MARY KAY COSMETICS INC.
The Challenge of InternationalizationSABANCI UNIVERSITY – EXECUTIVE MBA
INTERNATIONAL MARKETING
Beste AYGÜN
Cihan ÇOLPAN
Can ERDOĞAN
Zeynep KARAKAYA
Antar TURGAY
INTRODUCTION
Mary Kay Cosmetics Inc. (MKC) is a direct selling cosmetics company that was founded in
1963 in Dallas, Texas by Mary Kay Ash. The company sold a range of skin care, personal care
and cosmetics products through independent salespeople called ”beauty consultants”, who
purchased the products from MKC and then resold them at skin care classes or facials to
small groups of customers.
The interesting story of how MKC was founded provides valuable insight to the culture of the
company: After 25 years in the direct selling business, Mary Kay Ash resigned her position as
a national training director when a man she had trained was promoted above her at twice
her salary! Upon this she decided to start her own cosmetics company dedicated to “making
life more beautiful for women”. This vision of Mary Kay was the foundation of the strong
company culture which was based on offering unlimited opportunities for women in
business, together with a distinctive compensation and recognition plan.
In 1992, MKC was manufacturing a limited range of products emphasizing skin care systems
that included related items developed for specific skin types. All products were produced in
Dallas, in the only manufacturing plant of the company.
By 1993, MKC had become extremely successful in the US market and was sold in 19
countries. However, although the sales outside of US had a history of 15 years, they
constituted merely 11% of the total sales of 1 billion USD (On the other hand, one of MKC’s
major competitors in US, Avon Products Inc., made 55% of its total sales of 3.6 billion USD,
outside of US).
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The international expansion of MKC had not been strategic, but opportunistic. When
entering the first two markets, Australia and Argentina for example, it was the local
entrepreneurs who approached MKC. In 1992, MKC underwent an organizational change
and consolidated human resources, legal, finance, manufacturing and marketing functions to
support the subsidiaries worldwide. Moreover, regional sales headquarters were established
for Asia/Pacific, Europe and Americas to support the subsidiaries in those regions more
effectively and to make future international expansion easier for the company. However,
despite these efforts, the company had only limited success in internationalization. The
management believed that one reason for this was the direct application of the US
marketing strategy, products and communications to the subsidiaries without adequate
local modifications. Other reasons were low consumer brand awareness and insufficient
marketing tools.
In the beginning of 1993, MKC was trying to create an internationalization strategy by
defining critical success factors and identifying the elements of its culture, phlosophy,
product line and marketing programs that can be transferable abroad. Two markets were
especially in focus: Japan and China.
I. THE JAPANESE MARKET
The population of Japan is 124 million in 1992 and estimated population in 2020 is 137
million which is more than 9 times smaller than China. The Japanese cosmetics market is
mature and there is so limited market growth potential for the future. Japanese women in
the age ranging from 20 to 29 is equal to 8,8 million population which is the biggest group in
the age distribution therefore the cosmetic companies in Japanese market target this group.
More than that Japanese women in their twenties are less price sensitive and demand higher
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quality products than other parts of the age distribution therefore foreign companies are
more success selling make up in Japan.
A main information has to be considered is, Japan’s population is aging fast and this is a
major advantage for MKC because %46 of MKC’s sales in 1992 is skin care products. Thirty
one percent of the Japanese population is over age 50 and this ratio is expected to increase
five percent by the year 2000. This trend increases chance of success of MKC’s skin care
products in the Japanese market
The skin care segment in Japan is very lucrative, the Japanese women over the age 15 spent
an average of $400 on skin care products a year. More than that skin care products made up
approximately 40% of the total Japanese cosmetic sales. On the other hand the Japanese
women preferred skin care products from Japanese manufactures because of the belief that
local manufactures better understand their needs thus domestic firms dominate this
segment of the market.MKC has have a marketing plan focusing on the exclusivity of an
American brand to overcome this perception barrier.
Japan is one of the largest direct selling markets and also seventy seven percent of the
Japanese population lived in urban areas therefore the majority of the Japanese population
is easily accessible which is another advantage for cosmetics firms good at direct selling
including MKC.
The Japanese market produced about $3370 billion GDP in 1992, which is much more higher
than Chinese GDP. The natural result of this value is higher Japanese hourly compensation
which is around 60 times more that Chinese hourly compensation therefore the Japanese
consumer can more easily afford the product in their disposable income and MKC can sell
higher quality, higher margin products in Japan more easily.
