US healthcare and cosmetics giant Johnson & Johnson is on the verge of taking over Beijing Dabao Cosmetics Co, according to media reports yesterday.

The Shanghai-based Oriental Morning Post, quoting an industry insider, said the companies had reached an agreement that is pending regulatory approval.

However, neither firm was able to confirm that a deal had been struck.

A spokeswoman for Johnson & Johnson China said she was unaware of such an agreement, while Dabao was unavailable for comment.

According to the Oriental Morning Post, Wang Wenbing, a senior manager at Dabao, said he "did not categorically deny the deal," but did not wish to make any further comment.

The reported takeover deal is part of a trend in which foreign giants are acquiring Chinese domestic cosmetics brands to expand into the nation's middle- and low-end markets.

"Like L'Oreal Group acquiring Little Nurse several years ago, I believe Johnson & Johnson buying Dabao makes sense," said the marketing director of a well-known cosmetics company, who wished to remain anonymous.

China's cosmetics industry has grown rapidly in the past 20 years to become the world's eighth-largest market. Nationwide sales have grown at an average of 13 percent in recent years and were estimated at 68 billion yuan (US$8.4 billion) in 2005, according to private market research site China Investment Consulting.

But the numerous domestic companies have not managed to gain a presence in the high-end cosmetics market, which has been carved up by foreign giants such as L'Oreal, Procter & Gamble, Shiseido and Avon.

"It is alarming to note that foreign cosmetics brands account for 50 percent of sales volume but over 70 percent of sales value, as they occupy almost all of the high-end market. And many of them are now expanding into the middle- and low-end markets," said Zhang Tiecheng, director of the China Association of Fragrance, Flavour and Cosmetics Industry.

Industry analysts say that faced with intensified foreign competition following China's accession to the World Trade Organization, domestic companies are falling short in terms of innovation and sustainable development.

The same reason could explain L'Oreal's acquisition of Little Nurse in 2003, a deal that shook China's cosmetics industry.

While focusing on medical and baby-care products in the Chinese market, Johnson & Johnson has launched its Neutrogena and Clean & Clear cosmetics brands in the middle- to upper-middle market.

The acquisition of Dabao would provide Johnson & Johnson with a product line and distribution channel in the low-end market, similar to that secured by L'Oreal after its takeover of Little Nurse, said analysts.

But unlike Little Nurse, Dabao is a State-owned company, which means approval would take longer, be more complex, and may be hard to obtain, analysts said

The Dabao brand was launched in 1985. Its SOD Milk cream is particularly popular among people in the lower-income bracket.

(China Daily August 3, 2006)