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BRIC: Promises and Caveats

Irina Barbalova, Euromonitor International
  • BRIC will contribute $23 billion to cosmetics and toiletries 2007–2012.
  • Brazil is expected to be the largest contributor to world growth, adding $9.5 billion to global sales.
  • In Russia, premium products will be the focus for the market.
  • Young people living in urban environments who are increasingly brand-conscious are the key to the future in India.
  • Total value sales should rise to $6 billion by 2012, making India a safer bet for investors.
  • China’s per capita expenditure is expected to rise by 104% during 2007–2012.
  • Across the board, BRIC’s growth is set to slow, and the long-term dominance is not a certainty.

With a combination of underdeveloped consumer markets, growing economies and vast populations with increasing disposable incomes, it is easy to see why cosmetics and toiletries manufacturers are drawn to Brazil, Russia, India and China (the BRIC countries) when growth is slowing in the West.

Fulfilling its Potential

The BRIC countries were identified early in the 21st century as the emerging giants of the global economy. It was predicted that together their economies would overtake those of the current six richest countries within 50 years.

In line with predictions, BRIC’s economy has recorded impressive growth in the last decade. According to Euromonitor International figures, during 2001–2006, BRIC accounted for more than one-third of total global growth in the cosmetics and toiletries market, while Brazil topped global beauty growth in absolute terms in the same period. BRIC has been the focus of many multinational manufacturers’ long-term strategies, and cosmetics and toiletries market values are growing at a level well above the world average. It is predicted that during 2007–2012, BRIC will contribute $23 billion to the sector, or half of its absolute growth.

Booming Sales in Brazil

In terms of total value sales in BRIC, Brazil leads the way. In 2007, its cosmetics and toiletries sector was worth $22 billion, third in the global market behind the U.S. and Japan. From 2002 to 2007, the country achieved double-digit growth each year, averaging out at 24% a year, three times the global average. While growth is predicted to slow to 2012, Brazil is still expected to be the largest contributor to world growth, adding $9.5 billion to global sales, according to Euromonitor International.

Despite high levels of low-income households—80% of the population fall into the C, D and E categories—Brazil has a high per capita spend of $115, which will continue to grow due to Brazilian consumers’ preoccupation with beauty.

While the market in Brazil is booming, it is mass products—such as the country’s locally sourced and mid-priced Natura brand—that are the key drivers, while premium offerings are failing to have an impact. Premium products account for only 1.3% of total sales, compared to 28% in the U.S. and 41% in Japan. Despite rising purchasing power, brought about by an increase in the minimum wage and economic reforms, premium brands are still well out of reach for the majority. However, this does leave potentially lucrative opportunities for premier brands looking to exploit a small market of wealthy consumers.

Brazil’s economy is slowing, which may affect the market in the long term, but, because of the prioritization of beauty, the cosmetics and toiletries sector looks set to thrive for the foreseeable future. Sales are expected to grow by 43% during 2007–2012 to reach a total value of $31 billion —driven by product development, aggressive advertising campaigns and a growing young population, according to Euromonitor International.

Russia Set to Slow

Russia is the most sophisticated and westernized of the four BRIC countries, and stands in the top 10 of the world’s cosmetics and toiletries markets in terms of value sales. In 2007, its total market value stood at $9.8 billion, and, like Brazil, growth in the 2002–2007 period was extremely strong, at an average of 19% a year.

Despite high inflation, little can deter the spending of the Russian consumer, which stands at $69 per capita, and has grown 41% since 2002. Confidence in the economy means Russians are spending lots and saving little, and recent media emphasis on health and beauty is influencing consumers and driving sales in the sector. Unlike Brazil, premium products feature highly, standing at 13% of total cosmetics spend, behind skin care at 36% and hair care at 19%, according to Euromonitor International. Premium products look set to be the focus for the market in the future as consumers become more sophisticated, the retail structure modernizes and disposable incomes rise.

Although growth is predicted to slow in Russia by 2012, with sectors such as hair and skin care reaching maturity, the shift in focus to lifting value rather than volume should keep the sector buoyant. There is also potential in as yet largely untapped product areas—such as natural products, which are increasingly in vogue. Local manufacturers such as Kosmetika XXI are currently leading the way in naturals, but foreign companies with their bigger budgets are expected to rapidly make their mark.

Unlike the other BRIC countries, Russia has a declining population. High mortality and low birth rates mean the population is falling by around 700,000 per year, which will eventually have an impact on the sector.

