingly, from marketing campaigns to probably the product itself.”

According to Wharton marketing professor Barbara Kahn, this demographic shift is a continuation of a trend that has been happening for a while. She focuses her research on customer relationship management and consumer choice, among other areas. “Of course, consumer product companies are changing marketing strategies to appeal to the needs of the new consumer segments,” she says. For example, differences in foods that various segments like, or in religious values can affect product design and promotional and distribution strategies, she adds.

The percentage of Americans who are Caucasian continues to fall steadily, especially among the youngest generation. Barack Obama’s election as America’s first black president “was in some ways emblematic of the nation’s changing face,” according to a Wall Street Journal story on the Census report.  “It’s a major turning point for American society,” William H. Frey, a demographer at the Brookings Institution told the Journal. “We’re moving from a largely white and black population to one [that] is much more diverse and is a big contrast from what most baby boomers grew up with.” Whites, alone or in combination, fell as a percentage of the population from 77.1% to 74.8% between 2000 and 2010, noted a September 2011 Census report titled, “The White Population: 2010.”

Most of the newborn non-whites are concentrated around the East and West Coasts, especially in the southern states, a map in the Journal report shows. But that doesn’t necessarily offer ready solutions to marketers, according to Wind. “Demographic/ethnic groups are not homogeneous and are composed of number of segments,” he points out.

Also, Wind says, demographics are “a mere descriptor rather than a driver,” and smart marketers have to incorporate myriad influences in their marketing strategies. “The critical determinants of consumer behavior include previous purchase behavior, benefits sought, the influence of others, the context of the purchase and consumption.”

Featured Professors: ,
Posted in Knowledge@Wharton Today, Marketing | Leave a comment

Starbucks Moves to the Express(o) Lane in China

Posted on April 3, 2012

Starbucks is on a caffeine-fueled growth spurt in Asia. According to a report from the company newsroom, Starbucks plans to go from around 500 stores to at least 1,500 stores over the next three years, and predicts that its operations in China will be its second largest, outside of the U.S., by 2014. Starbucks coffee stores are currently located in 48 Chinese cities.

The company has had mixed success with expansion, however. Although it has strongly rebounded from flat sales in the U.S., it faces continuing resistance in Europe — where “fickle regional palates” and a sagging economy have weighed down performance, according to a recent New York Times article. Starbucks has yet to make a profit in France, the article adds, and “even in the parts of Europe where the company does make money, sales and profit growth lag far behind results in the Americas and Asia.”

Given this uneven track record, and continuing uncertainty over the global economy, how successful will Starbucks be in China?

“It has already been proven that there is a segment of consumers [willing to buy] premium coffee – given the huge success that Starbucks enjoys in big cities of China,” says Wharton marketing professor Qiaowei Shen. “In recent years, the number of coffee shops – national chain stores or local independently owned stores – that target high-income white collar [consumers] has been increasing dramatically. This is another piece of evidence to show that there is demand for high quality premium coffee, and the potential demand is likely to grow in the future.”

Also, according to Shen, the assumption that Chinese consumers tend to favor tea over coffee “may not be true for the young generation in China who grew up with Western food and drinks — such as McDonalds, KFC and Pepsi.”

At the same time, Shen adds, “Starbucks needs to be cautious about its expansion plan. The goal of tripling the number of stores in China within three or four years indicates that Starbucks is not only going to add new stores in the first-tier and second-tier cities, but is also expanding to third-tier or even smaller cities….. For large cities, the concern with proliferating stores is within-chain cannibalization, when the expansion rate exceeds the rate that the pie grows. For the new markets – third-tier or smaller cities — the concern is whether premium pricing is sustainable in less Westernized and economically less developed places. On the other hand, the aggressive expansion plan could potentially fend off some competitors and strengthen Starbucks’ foothold in the Chinese market.”

Wharton management professor Lawrence Hrebiniak is also enthusiastic about the expansion — with a few caveats. “China looks very good for Starbucks,” he states. “Coffee sales are up significantly as traditional tea drinkers [opt] for the newer form of caffeine. Sales are booming — revenue is up 38% — and margins are high, 35% versus 22% in the U.S.” When the company raised prices last year in China, he adds, “demand actually went up, a sign of a luxury good. Chinese customers seem to be enjoying the socializing at Starbucks’ sites, much like the original craze in the U.S. In addition, coffee sales forecasts show predicted increases of more than 50% by 2015.”

So, is there anything at all to be concerned about? “Perhaps,” he says. While the projected rate of growth is very robust — 200% in only three years — not all cities in China are alike. “Smaller cities with lower income levels may not react as strongly as their larger counterparts. Lower economic growth may affect the smaller markets more than the larger ones. And management attention definitely will be taxed somewhat as the top planners try to grasp and control such rapid growth.”

A “slightly slower, incremental approach” may be in order, he suggests. For example, the company should avoid undertaking too many initiatives simultaneously, such as openings, marketing programs, management controls and so forth. “This can tax even the best management team. China looks good and deserves a commitment to expansion and growth, no doubt about it,” he states, but “taking things a bit slower and opting for a less hectic growth program to avoid the problems of a too-large, complex change” may prove more successful, he notes.

For his part, Wharton marketing professor John Zhang suggests that Starbucks may not be moving fast enough. “The fact of the matter is that the U.S. would have a good year if its economy grows by 3%, and China would have a bad year if its economy grows by only 8%. Given the size of the China market and the projected high growth rate — 7% to 8% — for the coming decade, investors if anything may question why the company does not aim to grow faster. For instance, KFC already has more than 3,000 restaurants in 650 cities in China and is adding a new one every day. In comparison, Starbucks is definitely not turbo-charging its growth.”

There is “no question that the American brand is a big draw,” Zhang adds. “More importantly, consuming a cup of bitter-tasting, very expensive and foreign liquid is a sure way for someone to stand out as one of the sophisticates in China. Indeed, given the popularity of the brand” there, Starbucks can surely ride on the swelling middle class and fast urbanization in years to come. The risk lies in opening stores too slowly and losing the rare window of opportunity.”

As for the competition that Starbucks faces in China, Shen cites McDonald’s as one candidate, “but probably not the major one [because] McDonalds’ coffee is much cheaper and attracts different segments of consumers…. Currently, major competition comes from similar coffee chain stores from Taiwan and Japan, with some well-known brands. Competitors also include bakery stores that serve high-quality coffee. Many independently owned local coffee shops also are starting to populate the large cities. They typically have a very unique style and beautiful atmosphere,” attracting the same type of consumer that Starbucks is targeting. “The local competition,” Shen adds, “is intensifying.”

Featured Professors: , ,
Posted in Knowledge@Wharton Today | Tagged , , , , , , , | Leave a comment