International Journal of Logistics: Research and Applications

Vol. 11, No. 3, June 2008, 201–228

RESEARCH ARTICLE

How do foreign cosmetics companies align their supply chains

and distribution channels in China?
Tony Wu, Weiwei Wang, Christopher S. Tang*, David Liu, Frances Gao and Cindy Fang
UCLA Anderson School, 110 Westwood Plaza, Los Angeles, CA 90095, USA

(Received 26 May 2006; revised 26 February 2007, 18 April 2007; in final form 15 August 2007 )

Backed by robust economic growth, China’s cosmetics market has grown dramatically in recent years.
As foreign cosmetics companies develop strategies for establishing or expanding their presence in China,
they need to ensure proper alignment between their supply chain configurations and distribution channels.
Because no public data is available, we use a case study approach to investigate the extent these foreign
companies align their supply chains and distribution channels. In addition, we outline some current and
future challenges and opportunities that foreign cosmetics companies need to face as they compete for
growth.

Keywords: supply chain configurations; distribution channels; market entry strategies; alignment; China

1. Introduction

Ever since the 1978 economic reform and the 2001 WTO status, China has experienced a
phenomenal economic growth and a steady increase of disposable income.1 According to the
National Bureau of Statistics of PRC (NBS), out of a population of 1.3 billion people, over 500
millions reside in urban cities such as Beijing, Shanghai, and Guangzhou. Also, over 65 million
middle class people have an annual household income between US$7230 and US$60,240, and
most of them welcome western culture, especially products that offer individualism or status.
NBS predicted that the middle class would increase from the current 5% to 45% by 2020. These
environmental factors attracted many multinational corporations (MNCs) to establish their pres-
ence through various means. Some corporations outsourced their manufacturing operations to
China to exploit the abundant low-cost labour force, while others established sales channels to
expand their global sales.
In 2006, China is undeniably one of the most important consumer markets that multinational
corporations would like to enter or expand. According to a survey conducted by the American
Chamber of Commerce, three out of four US companies reported profitable operations and most

*Corresponding author. Tel.: +1 310 825 4203; Email: ctang@anderson.ucla.edu

ISSN 1367-5567 print/ISSN 1469-848X online

© 2008 Taylor & Francis
DOI: 10.1080/13675560701635500
http://www.informaworld.com
202 T. Wu et al.

reported their profit margins are higher in China than elsewhere in the world (c.f., Forney 2004).
For example, Shanghai GM (http://www.gmchina.com/english/), the flagship joint venture in
China, was the monthly sales leader in 2005 among all passenger car manufacturers. The sharp
increase in sales of Chevrolet and Cadillac in China has helped General Motors to narrow its
losses in the first quarter of 2006 to $323 million, compared with $1.3 billion loss in the same
quarter a year ago (c.f., Ellis 2006).
To succeed in a foreign market like China, it is increasingly important for a firm to develop
competitive advantages from coordinating various activities along the value chain (c.f., Arnold
2003). These activities include supply chain activities (procurement, in-bound logistics, man-
ufacturing operations, and out-bound logistics) and marketing activities (product development,
marketing and sales, and service). Unfortunately, since there is an urge to rush to market, most
companies may not have the luxury to develop a plan to coordinate various marketing and supply
chain activities when they enter a foreign market.

• Entering a new market without a good marketing plan can be detrimental.

◦ In 1995, Whirlpool, a world’s leader in home appliances, formed a joint venture with a
well-established refrigerator manufacturer Snowflake Electric Appliance Co. Ltd in Beijing.
While the manufacturing operations were running smoothly, only 39,000 of the total output
of 62,000 refrigerators were sold in 1996. The main reason for this dismal performance was
due to Whirlpool’s marketing strategy. First, unlike other well-known brands in China such
as Haier, LG, Hitachi, Sharp, etc., Whirlpool did not launch a strong advertising or promotion
campaign to create brand awareness and brand image. Second, Whirlpool positioned their
products at the high-end of the market and sold their products only at major retail chains
and hypermarkets like Carrefour that concentrated in major cities only. As Whirlpool was a
relatively unknown brand, Chinese consumers were reluctant to buy a Whirlpool refrigerator
at high price without any additional perceived value relative to other well-known brands. Even
though Whirlpool adopted the Chinese brand name, Hui Er Pu, meaning ‘cheap and popular’,
the sales continued to be abysmal. After suffering from major losses, Whirlpool terminated its
association with Snowflake in 1997. Currently, Whirlpool is focusing on exporting products
(microwave ovens, washing machines, and dryers) made in their remaining facilities in China
(c.f., Pan 2005).
◦ Over a two-year period (2005–2006), four major Japanese mobile phone companies
(Mitsubishi, NEC, Panasonic, and Toshiba) exited the China market, despite the fact that
China’s mobile phone market is one of the fastest growing in the world. Besides citing
poor sales performance as the key reason for exiting the China market, Myers and Yuan
(2006) highlighted two major market entry mistakes that these four Japanese companies
made. First, the Japanese mobile phone makers focused on the high-end market, which was
a limited market especially when the Japanese phones were priced above a comfortable
price-point for consumers living outside the major cities. Second, they focused on devel-
oping superior technology without spending significant effort in branding, marketing, and
sales. Inadequate effort in branding and marketing can be detrimental especially because
these Japanese companies entered the China market after Motorola, Nokia, and Samsung
captured the mass market in the mid-90s.
• Entering a new market without a good supply chain plan can be problematic.
◦ In 1981, due to a high manufacturing cost in Taiwan and Korea, Nike decided to source
their shoes from various contract manufacturers in China. Even though Nike was a well-
known brand and had an excellent marketing strategy, the company encountered major
supply chain problems. These problems include the lack of high quality raw materials
(nylon, canvas, rubber and chemical compounds), as well as problems in technology trans-
fer, quality, production planning and inventory control, logistics, communication, and human
 International Journal of Logistics: Research and Applications 203

resource management. Without a clear supply chain strategy, Nike was in a bind. Instead of
terminating the association with these contract manufacturers, Nike was able to enlist ADI
Corporation, their former contract manufacturer in Taiwan, to manage their operations to get
their manufacturing operations back on track (c.f., Austin and Aguila 1985).2
◦ After IKEA entered the market in 1998, they discovered various unanticipated supply chain
challenges. As reported in Miller (2004), IKEA lamented that the cost for managing its sup-
ply chain was much higher than expected due to the following reasons. First, it was more
difficult and more costly to import furniture components made of glass, timber or plastic
into China, due to strict import quotas and heavy import taxes. Second, due to regional-
ism, Customs clearance for imports and inter-provincial transportation was challenging and
costly.3 Third, as most Chinese customers are not accustomed to the ‘do-it-yourself’assembly
concept, IKEA had to provide delivery and assembly services. These ‘unanticipated’ after
sales services created another challenge for managing IKEA’s supply chain. Moreover, to
meet the demand of the Chinese customer at the right price-point, IKEA had to offer many
localised products (hard beds, chopsticks, cleavers, balcony furnishings, etc.) and reduce
their retail price by more than 10% (c.f., Gronlein 2005). As gross margin began to shrink,
IKEA planned to source more products directly within China to reduce cost. By doing so,
IKEA was concerned about counterfeits and copycats in China.

