• The Mainland and Hong Kong Closer Economic Partnership Arrangement (CEPA) came into effect on 1 January 2004. All goods made in Hong Kong, including cosmetics and toiletries products subject to the CEPA's rule of origin, can enjoy duty-free access to the Chinese mainland beginning January 2006.
• Hong Kong has a small cosmetics and toiletries manufacturing sector. Most manufacturers are producing lower-priced toiletries and perfumes with their own brands. Most of the industry players are traders who act as agents of foreign brands to sell in the region, particularly the Chinese mainland. In recent years, many facial and spa centres in Hong Kong also carry their own brands or act as foreign brands agents.
• International brands play a dominant role in the upper-end market of Hong Kong and the region. Local producers of cosmetics and toiletries are forced to put their focus on the middle- to low-price market segments. Apart from female make up and skin care products, international brands such as Biotherm, Clinique, L'Oreal Paris and L'Occitane also tap on male skin care market in recent years.
• With the arrival of mainland tourists under the individual visitor scheme and the concomitant surge in local cosmetics sales, many businessmen are eyeing the lucrative local cosmetics market. Hong Kong, as a showcase for foreign brands wishing to target mainland customers, has continued to attracted new brands to establish a presence here.
• Facial whitening products are getting increasingly popular, especially among Asian consumers. Their demand for multi-protection sun cream and anti-wrinkle cream has increased substantially in recent years.

Industry Features

Note: Industry statistics cover activities in Hong Kong only.

Hong Kong has a small cosmetics and toiletries manufacturing sector and most manufacturers concentrate their production on lower-priced toiletries and perfumes, particularly for marketing to the Chinese mainland, Southeast Asia and the US usually under their own brands.

Most of the companies in the industry are traders who act as agents of foreign cosmetics brands to sell to the Chinese mainland, US, Macau, Japan, EU and Southeast Asia markets. Some Hong Kong spa and beauty salons also act as an agent for Middle East's cosmetics and skin care products for the sales in Asian region. Hong Kong has experienced distributors well versed in regional markets and regulations. They act as distributors for popular brands, aiming at the general public and devising the whole marketing mix.

Some traders have good connections in the Chinese mainland, and could help sell professional product lines to beauty salons there. Hong Kong traders are good partners of foreign brands given their market knowledge, skills and connections, and integrity, especially as entry procedures into China would require disclosure of confidential information like product formula.

Export Performance ^

^ Since offshore trade has not been captured by ordinary trade figures, these numbers do not necessary reflect the export business managed by Hong Kong companies.
* Insignificant

The majority of Hong Kong's exports are re-exports, accounting for about 98% of the total. Most of the imports/exports are conducted by trading firms acting as agents of international brands (mostly French and Japanese cosmetics and fragrance) targeting the US and the Chinese mainland markets.

Re-exports of Chinese mainland origin including make-up preparation for skin care (sunscreen or suntan preparations, manicure or pedicure preparations), perfumed bath salts and hair treatment, accounted for more than 40% of re-exports in 2008.

The US has been Hong Kong's largest export market of cosmetics and toiletries, accounting for nearly 19.4% of Hong Kong's total exports in 2008, followed by the Chinese Mainland (17.2%) and Macau (15.5%). Meanwhile, exports to Macau and Japan also grew markedly by 30% and 28%, respectively.

Sales Channels

Most of the companies in the industry are traders who act as agents of international cosmetics brands to sell to the Chinese mainland, US, Macau, Japan, EU and Southeast Asia markets. They will sell to specialised importers and traders in these markets, who will distribute the merchandise under their own channels or through further distribution.

Most Hong Kong's cosmetics and toiletries manufacturers concentrate their production of middle to low-end toiletries and perfumes, marketing to the Southeast Asia and the US usually under their own brands. In addition, some Hong Kong manufacturers have succeeded in building their own brands in the Chinese mainland market, such as Cogi and Cheng Ming Ming.

