Aug 10, 2023

As a Century

In the 1990s, with a large amounts of foreign capital entering China, the Chinese market became a competitive arena for international beauty and daily chemicals giants such as Procter&Gamble, Unilever and L’Oréal, and Shanghai Jahwa(上海家化), which was in the ascendancy at the time, also attracted attention. In 1991, Shanghai Jahwa entered into a joint venture with the SC Johnson & Son Inc. and set up Shanghai Lumax Johnson Cosmetics Company.

"Perhaps the beginning of Shanghai Jahwa's road to globalization began with this Sino-American joint venture." Ye Weimin(叶伟敏), Vice President and Chief Operating Officer of Shanghai Jahwa, recalled this in his keynote speech "Shanghai Jahwa's Road to Globalization".

Shanghai Jahwa is a leading enterprise with a long history in China's beauty and daily necessities industry, and is ranked No. 1 in the beauty industry in the lists of "2023 Shanghai Top 100 Manufacturing Enterprises" and "2023 Shanghai Top 100 Private Enterprises". Its "VIVE"(雙妹) , which was founded in 1898, was once popular among celebrities in the Republic of China and won the Panama Gold Medal, the highest international honor.

In 2017, Shanghai Jahwa invested nearly RMB 2 billion to acquire Tommee Tippee(汤美星), a leading global brand in maternal and infant feeding. This marked the largest acquisition in the company's history and facilitated its entry into the UK market.

However, the overseas business development of Shanghai Jahwa has encountered challenges. In 2022, the gross profit margin of its overseas business declined by 0.71% compared to the previous year, reaching 51.15%. Similarly, in the first half of 2023, the net profit of Abundant Merit Limited, the main holding company of Tommee Tippee, experienced a year-on-year decline of 32.13%, amounting to around RMB 60 million. These declines can be attributed to several factors. Firstly, consumer confidence and spending willingness have decreased due to the persistent inflationary pressures in the UK. Additionally, the feeding category has witnessed intensified competition, and distributors have been reducing their inventories.

How did Shanghai Jahwa transform from a small-scale factory that had limited capabilities in producing low-end face creams and florida Water, to a publicly listed company with a market capitalization of nearly RMB 40 billion? As the rise of niche beauty brands both locally and internationally, as well as the increasing competition in the go global market, present both opportunities and dilemmas for Shanghai Jahwa, what strategies will they adopt to navigate through these challenges?

The History of a Century-old Beauty and Daily Chemicals Industry Giant

Shanghai Jahwa Co., Ltd. (hereinafter referred to as "Shanghai Jahwa") is one of the oldest domestic enterprises in the Chinese cosmetics and daily chemicals industry, with a history of over 120 years. EqualOcean has divided its development into the following stages:

Start-up and Exploration (1898-1980s): Shanghai Jahwa originated from Kwong Sang Hong(香港广生行), established in 1898 in Hong Kong. In the 1950s, as part of the public-private partnership campaign, Kwong Sang Hong merged with Shanghai Star Perfume Factory(上海明星香水制造厂), Orient Chemical Industry Corporation(东方化学工业社), and China Co-Joy Cosmetics Factory(中国协记化妆品厂) to form Shanghai Star Household Chemical Manufacturing Factory(上海明星家用化学品制造厂). In 1967, it was renamed "Shanghai Household Chemical Factory.(上海家用化学品厂)"

Reform and Listing (1990-2001): In 1992, the original factory was restructured into Shanghai Jahwa Corporation. In 1999, it completed the shareholding system reform and went public on the Shanghai Stock Exchange in 2001. During the 1990s, brands like Liushen(六神), Gaofu(高夫), and Herborist(佰草集) were successively launched. In 1991, the majority of Shanghai Jahwa's assets and key employees, including the brands Maxam and Ruby, were separated and formed a joint venture with the American company SC Johnson & Son. However, due to the lack of significant development for Maxam(美加净) and Ruby(露美) after the joint venture, Shanghai Jahwa repurchased these brands in 1995, and the core team returned.

Exploration and finalization (2002-2019): In 2003, Shanghai Jahwa established the household cleaning brand HomeAegis(家安); In 2013, its infant and child care brand Giving(启初) was launched; and In 2017, it wholly acquired Tommee Tippee. Today, Shanghai Jahwa's business system has taken initial shape.

Reshaping Brilliance (2020-): In 2020, Pan Qiusheng(潘秋生) took over as the Chairman of Shanghai Jahwa and proposed a business strategy called "1-2-3" with a focus on consumer-centric approach, brand innovation, channel advancement, and the use of culture, systems, processes, and digitalization as driving forces. This strategy has shown significant results. Despite a 7.43% YoY decline in revenue to RMB 7.03 billion in 2020, Shanghai Jahwa managed to achieve a 4.3% YoY growth in non-GAAP net profit to RMB 396 million amidst the backdrop of the pandemic.