Recognising the importance of aligning supply chain and marketing activities, we are interested in
examining the underlying supply chain and marketing activities adopted by different companies
when they entered a foreign market like China.4
This paper is intended to develop a unified framework for describing different supply chain
and market entry strategies actually adopted by various multinational companies. To enable us
to classify different companies and their chosen strategies, we focus on a particular industry: the
cosmetics industry. However, the framework and the underlying approach can be used to analyse
supply chain and market entry strategies for other industries, such as fashion and pharmaceutical
products. In this paper, we focus our study based on major companies in the cosmetic industry
for the following reasons:

1. Market Potential. The cosmetics market has grown from around US$25 million in 1994 to
$7.9 billion in 2004, and is expected to expand at an annual rate of about 12% (c.f., Tao 2005
and Fang et al. 2006). Also, the cosmetics industry has become the fifth largest consumption
hotspots on the Mainland China only after real estate, automobile, electronics, and tourism
(c.f., Li and Fung Research report, 2005).
2. Market Readiness. In 2004, the per capita annual spending on cosmetics in major cities such as
Beijing and Shanghai has reached US$20. As living conditions continue to improve, spending
on cosmetics is likely to increase exponentially. Also, other regions such as Tianjin, Zhejiang,
Hubei, Jiangsu, Chongqing, etc., are experiencing double digit growth in cosmetic sales (c.f.,
Li and Fung Research report 2005).5
3. Brand Awareness and Consciousness. According to a market research survey of 34,000 people
conducted by IMI in 2005, Chinese consumers are becoming more sophisticated and value
oriented. The top two factors affecting consumers’ choice of cosmetics are brands and prices,
which can be influenced by marketing and supply chain activities.6 This consumer preference
is revealed as major international brands, such as Olay by Proctor & Gamble (P&G), Aupres
by Shiseido, and L’Oréal Paris by L’Oréal captured the top three positions in the market of
skin care products (c.f., Li and Fung Research report, 2005). Moreover, while the local brands,
such as Dabao and Yu Mei Jing targeting the low-end market accounted for 60% of the market
share of the cosmetic market, 80% of the profit is captured by the international brands, such
as L’Oréal targeting the high-end market (c.f., Tao 2005).
204 T. Wu et al.

In addition to presenting a unified framework for describing the supply chain and market entry
strategies of different multinational cosmetics companies, we use a case-study approach to conduct
our industry analysis for the following reasons:7

1. Data Availability. Based on our search through various databases and publications available
in the public domain, we are unable to find pertinent data describing specific supply chain
and market entry strategies adopted by different cosmetics companies. As such, we are unable
to use the traditional statistical methods to test certain postulations presented in this paper.
However, we managed to supplement the information gathered from our personal interviews
with some sales information provided by Euromonitor International Databases.
2. Confidentiality. The actual supply chain and market entry strategies adopted by different com-
panies are usually confidential, especially when competition in the cosmetics market is fierce.
We obtained information regarding specific supply chain and market entry strategies adopted by
different companies via personal interviews with seven major international cosmetic companies
– Avon, Amway, Estée Lauder, L’Oréal, P&G, Revlon, and Shiseido. However, to ensure
confidentiality, we disguise the company identity when presenting our analysis in certain
sections.
3. Scope. The case-study approach is rather common in performing strategic analysis, especially
when conducting industry analysis in a developing country like China. This approach enables
us to develop a unified framework for describing the actual supply chain and market entry
strategies of various multinational cosmetics companies. Based on our qualitative analysis
of the information collected from our interviews, we illustrate how multinational cosmetic
companies align their supply chain and marketing activities to compete with other local and
international brands. The analysis presented in this paper can help managers to develop a
coordinated marketing and supply chain strategy before they enter a new market such as
China.

We conducted our case study as follows. We selected seven major international cosmetic
companies (Avon, Amway, Estée Lauder, L’Oréal, P&G, Revlon, and Shiseido) for our study.
(The background information about these companies is provided in Appendix 1.) These com-
panies were selected for our study because of the following reasons. First, the selection should
include multinational firms that are based in different geographical regions: Asia (Shiseido),
Europe (L’Oréal), and North America (Avon, Amway, Estée Lauder, P&G, and Revlon).8 Second,
the selection should include firms with major presence in China: P&G is the top player in the
skincare market, and L’Oréal is the top player in the colour cosmetics market. Third, our selec-
tion should capture a significant share of the cosmetics market: these firms capture 50.4% of the
skincare market and 40.1% of colour cosmetic market.
To learn more about supply chain and market entry strategies of different multinational cosmet-
ics companies, we developed a common set of questions to be discussed during our interviews
conducted in Chinese. As such, this set of questions was originally written in Chinese (Appendix
2). For the reader’s convenience, these questions are translated into English (Appendix 3). We
sent them to the director of Human Resource department of each company requesting their help to
identify individuals who would allow us to interview. These companies provided 18 individuals
who were knowledgeable about their company’s supply chain operations and marketing activi-
ties in China. The profile of these 18 interviewees is provided in Appendix 4. The face-to-face
interviews were conducted in Beijing, Shanghai, and Guangzhou, over a period of two months
in 2005. After our in-depth interviews, we combined the qualitative information gathered from
our interviews with the sales data obtained from the public domain to develop a framework
for describing the supply chain and market entry strategies of different multinational cosmetics
companies.
 International Journal of Logistics: Research and Applications 205

This paper is organised as follows. We classify different types of cosmetics products, different
supply chain configurations, and different distribution channel configurations in Sections 2, 3,
and 4, respectively. Also, we present qualitative analysis based on the information gathered from
various databases and our personal interviews with various executives in China. Furthermore, our
qualitative analysis motivates us to develop various postulations regarding the interaction between
supply chain configuration and market entry strategy. Section 5 presents a framework illustrat-
ing how multinational cosmetic companies align their supply chain and marketing activities to
compete with other local and international brands. In this framework, company identity has been
removed to comply with our confidentiality agreement. In Sections 6 and 7, we highlight some
future challenges and opportunities that multinational cosmetics firms should know to succeed in
a dynamic market like China. While this paper is based on qualitative analysis, we hope that prac-
titioners would find our paper to be informative, practical, and perceptive. At the same time, we
hope our postulations will generate interests for researchers to collect data to conduct quantitative
analysis in the future.

2. Product characteristics

Cosmetic products can be classified into seven major categories according to their functions, which
include skin care, body care, make up, sun care, baby care, men’s grooming, and fragrances.9
According to the 2005 Euromonitor’s database on cosmetics and toiletries, skin care category
represents 37% market share of the cosmetic market, which amounts to over US$2 billion in
sales. Within the skin care category, facial moisturisers take up more than 75% of the total sales;
facial cleaning creams, whitening creams, and anti-acne creams make up the rest of the sales.10
Other categories of skin care products capture relatively small market share. The key reason is that
skin care products are accepted culturally especially whitening products and moisturisers, while
make-up products and fragrances are still in the early adoption stage.11 Skin care products also
enjoy a higher profit margin than make-up products, because of simpler technology and lower
consumer taxes.12 As such, skin care products are much more popular because of their intrinsic
appeal – higher value at lower cost.
According to a report issued by the Chinese National Commercial Information Centre (CNCIC),
the most popular brands of skin care products are provided in Table 1. Notice that the skin care
products designed specifically for Asian skin, such as Aupres by Shiseido are well received in
their market (c.f., Jones et al. 2005).
To our knowledge, there is no industry-wide segmentation for different brands of cosmetic
products. However, we developed our segmentation based on the information gathered from
our personal interviews conducted at various multinational cosmetic firms. Essentially, most
companies use retail price as a way to classify their brands into three major categories: Premium,

Table 1. Market share of skin care products.

Brand Company 2004

Olay P&G (China) 32.5%

Aupres Shiseido 14.1%
L’Oréal Paris L’Oréal 7.5%
Dabao Beijing Dabao 5.3%
Longliqi Longliqi Group 3.8%
Yue-Sai L’Oréal 2.8%
Mininurse L’Oréal 2.4%
Avon Avon (China) 0.9%
Others 30.7%
206 T. Wu et al.

