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The State of the Industry

By: Rob Walker, Euromonitor International
Posted: May 30, 2013, from the June 2013 issue of GCI Magazine.

With notable growth, 2012 was a resurgent year for the beauty industry. Global retail sales (measured at fixed U.S. dollar exchange rates) grew by 6%, according to newly released data from Euromonitor International. It was the industry’s best performance in more than a decade, and a return to the growth trajectory seen prior to the global financial crisis.

Multinational players can ill afford to be complacent, however. Yes, markets in Western Europe, North America, Australasia and the advanced economies of Asia-Pacific generated growth in 2012, to varying degrees. And yes, the developed markets as a whole were key drivers of burgeoning demand for nail polish, anti-agers and a new generation of multifunctional brands (such as BB creams)—but the global scales of growth were still precariously one-sided. Developed markets accounted for less than a fifth of the industry’s worldwide incremental retail value (or absolute growth).

On that basis (i.e., share of growth), 2012 was actually the weakest performance of developed markets in three years. It would be wrong, therefore, to think that the industry is back to its pre-financial crisis best. Developed markets might never get back to the 40% share of growth they commanded before the Lehman bust, but the disparity with emerging markets needs to narrow rather than widen.

The Dependency Risk

The relative weakness of developed markets is indicative of a shift in global consumption power, but it is sustainable for multinational companies’ top lines only in so far as the emerging markets continue to outperform. Consider the case of Procter & Gamble, the industry’s biggest player. The developed markets account for more than 50% of Procter & Gamble’s retail sales in beauty and personal care, but they fueled less than 10% of absolute retail value growth in 2012, according to Euromonitor International.

Procter & Gamble’s beauty and personal care division was able to deflect that weakness, as it has since 2008, by strong performances in the emerging regions. Brazil and China alone accounted for almost half of the company’s incremental growth in 2012. It was a similar story for other leading players. Unilever, for example, generated over $1 billion of growth in Brazil last year, which was a third of the company’s total incremental retail value in beauty and personal care.

The problem is that neither China nor Brazil can be considered safe havens. Indeed, it is an ominous sign that the growth rate of beauty and personal care in China slipped below 10% in 2012. This is only the second time in two decades that China’s growth has dropped into single digits. On paper, growth in Brazil was much more bullish, at 17%. However, the impact of a cooling economy did not kick in until the end of the year.

Critically, retail sales in the fast-growing Brazilian regions of the north, northeast and center-west softened in the final quarter of 2012, according to the Instituto Brasileiro de Geografia e Estatística (IBGE) national statistics agency (retail sales in the north and center-west lagged behind the national average in the fourth quarter, for example). This is a big deal because those regions have been instrumental to the consumer goods growth story in Brazil.

New Growth Frontiers

The possibility of slower growth in Brazil and China reinforces the importance of building stronger positions in smaller but potentially faster-growing emerging markets. In 2012, Mexico’s economy grew four times faster than Brazil’s, for example, and it is widely expected to repeat or better that performance in 2013 and 2014. Mexico has been in Brazil’s shadow for most of the past decade, but its revitalized economy is filtering into middle-class confidence and making it one of the most attractive markets in the world for new consumer goods investment.

In 2012, Mexico’s retail spending on beauty and personal care increased by 8%, at fixed U.S. dollar prices. What is more, spending over the next five years is forecast to bulge by around $2.5 billion in absolute terms. The middle class is mushrooming in Mexico and spreading into traditionally poorer second-tier cities, such as Toluca, Celaya, Mérida and Querétaro. This is bringing in its wake new retail investment in the form of malls and supermarkets.

India is also beginning to stand out as a new engine of global growth. In 2012, retail spending on beauty and personal care climbed by 18%, which was equivalent to $1.4 billion of growth in absolute terms. Much of India remains blanketed in poverty, but there is evidence that wealth is starting to bud in some rural areas. Given the sheer size of India’s rural population (840 million in 2012), even a small increase in wealth could yield a highly significant upside for beauty and personal care products.

Other key second-tier markets to watch include Venezuela, Iran, Argentina, Indonesia, Saudi Arabia and Turkey. Each one is forecast to generate average annual beauty and personal care growth of 10% or more to 2017, according to Euromonitor International. These markets are not without their risk factors. Venezuela is in a state of limbo in the wake of the death of Hugo Chávez, and Iran’s political and social fabric is volatile, for examples. To mitigate risk, the beauty industry needs to be strengthening positions across a wide range of markets.

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