International Marketing

Hult International Business School, San Francisco campus

The Honest CompanyIndustry trends, statistics and forecast

Author: Team 7Cohort: Bay BridgeProfessor: Pete BolandDate: March 17, 2016

IndexAbstract I

Abstract

Description of Assignment

There are two components to this assignment:

(1) An in-class team presentation (2) A companion comprehensive 10 - 12 pages written report, that also includes an appendix (for example graphs and tables) and a reference section. The presentation is imagined as a pitch for a marketing consulting contract with a company of the team’s choice. Playing the role of consultants, the team needs to demonstrate a familiarity with the firm’s business and its industry, as well as knowledge of marketing concepts and tools. Additionally, it must present an analysis of the firm’s immediate challenges or opportunities, and recommend a framework and specific proposals for action. Panel members (marketing practitioners) will grade the presentation, the primary component of the assignment. Together, the written report grade and the presentation grade, will constitute the team’s final grade for this portion of the assignment. Each team will present during the last class session according to the assigned order by the professor. Visual presentation aids are recommended.

Learning Outcome Targeted

Analyze marketing problems and opportunities facing companies and develop viable options, and recommend appropriate strategies for markets locally, regionally and worldwide. Apply an analytical methodology, including both qualitative and quantitative assessments, to formal case studies and other marketing issues discussed in class.

IndexFigure Index II

Index

Index.................................................................................................................. I

Figure Index...................................................................................................II

1 The Honest Company..............................................................................1

1.1 What it Does..........................................................................................1

1.2 How it all Started..................................................................................1

1.3 Where it is currently.............................................................................1

1.4 Product Portfolio (Extract).................................................................21.5 What next?.............................................................................................2

1.6 What are limitations to the research?..............................................3

2 China.............................................................................................................3

2.1 What is happening in China?..............................................................3

2.2 How to penetrate this market?..........................................................4

2.3 What are the latest trends?................................................................4

2.4 What are the future prospects of this market?..............................7

2.5 What are the main Distribution Channels in China?.....................8

2.6 How is E-Commerce market in China?............................................9

2.7 What are our Positive short- and long-term growth drivers?....10

2.7.1 China’s relaxation of its one-child policy...................................11

2.7.2 Product price hikes and quality upgrades.................................11

3 Launch Strategy.....................................................................................12

3.1 How should we Brand our Product?...............................................12

3.2 What should be the Pricing Model?................................................12

3.3 How should we Promote our Brand?..............................................12

3.4 What Distribution channel could we use?.....................................13

4 Conclusion................................................................................................13

References....................................................................................................14

IndexFigure Index III

Figure Index

Figure 1 - Honest Founders.................................................................1

Figure 2 - Baby diapeers - Market Size China.....................................4

Figure 3 - Retail Sales 2009 - 2014 China...........................................4

Figure 4 - China Baby Products Market..............................................8

Figure 5 - China E-Commerce Market.................................................9

Figure 6 - China Retail E-Commerce Sales 2015................................9

Figure 7 - China Baby Diaper Market................................................10

Figure 8 - Penetration Rates Baby Diapers.......................................11

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1 The Honest Company

Figure 1 - Honest Founders

[1.1] Honest’s BackgroundWhat it DoesThe Honest Co. is a privatprivately heald companye US based company in the US with its headquartered located in Santa Monica, California. The company was and was established by Jessica Alba in 2011 and launched in 2012 by Jessica Alba and her co-partners.. It operates in the FMCG (Fast Moving Consumer Goods) sector with non-toxic household and eco-friendly products (Honest Company Website, n.d.), inspired by a need that was not being filledtheir unfulfilled need.

1.1 How it all StartedIn 2008, after the birth of her first child, Alba found it difficult to find ecofriendly and safe products; In her quest she met with Christopher GaviganDue to its position as a private company at the moment (planning to go public in 2016 / 2017), we had difficulties analyzing and forecasting expansion cost regarding distribution, marketing, advertising and market adaptation of products. As part of our research we made different andas well as ising market Its sales have been $50 million in 2013, $170 million in 2014 and was valued at $1.7 billion in August 2015. The company serves the United States and Canada and is making plans to serve England, Australia and China in the near future and also anticipating an initial public offering the coming years.who ran non profit firm, Healthy Child Healthy World. They both decided to launch website with word Honest. Alba was on her quest to reform 1976 Toxic Substance Control Act that allowed for more than 80,000 chemicals to remain untested in household products (Forbes: Clare O'Connor, 2015). During this time she metAlba,

