Easing of Zero-Covid Policy in China 2023

Easing of Zero-Covid Policy in China 2023

Easing Of China's Zero-Covid Policy Could Be Music To The Ears For Investors Looking At Asia. The pandemic brought about a number of challenges to every industry, with the ensuing digital disruption causing a massive shift in the consumer landscape.

The beauty and wellness industry for example, which relies heavily on physical brick-and-mortar operations, had brands and formulators scrambling to rethink the way they do things and adapt to the "new normal" comprising global shutdowns of physical locations, physical distancing and other "no-touch" regulations – pushing the beauty sector into the digital realm.

The sector was quick to adapt and digital soon became a huge thing for the beauty sector with the launch of social media avenues for beauty and wellness, such as the beauty TikTok community, which saw stupendous success.

Beauty was already a hugely valuable sector pre-pandemic. On a global scale, the beauty industry was valued at more than $500 billion in 2019, according to Forbes. The U.S. beauty and personal care market is significant, and stood at $85 billion in August this year.

The market continues to grow globally post-pandemic, with the global beauty & personal care market forecasted to reach US$615.92 billion in 2026 at a Compounded Annual Growth Rate (CAGR) of 5.30% during the period spanning from 2022 to 2026.

With businesses opening up post the lifting of restrictions consumers have started to feel more comfortable and safe going back to shopping in malls and physical stores.

The beauty sector's preference has always been skewed toward physical brick-and-mortar stores. This is because, despite the convenience of online shopping, testing out products in person is still extremely important to beauty customers and shoppers. According to data compiled by Common Thread Collective, as much as 81% of beauty product buyers prefer shopping offline.

Even with improved tech that allows customers to virtually try on makeup such as Sephora's virtual artist app or L'Oreal SA.'s (EPA: OR) and Shiseido Company Limited's (TYO: 4911) virtual try-on functions on their websites, testing out products in real life is still considered more trustworthy by consumers.

But some markets like China, which were once considered red-hot for the beauty industry, continued to face issues even as the world opened its doors to business. This is attributed to China's zero-Covid policy which had cracked down on the tech, entertainment, real estate and other sectors through a combination of snap lockdowns, mass testing and lengthy quarantines.

In early November, there were murmurs on social media platforms that China would scale back the zero-COVID policy, and Chinese stock indexes rallied amid the speculation that the Chinese government would tone down zero-Covid restrictions - following which, on 11th November, China announced a possible easing of its zero-Covid policy fuelling optimism of a rebound growth.

Then, on 7 December, a formal announcement was made on the Chinese National Health Commission's website making the roll back of these controls official. The requirement for negative Covid test results to travel to different parts of China has been removed, and, in a significant boost to businesses, the central government has also announced that unless an area is designated as high-risk, work and local production cannot be stopped.

This development will positively impact companies in the beauty sector that report getting the bulk of their revenue from the Chinese (Hong Kong) market, like Yoshitsu Co Ltd. (NASDAQ: TKLF), a retailer and wholesaler of Japanese beauty and health products, as well as other sundry products.

Yoshitsu has been ramping up its brick-and-mortar presence in North America and Europe as well as in Asia. The company recently opened a new store in Hong Kong, China, which brings it one step closer to achieving its long-term goal of expanding its presence in China. The new store offers customers cosmetics, skincare, fragrances, body care products and more.

In August, the company announced its financial results for the fiscal year ended March 31, 2022, highlighting that it successfully grew revenues by 3.1% despite the challenging environment. Yoshitsu's revenue increased by $6.9 million to a record $228.4 million for the company, from $221.5 million for the fiscal year 2021.

Commenting on the company's performance last year, Mei Kanayama, Principal Executive Officer of Yoshitsu said: "Although the global economy has been filled with uncertainties, we are satisfied with the accomplishments achieved in our key strategic initiatives, including the completion of our initial public offering in January 2022 and the expansion of our market coverage with new stores and wholesale customers."

"We believe that we are capable of mitigating the near-term turbulence and expect to continue to build strong momentum with our flexible and resilient business model. We are confident that our strategic initiatives will drive Yoshitsu to achieve long-term growth and generate more value for our shareholders."

The Company's distribution channels currently consist of lots of directly-operated physical stores in Japan and Hong Kong (China), many online stores in Japan, China, and Korea; numerous franchise stores in the U.S., Canada and the U.K., and over 200 wholesale customers in Japan and other countries, including China, the U.S., and Canada.