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In 1991, Japan imported $89 million cosmetic from the US market. More than that Japanese
tourists purchased $500 million cosmetics at duty free shops each year
The political structure in Japan creates a major obstacle for foreign companies to enter to
the Japanese market. The regulations governed by Japanese ministry of health for the
foreign imports are extremely strict and there is a lengthy approval process. In many cases
products need to be reformulated because the same ingredients that are approved in many
countries are denied approval in Japan. This regulations creates a competitive advantage for
the local companies when a new product is developed and launched. It is estimated that
MKC has to spent 1million dollars to meet these regulations. This is a huge initial cost to
enter to Japanese market.
Also there will be a high advertising cost due to the highly competitive market and together
with redesign, product development costs , the investment required by MKC is higher than
would be in other Asian countries.
There are over 1100 cosmetics brands in existence but the market is dominated by five
brands. These market share of this companies is, Shiseido(%27), Kao (%16),Kanebo(%11) ,
Pola (%8) and Kobayashi kose(%7) and the total market share of these five companies is 69%
. As a result the cosmetics industry in Japan is an oligopoly. This oligopoly is a major entry
barrier for MKC.
There are also perceptional and cultural barrier that MKC has to overcome to steal market
share from competitors. As an example pink was seen as a color more appropriate for
children and teenagers so the classic MKC pink was muted on potential packaging and caps
retooled to present a more upscale image. It was felt that redesigned packages might also
appeal to U.S consumers and that the potential existed for a global packaging redesign.
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Another limitation is market’s growth rate. The market is saturated and the growth rate is
only 3% so there is limited space for entry. On the other hand In 1989, import sales in japan
were only 3% of total sales, however , in 1991 this number rose to 5% so according to the
trend, foreign firms are stealing market share from domestic firms .
The established foreign competitors of MKC are Amway, Avon, Clinique and channel, Max
factor, Revlon and Revlon. The biggest direct selling foreign company is Amway in Japan.
Amway had been in Japan since 1977 and recorded $1,2 billion sales. Also Amway has an
extensive sales force of over 100000people, effective distribution system based on strong
relationships with dedicated distributers. Amway is a good success story for foreign
companies willing to enter Japanese market.
A direct global competitor, Avon ,that utilizes the person-to-person sales method, was
established in Japan in 1973 and recorded $325 million sales in 1991. So although direct
selling in Japan had a 6% decline from 1982 to 1992 and selling in department stores, drug
stores, supermarkets and beauty salons are the popular trend, there is still space for a well
organized direct selling foreign cosmetic company. MKC has high quality products but to
enter the Japanese market MKC has to complete cultural adaptation and then diversify the
products with suitable product mix. Additionally MKC has to build brand awareness
especially by using Mary Kay Ash’s Charisma to succeed in Japan. A successful entry to
Japanese market will lead the company into further countries of Pacific Rim.
II. THE CHINESE MARKET
China, is one of the largest countries in the world, not only with its 3,7 million square miles
of land but also with its massive population of 1,1 billion! This population is expected to rise
to 1,5 billion by the year 2020. When compared to Japan, there is a huge difference in this
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aspect. About 42% of this population is below the age of 24, and 39% is between the ages of
24 and 49. This is important, especially for cosmetics firms since the main consumers of
cosmetics products are between the ages of 20 and 29.
The Chinese people are less “urbanized” compared to Japan with only 27%. However
this portion is rising rapidly and when proportioned to China’s huge population of 1,1 billion,
it is still about four times larger than Japans urban population. 80% of China’s population
lives in the eastern part of the country, making it easier for foreign firms to decide on where
to invest.
Another important fact about China is that 87% of the female population has at least
one job, most of which have two; one being a state job and the other one being a part time
independent job.
China has somewhat less of a “political and economical” environment for its citizens
than Japan. But the situation is getting better with the pressures from other developed
nations, especially the US. With the “Open Door Policy” (1979), private firms are allowed to
manufacture goods FDI’s are more acceptable and free market pricing and more liberal
foreign exchange conversion is started to be implemented. Along with all these reforms,
economic indicators of China have been very promising for the last 10-15 years. In 1980s,
the GNP of China has increased 9% annually, and the consumption has risen by 6,6%
annually. Moreover, these numbers are estimated to be not less for the following years.