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was inspired by the 2008 birth of her first child Honor and her own history of childhood illnesses, wanted to to create aestablish a company that providesd an alternative to the prevalent baby products with natural ingredients. web Entreprenuer and trained attorney, Brain Lee, who had hit it big with LegalZoom.com. Lee was horrified when his son was banned from taking classic PB&J breakfast to school due to the rise in cases of allergies and children diseases. He brought in Sean Kane with him. Despite advice that she shouldto start small with a singular focus, Alba The 4 of them launched the The Honest company Company in 2011 with 17 products and now reached a product portfolio with approx. 120 products in 2015. seed funding of $6 million. The company Launched with an aim to satisfy the unfullfilled need of upper-middle class parents who care about organic, hypoallergenic and natural rising trends and who are willing to pay more for high quality products. (Clare O'Connor, 2015).

1.2 Where it is currently

The Honest Co. started with 17 products in its portfolio and by 2015 reached 120 products. The Honest Co. has recorded sales of $52 million in 2012, $150 million in 2014 (Zach Johnson, 2014); and was valued at $1.7 billion in August 2015 (Valentina Zarya, 2015). The company serves the markets of United States and Canada and plans to expand to England, Australia and China in the near future. Further, it is anticipating an initial public offering in 2016. 80% of its saleHonest sells 80% of productss were online via a monthly subscription service with the remainder being doneand rest in department stores and discount warehouses. As of August 2014, the company's products were available at retail outlets in of the United States and Canada, too, such as Whole Foods, Costco, Target Corporation, and Buy Buy Baby. What is About 75% of revenues still comes from online commerce, and the majority of that is from the company’s $79.95 monthly bundles of diapers and wipes. The most very specialinteresting aspect of their success is that as of August 2015, the company was thriving without everhaving ever used requiring traditional media such as print ads, television or billboards. Instead, Jessica Alba wais actively involvesd with charities such as Safer Chemicals Healthy Families, ONE, Habitat for Humanity, Project HOME (Honest Company Website,n.d.) and most important has 5 million Instagram followers on her account. At the same time, she admits that she feels an intense responsibility to give the her children the best possible start because many are still completely unaware of the toxic risks posed by everyday basic products. The key principles of Alba’s company are creating a culture of honesty, making beauty, outperforme its competitors, mattering about service, making sustain life, and having fun!80% of its saleHonest sells 80% of productss were online via a monthly subscription service with the remainder being doneand rest in department stores and discount warehouses. As of August 2014, the company's products were available at retail outlets in of the United States and Canada, too, such as Whole Foods,

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Costco, Target Corporation, and Buy Buy Baby. What is About 75% of revenues still comes from online commerce, and the majority of that is from the company’s $79.95 monthly bundles of diapers and wipes. The most very specialinteresting aspect of their success is that as of August 2015, the company was thriving without everhaving ever used requiring traditional media such as print ads, television or billboards. Instead, Jessica Alba wais actively involvesd with charities such as Safer Chemicals Healthy Families, ONE, Habitat for Humanity, Project HOME (Honest CompanyWebsite, n.d.) and most important has 5 million Instagram followers on her account. At the same time, she admits that she feels an intense responsibility to give the her children the best possible start because many are still completely unaware of the toxic risks posed by everyday basic products. The key principles of her company are creating a culture of honesty, making beauty, outperforming, mattering about service, making sustain life, and having fun! (Honest Company Website, n.d.)80% of its saleHonest sells 80% of productss were online via a monthly subscription service with the remainder being doneand rest in department stores and discount warehouses. As of August 2014, the company's products were available at retail outlets in of the United States and Canada, too, such as Whole Foods, Costco, Target Corporation, and Buy Buy Baby. What is About 75% of revenues still comes from online commerce, and the majority of that is from the company’s $79.95 monthly bundles of diapers and wipes. The most very specialinteresting aspect of their success is that as of August 2015, the company was thriving without everhaving ever used requiring traditional media such as print ads, television or billboards. Instead, Jessica Alba wais actively involvesd with charities such as Safer Chemicals Healthy Families, ONE, Habitat for Humanity, Project HOME (Honest Company Website, n.d.) and most important has 5 million Instagram followers on her account. At the same time, she admits that she feels an intense responsibility to give the her children the best possible start because many are still completely unaware of the toxic risks posed by everyday basic products. The key principles of her company are creating a culture of honesty, making beauty, outperforming, mattering about service, making sustain life, and having fun! (Honest Company Website, n.d.)

