New Crabtree & Evelyn owner targets China growth

Nan Hai plans to bring the personal care brand to mainland China by opening 100 retail outlets over the next two to three years.

Nan Hai plans to bring Crabtree & Evelyn to mainland China following the personal care firm's takeover for $175 million in mid-December – the largest foreign cosmetic deal to date involving a Chinese buyer.

The Hong Kong-listed Chinese investment company told FinanceAsia that it plans to open at least 100 retail outlets across the mainland over the next two to three years, starting with tier-1 and tier-2 cities.

“Of course we would like to open as many shops as possible as China’s consumer market has tremendous potential and is growing fast,” Yu Xin, an executive committee member of Nan Hai and the chief executive officer of Nan Hai subsidiary Dadi Cinema Group, said in an interview.

She said the company is hoping to target Chinese consumers who “pursue a high-quality lifestyle” and will leverage its experience in running the country’s second-largest cinema chain to grow Crabtree & Evelyn in China.

“In the past we would be very happy [in China] to just own a mobile phone. Then we wanted a branded mobile phone. And nowadays we want the latest version released. That’s the change in demand from just owning something that satisfies basic necessities to pursuing quality products nowadays,” Yu said. 

Nan Hai teamed up with Orange Blossom, a Cayman Islands-incorporated investment firm, to acquire Crabtree & Evelyn from C&E Capital last month.

Nan Hai plans to fund the acquisition with a mix of its own capital and bank loans and will own a 70% stake in the company once the deal is completed by June 2016.

The deal, which marks Nan Hai’s expansion beyond its core film theatre business, is also the largest and latest deal involving a string of Chinese companies seeking an established foreign brand to tap into China’s fast-growing cosmetic market.

In December Lancy Co, a Shenzhen-listed manufacturer and distributor of women’s apparels, bought 10% of South Korea’s L&P Cosmetic Co for Rmb330 million ($51 million).

Last year Chinese buyers completed six cosmetic-related outbound acquisitions worth a total of $269 million, up 82% from only two transactions in 2014, according to Dealogic data.

Growing market

China’s cosmetic industry has been expanding rapidly, posting a compound annual growth rate of 10.8% from 2005 to 2014. The world’s second-largest cosmetic consumer market after the US registered annual retail sales of Rmb200 billion ($31 billion) in 2014, official data shows.

Industry investors and analysts say the rising income of Chinese consumers and their relatively low levels of spending on cosmetics underpin the sector in both developed tier-1 cities such as Beijing and Shanghai and less prosperous and more remote tier-2 and tier-3 cities. 


“For many Chinese consumers cosmetics are still discretionary consumption. They, on average, only spend $35 on cosmetics every year, one eighth of Japanese spending,” Hu Junjun, an analyst at UBS Securities, said in a note in July 2015.

According to Euromonitor International, annual cosmetic sales in China are expected to grow at a CAGR of 11% from 2014 to 2019, reaching Rmb491 billion by 2019.

“China is a huge, blank market for Crabtree & Evelyn,” Yu of Nan Hai said, adding that the brand's expansion in the country would help to boost global sales, which declined 14.3% year-on-year in the fiscal year ending March 2015.
Crabtree & Evelyn, which has some exposure to mainland Chinese shoppers via Hong Kong but has yet to enter the world’s second-largest economy, was founded by the American entrepreneur Cyrus Harvey and his wife in Massachusetts in 1972.
Melded with the couple’s gardening interests, it first specialised in producing exotic soaps sourced from around the world and eventually developed into an international retailer that sells bodycare products, fragrances, and foods in more than 40 countries.
In 1996, the couple sold the brand to Kuala Lumpur Kepong Berhad, a listed Malaysian plantation company. It was acquired in 2012 by the Hong Kong-based investment-holding firm Khuan Choo International for $155 million, according to Dealogic.
Yu said Nan Hai plans to leverage its cinema-related network to help promote Crabtree & Evelyn’s business in China. For instance, it will implement cross-sales programmes among the brand’s point of sales and Nan Hai’s other bricks-and-mortar units, including film theatres, restaurants, and beverage shops.  
Coming soon to China

Nan Hai’s Dadi Cinema Group currently runs 270 leased cinemas and has more than 10 million members across the country. It plans to open another 300 cinemas over the next three years. It will also work with China’s leading e-commerce platforms such as T-mall and to gain an online presence.

Although Crabtree & Evelyn’s brand awareness in China is “much higher” than Yu expected, it might still have to face fierce competition from its Western counterparts, notably L’Occitane, which has had a longer presence in the country.

Sales of the French skincare and cosmetic brand reached €103 million in China in the financial year ending March 2015, a 20% year-on-year increase (at constant exchange rates), outstripping all other markets.

“It would be possible that Crabtree & Evelyn could replicate L’Occitane’s success in China. But the latter has been in China much longer and has definitely established a loyal consumer base in China,” Katherine Chan, China consumer discretionary analyst at Nomura, told FinanceAsia.

While Crabtree & Evelyn also aims to penetrate China’s tier-2 and tier-3 cities where cosmetics sales grow faster than in tier-1 cities and Dadi Cinema Group has its mainstream consumers, some analysts like Chan voiced a note of caution.

“The business in all these cities is very competitive. In tier-1 cities the competitors will mainly be global brands because of consumers’ higher affordability. In tier-2 to 3 cities you’ve got a bunch of local brands competing on the pricing front,” she said. “[Crabtree & Evelyn’s plan] may not be as easy as it sounds.”

Yu, on the other side, is optimistic.

“It is not time to fight for sharing a piece of the pie," she said. "We do not think of our peers as competitors but rather partners in making more pies as the market is still in [its] growth phase.”

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