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Annual State of the Industry: BRIC: It’s Mighty, Mighty

Alexander Kirillov

The global cosmetics and toiletries industry saw another year of strong growth in 2007 to reach a value of $290.9 billion. According to Euromonitor International’s research, the market grew by 6%, which represents only a slight slowdown on the 2006 figure ($274.7 billion). The worsening economic climate in many developed countries, particularly the U.S., and signs of a slowdown in penetration in emerging markets proved a drag on growth. These trends were partially offset by strong growth in emerging markets, continuing premiumization and product innovation across all sectors.

Sun care, while down from the double-digit growth achieved in recent years, remained the most dynamic sector, as consumer awareness of the dangers of solar radiation grew. There was no change to skin care’s status as the largest contributor to absolute growth, either. Thanks to innovation, premiumization and consumer fears about aging, skin care accounted for more than a quarter of the $16.2 billion growth in global beauty sales in 2007.

No Changes in Global Top 10

The global rankings of major cosmetics and toiletries manufacturers have not changed since 2006. Procter & Gamble, L’Oréal and Unilever occupy the top three places globally, accounting for 30% of the market. Unilever demonstrated the strongest growth, 7.7% in 2007, while Procter & Gamble and L’Oréal increased their sales by roughly 5.5% each. Of the top 10 global players Beiersdorf showed the healthiest growth, benefiting from its strong position in Eastern Europe and acquisition of C-Bons in China.

Favorable economic conditions in emerging markets benefited smaller local players. Companies such as Natura and O’Boticario in Brazil, Kalina and Faberlic in Russia, Jiangsu Longliqi and La Fang International in China, and Godrej and Dabur in India, showed very strong growth in their domestic markets, often outpacing multinationals.

BRIC Leads Growth of Global Market

Emerging markets remain the power engine of the global beauty market. Accounting for only a third of the global market of cosmetics and toiletries, they added more than $10 billion or two-thirds of absolute growth in 2007—with BRIC countries responsible for over 70% of this gain. Euromonitor does not expect the pace of growth to slow in the next few years, and, according to Euromonitor’s forecast, Brazil and China will gain almost $10 billion each by 2012, topping the list of the markets with the highest absolute growth. While India and Russia are expected to show more modest results, they still remain among the top five on the list. The only developed market on the list is Japan, mostly due to its sheer size rather than high growth rate.

Strong growth in Brazil was driven by steady economic expansion in the country, and the cosmetics and toiletries market benefited from this, expanding 22% in 2007 and reaching $22.3 billion in retail prices. Substantial contributions to these results came from successful governmental efforts to combat poverty through social programs as well as the favorable effect of U.S. dollar devaluation as local manufacturers took advantage of a cheaper greenback to invest in new technologies and modern machinery.

Russian market growth will remain robust in the forecast period. The market, driven by premiumization, expansion of retail channels, rising disposable income and strong consumer confidence will continue growing at 4% in real terms, reaching $12 billion in 2012, up from the current $9.9 billion. Contributing to this, Russian consumers are increasingly open to natural and organic cosmetics, with both domestic and international players getting involved in the trend.

Due to increased spending power, consumers in Russia are becoming more sophisticated and particularly focused on natural and ethically sourced ingredients. The trend for natural cosmetics in Russia is driven by consumer awareness of the potential hazards of the chemicals used in cosmetics and a conscious effort to avoid them. This is combined with a genuine awareness of the importance of protecting the environment from which the ingredient is sourced.

In 2007, the Chinese market for cosmetics and toiletries grew 9% in constant prices, on par with Brazil. The booming economy along with the upcoming Olympic Games and emerging middle class stimulated growth in the country, where per capita consumption still remains only 10% of that in Brazil. The Indian market, where per capita spending in constant terms on cosmetics and toiletries is only one-third of China’s, showed more modest results at 5% growth. However, the trend is looking upward from 2% growth rates only three to four years ago.