Through her husband, she met Web entrepreneur Brian Lee, a trained attorney who had hit it big with LegalZoom.com, an online legal-documentation service he cofounded with Robert Shapiro of O.J. Simpson infamy. By 2011, she had turned herself into an expert on consumer products and traveled to Washington, D.C. to lobby for updated legislation. She was — and is — particularly focused on reforming the 1976 Toxic Substances Control Act, which has allowed more than 80,000 chemicals to remain in household products untested. Lee had become horrified when his young son was banned from bringing that classic. Lee got on board with

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Alba and Gavigan that year, bringing with him a fourth cofounder in Sean Kane, who’d spent a decade selling discount products at Pricegrabber.com. Lee and Alba seeded their new startup to the tune of about $6 million, with another investor, according to a source close to the deal. Creating safe, chemical-free, nontoxic consumer goods from scratch without the infrastructure of, say, a Procter & Gamble or a Kimberly-Clark was a prospect that would cost way more than even the $6 million seed fund. So they went looking to get venture capital into the diaper business. The group called their new firm The Honest Company, as a nod to its values and transparent ingredients. About 75% of revenues still comes from online commerce, and the majority of that is from the company’s $79.95 monthly bundles of diapers and wipes.

To sum it up, two things stand out on their short-term agenda. First, international expansion. Honest products will debut in South Korea later this year and in China possibly in 2016. And then, most likely next year, a public offering, according to people familiar with the company.

[1.2] Product Portfolio (Extract)

Baby FMCG Type Price

Diapers

Diapers $ 13.95Honest Overnight Diapers

$ 17.95

Training Pants $ 12.95Wipes Dispenser $ 19.95Organic Healing Balm

$ 12.95

Diaper Rash Cream $ 9.95Organic Baby Powder $ 11.95Soothing Bottom Wash

$ 9.95

Feeding

Silicone Baby Bottle 8oz

$ 14.95

Silicone Baby Bottle 5oz

$ 12.95

Nursing Pillow $ 69.95 Baby DHA $ 19.95Lactation Plus $ 19.95

1.3 What next?

The company intends to go global. Initially they are planning to start with United Kingdom, Australia and China. They are also planning to public with their IPO set to launch in August 2016. (Coffey, 2016)

1.4 What are limitations to the research?Since Company’s Financial are not yet public, we had to make

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several assumptions on the market trends and statistics as well as comparison measures for analyzing and forecasting the expansion costs regarding distribution, marketing and advertising, and market adaptation of products.

[1.4] How to penetrate the Chinese market?

Many U.S. companies commonly use agents in China use agents to initially create relationships, adviseadvice on product standards, perform business development, and offer marketing support. Local agents possess the knowledge and contacts to better promote U.S. products and break down institutional, language, and cultural barriers. The U.S. Commercial Service offers a wide array of services to assist U.S. exporters toin finding Chinese partners through a network of five offices in Beijing, Shanghai, Shenyang, Guangzhou, Chengdu, and a partnership with the China Council for the Promotion of International Trade (CCPIT) to provide business matchmaking and related services in 14 other major cities in China. U.S. companies are strongly encouraged to carefully choose potential Chinese partners and take the time to fully understandcompletely understand their distributors, customers, suppliers, and advisors. Success in China requires a strong understanding of your business capabilities, development of long-term relationships, and an in-depth knowledge of this challenging market. Before making a decision to enter China, potential exporters should consider their own resources, past exporting experience, and willingness to commit a significant amount of time assessing and cultivating opportunities. Successful market entry strategies typically demonstrate regionally targeted efforts, application specific product positioning, well-qualified partners, measures to minimize non-payment risk, and a game plan for intellectual property protection.