Today, Shanghai Jahwa has grown into a leading enterprise in the Chinese beauty and personal care industry, with a presence in the beauty, personal care, home care, and baby care sectors. It not only operates five factories globally (in London, Rabat, Shanghai, Dongguan, and Hainan) but has also expanded its sales network from China to Asia, Europe, Africa, North America, and Oceania. Ye Weimin, the Deputy General Manager and Chief Operating Officer of Shanghai Jahwa, emphasized the importance of establishing a global supply chain system for achieving globalization. He stated, "To achieve globalization, it is necessary to establish a global supply chain network. In the future, Shanghai Jahwa will continue to enhance its global supply chain layout."

National Brands, Going Global

The expansion of the brand matrix is a necessary step for almost all consumer multinationals. In addition to the aforementioned "VIVE", the well-established brand Maxam has been sold in more than 40 countries and regions. The "Liu Shen" Florida water is also a popular summer product in Chinese supermarkets worldwide.

In 2008, Shanghai Jahwa responded to the initiative of "Chinese companies going global" and its premium brand, Herborist, obtained EU certification. In September of the same year, it started selling in France through Sephora, becoming the first Chinese beauty brand to truly go international. In May 2013, Herborist also entered another high-end cosmetics retailer, Douglas, expanding its sales channels.

In 2017, Shanghai Jahwa responded to the "The Belt and Road" initiative by utilizing Europe as its foundation and deepening its presence in Asia while expanding into the Americas and African markets. Through this expansion, the company aimed to introduce classic Chinese products such as Liu Shen soap and Florida water, as well as promote the culture of traditional Chinese medicine and herbal remedies to consumers from different countries. This transformation was made possible by the visionary leadership of the former Chairman, Ge Wenyao(葛文耀), who proposed a brand positioning strategy centered around "Chinese herbal medicine" and "Chinization".During the same year, Shanghai Jahwa participated in Alibaba's "Tmall Global" project, which facilitated the coordinated development of online and offline businesses. Powered by Tmall, this project simplified the process for merchants as they no longer needed to worry about overseas operational teams, logistics, payments, or product translation. Order processing became as convenient and efficient as domestic operations, allowing merchants to achieve a "one-store sells globally" approach without the need for additional operational expenses. This initiative enabled Shanghai Jahwa to expand its overseas market presence in a cost-effective and streamlined manner.

In 2019, Shanghai Jahwa cooperated with China Duty Free Group, the largest duty-free luxury goods operator in China, and became the first local daily chemical enterprise to enter into cooperation with CDF, and its brands Herborist and VIVE became the first local cosmetic brands to enter CDF's sales channels.

Shanghai Jahwa also owns many national brands, such as GF(高夫), Dr.Yu(玉泽), HerboristDerma(典萃), Yafun(雅霜), Youyi(友谊), Haiou(海鸥), BAISEN(百爱神), and Chunlei(春蕾), as well as PianZihuang(片仔癀), which it owns in cooperation with Zhangzhou PianZihuang Pharmaceutical Company(漳州片仔癀药业股份有限公司). In 2018, Shanghai Jahwa signed a long-term cooperation agreement for the Chinese region with the U.S.-based Church&Dwight Company, introducing the company's three major brands, namely Batiste(碧缇丝), Femfresh(芳芯), and ARM&HAMMER(艾禾美), to China.

The Overseas Business is Under Pressure Due to a Downturn in the UK Baby Products Market

After acquiring Tommee Tippee in 2017, the United Kingdom became a crucial market for Shanghai Jahwa's internationalization efforts.Tommee Tippee was established in 1965 and offers a wide range of products in five core categories: bottle feeding, breastfeeding, toddler feeding, pacifiers, and sterilization and warming. It is the leading baby product company in the UK and ranks fifth globally. Tommee Tippee holds over 40% of the market share in the UK and has a recommendation rate of over 90%. Additionally, it enjoys significant popularity in Europe and Australia. In the highly fragmented baby product market in the United States, Tommee Tippee has achieved approximately a 4% market share.

Despite the acquisition of Tommee Tippee providing strong support for Shanghai Jahwa's international business, the company has faced ongoing challenges in its overseas operations due to the economic downturn, destocking actions by distributors, disruptions caused by the COVID-19 pandemic leading to factory and logistics base shutdowns, and rising raw material costs. In the first half of this year, Shanghai Jahwa's overseas business revenue decreased by 12.28% year-on-year to RMB 786 million. These factors have put sustained pressure on Shanghai Jahwa's overseas business.

In addition, the continuous rise in inflation in the UK since the beginning of the year has led to a decline in consumer willingness to spend. In protest against high inflation, workers across various industries in the UK have demanded wage increases, posing challenges to profit due to high management costs.

During the performance briefing in the first half of 2023, Shanghai Jahwa announced that it would continue to prioritize Tommee Tippee as the core of its overseas business expansion. The company plans to increase investments in product development and marketing, focusing on enhancing product differentiation in the bottle category and exploring new customer acquisition channels. The aim is to gradually alleviate the pressure of overseas operations. Additionally, Shanghai Jahwa will concentrate on establishing a multi-channel presence in the Southeast Asian region, encompassing both online and offline channels.

