It used to be a common sight in major Japanese cities, especially during the Lunar New Year holidays: hordes of Chinese tourists arriving on buses and cruise ships and going on shopping sprees for duty-free, made in Japan goods. There’s even a term for that particular consumer behavior: bakugai, or explosive buying.
International travel, however, has come to a standstill amid tougher border controls caused by the pandemic, dealing a heavy blow to corporations that have relied on the purchasing power of inbound visitors from the world’s second-largest economy. In 2019, foreign visitors — of which nearly a third were Chinese — spent ¥4.8 trillion in Japan. Last year, spending plunged 85% to an estimated ¥745 billion.
To offset the fall in domestic sales, Japanese firms are doubling down on China’s gigantic online market by beefing up cross-border e-commerce strategies. In its earnings report for the year ended Dec. 31, for example, chemical and cosmetics giant Kao Corp. said that it’s cosmetic business contracted by 22% year-on-year to ¥234.1 billion due to the decline in inbound demand. Meanwhile, sales of cosmetics in China grew by 20%, with 70% of that revenue coming from e-commerce channels.
With an established business-to-consumer presence through its flagship stores on Chinese platforms such as Tmall Global and JD Worldwide, Kao is now breaking into the consumer-to-consumer segment that it estimates accounts for one-third of China’s ¥4.8 trillion cosmetics e-commerce market.
“We essentially want to improve our brand image while working with influencers who understand our product and can disseminate proper information,” said Shiro Okimoto, a director at the global business department of Kao’s cosmetics business.
Through its partnership with Tokyo-based TrendExpress, a company that provides support for cross-border e-commerce operations focusing on the Chinese market, Kao has so far signed contracts with 30 Chinese social media influencers who are buying Kao’s products in bulk for resale on online platforms such as WeChat and Taobao. So far, 11 skincare products have been selected, and online information sessions have been held to educate the private resellers on the characteristics of the goods.
In the past, these merchants posed a risk for many Japanese firms, potentially undermining their brand image since manufacturers can’t control pricing. But the phenomenon has seen an improvement since Beijing introduced an e-commerce law that came into effect in 2019, which clamps down on so-called daigou resellers by requiring them to register with the state and pay taxes.
Since then, many have called it quits, while successful online merchants have expanded their influence. And these are the people Kao wants to work with.
“Rather than driving up sales, it’s more about using the star-power of influencers to spread awareness of new products before their official launch in China,” Okimoto said.
Demand for Japanese cosmetics is rising as Chinese consumers unable to travel abroad accelerate online purchases. According to the Japan External Trade Organization (JETRO), China’s imports of cosmetics from Japan in 2020 climbed over 30% from the previous year, reaching around $4.3 billion (¥467 billion) — by far the largest in terms of import value among other major countries.
“While products such as lipsticks are said to have fallen in demand during the pandemic, basic skin care products produced by Japanese firms remain very popular among Chinese consumers,” said Etsu Ho, a researcher at JETRO’s China and North Asia Division.
“Consumers are also becoming more health conscious and seem to be drawn toward foreign-made health products and supplements,” she added.
China’s growing middle class and its aging population has seen demand for health care goods soar.
In its earnings report for the year ended March 31, cosmetics and dietary supplements company Fancl Corp. said net profit fell 19.7% year-on-year to ¥8 billion due to a plunge in inbound sales. Sales from e-commerce, however, grew 13.9% to ¥56.8 billion. Health supplements were especially strong, it said, and the company plans to triple the sales of supplements in the Chinese market to ¥6 billion by the end of fiscal 2023.
Fancl began selling supplements on Tmall Global in 2018 through a partnership with China Sinopharm International. It now sells around 50 supplements, with shoppers in their 20s and 30s, especially women, making up a bulk of the clientele.
“That’s not our final goal, however. We want to reach a larger audience by expanding beyond e-commerce,” said Takeshi Tanaka, manager at Fancl’s international business strategy division. For that, state approval is necessary, something Fancl was recently granted, allowing the firm to start offering health food products in China both online and in physical stores.
“Health care and preventive medicine is a major focus in China, represented by the Healthy China 2030 target,” Tanaka said, referring to China’s state-backed health-system reform project. “In that context, we believe health supplements will continue to remain in strong demand.”
According to Mckinsey & Company’s China consumer report 2021, China boasts the world’s largest e-commerce market, accounting for about 45% of global retail e-commerce transaction value in 2018. Statista says revenue in the Chinese e-commerce market is projected to reach $1.26 trillion in 2021.
Trends are changing too. Over the course of the pandemic, live streaming e-commerce has become all the rage in China. Platforms such as Taobao Live have been used by influencers to promote and sell merchandise in what has come to be known as “live commerce.”
Inagora Inc., a Tokyo-based cross-border e-commerce startup, has been working with Japanese firms to utilize this approach to reach Chinese consumers.
Founded in 2014, the firm operates Wandou Gongzhu, a Chinese-language online retailer with over 10 million downloads to date. The site features around 40,000 offerings from 3,300 Japanese brands covering cosmetics, clothing and food products produced by companies including Shiseido Co. and Kao and Fancl.
Shigetoshi Tsuda, vice president of Inagora, began hosting live streaming shows himself alongside Chinese interpreters last year to give an air of authenticity to the products the company sells on its app. Around 30 items are introduced during a single session, which could last several hours, and questions from viewers are accepted in real time. Filming can take place in studios or at drugstores and retail outlets, depending on the episode.
New products by cosmetics makers such as Shiseido that are yet to be released in China are popular, he said. “Our main targets so far are wealthy, single women living in large cities,” he said.
“Health supplements and diet-related products soared over the last year, as well as cooking utensils and fitness equipment, as many people worked remotely. In terms of cosmetics, more expensive products typically sold in department stores are in high demand.”
Tsuda said Japanese firms seeking to crack the Chinese market need to work harder to keep up with changing consumer trends. “I feel Japanese companies aren’t up to speed with what’s happening in China,” he said.
“Marketing decisions need to be made swiftly, and in order to do that, corporations need to accumulate up-to-date information on what Chinese consumers want.”
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