Table 2. Brand segmentation.

Brand classification Brand (Company)

Premium: retail price is above US$40 • Shiseido (Shiseido)

• SK-II (P&G)
• Crème De La Mer (Estée Lauder)
Mass-Premium: retail price is between US$20 and US$40 • MaxFactor (P&G)
• Revlon (Revlon)
• Aupres (Shiseido)
Mass: retail price is below US$20 • Olay (P&G)
• Maybelline (L’Oréal)

Mass-premium, and Mass. Premium brands represent products that are sold at retail price above
US$40; Mass-premium brands correspond to products with retail price ranges from US$20 to
US$40; and Mass brands are referred to products with retail price below US$20. Examples of
these three segments of brands are provided in Table 2.
Besides different retail prices, different classes of brands have different characteristics. For
example, Premium brands are usually positioned as ‘symbolic’ products that provide a sense of
social status or ‘experiential’ products that provide sensory/cognitive stimulation, while Mass
brands are usually considered as ‘functional’ products that provide some basic benefits to cus-
tomers. To position a brand based on the symbolic and experiential concepts, it is critical for firms
to develop specific distribution channel strategies to enhance the brand’s image. For example,
Chanel may locate a specialty store at an international 5-star hotel, such as St. Regis or Ritz
Carlton in Shanghai. Alternatively, a firm could sell their high-end products at some high-end
Salon/Spa, so that the sales representatives can provide personalised counselling services about
skin care or make-up to high-end customers in a more private environment. For instance, L’Oréal
and Estée Lauder started their business ventures at various beauty salons in Paris and New York
City in the 1900s and 1930s, respectively (c.f., Jones et al. 2006 and Koehn 2002). Also, Paul
Mitchell (www.paulmitchell.com) began his US$750 hair-care business venture in the 1980s at
the beauty salons, which has grown into a US$700 million success story in 2004. Besides distri-
bution channel strategies, Premium brands are usually promoted as fashionable items. As such,
it is very difficult to obtain accurate demand forecast for the Premium brand products. Table 3
highlights different characteristics of Premium and Mass brand cosmetic products.

Table 3. Characteristics of premium and mass brands.

Characteristics Premium Mass

Positioning Symbolic or Experiential Functional

Competitive Differentiation (High Perceived Cost Leadership (High
Strategy Image) Perceived Value)
Selling Format Counselling (High Customer Self Selection (Low Customer
Contact) Contact)
Customers Upper Income Consumers Less Affluent City Residents/
(concentrated in major cities such as Affluent Rural Residents
Beijing and Shanghai) (scattered throughout China)
Profit Margin High Low
Demand Low Volume/High Mix (High High Volume/Low Mix (Low
Demand Uncertainties) Demand Uncertainties)
Product Development Cost High Low
Product/Process Technology Complex Simple
Product Life Cycle Short (High Obsolescence) Long (Low Obsolescence)
Inventory Cost High Low
Stock out Cost High Low
 International Journal of Logistics: Research and Applications 207

3. Supply chain configurations

Based on our data collection and personal interviews, it appears that there are three major supply
chain configurations that a multinational company would adopt as a supply chain strategy for
their cosmetic products. We also noticed that some companies would use a combination of these
configurations especially when they offer brands in multiple categories. The three major supply
chain configurations are:

• Direct or Indirect Export of Finished Products. The firm produces the products in other regions
such as Europe or North America and exports the finished goods to China directly to the retailers
or indirectly through an agent or a distributor with local operating knowledge.
• Outsourced Manufacturing. The actual manufacturing function is outsourced to their Chinese
suppliers under certain licensing or contractual agreements. However, the firm may export
some or all of the raw materials to their Chinese suppliers including patented active ingredients
such as Pitera. The basic raw materials such as Propylene glycol and Lanolin Alcohol in hand
moisturisers, or packaging materials such as glass bottles and boxes are usually sourced within
China.
• Offshore Manufacturing. This configuration is the same as outsourced manufacturing except
that the manufacturing function is performed within a factory that is either a joint venture with
a Chinese partner or a wholly owned subsidiary of the firm. Besides serving the China market,
the firm may ship the finished products to other Asian countries, such as Singapore, Malaysia,
India, Japan, and beyond. For example, Shiseido manufactures its Aupres JS products for men
in Beijing and ships this line of products from China to the US.

Different supply chain configurations have different implications. We shall highlight three major
implications for illustrative purposes. First, exporting cosmetic products to China can be beneficial.
This is because Chinese consumers perceive that the imported cosmetic products are better in terms
of brand image and quality. As such, to enhance the brand image, many multinational firms, such
as Estée Lauder continue to export their cosmetic products to China.
Second, outsourced manufacturing of cosmetic products can be risky. Even though the reform
of the IP protection law has made some good progress after China’s WTO entry in 2001
(http://www.chinaiprlaw.com/english/news/news5.htm), some unfortunate incidents could still
occur. For example, as reported by Jones et al. (2005), Shiseido products were often counterfeited
and the company is currently working with the local police in Beijing to combat this problem.
Also, multinational firms are not necessarily protected legally when their Chinese suppliers start
producing unauthorised products using virtually identical design and materials. To elaborate,
when the relationship between New Balance shoes and one of their Chinese suppliers went sour,
the Chinese supplier started producing different types of shoes using a logo that resembles the
New Balance’s block ‘N’ saddle design. New Balance filed a lawsuit in China without success
and the saga continues. The reader is referred to Chandler and Fung (2006) for more details. As
such, it is still difficult to protect IP and to eliminate the risk of counterfeits when a multinational
firm outsources its manufacturing operations to their Chinese suppliers under certain licensing or
contractual agreements.
Third, exporting cosmetics can have other hidden costs. In addition to higher manufacturing
and transportation costs, there are other hidden costs associated with tariff and the time to market
as well. For instance, the import tariff for various cosmetic products varies from 10% to 15%
in 2004, but the tariff is supposed to reduce to 6% by 2008 under the WTO agreement (see
http://www.china.org.cn/english/government/51861.htm). Moreover, when exporting cosmetic
products with certain claims of specific functions, such as SPF, hair growth, blemish removal,
etc., it usually takes nine months to obtain a special license from the Ministry of Health. In some
208 T. Wu et al.

Table 4. Characteristics of different supply chain configurations.

Supply chain Direct/indirect Outsourced Offshore

configuration export manufacturing manufacturing

Perceived Brand Image High Low Medium

Quality Control High Low Medium
Intellectual Property Protection High Low Medium
Counterfeit Risk Low High Medium
Local Market Information Access Low Medium High
Time to Market Long Short Short
Sales Volume Potential13 Low High High
Startup Cost14 Low High High
Manufacturing and Transportation Costs High Low Medium
Responsiveness to Demand Change Slow Fast Fast
Tariff15 High Low Low

cases, it would require inspection and quarantine, as imposed by the General Administration of
Quality Supervision as well (c.f., Fang et al. 2006). The process for getting proper license could
delay the launch of certain specialty cosmetic products, which could affect the sales significantly.
Table 4 provides a comparison among the three types of supply chain configurations.
By examining the characteristics of different brand categories in Table 3 and the characteristics
of different supply chain configurations in Table 4, we establish the following postulations, which
observe the alignment between products and supply chain configurations:
• To maintain a higher perceived image, multinational firms should export their premium brands.
While the time and cost associated with exporting could be higher, there are compensating
factors including lower technology transfer risk, lower counterfeiting risk, economies of scale
derived from producing the products at one location, better production capacity, and better
control of quality and inventory.16
• To offer a higher perceived value, multinational firms should either outsource or establish off-
shore operations for their mass brands. While the financial risk and operational risk associated
with this strategy are higher, there are compensating factors including lower manufacturing
and transportation costs, strong brand awareness due to physical presence, better access to
local market information, easier product localisation to meet local consumer’s preference, etc.
Ultimately, having a stronger physical presence would enable multinational cosmetics firms to
compete with domestic leaders, such as Dabao in Beijing and Jahwa in Shanghai.
To test our postulations, we observe the supply chain configurations of different brands that are sold
by gathering some company information available in various research reports and by conducting
company interviews. Our findings are summarised in Table 5.