Along with this economical development, a higher-income, urban middle class has
emerged since 1988. This middle class is expected to grow more to about 41 million
households by the year 2000!
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Although the economical indicators are so good there are a few political and
economical risks concerning the multinational companies. The most important one is the
possibility of the nation’s long-standing leader Premier Deng Xiaoping’s retirement or death.
Some political struggles between the conservatives and the reformers might follow such a
situation which might delay further economic developments. Another risk is that Chinese
government is not providing its citizens enough political freedom commensurate with their
increasing economic freedom. One other risk is the high tariffs facing the importing
multinational companies.
The Chinese cosmetics market is estimated to be $825 million (manufacturer sales)
with skin-care products being dominant. About 3000 cosmetics producers, most of which
located in Shangai, are present in China. There are foreign competitors in China like Avon,
Johnson & Johnson, Kao, Unilever, L’Oreal, P&G Revlon, and Shiseido. However, these
companies make up only 3% of the sales in China.
Of these foreign companies, Avon is the most significant one as being the first and
only selling company in China. Avon operates via joint venture with the Guangzhou
Cosmetics Factory. It operates only in the southern province of Guangdong. Avon offers a full
product line of 170 items, with an average price of $4,00. Avon uses TV ads to promote its
products and print advertising to recruit salespeople. It positioned itself as offering service,
quality, reliability, and product guarantee to the consumers.
The urban consumers in China are becoming increasingly prosperous and demanding
which is good news, especially for the cosmetics sector. Almost all housing, medical and
transportation costs and midday meals are subsidized by Chinese government work units,
meaning rally low costs of living and more disposable income. According to a 1991 consumer
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study, an average Chinese female urban consumer (32-year old, married with ne child) is
attracted to foreign brands and considered skin care and cosmetics important. Also the
Chinese women are greatly interested in learning (education is very important in Chinese
culture). Chinese colleges and universities are getting more independent which can be
utilized by MKC.
There are 3 main regional markets in China: Guangzhou, Beijing and Shangai.
Guangzhou is in south, near Hong Kong with 6 million city population. It is known as
the low-cost manufacturing base for Hong Kong. Consumers in Guangzhou are more
interested in food and family. It has the highest consumer goods spending in China and
flooded with foreign consumer goods.
Beijing is in the north with 4 million city population. Since it is he capital and as being
the home of senior government officials, it has an elite group of consumers interested in
luxury goods. Beijing consumers are interested in technical aspects of the products and
therefore advertisements based on fact and information are well received. Plus, the
consumers are more willing to try new products.
Shangai is in the east coast by Yangtze River with 13,5 million city population! It is the
largest city in China. It is said to be the cultural and commercial capital of China with 8,5% of
China’s industrial output. Shangai consumers are proud and very concerned about their
appearances. They are described as the best dressed and smartest looking. They have the
highest spending on clothing, cosmetics and jewelry in China. Shangai consumers are happy
with European and Western influence. Shangai is the most influential market in China and it
is believed that a successful launch in Shangai is likely to be able to be extended to the rest f
China.
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The main cosmetics products in China are skin care products like wrinkle prevention
and removal products… Packaging is very basic in China. Skin care products are mainly
marketed in plastic or glass jars with decorated or colored caps.
40% of consumer products is sold in state-owned department stores, 32% is sold in
collectively owned stores and 20% is sold in individually owned retail stores. Only 3% is sold
through direct selling.
Advertising in China is very cheap. For example a satellite TV channel broadcast from
Hong Kong, Start TV, costs only about $0,50 per 1000 people. (1992 advertising expenditure
per capita is $0,86 where as it is $220 in Japan). Although the costs are higher for a foreign
importer or a joint venture partner, still they are much cheaper than in Japan. In China,
regional and provincial televisions are more popular than a single national channel.
-The Strategy-
Considering its operations for the new markets in Asia, the potential countries are Japan and
China. Two countries are distinctively separate from each other in terms of economies,
politics, consumer behavior and competitive market. China has a huge population and a
growing economy while the purchasing power of the population is low. It is a closed
economy. And there is less competition in the market. And the labor is cheaper than in USA
or in Japan. While Japan has an open economy with high purchasing power of the consumers
and as a result both domestic and international firms have established brands in the market
and the competition is very tough. MKC is suffering from the success of its international
operations. And it is a critical decision whether to invest in these countries or not and if the
decision is to invest then which country? According to the “competitive advantage of nations
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theory” making investment in Japan can force MKC to become better, because of the
demanding customers in the saturated Japan market and the consumer base is already
there. But it will be more costly to establish and run a business in Japan, because of
competition and also advertising, labor and general running costs. On the other hand China
is more like a blue ocean because of its very large geography, huge population, less number
of brands in the market, and cultural and economic changes in the country which makes it a
strong option to consider. Determining its short and long term strategies it can be a better
option to invest in China and establish the brand and operations then move into Japan using
its Chinese operations as a base and take advantage of the geography, being close to all
Asian countries and in decides to produce in China MKC can also benefit from the cheap
labor and production costs.
