Key Takeaways

Jefferies’ views on global beauty industry growth have tempered as growth drivers continue to moderate. China beauty sales decelerated to 7.7% in September; down from 7.8% in July/Aug and from +20% earlier this year. Currency devaluation raises risk to sustained travel retail growth; Hong Kong and Japan tourism figures have slowed. Without China’s double-digit increases, global beauty growth is likely to be 4% versus 7% from the year prior.

China Beauty Continues Mid-to-High Single Digits Increases:
China’s government data for beauty retail spend was +7.7% in September; down from 7.8% in July/August, 11.5% in June, and down sharply from March 2018 highs at +22.7%. September is the third consecutive month of single-digit beauty sales growth. Year over year growth had been tracking up double digits since April 2017 through June. Over the last two years, robust beauty spend in China has supported high single-digit organic growth of major beauty conglomerates. Given China is growing from a smaller base (relative) for most beauty companies, Jefferies assumes above market-average growth, but is inclined to take into account a more stable level of growth in the low/mid-teens versus 30% growth in the prior year.

China’s Currency Could be an Additional Headwind, Especially to Travel Retail:
Over the last few months the Chinese Yuan has devalued 9% versus the U.S. dollar.Currency devaluation helps China soften the impact of new U.S. tariffs, and encourages domestic spend, but may have negative implications on Travel Retail in both APAC and global tourist markets. Interestingly, even with the currency devaluation, beauty sales in China have slowed. Travel retail has afforded access to luxury brands at duty free prices, and a rising middle class in China has supported a regional travel boom. According to Travel Retail industry stats, 70% of global dollar growth in Travel Retail over the last year has been tied directly to the Chinese traveler. According to Japan’s National Tourism Organization, Chinese visits to Japan decelerated to -3.8% versus +4.9% in August and +22% average in the first six months of 2018, a negative particularly to the beauty industry as Chinese travelers are the largest cohort of buyers of cosmetics in Japan. Beauty is the number one purchased category by outbound Chinese travelers worldwide, as more than 50% make beauty purchases while outside of China. Beauty makes up about 35% of total travel retail sales globally and in Asia 60% of travel retail sales are from skin care.

Golden Week Tourist Up; Shopping Down:
China’s travel data site, CTrip, disclosed that the percentage of Chinese tourists with shopping as their primary travel motivation was down to 12% during Golden Week versus 33% in 2017 and 68% in 2016. This sharp drop is likely due to a crackdown on Daigou sellers and new airline baggage policies. During Golden Week, Chinese customs cracked down on tourists carrying more than 5,000 RMB ($720) worth of products back into China. In addition to crackdowns by customs, one of South Korea’s largest airlines, Asiana, announced they will stop carrying baggage meant for commercial use on flights to China and Hong Kong.

Data Leaves Jefferies Cautious on 2H 2018, 2019 Growth:

APAC market level data points have softened since Q2 reports. LVMH reported Q3 numbers last week and was the first to admit to growth moderation in China proper. Local APAC beauty co, Sa Sa, reported Q2 earnings (CQ3) yesterday; HK/Macau sales growth slowed to 9.6% from 27.7% in Q1 (CQ2). EL’s (Hold) guidance assumes 9% to 10% Q1 org growth and then a decel; their fiscal year looks to be at 7% to 8%. China and Travel Retail are the single biggest drivers with 80%-plus of growth. If one assumes 20%+ growth in China and Travel Retail (down from 30%), Lauder’s FY19 guidance embeds mature markets up low-to-mid-single digits. Absent a major acquisition, this implies a 400 bps to 500 bps acceleration. China Travel Retail have supported double digit growth in L’Oréal Luxe; segment sales decelerated to up 13% in Q2 versus up 14% in Q1. Coty’s (Hold) model has been reliant on high single digits to double digits sales from its luxe segment to offset ongoing declines in the consumer segment. Coty’s business in APAC is small and mainly tied to luxe fragrances.