Management Sponsored by
As rising costs continue, beauty marketers are reducing marketing expenditures and integrating their supply chain and consolidating distribution for improved efficiency. The success of these and other strategies is borne out by marketers profiled in the recent Personal Care: U.S. Competitor Cost Structures 2011 report by research firm Kline & Company, registering double-digit operating margins from 2009 to June 2011.
The Kline report notes that the costs of goods sold, which includes raw materials, packaging, processing and overhead, have increased on average to claim 11.1% of the net sales total in 2011, compared to 10.6% in 2009. Commonly used ingredients, such as UV agents, SPF ingredients, synthetic ingredients, chemical ingredients, fatty acids and essential oils, have all increased by as much as 8% from 2009 to June 2011. Additionally, consumers are increasingly seeking out natural personal care products, which tend to be more expensive to produce and source than synthetic alternatives. Packaging costs have seen similar increases as the consequence of volatile oil and commodity prices, as well as a consumer-driven interest in companies employing sustainable practices.
These market conditions have contributed to more beauty companies reallocating fiscal priorities and reassessing cost structures. Marketing costs, being the most malleable, have been curtailed and claim an average of 48.3% of net sales so far this year, down from 50% in 2009. However, Kline found the reduction in marketing expenditure is not exclusively driven by cost-cutting, but rather the ever greater use of more focused, often cost-effective, new-media methods to connect directly with the consumer. Many companies are reassessing their expenditures on traditional media advertising and increasing social media and web-based advertising in their marketing mix.
Greater consumer expectations of both environmental responsibility and sustainability are cited as new challenges and opportunities that are impacting beauty cost structures. The establishment and sourcing of sustainable, natural and/or organic ingredients are ostensibly challenges to costs of goods and ultimately profitability, but going green also helps create an opportunity for higher price points, increased sales and future cost savings.
Kline’s related research on natural beauty indicates that despite leaner times some consumers are willing to pay a premium for natural products and the popularity of these products has seen them experiencing double digit sales growth. Moreover, a brand’s appeal is also enhanced and the demand for “greener” and usually simpler packaging could ultimately reduce packaging costs. The high overheads resulting from continually high oil prices have already seen leading beauty marketers adopt lighter packaging to reduce freight costs and a minimization of plastic components, with the added benefit of implied environmental awareness.