Low R&D expenses and high profit margins make it an attractive transition option for traditional drug enterprises

"When I heard about lipsticks produced by a company that makes dermatitis cream, I thought it was funny. What does the lipstick smell like? I think I will definitely buy one when it comes out."

This was the response from Shen Li, a 22-year-old student in Shanghai, when she heard 999pyp, a brand under Chinese pharmaceutical giant CR Sanjiu famous for producing Compound Dex, was about to introduce a set of lipsticks.

According to the company, the set is composed of three lipsticks in different colors-bright red, sunset red, and bright orange, which will be sent out as a gift.

Market insiders said that traditional pharmaceutical enterprises stepping into the cosmetics industry was nothing new. Compared with medicine, the cosmetics business has relatively low research and development expenses and a low admittance threshold, and its gross profit margin is high, making it the best transition option for traditional pharmaceutical enterprises.

They noted that in recent years, unsatisfactory main businesses or a need for a multi-format layout had forced a host of old and famous drug brands to make the transition into the wider health industry. These enterprises are embracing new retail, crossover marketing and social media, to build younger brand images.

More than a decade ago, traditional drug companies, such as Yunnan Baiyao and Guangzhou Pharmaceutical Holdings Ltd, began to look at the toothpaste category.

And the beverage segment, including mineral water, functional drinks and herbal tea, is another target area. The trademark dispute between Wanglaoji and JDB popularized the herbal tea produced by Guangzhou Pharmaceutical Holdings Ltd, while other enterprises, such as Beijing Tongrentang Group Co Ltd, Xiuzheng Pharmaceutical Group, Taiji Group, also tapped into the sector.

In recent years, the cosmetics industry has become a favorite of traditional drug enterprises. Tongrentang sells sleeping masks, while the skin care kit manufactured by Zhangzhou Pien Tze Huang Pharmaceutical Co Ltd is popular among the millennial generation.

"I have been using skin care masks from Tongrentang for over two years. I trust the products because I trust the brand. It has many masks with different functions such as whitening, firming and moisturizing. And the prices are reasonable. The average price for a mask is less than 10 yuan ($1.4)," said Ma Yuanyuan, a 22-year-old student in Beijing.

Traditional pharmaceutical enterprises have the advantage of quality control systems, which is the breakthrough point for them to enter the daily chemical industry, market insiders said.

And some of them have already succeeded in making the transition. According to Yunnan Baiyao's financial report in the first half of fiscal year 2019, the company transformed from a traditional Chinese patent medicine enterprise into a forerunner in China's wider health industry.

In the first half of this year, the sales revenue of Yunnan Baiyao's health product subsidiary surged by 5.1 percent year-on-year to 2.47 billion yuan, with a net profit of 960 million yuan, roughly equating the same period in the previous year, the report said.

Meanwhile, the market share of its toothpaste business grew 20.1 percent year-on-year, ranking first across China.

Wuhan-headquartered brand Mayinglong Pharmaceutical Group Co Ltd, is well-known for its hemorrhoid ointment. In 2009, the company expanded its business by launching an eye cream. Last year, it completed business integration and established a health company, covering functional cosmetics, functional food, baby care, and anorectal care products.

In its financial report of fiscal year 2018, the company said that it was undergoing strategic transformation, expanding its business from the pharmaceutical industry to pharmaceutical circulation, hospital treatment and the wider health industry.

The sales revenue of the "other products" category reached 463 million yuan, taking up 21.06 percent of its total income, the report said.

This summer, Mayinglong launched a lipstick kit at a price of 399 yuan. The kit includes three lipsticks in light pink, crimson and maple-leaf red.

The incongruity of a hemorrhoid ointment company selling lipsticks made the lipsticks a success on the internet. One online comment said "Now I am good from head to toe."

In July, the monthly sales volume of Mayinglong lipstick on its online flagship shop surpassed 900, and most of the feedback online was positive.

"Because drug regulation is becoming stricter, many traditional pharmaceutical enterprises are turning to the daily chemical sector for new growth points, Mayinglong is one of them. However, our previous attempts were not successful," Xia Tian, from the bond department of Mayinglong, told Beijing Business Today.

Xia said that using social media to promote cosmetics sales is becoming a trend. "The way that social media convey information is suitable for makeup promotion, in that they show the difference between before and after wearing makeup. This is why we entered the cosmetics sector."

But why lipsticks?

Market insiders said that the fan-powered economy and social media-powered economy triggered the marketing strategy upgrade. The cosmetics market is becoming increasingly fragmented, and more unique and personalized brands are emerging, bringing opportunities.

And most importantly, as they noted, the lipstick economy is becoming increasingly popular. Even the prices of lipsticks from luxury brands are reasonable. For example, a Chanel lipstick only costs 300 to 400 yuan, but it is not possible to buy a Chanel purse for less than 10,000 yuan. Therefore, lipsticks have become a luxury that everyone can afford.

A survey conducted by industry consulting service website askci.com showed that 63 percent of consumers will choose lipstick when they can only pick three types of makeup. In 2017, the market volume of lip makeup reached 9.24 billion yuan, growing 29.2 percent year-on-year.

In addition, male consumers also contributed to the growth of the lipstick economy. According to the 2017 lipstick consumption report issued by Alibaba Group, 24 percent of lipstick consumption was by male consumers.

"Nevertheless, research and development into the colors of lipsticks is complicated. The current three colors cannot fully satisfy consumer demand. We need to think of how to produce distinctive colors next time. Besides, consumers' acceptance of our products remains to be tested by the market," Xia added.

Liang Jian, a professional from healthcare information provider med.sina.com, said that whether traditional drug enterprises can achieve sustainable development in crossover marketing is questionable.

"Chinese consumers, especially young ones, care about brand value when buying daily chemical products such as cosmetics. Therefore, it is not easy to get consumers to accept crossover products from a traditional pharmaceutical brand.

"After all, industrial barriers exist between drugs and daily chemical products. Even if the crossover products are popular among consumers in the first place, many of them buy the products on impulse and their enthusiasm won't last," he said.

Chen Qiaoshan, a medical analyst at Beijing-based market consultancy Analysys, said that whether traditional pharmaceutical enterprises will succeed in the cosmetics field remains to be seen.

"In terms of research and development, producing cosmetics is easier for a traditional drug company than producing drugs. If it succeeds, it can further explore its cosmetics business. If it fails, at least it caught public attention and promoted its brand image," she said.