Fragrance makers in the southwestern province are nosing ahead in their efforts to build local brands and gain global attention, report Yang Wanli and Li Yingqing in Kunming.

China's multibillion-dollar luxury goods market has just undergone a tumultuous year as a number of factors, including the plunging stock market and the national anti-corruption campaign, pushed sales lower and lower.

According to research released in January by Bain Co, the United States management consultancy, spending on high-end goods in China fell by 2 percent to $17.26 billion last year.

However, despite the widespread decline, a small number of luxury items maintained steady growth, with cosmetics, perfume and personal care items registering annual growth rates of 5 to 10 percent.

For the leading brands among these mostly foreign exceptions, the strong consumer power of the country's 1.3 billion people not only represents promising profits, but also signals the threat posed by new local rivals.

Chinese perfume makers were once at the bottom of the industry chain, but they are now producing sought-after cosmetics from natural plant extracts, and trying to grow their share of the profitable domestic market.

"An increasing number of Chinese women are now becoming accustomed to world-famous cosmetics and perfume brands, such as Dior, Chanel and Estee Lauder, but few of them know that some of the essential ingredients used by these brands come from China, or rather, from Yunnan province," said Du Zhizhi, an associate researcher at the Kunming Institute of Botany of the Chinese Academy of Sciences.

Boasting 15,000 plant species, Yunnan, in China's southwestern subtropical zone, is the country's most biologically diverse province. It is home to more than 400 types of natural spices, accounting for nearly 80 percent of all the varieties found in China.

According to the provincial department of commerce, Yunnan's fragrance manufacturers exported more than $104 mill-ion worth of natural oils and fragrances made with synthetic chemicals last year. The annual output of two essential perfume ingredients dominated global trade, with local eucalyptus oil accounting for 90 percent of all sales, while geranium oil accounted for 50 percent.

"We've seen steady growth in the province's cosmetics, healthcare and pharmaceutical industries, the key industries that use natural oils, fragrance extracts and synthetic chemicals," said Feng Rui, director of the China Association of the Fragrance, Flavors and Cosmetic Industries.

Raw materials

Although Yunnan's more than 30 fragrance companies employ about 2 million workers, almost all of them are essentially suppliers of raw materials, according to Feng.

"In recent decades, (profit) margins have been falling for these companies because of rampant price wars among domestic suppliers. That has resulted in some companies thinking about ways to avoid obstacles - by building local brands," he said.

That process started early for the pharmaceuticals giant Yunnan Baiyao Group in Kunming, the provincial capital. In 2008, Baiyao signed a technology transfer agreement with Maleave Cosmetics of Japan, and they started jointly developing cosmetics in 2011.

In 2014, the company's daily care products generated 3 billion yuan ($461 million), accounting for about 15 percent of the group's annual revenue, with 95 percent of the total coming from sales of Baiyao's star product - toothpaste.

"It's not easy to promote a new brand and make inroads in this profitable cosmetics market. It requires high levels of investment, but only generates low returns in the short term," said Qin Wanmin, vice-president and general manager of the group's department of healthcare products. According to Qin, it's common for overseas giants, such as L'Oreal Paris, to invest billions of dollars in the development of new products.

For the past five years, the company's cosmetics range has deliberately been limited to shampoos, face masks, soaps and hand creams.

"It will be some time before we plan a big expansion in the product range. The industry chain in Yunnan is still underdeveloped, so we're better off concentrating on producing medicines," Qin said.

Risks worth taking

For Baiyao, which has annual revenue of nearly 20 billion yuan, the small slice of the cosmetics-market cake currently available is not attractive enough to warrant a larger investment. However, in the eyes of small- and medium-sized fragrance companies, the risks associated with establishing a successful local brand are worth taking.

Having cooperated with a number of domestic and foreign cosmetics and health food brands for nearly 10 years, SeedShare Development, a herbal company in Yunnan, started its own skin care brand, called Herb-tale, in 2008.

"The big overseas brands are recognized not only for the good quality of their products, but much more as icons of higher social status and a luxurious lifestyle," said Ding Rui, Herb-tale's president.

"It's very difficult for a Chinese company to survive under such circumstances," she added. "The profits are good, but extremely difficult to make. To compete with the big brands, we have to maintain the same quality as them, while looking for something unique."

Ding said local perfume brands are not competitive because the world's top perfumers mostly work for French brands. That means the trump card for Yunnan companies is essential oils and the skin care products made from them.

"It's a safe bet because China now has world-leading oil-extraction technology," she said. As the country of origin, China enjoys low-cost raw materials, which means the products have strong price competitiveness.