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[2] China

1.5 What is happening in China?Nappies, diapers, and pants witness growth of 18% in retail value terms to reach CNY 41.2 billion in 2014 and the same segment sees a 3% increase in average unit price in 2014. While, domestic manufacturers invest in international advanced production facilities to further upgrade their products. However, Procter & Gamble (Guangzhou) Ltd. still takes the top position in this market with a value share of 42%. The entire retail sales of baby nappies / diapers / pants are expected to post a constant value CAGR of 15% to reach CNY 81.2 billion in 2019. (Passport, 2015)

Source: http://www.portal.euromonitor.com/portal/statistics/rankcountriesFigure 2 - Baby diapers - Market Size China

2010 2011 2012 2013 20140

50001000015000200002500030000350004000045000

Retail sales 2009-2014 China

Disposable Pants 398.9 Nappies/Diapers 16,412.50- Junior Nappies/Diapers 2,761.9 - New Born Nappies/Diapers 4,780.2- Standard Nappies/Diapers 8,870.4

Source: http://www.portal.euromonitor.com/portal/statistics/rankcountriesFigure 3 - Retail Sales 2009 - 2014 China

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1.6 How to penetrate this market?

Many U.S. companies in China use agents to create relationships, advice on product standards, perform business development, and offer marketing support. Local agents possess the knowledge and contacts to better promote U.S. products and break down institutional, language, and cultural barriers. The U.S. Commercial Service offers a wide array of services to assist U.S. exporters to find Chinese partners through a network of offices in Beijing, Shanghai, Shenyang, Guangzhou, Chengdu, and a partnership with the China Council for the Promotion of International Trade (CCPIT) to provide business matchmaking and related services in 14 other major cities in China. U.S. companies are strongly encouraged to carefully choose potential Chinese partners and take the time to completely understand their distributors, customers, suppliers, and advisors. Success in China requires a strong understanding of your business capabilities, development of long-term relationships, and an in-depth knowledge of this challenging market. Before making a decision to enter China, potential exporters should consider their own resources, past exporting experience, and willingness to commit a significant amount of time assessing and cultivating opportunities. Successful market entry strategies typically demonstrate regionally targeted efforts, application specific product positioning, well-qualified partners, measures to minimize non-payment risk, and a game plan for intellectual property protection.(https://www.weconnectfashion.com/articles/doing-business-in-china-a-guide-to-help-us-companies-export, 2015)

Nappies, diapers, and pants witnesses’ growth of 18% in retail value terms to reach CNY 41.2 billion in 2014 and the same segment sees a 3% increase in average unit price in 2014. At the same time, domestic manufacturers invest in international advanced production facilities to further upgrade their products. However, Procter & Gamble (Guangzhou) Ltd. still takes the top position in this market with a value share of 42%. The entire retail sales of nappies / diapers / pants are expected to post a constant value CAGR of 15% to reach CNY 81.2 billion in 2019.

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Figure 4 - Baby diapeers - Market Size China

2010 2011 2012 2013 20140

50001000015000200002500030000350004000045000

Retail sales 2009-2014 China

Disposable Pants 398.9 Nappies/Diapers 16,412.50- Junior Nappies/Diapers 2,761.9 - New Born Nappies/Diapers 4,780.2- Standard Nappies/Diapers 8,870.4

Figure 5 - Retail Sales 2009 - 2014 China

[2.1] Market TrendsWhat are the latest trends?

Value for Quality

Over the review period, the young generation of parents born after the 1980s became the mainstream consumer group for nappies, diapers, and pants in China. They were better educated, wealthier and willing to spend heavily to provide their babies with best things they could afford, which made high-end brands such as “Huggies” and Kao extremely popular while most domestic brands showed weak performance due to inferior brand images. To cater to consumers’ rising demand for higher-positioned products, many domestic manufacturers invested heavily in foreign manufacturing facilities, trying to

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upgrade their products in terms of quality, packaging as well as image.

Growth in Diaper SalesNappies, diapers, and pants saw value growth of 18% in 2014. The consumer base for premium brands continued to grow, while low- to mid-range brands’ contracted, which, combined with rising raw material and labor costs, put upward pressure on the average unit price. However, to survive the fierce competition from high-end brands and keep as many as consumers as possible, many mass-market-orientated brands lowered product prices or undertook long-term promotional campaigns. However, the average unit price increased at a lower rate in 2014 than that in 2013.

Disposable Pants

Disposable pants remained the fastest-growing category in 2014 with volume and value growth of 44% and 48%, respectively, due to its small market base and consumers’ better understanding of this product. Disposable pants are easier to pull on and off, specifically targeted at toddlers. Previously Chinese consumers lacked knowledge about this type of product. However, thanks to manufacturers’ consistent efforts in terms of consumer education during the review period, more and more consumers are aware of the products’ functionality.

