Despite the popularity of the SOD Milk Cream among people in the lower-income bracket, Dabao had not managed to gain a presence in the mid-level cosmetics market, not to mention the high-end market dominated by foreign giants.

Statistics from the China Brand Research Institute (CBRI) show that Dabao accounted for 17.79 percent of the Chinese cosmetics market in 2003. In 2005, despite the fact that Dabao, with its sales volume reaching 780 million yuan, ranked first among domestic skin care brands, it took up only 1 percent of the 70 billion yuan of total sales generated by the domestic cosmetics market that year.

Hoping to survive

Yet Dabao was planning a breakthrough, starting with its sales bulletin on the CBEX. With a record high price of 2.3 billion yuan as its sales price, Dabao scaled down the list of bidders by implementing a number of criteria that all but turned it into a one-horse race.

As part of the criteria, Dabao stated that potential bidders must be engaged in skin care products manufacturing and marketing and own cosmetics brands distributed globally or nationwide in China. The bidder was also required to pay no less than the posted price in cash for the takeover bid. It was also stipulated that any potential bidder promise to use and develop the brand of Dabao, optimize and elevate its brand awareness and retain Beijing as its registered headquarters.

With due prudence in choosing a buyer, Du hoped that the Dabao brand would not disappear. Wang Wenbin, General Manager of Dabao Cosmetics, explained, “We sold the company to seek more growth room, not because of a profit bottleneck.”

According to a Xinhua report, J&J is now targeting cities at the second and third levels and the rural market with Dabao. For them, Dabao’s mature and far-reaching networks in these markets, especially in the wholesale business, are a great advantage.

According to statistics from the National Bureau of Statistics, people living in towns, villages and the countryside account for 69 percent of the total consumption of skin care products, two fold that of major cities. The Dabao, Longliqi and Vaseline brands are most popular in rural markets because of their economical prices and universal uses.

At present, J&J owns only the Neutrogena and Clean & Clear cosmetics brands in the middle to upper-middle market. The Clean & Clear series enjoys certain brand recognition, but the newcomer Neutrogena is known only in major cities.

Huang Zhidong, researcher with CBRI, said that since China lifted the tax on skin care and shampoo products on April 1 this year, costs for daily cosmetics manufacturers have been reduced, allowing dealers and manufacturers to penetrate rural markets more deeply. Foreign brands may attempt to create or buy more cosmetics brands that suit rural markets, lowering prices at the same time. Dabao is undoubtedly a mature choice for a J&J eager to explore China’s village markets.

Facing the competition

With international cosmetics giants developing middle- and low-end products and already holding the lion’s share of the high-end market, local companies are feeling the impact.

“A majority of local enterprises focus on middle- and low-end products and enjoy advantages in channels of the second- and third-level markets,” said Lai Shuqin. “With the competition getting fiercer, these advantages are crippled.”

International cosmetics giants are joining in on the trend to acquire local skin care brands. After its acquisition of Mini Nurse, L’Oreal Group took advantage of the former’s sales channels to serve its three brands: Maybelline, Garnier and L’Oreal. In 2004, L’Oreal Group doubled its sales in China to reach 3 billion yuan, nearly 16 times what it was in 1997 when it had just entered the market.

Avon and Shiseido are also seeking new targets of acquisition. Lai said that multinationals would soon nibble into the low-end market.

But Pan believes all cosmetics manufacturers have possibilities given such an emerging lucrative market. According to him, at the end of 2005, only 4.11 percent of the companies in the market were foreign owned, with the rest domestic private or state-owned enterprises. The main players included Longliqi, Lafang and Tjoy.

The most pressing problem facing local brands is not the possibility of being acquired by foreign brands, but how to boost their profits, said Pan. “I can guarantee that domestic cosmetics products are not inferior to foreign brands in terms of quality.”

Local brands like Dabao only see about a 2-3 percent profit gain per year, while multinationals and joint ventures can gain as high as 10 to 30 percent. Foreign brands account for 80 percent of the total profit the cosmetics market generates, though local brands hold 60 percent of the market share.

“On the other hand, with advantages in brand, management and funding, multinationals will crave for more and explore the markets of smaller cities,” said CBRI’s Vice President Zeng Zhaohui. “When foreign brands penetrate deeper, local brands should find solutions instead of relying on quick sales at small profits in order to survive.”