Table 5. Supply chain configuration of different multinational brands.

Outsourced Offshore
Brand category Brand (Company) Export manufacturing manufacturing

Premium Lancôme (L’Oréal), Biotherm (L’Oréal), X

Estée Lauder (Estée Lauder), Clinique
(Estée Lauder), Crème De Lar Mer (Estée
Lauder), SK-II (P&G), Shiseido (Shiseido)
Mass-premium Revlon (Revlon), Aupres (Shiseido), L’Oréal X X
Paris (L’Oréal)
Mass Maybelline (L’Oréal), Olay (P&G), Dove X
(Unilever), Pond’s (Unilever), Avon17 ,
Amway
 International Journal of Logistics: Research and Applications 209

Our postulations are supported by the results reported in Table 5, especially for the premium
and mass brands. First, to maintain a consistent global brand image focus, all Estée Lauder brands
are premium products exported directly from Europe. Second, as Unilever produces only mass
brand products, they need to compete with domestic leaders, such as Dabao and Jahwa on cost
and value. To do so, Unilever established joint ventures in Shanghai and Anhui. Also, for their
mass brand products, P&G outsources over 90% of their raw materials for their manufacturing
production. Third, L’Oréal, P&G, and Shiseido pursued a diversification strategy by offering
different categories of brands. As shown in Table 5, the premium and mass brands adopted the
export model and the offshore manufacturing model, respectively, while the mass-premium brands
adopted a hybrid model that combined outsourced manufacturing and offshore manufacturing.
Specifically, in the hybrid model, the production of certain products associated with a brand is
completely outsourced, while other products are produced under a mixed configuration (i.e., a
mixture of offshore manufacturing and outsourced manufacturing). When a mixed configuration
is adopted, the core operations that affect quality are usually performed at the offshore factories.
These operations include the manufacturing of active ingredients, blending of different ingredients,
and final assembly operations. Other non-core operations, such as the manufacturing of packaging
materials and basic ingredients are performed at various outsourced manufacturing sites.

4. Distribution channel configurations

Based on our data collection and personal interviews, China’s retail sector has undergone tremen-
dous changes recently. Specifically, most cosmetic products are sold through the following five
major distribution channels today:18
• Department Stores. Department stores can be divided into two major classes: high-end stores,
such as Scitech in Beijing and low-end stores, such as Beijing Xidan Shopping Centre. In
most cases, cosmetics establish their own sales counters at the department stores to provide
professional advice to customers. Since high-end department stores charge their rent based on
a percentage of sales revenue (from 20% to 30%, depending on the location and the reputation
of the department store), each cosmetics counter must satisfy certain brand image and sales
record requirements.19
• Hypermarkets/Supermarkets. Major hypermarkets or supermarkets include Wal-Mart and
Carrefour. Similar to department stores, cosmetics companies are required to pay certain ‘slot-
ting fees’, in order to sell their products at certain well-known hypermarkets or supermarkets.
• Specialty Stores/Professional Stores.20 Specialty stores tend to provide a full range of products
of a specific brand and professional services, such as skin test for skin care products or lighting
simulation for colour cosmetics. Well-known brands, such as Shiseido and Estée Lauder set
up their standalone specialty stores. Professional stores, such as Sephora offer many premium
brands since 2004.21
• Pharmacies and Personal Care Stores. Most pharmacies have pharmacists or medical doctors
on site to provide professional advice to customers. These value added services tend to attract
customers who are seeking cosmetic products that offer specific functions, such as wrinkle-free,
whitening, and anti-acne, etc. For example, Vichy by L’Oréal was sold through pharmacies as
a pharmacy brand (c.f., Fang et al. 2006). Personal care stores, such as Watson’s have become
increasingly popular for selling cosmetic products because of their credible and professional
image.
• Direct Sales. Avon was the first cosmetic company introducing the direct sales method in
1990. Due to the concerns over the ‘pyramid selling’ scheme, the Chinese government banned
the direct sales method in 1998. The reader is referred to Godes (2004) for a detailed
210 T. Wu et al.

description of Avon’s sales strategy, and Coughlan (2004) for a detailed description of the
pyramid selling scheme. To comply with the government regulation that each sales repre-
sentative must be affiliated with a retail outlet, Avon had to set up their own standalone
specialty stores and sales counters at department stores and supermarkets to sell their prod-
ucts. In April 2005, the Ministry of Commerce of China finally gave the approval to Avon
to implement a pilot direct-selling programme in Beijing, Tianjin, and Guangdong. This pilot
programme was intended to help the Chinese government to develop ways to regulate the
direct-sales channels properly. In 2006, Avon sold their products via standalone specialty
stores, cosmetic counters, direct sales representatives, and online via www.263.com, which
created some channel conflict issues for Avon to handle.22 The reader is referred to Gao
et al. (2006) and http://english.people.com.cn/200504/11/eng20050411_180456.html for
more details regarding the recent development of direct sales models.

Different distribution channels have different implications. First, as the beauty advisors at the
department stores or specialty stores have in-depth knowledge about different products of a specific
brand, these beauty advisors can provide professional advice that would enhance the perceived
brand image as well as brand loyalty. In addition, they have specific customer knowledge, which
is valuable to the company for developing new products, promotion plans, pricing strategies,
etc. Second, the direct sales method is quite economical, because the distribution cost is entirely
variable. As such, it is easy for the company to expand without incurring upfront fixed cost,
such as slotting fees. Moreover, the direct sales method is an economical distribution channel for
selling products in regions experiencing strong economic growth. These regions include Zhejiang,
Shandong, Hubei, Henan, Sichuan, etc. Table 6 compares the key differences among different
distribution channels.
Notice from Table 6 that the relative market share of cosmetics sold at the department stores has
declined recently. For instance, in 1997, department stores accounted for 72% of all cosmetics
sales; however, this figure has declined to 48% by 2004, which represents a decline of 33%.
There are three major reasons for this trend. First, more channels especially hypermarkets and
supermarkets are opening up more outlets. As such, some of the sales have shifted from department
stores to other channels. Second, as customers are more familiar with certain brands or products,
they are more comfortable to purchase the products at other channels besides department stores.
Third, as Chinese government lifted the ban on direct selling, more sales representatives are eager
to sell directly to the consumers. As more direct sales companies enter the China market, retaining
experienced sales representatives is currently a major challenge that Avon and Amway are facing.

Table 6. Characteristics of different distribution channels.

Specialty stores/ Pharmacies

Distribution Department professional Hypermarkets/ and personal
channel stores stores supermarkets care stores Direct sales

Perceived brand High High Medium/low Medium/low Medium/low

image
Sales volume Medium Medium High Medium High
potential
Distribution cost High High Medium Medium Low
Product assortments Medium Large Medium Small Large
Mutual learning High High Low Medium High
Reach/convenience Medium Medium Low currently (due to Medium High
limited number of
outlets)
Relative change in −33% 600% +69% 100% 50%
market share23
Table 7. Distribution channels for different multinational brands.