-Target Market Analysis-
China is an attractive market for international firms with huge population. And the estimated
growth will be 1,5 billion by year 2020. The economy is growing every year. And there is big
transitional change in the country where population is moving from rural areas to urban
areas.
Geography:
China with its massive population is a very attractive market for almost all sectors as
for the cosmetics sector. Although the urban population is only 27% compared to Japan’s
80%, it is still almost 300 million people! Also this population is increasing rapidly. The
population is attractive to the cosmetics sector not only because of its size but also with its
structure. About 70% of Chinese population is under the age of 45. This is very ideal for a
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cosmetics company. Moreover, this is also promising for the future as well because 42% of
the population is under 24, meaning that they will be the future customers.
87% of the female population has at least one job, most of which have two; one
being an independent part time job. This is also very suitable for MKC’s direct selling strategy
and team. It can find many suitable members for its sales crew. MKC’s long term career plan
for its sales consultants can work in China very well. MKC can implement nonmonetary
reward programs in China like housing, child care, tuition support etc for the specific needs
of Chinese women.
Although the housing situation and the people’s attitude towards a party plan in an
individual’s house is not appropriate for this selling method, sales consultants can be
encouraged and supported to hire/rent a private office, location, university classrooms etc to
overcome this obstacle. Plus, the Chinese cultural tendency for education is very suitable for
training of the sales consultants.
One other important aspect of the population is the rising middle class which is a very
important consumer group for companies. Chinese middle class is getting richer and
demanding more. This leads to a “revolution of rising expectations” and to a more demand
for consumer products.
The consumers in Chine are getting more and more open to foreign products and
brands. Shangai consumers are especially proud of European and Western influence. With
increasing disposable income, consumers tend to spend more on self care and glamour
products.
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The economical indicators for China are also impressive. Although the total GNP is
less than Japan’s, when the buying power parity is considered, China’s economy is huge. The
growth rate for the Chinese economy is one the largest in the world with an average of
almost 9-10%. Consumption also increases by about 7%. These all make China a better
choice, especially for a long term investment.
China has to produce more to keep its population employed and Chinese government’s
priority is employment. The Chinese economy is heavily relied on exports. And most of these
export goods are produced with foreign direct investments. But China also has to increase
domestic consumption to keep its growth healthy. Due to increasing demand for cheap
Chinese labor and government’s policies to employ more people and to increase
consumption, the buying power of the Chinese people are also increasing. Although
comparatively lower than Japan, there is an increasing trend in China that is creating
opportunities for MKC.
Joint Venture?
But China is also a risky country in terms political instability, high tariffs if MKC considers to
import its goods and products in the country and Chinese people having very little economic
freedom and buying power. The first decision for MKC to make is whether enter Chinese
market with a joint venture agreement or not. And because of the liability of foreignness and
the difficulties of the Chinese market it is more common for international firms to come up
with joint venture agreements to start their operations in China. And there are also some
successful examples of joint ventures like Colgate-Palmolive and Pepsi. Only 5% of the retail
sales are made with joint ventures and 3% of the retail sales are made with direct-selling
companies. But choosing the right partner is the critical factor which will determine the
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future and the success of MKC in the Chinese market. The possibility of opportunistic
behavior of the partner can cause problems for MKC. In order to prevent this, the
management and critical jobs must be held by MKC.
Import or produce in China?
The second most important decision is whether import goods to China or produce in China.
The main risk of importing the goods is the high tariffs Chinese government imposing up to
100%. This will result in increasing the price of the MKC goods in the market. Considering the
lower purchasing power of the population it will decrease the competitive advantage of MKC
to gain a strong market share among its competitors. Currently MKC produces all of the
goods produced in the Dallas facility. But MKC can benefit from producing in China. The
labor in China is cheaper than USA. As a result it will give MKC producing more efficiently
with lower costs is China. Also producing in China means employment for Chinese
people,that is also inline with Chinese government’s policies. By producing in China, MKC will
also eliminate the risk of imposed high tariffs. Depending on the capacity of the
manufacturing plant in China, MKC can also use China as a base location for other Asian
countries benefiting from lower production and transportation costs.
