Multinational companies (MNCs) are losing ground in China as their "halo effect" fades amid rising competition and a consumer spending slump, while analysts warn that a trade war with the US could make it even harder for foreign brands to turn things around.
American cosmetics giant Estee Lauder posted an 11 per cent net sales decline in Asia-Pacific for 2024 in its latest financial report published on February 4. The owner of Bobbi Brown and La Mer attributed the setback to "subdued consumer sentiment" across China and South Korea, as well as challenges in its Asia travel retail business.
Shortly after reporting its results the company said it would slash 5,800 to 7,000 jobs worldwide with the goal of "managing external volatility, such as potential tariff increases globally".
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"Tit-for-tat tariffs are obviously increasing the uncertainty and the risk of multinationals getting caught in the crossfire of tensions," said Alfredo Montufar-Helu, head of the China Center at The Conference Board, an international think tank.
"Multinationals are not only dealing with this new competitive reality of slower demand, lower profits and entrenched local competition [in China], but they're also dealing with a more uncertain environment because of the impact of geopolitical developments, which makes planning very difficult."
China's retaliatory tariffs of 10 to 15 per cent on select US imports, including crude oil and liquefied natural gas, took effect on February 10, just days after the US imposed an additional 10 per cent blanket tariff on all Chinese imports.
"Although China has not currently imposed tariffs on American cosmetic imports, it cannot be ruled out that if the trade war escalates, China may impose tariffs on more American consumer products," said Richard Lin, chief consumer analyst at SPDB International, an investment bank.
Such a deterioration in trade tensions could have a "very sizeable" impact on multinational companies like Estee Lauder, further eroding their market share in China, Lin added.
Mao Geping, a popular Chinese cosmetics brand launched by a famous make-up artist, listed on the Hong Kong stock exchange last year. Photo: WEIBO/ Mao Geping alt=Mao Geping, a popular Chinese cosmetics brand launched by a famous make-up artist, listed on the Hong Kong stock exchange last year. Photo: WEIBO/ Mao Geping>
While tariff risks loom, foreign businesses face a more immediate challenge: slowing growth and declining sales as local competitors gain favour and an economic downturn constrains spending by China's enormous middle class, which has traditionally favoured imported brands.
"Historically, MNCs led the premium segment, supported by the perception that foreign brands were superior, aspirational and symbolised trendiness and quality," consultant Bain & Company said in a report on Tuesday. "However, in recent years, that 'halo effect' has waned and local brands have substantially increased their quality and competitiveness."
In addition to Estee Lauder, French skincare giant L'Oreal and Japan's Shiseido have also suffered while the pingti trend - a preference for cheaper but high-quality local alternatives - benefits domestic brands like Mao Geping, analysts said.
Meanwhile, in the luxury fashion sector, Christian Dior parent LVMH, Gucci parent Kering and Burberry have been battered by tepid demand in China. During an earnings call on Tuesday, Kering CEO Francois-Henri Pinault told analysts that he did not expect the country's "economic crisis" and low consumer confidence to improve this year.
"For luxury goods, the issue isn't Chinese brands replacing international ones - because China doesn't have [major] luxury brands - but rather the decline of the overall market and shrinking spending power," said SPDB's Lin.
All is not lost for MNCs. US-based Ralph Lauren reported 20 per cent sales growth in the third quarter from a year earlier, thanks to fondness for its "old money aesthetic" on social-media platforms like RedNote. Coach parent Tapestry eked out 2 per cent quarter-on-quarter growth in the most recent three-month period, as the US-based firm's products resonated with China's luxury-loving but increasingly budget-conscious middle-class consumers.
"For premium brands, success hinges on how well MNCs tailor their brand positioning for locals, embed higher-level values into their products and bring those values to life," Bain's report said. For mass-market brands, unbundling the value chain and developing local partners could help drive cost-competitiveness, it added.
"Chinese consumers today are highly sophisticated," said Ivan Su, a senior equity analyst at Morningstar. "They don't buy a product simply because it's from a Chinese or international brand. [They] now have distinctive tastes and trends, and expect brands to cater to them with more focus and dedication."