U.S. Market Slipping

As the U.S. economy faces increasingly gloomy prospects, the cosmetics and toiletries market shows strong signs of contraction, with virtually no growth in real terms in 2007 and a disappointing outlook. According to Euromonitor’s forecast, the U.S. market will decline 2007–2012 by almost $1 billion—as calculated in 2007 prices—or 0.4% a year on average. Fragrances will be the sector hardest hit by the economic downturn, as cash-strapped consumers turn away from items they consider superfluous. With premium fragrances seemingly available everywhere, perfumes’ mystique has disappeared for Americans. Premium cosmetics as a whole will shed $410 million in the next five years, as consumers switch from expensive prestige brands to less expensive analogues.

Skin Care Remains Biggest Sector Globally

The global skin care market reached $65 billion in 2007, growing by 7%—the same growth rate as in 2006. Global skin care manufacturers have introduced a wide range of innovative products, especially in the antiaging segment, capitalizing on consumers’ fears of looking old and the emergence of such new science advances as nanotechnology.

Indeed, two antiaging segments—nourishers/antiagers and firming/anticellulite body care—demonstrated the strongest results, growing at double-digit rates. As an anecdotal example of consumer interest in the antiaging segment and its explosive potential, there was a noticeable consumer frenzy over the masstige antiaging brand Boots No.7 in the U.K. after it was endorsed in a BBC television program. Strong growth of local brands such as Antivozrast in Russia and The Face Shop in South Korea saw high growth rates for mass and masstige products, demonstrating the strong global consumer demand for such products.

Celebrity Fragrances Big in Western Europe

The global fragrances market reached $33 billion in 2007, a 6% growth from 2006, driven by a plethora of celebrity scent launches. This was especially evident in Western Europe, where sales were up 3.6%, and booming demand from emerging markets Latin America, Eastern Europe and Asia-Pacific (excluding Japan) contributed double-digit growth in 2007.

Celebrity fragrances continued to create buzz in 2007, with more than 30 scents launched in the U.K. alone—including fragrances from Kate Moss, Katie Price, Christina Aguilera and Gwen Stefani. Men also joined in. After Sean John’s Unforgivable achieved top 10 status in the men’s premium segment and Intimately Beckham for Him demonstrated strong performance in both the U.K. and U.S., fragrance manufacturers rushed to create new celebrity fragrances for men.

Even direct sellers saw opportunity with celebrity fragrances. Avon teamed up with designer Christian Lacroix to create Christian Lacroix Rouge, and Avon also announced that actor Patrick Dempsey will collaborate with the company on a signature men’s fragrance—to be launched in November in the U.S. and globally in 2009.

However, the fragrances market growth was hampered by worsening economic conditions in developed countries. The recent credit crunch pushed consumer credit rates and mortgage payments higher, squeezing consumers and forcing them to cut down their expenses on nonessential items such as fragrances, leading to market contraction in North America.

Smoky Eyes, Nude Lips Drive Color Market

Global color cosmetics sales reached $36.8 billion in 2007, according to Euromonitor International’s research, representing a near 5% rise on the 2006 figure. While a seemingly healthy increase, cosmetics and toiletries are typically strong performers within the consumer packaged goods market and, compared to other beauty categories, color cosmetics lag behind the average. In fact, Euromonitor International’s figures suggest only the commoditized bath and shower category and depilatories, which faces stiff salon competition in many markets, recorded lower growth in 2007.

Eye makeup ($10.1 billion) was the engine of dynamism in the global color cosmetics market from 2002–2006, and enjoyed a further year of category-leading growth at 6% in 2007. Dramatic, smoky eyes and nude lips and the mod look dominated makeup trends across Western markets. This helped propel the sector with continued innovation in mascara. Facial makeup, at $13.2 billion, is the largest color cosmetics sector and showed the weakest performance in 2007. Not even the growing demand for blusher and bronzers could help offset the slowdown in the maturing foundation market.

Strong Growth in Direct Sales Channel

Non-store retailing remained the fastest-growing channel, driven by strong expansion in Internet and door-to-door sales. In 2007, the channel grossed $39 billion, 9% growth over 2006. Direct sales, a huge contributor to the channel, amounted to $30 billion in 2007. This sector is followed by home shopping, which includes TV shopping, direct mail, catalogs and Internet—contributing approximately $4 billion each.

