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Medical cosmetology market expected to be worth 300b yuan by 2020

As more Chinese opt for a nip or a tuck in search of the body beautiful, growing competition in the market means margins are being squeezed

PUBLISHED : Thursday, 22 September, 2016, 1:35pm
UPDATED : Thursday, 22 September, 2016, 10:20pm

China’s plastic surgery and beauty treatment market is booming, but experts are warning that as more and more firms jump on the bandwagon, margins are becoming ever slimmer.

According to the latest research from CITIC Securities, the Chinese investment bank, the country’s medical cosmetology market is expected to achieve 25 per cent compound annual growth rate (CAGR) and be worth 300 billion yuan by 2020, up from 100 billion yuan last year.

Cosmetology is essentially the study and application of beauty treatments, and include everything from specialty hair colouring and skin care, to procedures including botox injections, changes of skin colour and cosmetic surgery.

The surging market for the very best in looking good is being driven, said the CITC report, by China’s consumption upgrades, demographic changes and technology advances – essentially people are earning more and wanting to look as perfect as possible, and they can afford to whatever it needs.

And maybe surprisingly, its older people who are tending to show stronger demand for the medical types of beauty services, said Zhou yu, an analyst at CITIC.

“The penetration ratio among younger people born after the 1990s is also high, especially a rising demand from stylish men.”

With the help of technological advances, along with tighter regulations, the number of beauty treatments being bought grew at a CAGR of 14.9 per cent in China between 2009 and last year.

The research, development and certifications process in China can take a long time, which in turn presents higher technological entry barriers for newcomers
Zhou yu, analyst at CITIC

Taking into account rising penetration ratios, higher frequencies of treatment, and better qualities of services and products on offer, Zhou now estimates that growth rate to be 25 per cent in the coming five years, as the sheer number of beauty treatments on offer mushrooms.

With China’s rising incomes, come higher demands, and Zhou’s figures also show that breaking into this booming industry is proving hard for many smaller operators. The regulations being imposed by the authorities, are also becoming increasingly stringent, making it an expensive industry to enter.

Upstream enterprises in the industry chain are primarily engaged in the manufacturing of injections and beauty devices.

“The research, development and certifications process in China can take a long time, which in turn presents higher technological entry barriers for newcomers,” Zhou added.

“The market concentration ratio is also very high, with the top two hyaluronic acid players now accounting for 70 per cent of the market.”

Hyaluronic acid is a gel-like water holding molecule that is the space filler and cushioning agent in all mammals. It naturally cushions joints, nerves, hydrates skin and hair, and fills the eye, hence the widespread appeal of its use in the beauty industry for skin treatments and to ease the natural effects of ageing.

Botox and other botulinum neurotoxin products are becoming very widely used in treating facial wrinkles. But Zhou said just two brands have obtained regulatory approval in China.

According to the same CITIC report, upstream manufacturers in China generally operate at a gross profit margin (GPM) of 50 to 90 per cent and a net profit margin (NPM) of 25 to 60 per cent, while mid-stream distributors could achieve a 25 to 35 per cent GPM and a 5 to 15 per cent NPM.

Downstream service providers, however, are competing in a highly-fragmented and fiercely competitive market.

In 2015, there were around 6,000 hospitals in China offering some form of cosmetic procedure, of which 80 per cent were privately-owned medical institutions and clinics.

But analysts suggest that intensified competition and rising expenses are seeing margins being constantly eroded, and many of that number are believed to be finding it hard to survive.

The CITIC numbers show the market’s entire blended GPMs stood at 50 to 65 per cent, but the average expense ratio was above 50 per cent. Rising labour costs account for 30 per cent of total revenue and heavy advertisement spending accounting for 25 per cent of the total.

Wang Yumeng, at analyst at HSBC, said she too has seen a decrease in the median retail price across most services being offered in the market.

“A sharper price drop of 15 to 30 per cent is being seen at the lower end, meaning certain hospitals are adopting more aggressive approaches to attracting patients,” Wang said. “We expect competition to continue to intensify.”

The cost of attracting those paying patients is also growing, according to China Merchants Securities, whose figures suggests it costs around 7,000 yuan in marketing and other expenses to attract one customer, and the average consumption of a patient is just 10,000 yuan.

Faced with such tight returns, Zhou from CITICS suggests many of the incumbent players are already looking to the internet, and the power of social media, to reach a larger audience, as well as build trust in their brands through word-of-mouth, to lower their customer acquisition costs and increase the number of repeat customers.

A number of internet-based plastic surgery start-ups have already become established, such as SoYoung.com and Suning Universal, which are communication and information platforms for patients and surgeons.

“Plastic surgery apps provide channels for plastic surgeons to share information and a platform for patients to communicate,” said Sun Yu, an analyst from China Merchants Securities.

“And they play a critical role in attracting more surgeons into the field.”

With less policy restrictions placed on them than traditional medical facilities and their procedures, online plastic surgery companies have already been attracting strong investor interest, and are expanding quickly.

“Using e-commerce platforms in the cosmetic surgery industry will help make information and pricing more transparent,” said Sun.

“Attracting patients to have plastic surgery will mainly come from online platforms in future, which will change the entire profit model of the industry.”

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