Brand Department Specialty stores/ Hypermarkets/ Pharmacies and

category Brand (Company) stores professional stores supermarkets personal care stores Direct sales

Premium Lancôme (L’Oréal), Biotherm (L’Oréal), X (High-end department X

Estée Lauder (Estée Lauder), Clinique stores only)
(Estée Lauder), Crème De Lar Mer
(Estée Lauder), SK-II (P&G), Shiseido
(Shiseido)
Mass-premium Revlon (Revlon), Aupres (Shiseido), X (Mostly low-end X X X
L’Oréal Paris (L’Oréal) department stores)
Mass Maybelline (L’Oréal), Olay (P&G), Dove X X X
(Unilever), Pond’s (Unilever), Avon,
Amway
International Journal of Logistics: Research and Applications
211
212 T. Wu et al.

By examining the characteristics of different brand categories in Table 3 and the characteristics
of different distribution channels in Table 6, we establish the following postulations that examine
the alignment between products and distribution channels:
• To maintain a higher perceived image, multinational firms should sell their premium brands
via high-end department stores and specialty stores. While distribution cost associated with
department stores and specialty stores are higher, there are compensating factors including brand
image, customer intimacy, and consistent customer purchasing experience. These compensating
factors could lead to customer loyalty.
• To offer a higher perceived value, multinational firms should sell their mass brands via
hypermarkets/supermarkets and direct sales. While mass brands have lower profit margin,
the direct sales and the supermarket channels would enable the firm to penetrate the consumer
market in second-tier regions, such as Zhejiang, Shandong, Hubei, Henan, Sichuan, etc. The
additional sales generated from these second-tier regions could outweigh other negative factors.
To test our postulations, we examined the distribution channels of different brands that sold by
gathering company information available in various research reports and by conducting company
interviews. Our findings are summarised in Table 7.
Our postulations are generally supported by the results reported in Table 7, especially for the
premium and mass brands. For example, All Estée Lauder and L’Oréal’s premium brands are
sold through high-end department stores and specialty stores only. However, L’Oréal and P&G
sell their individual mass brands Maybelline and Olay at various supermarkets, pharmacies, and
personal care stores, respectively. As L’Oréal expands their presence in every brand category and
in every distribution channel, it has the opportunity to learn more about the market conditions
from the sales of different brand categories in different distribution channels.

5. Aligning supply chains and distribution channels

Combining the information provided in Tables 5 and 7, one can conclude that the multinational
firms do align their supply chains and distribution channels to a great extent. Figure 1 illustrates

Channel

Department
stores Premium

Specialty Stores
Mass-
premium
Hypermarkets/
Supermarkets

Pharmacies
Mass

Direct Sales

Supply
Chain
Offshore Outsource Export

Figure 1. Supply chain and distribution channel alignment for different brand categories.
 International Journal of Logistics: Research and Applications 213

how firms align their supply chains and distribution channels for different brand categories. For
instance, most firms export their premium products to China and distribute them via high-end
department stores and specialty stores. In addition, most firms manufacture their mass products at
various offshore factories and distribute them at supermarkets and pharmacies or through direct
sales representatives.

6. Future challenges

As the economic growth continues to be strong and as the Chinese consumers are becoming
more brand conscious, the cosmetics market has tremendous growth potential. Besides the supply
chain configuration and distribution channel alignment, we would like to highlight some additional
challenges and opportunities that multinational cosmetics firms would face in the near future:
• Domestic cosmetics companies strike back. As more multinational cosmetics firms introduce
more products, major domestic cosmetics companies, such as Dabao and Shanghai Jahwa are
developing different strategies to compete. First, Dabao have launched more than 100 products
using herbal essence, such as Ginseng Bath Lotion, Ginseng Shampoo and Conditioner in
1996 and they are continuing to develop new biological active ingredients that are perceived
as natural, good quality, and fair price among the Chinese customers. In addition, Dabao are
expanding their global market by building a new factory in Bangladesh and exporting their
Ginseng products that appeal to some European customers in countries such as Switzerland
and Sweden. Second, Shanghai Jahwa set up a joint venture with Sephora (France), which
is intended to open 100 professional cosmetics stores Sephora (China) by 2010. In this joint
venture, Shanghai Jahwa held 19% stake in 2005 that can be increased to 49% by 2007.
Shanghai Jahwa can exploit this new distribution channel in two major ways: launch private
label products at Sephora (China) that can be positioned as mass-premium or premium due to
the association with other brands sold in the Sephora (China) stores, and obtain information
about market trend and consumer behaviour directly from Sephora (China) (c.f., Tao 2006).
• China’s WTO entry benefits domestic cosmetics companies as well. While it is true that the
multinational cosmetics firms can enjoy a lower tariff when they export their premium brands to
China, the domestic companies pay a lower tariff for importing raw materials as well. Therefore,
domestic cosmetics companies can lower production cost, which would enable them to maintain
their cost leadership position.
• R&D Race. To learn more about customer’s preference, product customisation, product local-
isation, and developing new herbal based active ingredients, cosmetic firms are opening R&D
centres. For instance, P&G, Shiseido, and Dabao established their R&D centres in Beijing
during the 1990s, while Shanghai Jahwa, Unilever, L’Oréal, Estée Lauder opened their R&D
centres in Shanghai over the past few years. As firms learn more about consumer preference,
the race to develop new products for China market has just begun.
• Effective Advertising and Promotion may become less effective. Advertising can be an effective
tool to increase sales via brand awareness and association. For example, in order to gain market
share, P&G increased its advertising and promotion budget by 160% for their Olay brand in
2004. The 2004 campaign was based on four famous Chinese actresses endorsing Olay skin care
products, onsite display at various hypermarkets and supermarkets, and onsite demonstration
shows. The 2004 campaign generated 94 additional 12% market share, and Olay became the
most popular skin care product. While this campaign has been a great success, it may be difficult
to obtain high return on investment for this kind of campaign in the future, especially when
more cosmetics firms develop different blockbuster advertising and promotion campaigns to
compete for additional market shares.
214 T. Wu et al.

• The market for premium brands is still small. At this point, the market share of premium bands
is low for two major reasons. First, the market size for the premium brands is relatively small
at this point. Second, due to concern over counterfeits, most elite Chinese customers would
prefer to purchase the premium brands during their overseas trips to ensure genuine products.
For example, Shiseido has encountered situations in which various sales counters in department
stores were selling counterfeited Shiseido products (c.f., Jones et al. 2005). Until the Chinese
government has better control of counterfeits, the market share of premium brands will continue
to be small.
• Changing landscape. The political and the economical systems are evolving rapidly. There
are many unsettling issues that the multinational cosmetics firms need to be aware of. First,
the Chinese government in permitting Avon to run a pilot programme associated with the
direct sales method in 2005 in which the actual policies for governing direct sales mechanisms
remain unclear. Second, the tariff and quota are subject to change, even though the import tariff
for cosmetic products is supposed to be reduced to 6% by 2008. Third, unless the Chinese
government can enforce certain laws against counterfeits and commercial frauds, Chinese
customers are reluctant to purchase their products online.