Considering all the advantages, the best option seems to be producing in China.
Product Mix
The main target will be urban middle class segment. And the product mix should be
determined accordingly. MKC’s product range includes, skin care, personal care and
cosmetics. The main products in Chinese market were made to prevent and removal of
wrinkles, reduction premature aging, healing acne and purifying pores. Therefore, skin and
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personal care products can form the basis of the product mix. But for product differentiation
MKC should also focus on cosmetics and beauty line. Especially in Shanghai region where
30% of disposable income is spent on cosmetics and personal care MKC can benefit from
beauty line products where there is clearly a need for marketing.
Not only the functions of the products are important but also the packaging and
presentation of the products are also play a critical role. The packaging of the products
issimpler than in the USA mainly promoted in plastic or glass jars. Labels carry both Chinese
and English. And the outer packaging varies in the quality of cartoons and liners. MKC
should see this as an opportunity to differentiate their products from the rest of the
competition. Simple and cost effective but clever designs can differentiate the products and
clearly can increase the demand for MKC products. Afterall the products are cosmetic
products and attractive design and packaging must be in accordance with the product itself.
The instructions in the product packages should also include both Chinese and English
versions. It will help the consumers understand the correct use of the products and also help
the consumer’s education on cosmetic and personal care goods and increase their
knowledge about the products.
Distribution channels
MKC has expertise in direct selling channels. And it can also pursue the same strategy in
China. The sales force is also another key factor in retailing business. Considering the
Chinese women having two separate jobs, direct selling method would fit the current
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employment status. And also Chinese women are very concerned and interested about
education. Therefore, education of the sales team will be very important and it will generate
interest in the potential sales force.Also to attract more sales people MKC can cooperate
with universities sponsoring certain events to get the right to demonstrate the products at
the stands, and organize seminars and training programs.
Due to size of the small houses in China, it may not be efficient to organize home parties for
sales attractions. But instead of that approach MKC can take the door to door channel of
selling products.
Advertising
MKC can use strong launch campaign to create brand awareness. Since only 3% of the
cosmetics sector in China belongs to the foreign players, there is an important opportunity.
Chinese consumers, especially Shangai consumers are open to new and foreign products and
brands. Regional advertisement campaigns through TV, magazines etc like in Shangai could
prove to be successful strategy. Since the advertisement costs in China are very low, MKC
can create a strong effect within short time, than it can in Japan.
The main element in skin care product advertisements can be local celebrities with smooth,
clean, white skins. For glamour and make up products, international celebrities with elegant
looks can be used, especially n Shangai region.
Conclusion
Investing in China with a right partner is the most efficient option for MKC. Taking advantage
of lower costs and also eliminating the high tariffs imposed by the Chinese government,
rather than importing goods from the USA facility, it will be cheaper to produce in China.
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Once established in China using the cost advantage and also geographic advantage MKC can
extend its operations in other Asian countries mainly in Japan. It can also benefit from low
production costs and can even consider producing some of its product lines in China and
selling other countries not only limited with the Asian market.
The growing urban middle class in China is a considerable opportunity for the international
operations of MKC. Chinese women are into education, they become more self-aware and
also Chinese Ministry of Commerce initiated training programs for cosmetic industry
professionals showing their interest in the sector.
The first region to launch its operations should be Shanghai. It has 13.5 million city and 60
million province population. Although not the richest of the regions between Guangzhou
and Beijing, Shanghai is the cultural and commercial capital of China. The culture and the
lifestyle of Shanghai people fit MKC’s product offerings. Highest spending in clothing,
cosmetics, and jewelry estimated to be 30% of disposable income in Shanghai. The main
direct competition in China would be Avon. Avon based in operations in Guangzhou. So to be
in Shanghai would be a protection wall for MKC in terms of direct competition. And
considered the most influential market in China a successful launch in Shanghai believed to
be extended successfully for the rest of China.
With the right product mix, mainly based on skin care and cosmetics and product
differentiation, MKC can gain a sustainable market share in China. Also being and producing
in China can create new opportunities for MKC for the Asian market and also global
operations.
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