Penetration

In 2014, the penetration rate for nappies/diapers increased to 36% while that for disposable pants reached just 5%. Due to manufacturers’ achievements in providing a variety of products across all price points, an increasing number of post-1980s generation parents used nappies and diapers instead of traditional cloth nappies. In terms of disposable pants, their relatively higher price and limited product awareness resulted in the small market value share of 6% at the end of the review period.

New born Nappies vs Junior Nappies

Junior nappies and diapers developed faster than new born and standard nappies/diapersones over the review period in both volume and value terms. Improved nutrition resulted in babies’ higher birth weight and they tended to grow faster than before; thus, it took a shorter time for standard/junior nappies/diapers to be

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suitable for them. In addition, many young mothers believed that it was to be more beneficial to their babiesnew born if they use if traditional cloth nappies and diapers were used during the early period after birth. As a result, the new born nappies/diapers showed sluggish performance in 2014 even though manufacturers tried hard to promote them in order to generate brand loyalty at an early stage.

Change in Beliefs

The traditional belief is that cloth nappies and diapers are made of more natural materials and thus are more beneficial to babies’ skin. Influenced by this, some young generation parents have been reluctant to use new born nappies/diapers. However, since the post-1980s generation of parents are better educated, wealthier, more receptive to modern parenting skills and also too busy to devote dedicated care to their new born babies, the practice of using modern nappies / diapers in place of traditional cloth nappies is becoming commonplace.

Delay in Potty Training

Potty training in China counts as one of the most important stages of baby nursing. Trade sources indicate that training generally starts when babies are 7 to 9 months old, with the focus being on the exact time of excretion, which gradually helps babies to adapt to using a potty. However, because of the accelerating pace of modern lifestyles, it is becoming increasingly difficult for young parents to devote most of their time and energy to caring for their babies.

Customer Segments

Today´s Chinesea consumer market is dominated by a relatively narrow middle class. Leass than 2% of workers earn enough even to pay income tax (do we have a salary range of different customer classes?). So what the world has seen so far is only a preview of the opportunities to come: 11% of China´s population can be considered middle class, 2% of earners pay income tax and 770 Million people is the worker population in China. Chinese consumer spending can be broken down into 7 categories: Looking more Beautiful, Eating Better, Better Home, More Mobility / Connectivity, Having more fun, Well-being (Health / Education) and Luxury.

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Additional Consumer BehaviorThey are more demanding and pragmatic than ever as their horizons expand beyond basic concerns about product features. Especially, Online to Offline (O2O) Services: O2O can be defined as anything digital such as a mobile app which brings people to shop in offline stores. Mobile payments are an enabler for O2O wherein customers can shop from offline stores and use a service such as Alipay to make the payment for the service or product. A food delivery service like Ele.Me is an example of O2O which allows consumers to order from local restaurants and connects them to these offline stores. O2O services have accelerated from a developmental phase to a commercially viable business model across China´s largest cities in 2015.

SegregationFirst, older generation generally maintains “traditional” spending habits, second Middle-aged Chinese oscillate between tradition and new trends and finally and most important younger generation is becoming more Westernized and quality conscious.

Important fact about baby productsGeneration ChangeOlder generations raised their babies with self-supplied products – such as cotton diapers and homemade baby food – but younger generations will reliesy on disposable diapers and canned baby food. New parents and grandparents hope to buy the best products possible for their children, especially given recent food safety concerns. For example, after the Sanlu Group melamine-tainted milk incident in 2008, most parents interviewed said they they no longer trusted local brands of infant formula and would buy imported brands if they can afford them. In addition, many new parents will turn to Western baby products because the variety of traditional Chinese baby products is limited. Organic ProductsChina is now the fourth-largest consumer of organic products in the world. At the China International Organic Food Fair, countries like Denmark, Germany, and Australia were eyeing the potential market and showcasing their dairy, meat, and wine products. China has 731 certified domestic organic food companies and its market share is expected to grow to 1 to 1.5 percent from 2014 to 2018, from the current 0.3 percent.