The Internet channel demonstrated the fastest growth among non-store retail channels, expanding by 13% in 2007. Direct sales, at 9%, also grew strongly in 2007. While growth in Internet retailing is coming mostly from developed countries, direct sales are growing strongly in emerging markets, and companies such as Avon, Oriflame and Natura strongly benefited from the channel’s growth—especially in Latin America, Asia Pacific and Eastern Europe.

Supermarket Expansions Benefits Emerging Markets

Supermarkets/hypermarkets continued to be the fastest-growing store-based channel for cosmetics and toiletries worldwide, accounting for 28% of global beauty sales. The sales of cosmetics and toiletries products through the channel grew 7% from 2007. The key drivers include fast expansion of supermarkets/hypermarkets chains in Latin America, Eastern Europe and Asia Pacific, strong growth in private labels in Western Europe and strong growth in hypermarkets sales in North America. Perfumeries and pharmacies/drugstores also performed well in 2007, with both posting sales of cosmetics and toiletries of more than $30 billion—an approximate growth of 7% over 2006.

Perfumeries, represented by specialists outlets such as Sephora and Marionnaud, grew across all regions due to increasing consumer interest in specialist and niche brands. Sales through pharmacies and drugstores were particularly strong in Eastern Europe and Latin America, where retail format is relatively new and expanding rapidly.

Premiumization Remains Important Trend

Premium brands sales amounted to $67 billion, or 23% of the global market in 2007. The bulk of premium brands were concentrated in the skin care, hair care, color cosmetics and fragrances sectors, and the strong demand for premium cosmetics was driven by improved worldwide wealth. In strongly developed markets, consumers have access to the most necessary commodities, and they are happy to splurge on cosmetic products. The rise of niche brands, especially in Western Europe and North America, also contributed to strong performance of premium brands.

The creeping recession in the U.S. and uncertainty about economic growth in Western Europe forced many consumers to start looking to trade down instead of trade up. However, this trend will be offset by consumers in booming emerging markets, where economies have become less dependent of the U.S. in recent years. Double digit growth is happening across all premium cosmetic sectors in Eastern Europe and a majority of sectors in Latin America and Asia Pacific, excluding Japan.

Demand for Natural/Organic Continues to Rise

According to Euromonitor’s estimations, products with natural claims account for 10–12% of the global cosmetics and toiletries market. Demand continues to boom as consumers become more concerned about their health and increasing exposure to chemicals during their daily beauty routines. The spread of retail concepts such as Whole Foods Market, The Organic Pharmacy in the U.K. and Wal-Mart’s Natural and Organic Bodycare Oasis have also helped lift the profile of natural and organic products.

However, the lack of global and regional standards for natural cosmetics and toiletries products still confuses customers. There were a number of industry attempts to create standards for natural products, such as CosmeBio in France, but these labels, so far, have a limited use in terms of geography and manufacturers. However, Euromonitor International expects internationally harmonized standards for naturals some time in the future, with strong growth expected as a result.

Looking Forward

Euromonitor International forecasts average annual growth of 3%, to reach global sales of more than $337 billion in 2007 prices by 2012. Skin care and sun care will remain the most dynamic sectors, expanding at 5% a year on average. While Latin America will achieve the highest growth in 2007–2012, Asia Pacific will provide the biggest contribution in absolute terms. Eastern Europe will be a third market by growth rate and fourth by absolute growth.

Strong growth in emerging markets will further benefit local companies, as well as create opportunities for multinationals, which will be seeking ways to offset sluggish growth in Western Europe and North America. The industry may see more acquisitions in Eastern Europe and Asia Pacific, despite a possible drop in cash flow for Western manufacturers.

Non-store retail will continue to expand in all areas—direct sales, home shopping and Internet—across all regions. The recession in the U.S. may create additional supply of sales representatives for direct selling companies, as people will be looking for additional ways to earn money. Because many consumers will be looking for cheaper alternatives to cut their beauty expenses, direct sellers will prove to be a good solution and have the most to gain from the recession.

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