Emerging Markets is Promising

In order to explore the success of the world's top cosmetic companies and the globalization prospects of Shanghai Jahwa, EqualOcean has conducted a comparative analysis between L'Oréal, Estée Lauder, Shiseido, and Procter & Gamble and Shanghai Jahwa.

International cosmetic giants invariably make good use of M&A and integration to accelerate grouping, category-wide and globalization. They mostly enter new fields quickly through M&A and integration, realize multi-level price and brand complementarity from mass, high-end to luxury, help the expansion of overseas markets, and meet differentiated consumer demand. Furthermore, international beauty giants often adopt a combination of global research and development systems with localized market strategies. This enables them to continuously introduce blockbuster products that resonate with consumers. Examples of such products include L'Oréal's Lancôme Advanced Génifique, Estée Lauder's Advanced Night Repair, Estée Lauder's Crème de la Mer moisturizer, and Shiseido's Ultimune Power Infusing Concentrate. These star products not only represent the company's brand but also play a crucial role in driving revenue growth.

Compared to its global counterparts, Shanghai Jahwa does exhibit some gaps in areas such as research and development investment, marketing innovation, blockbuster product creation capability, brand influence, and channel management.Taking research and development as an example, over the past 20 years, L'Oréal has consistently allocated over 3% of its revenue towards research and development. In 2022, L'Oréal's total R&D investment reached USD 1.21 billion, with an R&D expense ratio of 3%. In contrast, Shanghai Jahwa's R&D expenses in 2022 were only RMB 160 million, representing a year-on-year decrease of 1.98%, and the R&D expense ratio was 2.25%.

Indeed, Estée Lauder has successfully created several "evergreen" blockbuster products through its strategy of focusing on key products. One of the most recognizable and widely known examples is the Advanced Night Repair, commonly known as the "little brown bottle." Since its launch in 1982, it has become the first-ever serum in skincare history and has enjoyed 41 years of global success. At its peak, it achieved the remarkable feat of selling one bottle every 10 seconds. According to Tmall data, in 2022, the Advanced Night Repair series accounted for nearly 40% of the total sales in Estée Lauder's store and nearly 60% of the sales in the skincare category.

In comparison, Shanghai Jahwa has relatively fewer star products. Although during the 618 period this year, the Dr.Yu oil-sensitive cream line sold a total of 240,000 units, becoming the top-selling product, the data for 2022 shows that Dr.Yu's total number of customers for the current period is RMB 2.13 million, a year-on-year decrease of 40.9%; the number of repeat customers is 1 million, a year-on-year decrease of 34.7%. Therefore, the brand still lacks some strength.

Regarding how to achieve sustainable development in the future, Shanghai Jahwa made relevant introductions during the 2023 interim report performance briefing. This includes paying attention to the pursuit of efficacy products by young people, as well as the development trends in beauty, skincare, maternal and infant care, personal care, and household cleaning sectors. At the same time, Shanghai Jahwa is also actively monitoring the consumption trends in the international market for beauty and personal care products.

In the highly competitive international beauty market, EqualOcean believes that the combination strategy of "emerging markets + niche categories" can help Shanghai Jahwa find new growth opportunities. Functional cosmetics, for example, the market prospects for functional cosmetics are promising. The global market size of functional cosmetics is estimated to grow from USD 3.3 billion in 2022 to USD 4.6 billion in 2028, with a CAGR of 5.4% from 2022 to 2028. By increasing research and development efforts, Shanghai Jahwa can focus on developing more technologically advanced functional cosmetics to enhance the product's differentiation and competitive edge.

In terms of market, the beauty and cosmetic consumer markets in the US, Europe, Japan and Korea are more mature, making it difficult for new brands to enter. In emerging markets, such as Southeast Asia, where international luxury brands and local brands are limited, the growth potential of per capita beauty expenditure is large. Benefiting from a younger demographic, a fast-growing middle class and diversified marketing channels, Shanghai Jahwa may be able to launch popular brands more quickly.

According to "Unlocking hyper-growth in Asia's luxury beauty landscape" recently released by A.T. Kearney and LUXASIA, the luxury beauty industry in Southeast Asia and India has a bright future, with its market size reaching USD 7.6 billion by 2026, and a compound annual growth rate (CAGR) between 2021 and 2031. The market size is expected to reach USD 7.6 billion by 2026, with a CAGR of 11% between 2021 and 2031. This not only includes a large space for sales growth, but also an opportunity for Shanghai Jahwa to realize brand upgrading.

In addition, in the field of daily chemicals, global consumers are increasingly concerned about environmental sustainability and health. There is a growing demand for products that align with concepts such as natural and organic. This trend aligns perfectly with Shanghai Jiahua's core brand positioning and can be leveraged as a marketing selling point.

In conclusion, Shanghai Jahwa has broad prospects in the overseas markets of beauty and personal care. As long as the company can keep up with consumer trends, focus on technological innovation and brand marketing, and actively explore emerging markets and expand product lines, it has the potential to stand out in international competition, narrow the gap with industry giants, and even achieve a leading position.

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