Some high-end foreign brands establish sales counters in local department stores, as well as set up their own outlets in posh malls. Professional products are sold through beauty salons. Specialty cosmetics chains are well developed in Hong Kong, with Sa Sa, Bonjour, Aster and Angel taking the lead. They mainly sell international brands with deep discounts, as well as private label products. Grocery chains such as Watsons and Mannings have shifted their focus more towards cosmetics in recent years, selling mainly international brands. Some Hong Kong chains have extended their reach in other markets like China.

Hong Kong is host to large trade fairs such as "Cosmoprof Asia" and "Beauty and Fitness Expo" in the region. To establish contacts with potential distributors and explore new market opportunities, one could also join trade fairs and missions organised by the Hong Kong Trade Development Council (HKTDC), such as the China (Shanghai) International Beauty & Cosmetics Expo and the Guangzhou International Fair for Cosmetics and Hair Dressing Products. HKTDC also organises from time to time study or match-making missions for Hong Kong manufacturers to visit specific markets for exploring business potential and establishing new business relations.

Industry Trends

Owing to high production costs in Hong Kong, many manufacturers have set up offshore production facilities on the Chinese mainland and in Southeast Asian countries such as Thailand, Indonesia and the Philippines.

The world cosmetics market, especially the upper-end segment, has long been dominated by giant companies such as P&G, Unilever, Shiseido, L'Oreal and Estee Lauder etc. Their brands and images are well recognised internationally. They predominate over the top tier market segment that makes it difficult for new brands to enter.

However, OEM production is not widespread due to the strict requirements on quality control and secrecy of product formula. Most manufacturers will directly export the finished products to their overseas distributors. Recently, some international suppliers have reached licensing agreements with supermodels or fashion brands to develop fragrances and cosmetics products. Besides, an increasing number of famous fashion brands have diversified into developing cosmetics products under their own brands, such as Anna Sui, Burberry, Calvin Klein, Christian Dior and YSL.

There is a rising trend of Hong Kong companies exploring the Chinese mainland market. Due to the increased affluence and appearance consciousness of Chinese consumers, the potential of the cosmetics and toiletries market in the Chinese mainland is huge, especially for branded medium to high-end cosmetics and toiletries products. Chinese mainland's cosmetics market is highly brand-oriented.

CEPA Provisions

Under the Mainland and Hong Kong Closer Economic Partnership Arrangement (CEPA), all items can enjoy duty-free access to the mainland beginning from 1 January 2006 by meeting the CEPA rules of origin. According to the stipulated procedures, products which have no existing CEPA rules of origin will enjoy tariff-free treatment upon applications by local manufacturers and upon the CEPA rule of origins being agreed and met. In general, for cosmetics and toiletries, mixing, heating and blending, which are identified as the principal processes for the purpose of delineating their origin, are required to be carried out in Hong Kong. For more information about country of origin criteria of printed matters, please refer to the Trade and Industry Department's CEPA web page: http://www.tid.gov.hk/english/cepa/tradegoods/files/mainland_2009.pdf.

General Trade Measures Affecting Cosmetics and Toiletries Exports

The tariff rate of the Chinese mainland is higher than most other markets. Foreign exchange controls, product standards and quality control requirements are also barriers to importation of foreign cosmetics products. However, as a result of continued import liberalisation efforts, these barriers are expected to decrease. For instance, in 2004, China has replaced the cosmetics import approval system with the registration system, thereby greatly simplifying import procedures. This makes timely import of fashionable cosmetics possible. Under China's WTO commitments, import tariff of cosmetics and toiletries had reduced to 6.5% -10% in 2008.

Safety and environmental issues are major trade concerns in overseas markets. In US, the Centre for Food Safety and Applied Nutrition of the US Food and Drug Administration (FDA) is the official body for monitoring the safety of all imported cosmetics. Cosmetics exported to the US must be in compliance with the provisions of the Federal Food, Drug and Cosmetic (FD&C) Act, the Fair Packaging and Labelling (FP&L) Act, and the regulations published under the authority of these laws.