Herb-tale's star product - essential rose oil - sells at about 300 yuan for 10 milliliters, about a quarter of the price of the same oil produced by Jurlique, an Australian brand known for natural essential oils and related skin care products.

"Consumers are much more familiar with Rosa Damascene, more commonly known as damask rose," Ding said. "But few know that the reputation of damask rose is mainly based on its unique fragrance.

"However, Yunnan's native roses are extremely effective in skin care because of the thick petals, which are rich in polysaccharides - chemicals that aid the skin's natural ability to hydrate and retain water," she said.

'Secret' formulas

In recent years, Ding and her team have traveled around Yunnan, visiting many of the 25 local ethnic groups, the largest number in any province, to collect little-known skin care formulas and special herbs.

"China is the only country in the world that produces truly herbal drugs," she said. "We are experienced in extracting the herbs' active ingredients, and the secret formulas from different ethnic groups will be a unique selling point."

In the Lijiang Naxi autonomous prefecture, Ding and her team found Prinsepia Utilis Royle, a rare member of the rose family. The cherry-like bloom can be used to treat acute inflammation and relieve pain, and is also used by the locals as a treatment for burns. Herb-tale has now included the herb in its sunscreen products.

Ding's team also explored the properties of Matsutake - an expensive mushroom that originated in Japan, but grows extensively in Yunnan. Believed to be one of the world's most-expensive fungi, Matsutake contains many vitamins and minerals, and also has a unique chemical that helps boost the body's immune system. Herb-tale has incorporated it in its anti-aging skin care products.

Tourism boost

For many local companies, building a widely recognized brand not only requires star products, but equally important, a good marketing strategy.

Unlike Herb-tale, which promotes its products through franchises in large shopping malls and attracts customers by providing a free basic skin care massage with every purchase, the fragrance brand Mythic Flora promotes itself through Yunnan's booming tourism market.

Last year, the province welcomed 3.2 billion domestic visitors and more than 107 million tourists from overseas, according to the provincial tourism authority. Tourism generated income of $50.5 billion last year, not far off the $61 billion New York earned from tourism in 2014.

"Many ethnic groups in Yunnan cook flowers as part of their daily diets, including adding them to soups or frying them along with other vegetables. That culture is now becoming known nationally thanks to the soaring number of tourists," said Du from the Kunming Institute of Botany.

As examples, he cited the Dai and Yi peoples in southern Yunnan, who eat the flowers of pomegranates and Japanese bananas, while the Bai people in the north prefer white rhododendrons and pumpkin flowers. They believe flower diets are not only healthy, but also make people beautiful.

"Flowers are now a unique symbol of Yunnan. Ten years ago, travelers took lots of fresh flowers when they left. Now, planes and trains leaving Yunnan are fully loaded with gift boxes containing pancakes made with flowers. The next trend will be in fragrance products," said He Jian, Mythic Flora's general manager.

Investment

Yimei Industrial Holding Group, Mythic Flora's parent, has invested 3 billion yuan to build a holiday resort in Kunming and further its aim of promoting cosmetics made from natural fragrances.

In addition to a five-star hotel, a large shopping mall and a cinema, the resort, called The City of Flowers, also runs Colorful Wonderland - the world's largest flower-themed greenhouse - and a perfume museum, which tells the 300-year-long story of the fragrance trade between China and France.

"We run Mythic Flora's biggest boutique in the resort, trying to introduce our products as part of the process of promoting Yunnan's fragrance culture," He said, adding that the biggest obstacle to the development of local brands is consumers' strong reliance on big-name brands.

"Many people never try cosmetics made in China. But promotion is easier with tourists. If they try our goods, we have at least had a chance to prove the quality of our locally made products," he said.

Although they have taken different marketing paths, Mythic Flora and Herb-tale are now facing the same problem: a lack of both packing and logistics companies and of talented designers.

Both companies purchase their pill bottles from Guangzhou, a coastal city in Guangdong province that's famous for manufacturing, while their product designers all hail from Shanghai.

"A quality problem meant the product labels couldn't be fixed firmly on the bottles made in Yunnan. Extending the industry chain isn't easy, but we have to try," said Zhao Pingzhou, Herb-tale's vice-president.

"Most global brands are born in the areas where the raw materials are produced," Zhao said. "As China's botanical garden, and the home of many rare plants, Yunnan should have its own cosmetics brands - companies that will make the leap from local and national fame to becoming well-known in the global market."

Lyu Chang contributed to the story.

Contact the writers through yangwanli@chinadaily.com.cn