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“China is a market that attracts great attention from the world’s organic traders,” Wang Yunhao, director of China Green Food Development Center (CGFDC), said at an organic food fair on May 28. According to a new market report published by Transparency Market Research titled “Organic Personal Care Products Market for Skin Care, Hair Care, Oral Care, and Cosmetics – Global Industry Analysis, Size, Share, Growth, Trends and Forecast, 2012 – 2018, “the global demand for organic personal care products was over $7.6 billion in 2012 is expected to reach $13.2 billion by 2018 growing at a CAGR of 9.6% from 2012 to 2018.

[2.2] What are the future Pprospects of this market?

Product Innovation in High-end ProductsThanks to increasing disposable income levels, a preference for mid- to high-end products is likely to become an inevitable trend over the forecast period. Faced with declining market share, mid-range brands such as Mamy Poko and Anerle are predicted to introduce high-end products to meet market demand and catch up with premium brands. Future product innovation will be focused on further improving softness, comfort and absorbency of the products. Local economy brands that are unable to compete in the upper market are likely to concentrate on underdeveloped areas and lower prices to attract price-sensitive consumers.

GrowthRetail sales baby diapers are expected to experience an additional rapid growth with constant value CAGR of 15% over the forecast period. The penetration rate of nappies, diapers, and pants was 36% for 0 to 1 year-old children in 2014. A key contributor to sales growth will be upgrading demand from low-end or mid-range products to premium brands. In addition, another baby boom is expected following the government’s relaxation of the one-child policy.

Knock-offs Fake products are believed to be the primary threat to forecast growth of nappies, diapers, and pants in China. Chinese consumers are frugal and want to buy goods at as low a price as

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possible. Some unscrupulous manufacturers have taken advantage of this and made fake nappies, diapers, and pants of well-known brands and sold them at a relatively lower price. Over the forecast period, fake products are still likely to be found on the market, since it is highly profitable for these unscrupulous manufacturers and it is often difficult for consumers to tell the difference between fake products and real ones when making purchasing decisions.

Increase in Disposable Pant MarketDisposable pants are predicted to see the most dynamic growth with a constant value CAGR of 28% over the forecast period. In 2014, disposable pants accounted for just 5% of the market in value terms and the penetration rate for this category remains limited at 5%. Thanks to rising income levels and manufacturers’ consistent efforts in terms of consumer education, these products are expected to gain an increasingly larger consumer base (WooEB, 2012).

Modest Price RiseAverage unit price for nappies, diapers, and pants is expected to show modest growth over the forecast period. Although trading up from low-end or mid-range products to premium ones will put upward pressure on average unit price, price discounts offered by economy brands will partly offset this. Moreover, competition is expected to intensify with more and more foreign entrants, which is likely to lead to more frequent promotional campaigns.

CompetitionCotton material hygiene products are expected to be more popular and represent the development trend in China. In September 2014, Shanghai Uni-Charm Co Ltd launched its Yun Rou Mian Bao series of nappies/diapers, which featured a high-end positioning and aimed to compete with premium brands such as Huggies. The Yun Rou Mian Bao series received a very positive response from the market, highlighting the success of the company’s strategic transition from mid- to high-end positioning .

No One Child PolicyDue to the government’s relaxation of the one-child policy, leading players have begun to expand production capacity to cater to potential new demand over the forecast period. Enhanced production capacity on the part of leading players will ensure stable supply over

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the forecast period, even with strong double-digit retail volume sales growth expected.

Market PotentialPer capita consumption of nappies/diapers/pants of China is still much lower than that in Western countries. Therefore, there exists a huge potential for the future development of China’s nappies, diapers, and pants market. Having identified this, some of the leading manufacturers plan to expand their production capacity in mainland China. In addition, more foreign brands are anticipated to enter this market due to Chinese consumers’ enthusiasm, which can be seen from the fact that many young parents try to buy nappies/diapers/pants from overseas markets via the internet.

Organic ProductsChina is now the fourth-largest consumer of organic products in the world. At the China International Organic Food Fair, countries like Denmark, Germany, and Australia were eyeing the potential market and showcasing their dairy, meat, and wine products. China has 731 certified domestic organic food companies and its market share is expected to grow to 1 to 1.5 percent from 2014 to 2018, from the current 0.3 percent. “China is a market that attracts great attention from the world’s organic traders,” Wang Yunhao, director of China Green Food Development Center (CGFDC), said at an organic food fair on May 28. According to a new market report published by Transparency Market Research titled “Organic Personal Care Products Market for Skin Care, Hair Care, Oral Care, and Cosmetics – Global Industry Analysis, Size, Share, Growth, Trends and Forecast, 2012 – 2018, “the global demand for organic personal care products was over $7.6 billion in 2012 is expected to reach $13.2 billion by 2018 growing at a CAGR of 9.6% from 2012 to 2018.

