High-flying cosmetic stocks usually emerge in counter-cyclical economic environments, why is China the exception?

From past overseas experience, counter-cyclical consumption trends often give rise to high-performing cosmetic stocks.

The logic is that in a counter-cyclical period, the prices of durable goods drop year by year, so the rational choice is to postpone replacement. Cosmetics are consumables that cannot be delayed, and their unit price is too low to be included in household budget decisions. The superposition of the two factors makes them more resilient to declines than other optional consumer goods. Therefore, during Japan's "Lost Three Decades", the stock prices of most optional consumer sectors remained sluggish, yet high-performing stocks such as Shiseido and Kao emerged.

The same story has not happened in China. Leading domestic A-share cosmetic enterprises have experienced consecutive years of decline, among which the cosmetic leader with the highest market value saw both its revenue and profit decline for the first time in 2025. The bottleneck they encountered is that the demand scenarios for domestic cosmetics are decreasing.

Cosmetics first have the attribute of consumer goods, but domestic users do not have the high income base of Japanese users, and they are faced with domestic beauty brands that keep raising prices. As a result, cosmetics in China have become non-cheap optional consumer goods, and demand is easily suppressed. Cosmetics also have certain investment attributes, which are a kind of investment product for some women to package themselves. However, the collapse of the "simp economy" has also made this "return on investment" unstable.

After domestic demand hits a bottleneck, cosmetics could have followed Shiseido's path to go global. But this path is very difficult to take today.

The core of Shiseido's breakthrough in overseas markets is that it seized China, the fastest-growing emerging market. The current problem is that there is no "next China" overseas. It is also not easy to turn to mature markets. The industry characteristics of cosmetics, which feature slow iteration, high industrial chain maturity and differentiation determined solely by brands, determine that domestic brands can hardly compete with world-famous high-end brands that have been established for a long time.

Therefore, the emergence of high-performing cosmetic stocks in the counter-cyclical period is never inevitable.

01 The failure of the safe-haven attribute of optional consumer goods

From an overseas perspective, beauty products are a safe haven for optional consumer goods.

Japan entered a long-term stagnation in the 1990s. In the 30 years from 1992 to 2022, traditional optional consumer goods fell by an average of 29.3%, while the beauty sector rose by 45.9%.

During this period, high-performing cosmetic stocks such as Shiseido, Kao and Kose also emerged in Japan. From 1992 to 2018, Shiseido's market value rose from about 500 billion yen to nearly 3 trillion yen, and its revenue increased from 553.3 billion yen to 1.0051 trillion yen.

Against the backdrop of economic stagnation, the beauty industry achieved contrarian growth, driven by the combined effect of rational choice and self-pleasing consumption, which shifted household budgets from "household-based durable goods" to "individual-based high-frequency small expenditures".

In a deflationary environment, the prices of durable goods drop year by year, so the rational choice is to postpone replacement indefinitely, and demand is frozen in stock renewal. Cosmetics are consumables that can neither be delayed nor hoarded, and their unit price is too low to be included in household budget decisions. Therefore, among optional consumer goods, they have the strongest sales resilience.

However, the situation in China is different, and the beauty industry has not played the same role.

The three A-share cosmetic companies with the highest market value have seen their stock prices drop by 35%, 61% and 22% respectively in the past three years. It is not just performance that has fallen, but also valuation. The PE (TTM) of leading domestic cosmetic companies has dropped from an average of 40 times in the past five years to the latest 10 times.

The valuation decline is due to the end of high growth and the slowdown of performance. In 2025, the total revenue of A-share cosmetic companies only increased by 1.2% year-on-year. The profitability of cosmetic companies is also declining. From 2023 to 2025, the net profit margin of the A-share cosmetic sector dropped from 11.5% to 8.2%.

The main reason for the decline in profitability is that the rising traffic cost and increasingly fierce internal competition in the industry force cosmetic companies to spend more sales expenses to achieve growth. From 2023 to 2025, the sales expense ratio of the cosmetic sector increased from 33.7% to 40.8%.

With the sector slowing down, leading players have not been able to demonstrate counter-cyclical resilience. The A-share cosmetic company with the highest market value saw its revenue and net profit drop by 1.68% and 0.99% year-on-year respectively in 2025, which has been negative growth.

Why have domestic cosmetic companies not shown the strong resilience of their overseas peers?