7. Future opportunities

Despite various challenges, there are many great opportunities for multinational cosmetics firms
to gain a strong foothold in China. Some major opportunities are:
• Exploit low-cost manufacturing. By and large, the abundant supply of low cost labour entices
many firms to outsource or offshore their manufacturing operations. Clearly, due to low profit
margin and high transportation cost, it makes perfect sense to manufacture the mass brands.
However, while most premium brands are manufactured in Europe or North America and then
exported to China for China market, many premium brands are outsourcing their packaging
operations (gift packs for different sales events, holiday seasons, etc.) to China. Essentially,
many premium brands are sold in bundle, say, body lotion with cologne, body lotion with
perfume soap, or tie-in gift, say, a Christmas plush bear for purchasing a bottle of toilette.
To produce gift bundles without hurting the profit margin, many firms export their premium
products to their Chinese suppliers, where they assemble the products with locally sourced
materials (holiday tie-in gifts and boxes) into gift packs. These finished gift packs are then
shipped to Europe and North America.
• Exploit local talents. As the education system continues to improve within China and as more
Chinese are receiving education overseas, multinational cosmetics firms should exploit local
talents as a way to reduce cost, increase public acceptance of the brand, and ultimately, develop
products that appeal to Chinese customers. This strategy has proven to be effective in the auto-
motive industry. For instance, many popular Japanese cars sold in the U.S., such as Acura’s TL,
Toyota’s Camry, and Nissan’s Altima, are designed, manufactured, and marketed by Americans
for the American consumers (c.f.,. Sapsford and Shirouzu 2006).
• Export cosmetics products from China. As products designed and manufactured such as Lenovo
(contract manufacturer for IBM notebook computers until recently) gained mass appeal, multi-
national cosmetic firms can use their factories in China as their ‘lead factories’ whose products
are exported from China to other Asian countries and beyond. For example, L’Oréal exports
their mass brand products from their factories to Japan, Korea, and other Southeast Asia coun-
tries. The reader is referred to Ferdows (1997) for a detailed description of lead factories and
a framework for exploiting the value of foreign factories.
 International Journal of Logistics: Research and Applications 215

• New Product Development. Besides developing new cosmetics products with strong appeal
to Chinese consumers by using the existing brand names, some companies have developed
new products market under different brand names. For example, Shiseido created a new brand
Aupres in the late 1980s that is designed and manufactured by the Chinese for the China
market.24 By 2004, Aupres had the third highest market share within the skin care category.
This success story may motivate other cosmetics companies to develop more new products for
the China market in the near future.
• Brand Acquisitions. Developing new products specifically for a foreign market can be very
risky in terms of cost and time. To reduce the potential financial risk and gain market share
quickly, many multinational firms have acquire domestic brands with proven brand image and
sales record. As part of L’Oréal’s global expansion strategy and as a way to fill the missing gap
of mass and mass-premium brands, it acquired two well-known domestic brands Mininurse and
Yue-Sai in 2003 and 2004, respectively.25 These two acquisitions enable L’Oréal to become the
number 1 cosmetics company in China (in terms of total sales) and continue to be the largest
cosmetics company in the world.
• Channel Expansion. Since the China market is geographically fragmented, it is challenging for
companies to reach different market segments in different geographical regions. To gain market
share, many multinational firms, such as Shiseido and Avon are expanding their distribution
channels by opening specialty stores in major cities. For example, Shanghai Jahwa is opening
professional stores via a joint venture with Sephora.
• Exploit emerging supply chain capabilities. As the information technology becomes more
mature, there is a great opportunity for firms to exploit the point of sales data to improve their
supply chain visibility so as to improve the overall supply chain performance. For example,
P&G is the first manufacturing enterprise to set up an efficient consumer response (ECR)
system. This ECR system enabled P&G to manage their supply process for meeting customer
demand in a cost effective manner.
• Exploit integrated logistics capabilities. The logistics industry is fragmented due to regional
license requirements in China. At this point, most supply chains are not integrated due to the
need to use different transportation companies in different regions of China and due to limited
IT capabilities to integrate information from different transportation companies. Currently, no
single logistics provider commands more than 2% of the China market (c.f., Bolton and Wei
2005). However, the logistics industry is growing by more than 50% annually since 2001 due
to China’s WTO entry, and it is changing rapidly due to recent mergers and acquisitions. For
example, DHL (Germany) acquired Exel Logistics (England) in January 2006. As the logistics
service operations become more sophisticated, many cosmetics firms can outsource their logis-
tics operations to some major logistics providers so that they can focus on their core competence.
More importantly, it would enable these companies to improve their supply chain operations, so
that they can offer more products to consumers without facing high operating cost, high inven-
tory cost, or high obsolescence cost. Ultimately, it can enable these companies to compete
on cost, product variety, and product availability (c.f., Billington et al. 1998, Fisher 1997 and
Lee 2004).

In summary, most multinational cosmetics firms align their supply chain configurations and
distribution channels to a great extent. However, firms with diversified portfolios in differ-
ent brand categories tend to adopt multiple supply chain configurations and distributions
channels. This strategy is consistent with the multiple supply chain concept articulated by
Byrnes (2005). As the cosmetics market continues to grow, more challenges and opportuni-
ties are present for firms to develop aligned strategies to sustain their growth in China and
beyond.
216 T. Wu et al.

Notes

1. NBS PRC reported that China’s GDP was growing at a rate of 9.5% in 2004 and the per capita annual disposable
income of urban households was US $1200 in 2004.
2. After Nike handled this crisis in the late 80s and weathered the storm about sweatshops and child labour issues, Nike
has implemented its supply chain strategy and its marketing strategy in China successfully, and it is now opening,
on an average, 1.5 new specialty stores per day in China (c.f., Forney 2004).
3. The reader is referred to Huffman (2003) for an insightful discussion on how WalMart overcame the difficulties of
distribution and supply chain management in China.
4. While Porter (1986) presented various generic international strategies for firms to compete globally, our paper
focuses on the issue of coordinating supply chain and marketing activities for a firm to succeed in a new
market.
5. In 2004, Shiseido was pleasantly surprised with the sales of their most expensive skin cream Clé de Peau at US$500
per bottle at four high-end department stores in China (c.f., Koehn 2005).
6. Other factors were packaging, advertising, buying convenience, others’ recommendations, etc.
7. The reader is referred to Eisenhardt (1989) and the references therein for various justifications of case-study research
methods and Ellram (1996) for a good application of case-study method in logistics research.
8. Unilever was unable to provide specific contacts for us to conduct our interviews, even though Unilever was included
in our original selection.
9. Some may include bath and shower products, shampoo and conditioner products, deodorant products and oral
hygiene products as cosmetic products (c.f., Fang et al. 2006).
10. Anti-wrinkle cream did not perform well due to the negative connotation, and hence, many brands are re-naming
this subcategory as anti-aging cream, currently.
11. Among all make-up products, lipsticks are by far the most popular item among the Chinese consumers (c.f., Tao
2005). Chinese consumers are still not accustomed to strong fragrances and still prefer subtler scents based on
natural ingredients such as herbal essence or fruit extract. For more details about market share of each product
category in different regions of China, the reader is referred to Fang et al. (2006) for details.
12. As of 2004, the consumption taxes associated with skin care and make-up products are 8% and 30%, respectively.
13. The sales volume potential is even higher if one includes the potential of shipping the finished cosmetics products
from the Chinese factories to other countries throughout Asia and beyond.
14. Start-up cost includes the cost of searching for a reliable contract manufacturer, which could be significant and
time consuming. This is exactly the core value provided by trading companies such as Li and Fung in Hong Kong.
Specifically, the company, Li and Fung, provides a one-stop outsourcing solution to multinational firms such as
Gap and Warner Bros. for the production of garments and toys (c.f., Tang 2006).
15. Besides import tariff, the Chinese government imposes import quotas for certain countries exporting certain products.
16. For instance, in early 1980s, due to the lack of sophisticated production technologies, Shiseido insisted that they
could only produce basic toiletries such as shampoo and conditioner. These toiletries were sold under the brand
name HuaZi without any association with Shiseido’s name.
17. According to the 1998 regulation established by the Ministry of Commerce of PRC, products sold within China
under the direct sales model must be manufactured within China. Both Avon and Amway offer a few products
in the Mass-premium category as well. To simplify our exposition, those mass-premium products are neglected
here.
18. Online sales of cosmetic products are still weak for three major reasons. First, most premium products sold online
are counterfeited, smuggled, or bootleg products. Second, consumers are not fully protected for online frauds, even
though all online sales websites are subject to the government approval. Third, the logistics service industry is
not well developed to support the pick-up and delivery services for online customers. As such, few known brands
offer online sales services directly to customers. However, customers can now purchase Avon products via Avon’s
authorized Chinese portal www.263.com; the products are shipped directly from Avon’s regional distribution centres
to the customers via third party logistics providers (c.f., Gao et al. 2006). Moreover, DHC of Japan has recently
entered China market using their website as their main distribution channel (c.f., Li and Fung Research Report,
2005).
19. This practice is common among high-end department stores worldwide. For instance, without a proven brand image
and sales record, Estée Lauder was unable to set up sales counters at Saks Fifth Avenue initially. However, Estée
Lauder won Saks Fifth Avenue over, after she devised an innovative scheme in the late 1940s (c.f., Koehn 2005).
20. Although there are no official figures on the sales at the beauty salons and spas, we observe that many high-end
beauty salons and spas are located in virtually all international 5-star hotels such as St. Regis, Four Seasons, Ritz
Carlton, etc. These beauty salons and spas being a perfect location tend to attract high-end customers to test new
products or to collect customer information in a more relaxed environment.
21. Sephora (China) is a joint venture between Sephora of France and Shanghai Jahwa. It focuses on premium brands
with Chinese characteristics. Sasa of Hong Kong also opened its first franchised cosmetic superstore in Shanghai
in 2005 with a plan to open 30 stores by the end of 2007.
22. As reported in New York Times on April 29, 2006, Avon’s first-quarter profit fell 67% due to the decline of direct
sales in America; however, Avon is relying on the China market to sustain growth.
 International Journal of Logistics: Research and Applications 217