In EU, cosmetic products are covered by 2 main directives which provide that cosmetics product which is placed on the EU market must not cause damage to human health when applied under normal or reasonably foreseeable condition of use, taking account, in particular, of the product's presentation, its labelling and any instructions for its use and disposal. The directives also contain specific provisions on the labelling, marking and packaging of cosmetic products.

In 2002, the Japanese House of Representatives passed the amended Pharmaceutical Affairs Law (PAL), which is applicable to all cosmetics, quasidrugs, drugs and medical devices entering the Japanese market. Effective from April 2005, foreign sales of cosmetics approval will be subject to the following new requirements:

• A foreign manufacturer must appoint a Marketing Authorisation Holder (MAH) as their representative in Japan;
• Under the amended PAL, products designed to prevent nausea, bad breath, body odor, heat rash or sores, and hair loss as well as products designed to promote hair growth or remove hair are defined as "quasi-drugs," while products used for cleansing or beautification are defined as "cosmetics."
• The display on cosmetics and quasidrug products should provide realistic information without and exaggeration. In addition, the display list of all ingredient components is expected to list in descending order from the most commonly used substance, ingredients that are 1% or less can be listed in no particular order.

In August, 2008, the Mainland's General Administration of Quality Supervision, Inspection and Quarantine issued a notice concerning implementation of the "Administrative Provisions on Cosmetics Label" clarifying that cosmetics produced and processed before 1 October 2009 may continue to use the original packaging labels. Starting from 1 October 2009, any non-compliance with the "Administrative Provisions" will be strictly dealt with by supervisory authorities at all level. For details, please refer to: http://www.tid.gov.hk/english/aboutus/tradecircular/cic/asia/2008/ci4212008.html

Product Trends

Makeup tends to have shorter life cycles than many other consumer goods. In advanced markets, the average product life of makeup products could be as short as 1 month. Colours and shades play an important role, and these elements are heavily influenced by fashion trends, tastes and seasonal moods. These trends usually originate in large-scale trade fairs in Europe, spread to the US, then Japan and Asia, through trendsetter magazines. Giant makeup companies have huge influence on those magazines. It is important for manufacturers to offer a wide selection of colour and shades in each season.

The aging population is driving the recent surge in "cosmeceutical" products that combine cosmetics with vitamins, herbs, and sometimes pharmaceuticals, such as Vitamin-C lotions, tea tree oil-infused cleansers and collagen masks (collagen is formerly used in treatment of burn wounds). Many of these medicinal beauty products focus on the anti-aging skin care function. Dermatology is incorporated in product development, and products catering for different skin types are available. Active ingredients are being added to cosmetics and plant extracts and traditional Chinese herbs are also very common, especially among Chinese, Japanese and Korean made cosmetics.

Technological advances have allowed for the creation of multi-functional products - products that perform more than their basic roles, such as cosmetics that contain ceramides and vitamins, as well as UV protection. Multi-functional products are very popular among consumers because they are placing strong emphasis on value for money in their cosmetics purchases. Demand for facial whitening products has kept on growing in Asian countries, while Western consumers prefer to have bronze-coloured skin and spend more on sun tanning lotion.

More professional products with specific functions have emerged in recent years as consumers are more educated in terms of product application. They pay more attention to the ingredients and functions of products, and can handle more steps and specific application. Many products are also moving towards beauty salon standards, claiming to achieve salon effects. For example, body-firming products such as Estee Lauder Perfectionist, Fancl Shape Design and L'Oreal Perfect Slim, are all attempts to compete with salon products, but consumers can carry out salon-type procedures at home. This trend may continue in the long term as the persistence of slimming trend adds to the drive of firming products. Meanwhile, men's skin care products are also expected to become more specific as demand develops.