[2.3] What are the Mmain Distribution Channels in China?

Increasing use of E-Commerce in China, diapers are distributed through the following 5 channels, with the first 3 of these accounting for the majority of sales, based on our estimates:

E-commerce. This includes direct sales through online platforms and sales to online shopping outlets that resell the products on to consumers.

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Also, some diaper brands leverage baby specialty stores to deliver customers’ orders placed online.

1. Modern channels (retail organizations). These comprise supermarket and hypermarket chains. While they are still an important sales channel, diaper sales at these outlets declined by 4% YoY in 2013, according to AC Nielsen. We expect diaper sales through these channels to continue to weaken in the years ahead, given declining customer traffic and greater competition from other channels.

2. Specialty baby stores. These are stand-alone stores and chains that sell maternity and baby goods. They have been a fast-growing sales channel in China in terms of revenue and store count over the past few years. Biostime estimates that there are over 70,000 such baby specialty stores in China at present, up from 50,000 stores (Anson Chan, CFA, 2014).3. E-commerce. This includes direct sales through online platforms and sales to online shopping outlets that resell the products on to consumers. Also, some diaper brands leverage baby specialty stores to deliver customers’ orders placed online.

4. Traditional distributors. These distributors distribute the diaper players’ products to retail stores in low-tier cities, mom-and-pop shops and some of the specialty baby stores.

5. Pharmaceutical and medical channels. These include hospitals, pharmacy chains etc. In some industry research statistics, they are also classified as modern channels or as outlets serviced by distributors.

Figure 6 - China Baby Products Market

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[2.4] E-Commerce: Honest’s main distribution channelHow is E-Commerce market in China?

China’s explosive growth in shipping is an indication that e-commerce is already expanding – and has potential to grow even further. Shipping grew 10x from 2006 to 2014. (2006: 1 Billion packages delivered, 2014: 10 Billion packages delivered). China’s online retail market reached 945.1 billion Yuan ($143.5 billion) with a growth rate of 45% in Q3 2015 according to analysis (IncitezChina, 2016)

Figure 7 - China E-Commerce Market

China’s e-commerce retail sales are expected to increase by 42.1% to $672.1 billion, accounting for over 40% of the global e-commerce retail sales in 2015 estimated by eMarketer. The e-commerce market in 2018 is expected to reach $1.57 trillion according to eMarketer. China has become the world’s largest e-commerce market (ChinaInternet Watch Team, 2015).

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Figure 8 - China Retail E-Commerce Sales 2015

[2.5] What are our Positive short- and long-term segment growth drivers?

Industry forecasts call for China’s baby diaper sales volume to see an 8% CAGR over 2013-20E (Anson Chan, CFA, 2014). We expect the domestic and foreign market players in the country to benefit from the relaxation of the one-child policy and raise prices on product quality upgrades. Our industry research indicates that baby diapers should see among the fastest sales-volume growth of China’s major personal hygiene product segments over the coming years (AnsonChan, CFA, 2014).

Figure 9 - China Baby Diaper Market

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1.6.1[2.5.1] China’s relaxation of its one-child policy

We expect China’s gradual relaxation of its one-child policy will lead to an increase in the country’s birth rate over the coming years. As announced the couples have the right to get a second child. Officials from the National Health and Family Planning Commission estimate that this policy relaxation will lead to an additional 2m births in 3-5 years’ time. This implies a 12% increase from the number of births in 2013 (Chris Buckley, 2015).

1.6.2[2.5.2] Product price hikes and quality upgrades

Both domestic and international baby diaper brands in China have been increasing their ASPs since 2012, mainly through product mix upgrades, and we think more is to come on this front. In this context, Daiwa’s Japan Consumer Staples Sector analyst, Katsuro Hirozumi, published a report on 28 August 2014 on the disposable diaper market in China in which he has highlighted the following, which we extrapolate for the China diaper market.