23. Relative change in Market Share for Channel for Channel X = (Market share for Channel X in 2004 – Market Share
for Channel X in 1997)/(Market Share for Channel X in 1997). See Fang et al. (2006) for more details.
24. Shiseido established a joint venture with Shanghai Zotos CITIC to launch a new mass brand FITIT without any
affiliation to Shiseido’s name, in 2002. Toyota has adopted a similar concept in the US by developing a new brand
Scion targeting the young American market.
25. L’Oréal’s strategy focused on creating a strong presence in every brand category and in every distribution channel.
This strategy has enable L’Oréal to achieve double digit growth in sales for the last 19 consecutive years (c.f., Jones
et al. 2006).

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218 T. Wu et al.

Appendix 1: Background information about the selected companies

1. Avon (www.avon.com). Known as California Perfume Company until 1939, Avon is based
on a direct-sales method that depends on three million sales representatives to sell products
in 139 countries, making it one of the largest direct sales companies in the world. In 1990,
Avon introduced the direct-selling method and employed local women as independent sales
representatives. After the ban of direct sales in 1998, Avon was the first direct sales company
to be re-licensed as a wholesale/retail business, and it quickly opened counters and standalone
stores throughout China. In 2004, Avon was selling through its network of 6000 standalone
stores and 1800 counters. In the process of lifting the ban on direct sales in 2005, Avon
received approval to be the first to implement a direct-selling trial programme in selected areas.
The company pilot programme will assist the government in developing rules to manage the
direct-sales channel.
2. Amway (www.amway.com). Amway is a privately owned company based in Michigan, and
currently distributes products in 80 countries and territories, making it one of the world’s largest
direct sales companies. Amway offers more than 450 different products, ranging from cosmet-
ics, personal care, nutrition and wellness, home care, home tech, and commercial products. In
1992, Amway entered into China by investing US$ 29 million in a joint venture to build a plant
in China. The company was impacted by the 1998 ban on direct selling practices. However,
after adapting its operation to comply with the new government regulations, the company not
only survived enough to recover lost ground by the time the ban was lifted in 2005, it also
made China one of its highest earning regions. Amway’s Artistry is the second largest skincare
brand now.
3. Estée Lauder (www.esteelauder.com). The company was founded in 1946 and has become a
leading international player in the prestige skincare, colour cosmetics and fragrance products.
Estée Lauder focuses exclusively on the prestige segment of the colour cosmetics and skincare
and has not followed the trend of other companies in entering into the mass market. Estée Lauder
has achieved business expansion by growing organically in product lines of skincare, colour
cosmetics, and fragrance. The company sells its products in over 100 countries worldwide and
continues to manage each of its brands as a separate business unit. Estée Lauder entered into
the China market in 1993.
4. L’Oréal (www.loreal.com). The company was founded by Eugene Schueller, a twentieth-
century French chemist who was famous for inventing the first synthetic hair colouring product.
Hair care was the focus of the company until 1936 when L’Oréal began to focus on cosmetics
with a brand portfolio that ranges from colour cosmetics to hair care. The China subsidiary,
L’Oréal China, opened its headquarter during 1997 and has rapidly grown to become the second
most prominent cosmetics and toiletries industry player by the end of 2004. The company has
an extensive product portfolio and strengthened its local presence with the purchase of domestic
brands (Yue-Sai and Mininurse).
5. Proctor and Gamble (www.pg.com). P&G was established in 1837 as a partnership between
William Procter and James Gamble. The company’s products had expanded from candles and
soap into many other products, ranging from sanitary products, coffee, foods, pharmaceuticals,
skincare products and other cosmetics and toiletries products. The company has also expanded
its operations internationally and entered China in 1988. P&G established its first joint venture
in Guangzhou and has become the company’s sixth largest territory. P&G has developed joint
ventures and wholly owned subsidiaries located throughout China, and has hired over 4000
employees and invested over US$1 billion.
6. Revlon (www.revlon.com). Revlon was founded in 1932 by Charles and Joseph Revson in
conjunction with a chemist Charles Lachman. The company began with selling only nail polish.
 International Journal of Logistics: Research and Applications 219

In only six years the company became a multimillion-dollar organisation, Revlon became one
of the most recognised cosmetics names in the world. Since the 30s, the company has become
a leading mass-market player in cosmetics. The company has rapidly expanded its franchise
to approximately 175 countries and territories. Revlon’s major brands include Revlon, Almay,
Ultima II, and Charlie.
7. Shiseido (www.shiseido.com). The company was originally established as a pharmacy in Japan
during 1872. Since then, Shiseido has grown to become one of the world’s top multinational
companies in the cosmetics industry. The company has a strong product development strategy
around the Shiseido name, and uses it as the main brand in many of its products. Shiseido began
its operations in 1981. Later in December 1991, a joint venture Shiseido Liyuan Cosmetics
Co Ltd was incorporated, focusing on manufacturing Aupres, a brand created specifically for
China market.

Appendix 2: A common set of questions (in Chinese) discussed during our interviews
220 T. Wu et al.
International Journal of Logistics: Research and Applications 221
222 T. Wu et al.
International Journal of Logistics: Research and Applications 223
224 T. Wu et al.

