Covid gives China's beauty brands enhanced allure

China's cosmetic brands may finally be ready to face down their foreign rivals, thanks to the Covid outbreak and a wave of patriotic buying. The rising popularity of domestic makeup products is an example of how the pandemic upheaval and geopolitical tensions are creating unexpected winners and losers.

Shares of Proya Cosmetics Co., Guangdong Marubi Biotechnology Co. and Shanghai Jahwa United Co. have soared this year, outpacing the gain in Shanghai's benchmark index. Meanwhile, mid-range cosmetics makers such as Japan's Shiseido Co. and South Korea's Amorepacific Corp. — those most vulnerable to the rise of Chinese competition — have sunk by more than broad market indexes in their home countries.

To understand the shift, look at the change in consumer habits brought about by the coronavirus. Lockdowns have forced people to stay at home while unemployment has pummeled incomes, encouraging consumers to spend more time online and to search for lower-priced goods. China's digital-savvy makeup brands were perfectly positioned to take advantage.

Companies such as Proya have been ahead in using tools such as livestreaming and online celebrities to sell their products. The Hangzhou-based cosmetics manufacturer hired singer-songwriter Cai Xukun as a brand ambassador, and holds livestreaming sessions on Alibaba Group Holding Ltd.'s Taobao shopping site that last as long as 16 hours a day. As much as 86% of local cosmetic products are sold online in China, versus 58% for multinationals, according to a June report from Goldman Sachs Group Inc.

The virus has helped in another way, by spurring demand for products that can soothe skin irritated by constant wearing of face masks. Dr. Yu, a face cream sold by Shanghai Jahwa, chalked up a 500% surge in surge in revenue in the first quarter compared with a year earlier.

Tensions with the US and a series of spats with countries from the UK to India have also driven China's consumers to turn away from overseas products and seek local alternatives. The disputes have stoked nationalistic fervor among younger people who already hold a less favorable view of foreign brands and are more adept with digital commerce. Dr. Yu was named as as one of the top patriotic brands in a report by the Hong Kong-based South China Morning Post earlier this year.

Others have benefited, including closely held Shanghai Pehchaolin Daily Chemical Co., the country's biggest domestic skincare company. As of last year, its 89-year-old Pechoin brand had 7.3% of China's mass skincare market, second only to L'Oreal SA, according to Euromonitor data. Chando, owned by Shanghai-based Jala Group, was tied for third place on 5.5% with Procter & Gamble Co.'s Olay. 

The trend is disturbing a long-established order. Color cosmetics and skincare are two of the product areas where overseas multinationals have traditionally held sway. With money trapped at home and consumers "reshoring" their spending, that's under threat.

If China's neighbors are any guide, this shift could have a lot further to run. Multinationals still account for as much as 46% of the country's mass-market cosmetics revenue. In Japan and South Korea, their share is in the low to mid-teens. There's plenty more skin in the game for the likes of Dr. Yu.

Nisha Gopalan is a Bloomberg Opinion columnist covering deals and banking. She previously worked for the Wall Street Journal and Dow Jones as an editor and a reporter.

Disclaimer: This article first appeared on Bloomberg.com, and is published by special syndication arrangement.