Brand Perception:”High-end disposable diapers made in Japan should continue to sell, but those made in China look set to struggle”. We believe this shows that Chinese consumers’ brand perceptions of domestic players’ diaper products are currently inferior to those of Japanese players. An increasing availability of Japanese brands should further enhance Japanese diaper brands’ awareness among Chinese consumers in the coming years. But, we also note that domestic diaper players are taking steps to enhance their brand awareness (Satsuki Kawasaki and Taketo Yamate, 2013).

Rural vs Urban PenetrationPenetration of baby diapers was below 35% in 2013 in China (Satsuki Kawasaki and Taketo Yamate, 2013). The penetration rate was above 90% in coastal areas and tier-1 cities such as Beijing and Shanghai but was much lower in rural areas. By comparison, the 2013 penetration rate of baby diapers was 95% in both the US and Japan according to Beijing S&P Information Consult as the next chart shows. We expect the penetration rate of baby diapers in China to catch up with that in developed countries over the medium to long term, driven by: 1) an increasing number of educated and young parents, who generally prefer disposable diapers to cloth nappies for reasons of convenience and hygiene, and 2) increasing availability as

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more foreign and domestic brands are expanding their production capacities in China, launching more high-quality diaper products, and thus raising their sales penetration in China. For example, an increasing use of online sales channels also makes it easier for diaper players to penetrate into lower tier-cities at a lower distribution costs.

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Figure 10 - Penetration Rates Baby DiapersOrganic ProductsChina is now the fourth-largest consumer of organic products in the world. At the China International Organic Food Fair, countries like Denmark, Germany, and Australia were eyeing the potential market and showcasing their dairy, meat, and wine products. China has 731 certified domestic organic food companies and its market share is expected to grow to 1 to 1.5 percent from 2014 to 2018, from the current 0.3 percent.

“China is a market that attracts great attention from the world’s organic traders,” Wang Yunhao, director of China Green Food Development Center (CGFDC), said at an organic food fair on May 28. According to a new market report published by Transparency Market Research titled “Organic Personal Care Products Market for Skin Care, Hair Care, Oral Care, and Cosmetics – Global Industry Analysis, Size, Share, Growth, Trends and Forecast, 2012 – 2018, “the global demand for organic personal care products was over $7.6 billion in 2012 is expected to reach $13.2 billion by 2018 growing at a CAGR of 9.6% from 2012 to 2018.

2[3] Launch Strategy

2.1 How should we Brand our Product?

The USP of The Honest Co. Brand is its high quality organic eco-

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friendly products. It should position its product for the same. Our research proves this to be a valid product for the chinese market. The product must further forecast its American origin and Lifestyle as such an attribute is valued for the quality.

2.2 What should be the Pricing Model?

Our research indicates that the premium diapers in China Sell at 3 Yuan ($0.4). We suggest to stick with similar price. We could also bundle our products to give a higher value to our product. This way we can position ourselves stronger in this consumer segment.

2.3[3.1] How should we Promote our Brand?

Jessica Alba, as a celebrity mother and CEO has been strong image for the brand. She should continue doing the same. To add value to her personality, she could hire a Celebrity mother such as Ziyi Zhang. Ziyi Zhang could be a great personality for the brand not only because of her place as one of the four Dan Actresses of China (4 Dan Actresses, 2000), but also for the fact that she is recently becam a mother.

The target audience for the product are those seeking for western culture, primarily the once who have in the past lived in the western countries and were exposed to their values and trends.

2.4 What Distribution channel could we use?

The Honest company must continue to use E-commerce and sell its products through its website. Along with this it can utilize Alibaba.com as it already has a huge market that is using it. Further, Speciality stores in China have had a huge hit. Therefore, Honest Company should plan to set up its first set of Flagship stores across Beijing and other big cities. This would increase the brand presence. Along with the above strategies, Honest Co can promote its brand through Hospitals and baby care centres. It could partner with Doctors for promoting its products at their nursing homes.

3[4] Conclusion

As part of the company’s global expension plans, The Honest Company should first target the Chinese market. By positioning itself as a high quality eco-friendly American brand, using the online platform along with Flagship stores and promoting Jessica Alba’s

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Image along with a Chinese celebrity mother such as Ziyi Zheng, It can expect a significant success in this market even under the least perferable scenario. We believe after a successful launch the chainese market will present many future opprotunities for the Honest Company to penetrate with other baby and personal care products it has in its portfolio.

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https://www.honest.com/

http://www.portal.euromonitor.com/portal/statistics/rankcountries