Appendix 3: A common set of questions (translated from Chinese) discussed during our
interviews

Questionnaire for cosmetics company

The purpose of this questionnaire is to gather information about China cosmetics market (includ-
ing skin care, colour cosmetic, fragrances). The questionnaire is divided into four sections,
including Cosmetic Market, Business Environment, Distribution Channel and Supply Chain
Structure.

Part I: Cosmetics market

Segmentation.
1. How does your company segment the cosmetics market in China by?
(Circle all the responses that are applicable)
a. Product line
i. If yes, by what product lines? (Skincare, Make-up, Fragrance etc.)
b. Customer income level
ii. If yes, by what and how many income levels (high-income, low-income)
b. Geographical regions
i. If yes, how did you decide on the regions (by purchase pattern, population, income)?
c. Others (please specify)
2. Why did you select that method of segmentation?
a. What were the driving factors?
i. Income
ii. Consumer buying behaviour
iii. Others (please specify)
 International Journal of Logistics: Research and Applications 225

b. Was it based on certain capability or strengths?

i. If yes, was it geographic reach, product line, etc?
ii. If no, how was the decision made?
c. Other reasons?
3. Is this method unique to China?
a. If yes, why?
b. If no, where is this method used internationally? (please specify)
4. Has your method of segmentation changed since you first entered the China Market?
a. If yes, what was the initial method? Why the change?
b. If no, go to next section (Targeting).
c. If you do not know, do you know someone who would know?

Targeting.

1. What segment do you target now? With what Brands?

2. What are the reasons for the target selection?
(Please circle all that applicable)
a. Opportunity in the market
i. If yes, what kinds of opportunity?
b. Higher profit
i. How does the target contribute to higher profit?
c. Company Strength in targeting particular segment
i. What are the strengths?
d. Others (please specify)
3. Is the positioning different from those in overseas markets?
a. If yes, please specify
i. How it is different?
ii. What are the reasons for such a different positioning?
4. How did you target those segments in the China market? Did you do it via any of the following
methods: (circle all that applicable)
a. Acquisition of local brands
i. If yes, what brands and why?
b. Introducing own existing brands
i. If yes what kind if existing brand (high-end, low-end) and why?
c. Developing localised brands
i. If yes, what kind of localised brands and how was the decision made?
d. Others (please specify)
5. Has your target segment changed since your initial entry into China market?
a. If yes, how has it changed and why?
b. If no, do you see it changing in the future?

Market trend.

1. What do you see in the trends of China’s cosmetic market in 5 years in the following areas?
(please check all that are applicable and specify detail)
a. Sales growth
b. Regional trend
c. Product mix break-down change
d. Consumer shopping behavior change
i. Need for more localised product
226 T. Wu et al.

ii. Shop at different distribution channels

e. Other (please specify)
2. Will the forecasted trend impact your segmentation and targeting? How?

Part II: Business environment

1. Is there any favourable or unfavourable policy for foreign investment in this industry?
a. Tax policy, WTO terms, etc (Any others)
b. Is there any geographical difference on these policies?
2. What governmental regulations impact your strategy now?
a. Is your company required to customise products, participate in joint ventures?
i. If yes, how does that impact your strategy?
b. Is the procedure of getting approval from the ministry of health for a new product different
for localised and imported products?
iii If yes, how does that impact your strategy?
c. Other (please specify)
3. What changes in governmental regulations do you think will impact your future strategy?
(Circle all that applicable, and please specify how that change will impact your strategy)
a. WTO: Lowing tariff/consumer tax of imported cosmetic products
b. Direct-sales: Permission for future direct sales
c. Others (please specify)
4. Will the impact result in any of the change in Supply Chain Setup? (circle all that applicable,
and please specify how your supply chain setup will change due to the impact)
a. Entering new distribution channel
b. Building of new plants
c. Increasing responsibility for China plants
i. Authority of procurement and production plans
ii. Product & procedure re-engineering
iii. Establish R&D Centres (where?)
iv. Manufacturing more parts (what parts?)
v. Product serves local and international markets (what markets?)
d. Others (please specify)
5. Are there any other areas of your operations that you can think of that are particularly unique
in China?

Part III: Distribution channel(company level, brand level)

1. What is the geographical coverage of your Brands? And what is the distributor structure for
each Brand?
2. What distribution channels you used for the Brands?
(Circle all that are applicable; for each channel, please specify the brands)
a. Department store (high-end, low-end)
b. Specialty Store
c. Duty-free stores
d. Direct sales
e. Supermarket/Hypermarket
f. Pharmacy/Drugstore
g. Others (please specify)
 International Journal of Logistics: Research and Applications 227

3. Are the distribution channels you use in China different from those you use in your overseas
markets?
a. If yes, please specify the difference and the reason for such a strategy
b. If no, go to question 4.
4. Why are the distribution channels set up in such ways?
a. To project specific image?
i. If yes what kind of image?
ii. If no, go to b.
b. Reach of channel to ensure volume?
i. If yes, how does the channel ensure volume?
ii. If no, go to c.
c. China specific challenges?
i. If yes, what kind of challenges?
ii. If no, go to d
d. Others (please specify)
5. Did distribution channels have an influence on how you set up logistics and operations? If so,
how?
6. Are there unique methods of distribution for the different cosmetic segments? If so, why?
(open-ended)
7. How did the geographical coverage and distributor structure change after the Brand’s entry to
China? Why?
8. What do you see in the trend of cosmetic products distribution system as well as retail channel?
9. What’s the impact you foresee of the entry of Sasa and other cosmetic chain stores (multi-brand)
to China mainland market?

Part IV: Supply Chain Structure

Product flow in the supply chain structure (brand level, product-line level).
1. What point of the Supply Chain flows into China?
a. Manufacturing or Packaging (If yes, go to Question 2).
b. Distribution (if yes, go to Question 4).
a. Others (please specify)
2. What parts of the product are manufactured or assembled in China? Why?
3. How is raw material procurement done?
a. Do the manufacturing plants choose the local suppliers?
i. If yes, how are the remaining parts of the product imported into China?
ii. If no, go to b
b. Others (please specify)
4. Where are the warehouses located?
5. Do you outsource warehousing to third-party companies? (please specify reason for such a
setup)
6. Logistics
a. How do you deal with the inbound transportation?
b. How do you transport the products to distribution channels?
c. Outsource distributors or logistic companies
i. Who are the distributors?
ii. What are the their responsibilities (e.g. packaging, distribution)?
iii. Why such choices?
7. Are those products manufactured/assembled in China for the international market as well?
228 T. Wu et al.

a. If yes how do you distribute the products from China to international market?
b. If no, why keep it only in China?

Consolidation (company level). For different brands, if you use different supply-chain setup,
please go to question 1; if no, go to question 2.
1. Does any part of the supply-chain setups for different Brands share a common setup at Company
level?
(a) If yes, where is it the same?
(Circle all that applicable; please specify reason for such a setup)
i. Raw material sourcing
ii. Manufacturing plants
iii. Transportation
iv. Warehouses and distribution centres
v. Others (please specify)
b. If no go to Question 4.
2. What are the reasons for such setups?

Demand forecast (optional).

1. What data were used for demand forecasting?
a. Based on historic trend
b. Forecast retail out
2. Does the outcomes of the demand forecasting affect Supply Chain setup and manufacturing
plan?

Appendix 4: The profile of interviewees

Company Executive Supply

(China division)\ officers chain Marketing Public Legal
Function (rank in (CEO/ (Director/ (Director/ relations counsel
China division) CFO) VP) VP) (Director/VP) (Director/VP)
Avon 1 1 1
Amway 1 1
P&G 1 1
Estée Lauder 1 1
L’Oréal 1 1 1
Revlon 1 1 1 1
Shiseido 1 1