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- China, Brazil and other first-tier emerging markets should continue to yield a positive influence on the balance sheets.
- Brazil could be vulnerable to a European recession, but, crucially for beauty companies, Brazilian consumers are fundamentally spenders rather than savers.
- In 2011, second- and third-tier emerging markets accounted for an incremental growth value of approximately $8 billion.
- Key growth markets include Mexico, Argentina, Indonesia, Thailand and Turkey.
The global beauty industry generated some $21 billion of incremental retail value in 2011, of which the emerging markets fueled a whopping 81%, according to the latest data from Euromonitor International. But as the world’s economy teeters on the edge of a new downturn, triggered by debt crisis in the Eurozone, can the industry continue to count on consumers in emerging markets to offset lackluster demand in Europe and North America?
Emerging Markets Remain Silver Lining of Growth
Currently, there is an overriding sense of unease surrounding the global consumer goods market as international investors and multinational companies alike get jittery about the prospect of a global recession—in particular, its effect on fast-growing emerging markets.
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The primary concern is that an economic slowdown in 2012 could prove more damaging than the 2008 financial crisis, first because emerging Asia, and China in particular, looks more exposed than four years ago, and second because high commodity prices are applying upward pressure on inflation almost everywhere in the world. As a result, even if the emerging markets continue to post upbeat GDP growth, their consumers are unlikely to feel as insulated as in 2008.
Since 2008, emerging markets have been essential ballast to the weakness of developed markets. Total beauty and personal care spending is still higher in developed markets, at around $226 billion in 2011 compared to $177 billion, but growth in the emerging markets was 10 times stronger over the 2008–2011 period, according to Euromonitor International.
That emerging market growth translated into an incremental retail value of $46 billion compared to $7 billion in developed markets. It would be fair to say that in the post-Lehman Brothers global operating environment, consumers in emerging markets have thrown the beauty industry a lifeline of new business.
Exposure to China and Brazil Key
The exposure of leading multinational beauty companies to emerging markets varies widely, ranging from 74% of global retail sales in the case of Avon to 30% in the case of L’Oréal, according to data from Euromonitor International. The key question is which of these players will be most insulated from a possible global economic slowdown.
L’Oréal’s comparatively weak exposure to emerging markets has been, arguably, its biggest strategic weakness since 2008. But, with the emerging markets looking more vulnerable to contagion than four years ago, could L’Oréal’s lower exposure be viewed as a strategic strength in 2012?
The most unpredictable emerging market regions are the Middle East and Africa, but none of the leading players are heavily positioned there and ought to be able to absorb any short- to medium-term sales slowdown. By far the most significant exposure is in Latin America and emerging Asia, fueled by Brazil and China—the two fastest-growing beauty and personal care markets in the world since 2008, based on incremental value. Were demand in either of those markets to slow significantly, there would be negative reverberations for a raft of companies—notably Unilever, Avon and Colgate-Palmolive.
Spreading Emerging Market Risk Will Be Increasingly Important
In the third quarter of 2011, China’s economy grew year-on-year by 9.1%, down from 9.5% in the second quarter but still a powerhouse performance. And even if economic growth continues to slow in 2012, pushed down by slower export demand from Europe, it would need to fall a long way before having any major downside impact on domestic demand, which is booming in the coastal regions and spreading inland too.
Brazil could be more vulnerable than China to a European recession. Indeed, the country’s president Dilma Rousseff has been warning of tougher times ahead. And the latest figures seem to bear this out, with the economy contracting marginally in the third quarter. However, Brazil has a strong banking sector, substantial international reserves and, crucially, consumers that are fundamentally spenders rather than savers.
All things considered, exposure to China, Brazil and other first-tier emerging markets should continue to yield a positive rather than a negative influence on the balance sheets of beauty companies in 2012. Growth might well be weaker than in 2011, but strong BRIC positions will continue to be a central factor in how well a company performs globally.
Emerging market growth is not all about the BRICs, however. In 2011, those four countries fueled collectively some 54% of incremental beauty growth in the emerging markets, but that still left second- and third-tier emerging markets accounting for an incremental growth value of some $8 billion. Of those, key growth markets included Mexico, Argentina, Indonesia, Thailand and Turkey, according to data from Euromonitor International.
Going forward, beauty companies ought to look at strengthening their positions across a broad range of second-tier emerging markets, not least to dilute some of their growth dependency on the BRICs. Some of these second-tier emerging markets carry significant investment risk. But, as the global economy tilts toward a potentially protracted downturn, risk is central to strategic planning if companies with a global outlook are to keep their bottom lines healthy.