Strong; Steady Sales in India

India has, so far, been the least impressive of the BRIC countries in terms of fulfilling its early promise. From a $2.9 billion market in 2002, it grew to $4.6 billion in 2007. While this 46% total growth is still above the global average, it is by far the smallest of the four BRIC countries, according to Euromonitor International.

The extent of poverty in the country means sales come from a very small consumer base, and per capita spend is just $4.10. While rising incomes are slowly opening up the market to lower-income groups and driving volume sales, the country’s population remains very polarized and inequality continues to rise. High levels of rural poverty and unemployment remain barriers to sector growth.

Bath products, hair care and oral hygiene top India’s product table, as a sizeable proportion of Indian consumers can only afford to purchase essential hygiene products. In a bid to draw in low-end consumers, Procter & Gamble, in 2007, began to offer sachets of its Pantene Pro-V for Rs1.50 (US$0.03) and the trend is likely to extend into other product areas.

However, the Indian market is not one to overlook. The country has a large and growing population of young people living in urban environments who are increasingly brand conscious, and it is they who are the key to the future of the sector. In BRIC, the retail channels are modernizing. In 2008, for example, Estée Lauder announced the openings of four stand-alone outlets in the country.

While India’s growth is small compared to the other three countries, it is predicted to continue at the same rate up to 2012. Total value sales should rise to $6 billion by 2012, making the country a safer, if less exciting, bet for investors.

China’s Premium Potential

It is well documented that China’s economy is booming, and this is reflected in the strong growth of the cosmetics and toiletries sector. Its total market value rose to $14.2 billion in 2007. In terms of total value spend, China is closing the gap on Asia-Pacific leader Japan. But in terms of per capita it lags far behind, standing at $10 in 2007, with Japan at $238. However, per capita expenditure is expected to rise by 104% during 2007–2012, a figure unrivalled anywhere else in the world.

Disposable incomes are rising in China, along with increasing sophistication among consumers, who are placing more emphasis on appearance and embracing Western culture more than ever before. These factors make the country a fertile ground for imported premium cosmetics. To the Chinese consumer, a premium brand is a status symbol, offering a quality guarantee that is well worth the indulgence. Currently standing at a retail value of $1.8 billion, premium products are also expected to achieve growth of 104% by 2012.

Major multinationals have been quick to catch on to the country’s potential, and are now leading the way. Shiseido had 104 outlets in the country in 2004; in 2007, it had 2,500. Estée Lauder announced early in 2008 that it would introduce two or three more brands to the Chinese market by 2010—its skin care products currently have a 70% market share and its high-end products have a 25% share, according to Euromonitor International.

However, expansion in China is not without risk. Rapid growth and increasing inflation have led to concerns that the economy may overheat and fall into recession. There is also the ongoing challenge of low penetration rates and a polarized population.

The Future of BRIC

While each of the BRIC countries is expected to continue showing strong growth well above the predicted world average, it must be noted that, across the board, their growth is set to slow. The long-term dominance of BRIC is by no means a certainty, and each of the countries presents fundamental difficulties to manufacturers looking to sustain earlier levels of growth.

All currently have a large income disparity, poverty in rural areas and poor infrastructure, which will continue to be a problem for the foreseeable future and hinder market development. Furthermore, the rise in living standards and disposable income, which is currently underpinning the booming sales, will eventually bring about a rise in production and marketing costs and diminish the factors that made the economies so attractive in the first place.

The BRICs will remain the powerhouses of the global beauty market in the coming years and, for most major multinationals, the risks they present are still well worth taking. The extent to which these markets will be affected by the global economic slowdown is likely to be far weaker than in Europe and North America. Many international producers have made further investments in the BRICs recently in the hope for more growth opportunities. Estée Lauder’s ongoing outlet expansion in India and its recent purchase of Forest Essentials, for instance, are indicative of the company’s commitment to the country and its attempts to compete in the current economic climate.

Nevertheless, much economic growth in these markets has been driven by manufacturing and service industries consumed by ‘Western’ economies. A fall off in demand for these industries will indirectly affect consumption patterns in emerging markets to a certain extent. Nonetheless, the consumer bases are so much larger and the markets so much more immature that the cosmetics and toiletries markets remain full of potential.

Irina Barbalova is Euromonitor International’s global cosmetics and toiletries research manager.

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