02 The number of demand scenarios is decreasing

As mentioned above, the consumption logic behind Japan's contrarian growth in the beauty industry is that household budgets have shifted from "household-based" durable goods to "individual-based" high-frequency small expenditures.

Under the "individual-based" logic, Japanese cosmetics have maintained their basic consumption base with the increase of women's labor force participation rate.

Japan's female labor force participation rate rose from about 57% in 1990 to about 73% in recent years.

The increase in female labor force participation rate has brought two things. First, women have stronger consumption capacity to support their demand for beauty products. Second, the expansion of confidence and social scenarios brought about by the increase in labor force participation rate has also increased their demand for cosmetics purchases.

Looking back at China, the basic consumption base of cosmetics is facing challenges. The labor force participation rate of domestic women aged 15 to 64 has dropped from 79.4% in 1990 to 70% in recent years. The decline in labor force participation rate has made the already not high income even worse.

Calculated by purchasing power parity (PPP, which eliminates exchange rate interference and measures actual purchasing power), the average domestic consumption level is about 50% to 65% of that of Japan in the 1990s. With the decline of domestic women's labor force participation rate, the gap between domestic women's consumption capacity and Japanese women's may be larger than this figure.

In other words, compared with overseas users, domestic users do not have a high income base to support high-frequency beauty consumption. What's more, domestic beauty brands are showing a trend of rising prices. Once a certain brand's 20-yuan lipstick swept through university dormitories, but now it has risen to 160 yuan per piece, with the price increased by 8 times.

Insufficient purchasing power mainly affects the demand for the consumer attributes of cosmetics. Changes in the general environment have suppressed the investment attributes of cosmetics. For some consumer groups, cosmetics are an investment product for women to package themselves, so as to obtain appearance premium.

But at present, such "return on investment" is unstable. For working women, the decline in labor force participation rate means that workplace socializing has disappeared in the lives of some people, and consumption scenarios have decreased accordingly. For others, the collapse of the "simp economy" has also eliminated the return on investment of cosmetics.

Under the superposition of various factors, domestic cosmetic sales have lost the opportunity for explosive growth.

03 No access to overseas premium

The increase in Japanese women's labor force participation rate mostly prevented cosmetics from declining like other optional consumer goods in the counter-cyclical period. However, the value growth of Japanese cosmetics in the capital market relies more on breakthroughs in overseas markets.

The period when Shiseido's stock price rose the most sharply was from 2013 to 2018, rising from 1000 yen to 9000 yen. There are two core logics: entering the Chinese market through e-commerce channels; the visa threshold was lowered, the number of tourists visiting Japan increased, and sales through tourism channels also rose. In 2018, the Chinese market and tourism channels contributed 77% of Shiseido's performance increment that year.

It was also at that time that Shiseido's valuation logic changed. It was re-priced from "a domestic anti-decline cosmetic company in Japan" to "a globalized asset with mature high-end brand assets that can benefit from the dividends of overseas consumption upgrading".

But today's domestic cosmetic companies do not have the overseas expansion conditions that Shiseido had.

From the demand side, the core of Shiseido's breakthrough is that it seized China, the fastest-growing emerging market. Now there is no "next China" overseas, and domestic cosmetic enterprises have no new high-growth emerging markets to develop.

Without an incremental market, it is very difficult for domestic brands to make achievements in mature overseas markets. At present, the overseas revenue of most domestic cosmetic companies is still in single digits as a percentage of total revenue.

The difficulty of overseas expansion is determined by the industry logic of cosmetics.

Cosmetics are a typical industry with slow iteration: the industrial chain has high maturity, the access threshold is extremely low, and differentiation can only be determined by brands.

On the product side, the functions of various brands are highly similar, most of which are permutations and combinations of familiar ingredients such as hyaluronic acid, niacinamide and pro-xylane. On the raw material side, suppliers are also much the same. The retinol in Proya's "Morning C Night A" comes from BASF, which also supplies brands such as HBN and Elizabeth Arden.

There is no room for differentiation in functions and raw materials, so it is difficult for enterprises to overtake on curves through products, and brand popularity is the only remaining factor that affects consumers' decisions. This also determines that it is difficult for domestic cosmetic companies to seize market share from long-established high-end brands.

To put it bluntly, the reason why domestic cosmetic companies have not replicated the counter-cyclical story of overseas brands is not that they do not work hard, but that they have not caught up with the good era.

This article is from the WeChat official account "Understanding Finance", written by Duqu Zhijun, and published with authorization from 36Kr.