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State of the Industry: Will Megabrands Rule?

By: Briony Davies
Posted: August 15, 2006

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Retailers, including C&T specialists Sephora and Sa Sa, also have their eyes on China with new store announcements on a frequent basis; direct sellers such as Avon, Alticor, Mary Kay and New Skin are salivating at the potential to benefit from the Chinese government’s December 2005 decision to lift restrictions prohibiting sales agents that are not attached to stand-alone stores. All of these factors are likely to unite to enable manufacturers to push C&T out of the primary economic zones to the majority of the population, creating a massive sales boost.

Brazilian Beauty Blossoms

Latin America was the fastest-growing area last year, with sales up 11.3% to $28 billion, with all countries posting good gains. Brazil, in particular, has boosted the region’s sales with significant acceleration since 2001. Looking forward to 2010, the country will remain Latin America’s most attractive market—both in terms of growth and value sales gains. Huge future potential make it a honey pot for new entrants keen to take advantage of both increased domestic demand and the rising popularity of Brazilian products in developed regions. The addition of natural ingredients, as diverse as obscure Amazonian fruits and extracts of shark fin, has been a key trend in Brazilian new product development since 2001. In opening a Paris store last year, Natura Cosméticos SA, Brazil’s leading direct sales player in C&T, is attempting to capitalize on the preference for natural products in Western markets.

Companies planning to conquer the Brazilian market should heed this advice: The greatest rises are expected in fragrances, hair care and premium quality product offerings as consumers trade up in line with their growing incomes. With a majority of the population earning between BRL7,000 and BRL14,500 ($2,500 to $5,000) per month, manufacturers should target the masstige price category to maximize profitability from the country’s strong growth forecasts. However, consumers in the lower income brackets should not be ignored, with the development of cheaper product ranges for the discount market a sure-fire way to reap rewards.

Skin Care Reigns

Skin care is the largest sector in global C&T, and, in contrast to the second and third largest (hair care and color cosmetics), it maintains very strong growth rates with sales up 6.8%. Although facial skin care presents the biggest prizes, 2005 has seen manufacturers such as L’Oréal and P&G (with its Olay brand) extend their facial brands to other parts of the body. Firming/anti-cellulite body care enjoyed growth of approximately 9.5% in 2005, making it the world’s most dynamic skin care sector and demonstrating a growing consumer preoccupation with body-focused skin care. In June 2005, LVMH’s Benefit brand became body conscious, launching its Wonderbod collection. This February, Beiersdorf subsidiary Juvena introduced Juvedical Renewing Body Serum and Renewing Body Cream as part of its attempts to offer products suitable for the whole body.

Other factors fueling skin care’s growth in 2005 are the continued pre-occupation with anti-aging products, which has prompted the launch of advanced formulas from mass players (Olay’s Regeneriste, Avon’s Anew and L’Oréal’s DermoExpertise) and super-premium products from doctor brands. Men’s skin care also has been a strong performer, and potential in areas such as Eastern Europe indicate that key players in this space should begin to think about global expansion.

Segment Ailing Sectors

As usual, sun care, baby care and men’s toiletries were extremely dynamic. Africa/Middle East and Eastern Europe have been particularly significant for men’s and baby, while global sun care growth has been helped by Asia-Pacific and Latin America. All three product areas still offer up plenty of growth potential in developed markets. Sectors such as hair care, bath and shower, and oral hygiene all have been relatively slow moving since 2001 due to their high penetration. However, there is potential to eke out growth by slicing and dicing consumers into microsegments, as exemplified by hair care. There now are products for men, women and children; those for hair that is oily, curly, dandruff-prone and even straight (Garnier Fructis Long and Strong), and lines to give treatment benefits (antiaging and antipollution for example), indicating that innovation is key in mature sectors. Manufacturers that want to revive other struggling sectors can employ such a strategy.

Bigger and … Bigger

Besides heralding recovery, Euromonitor International’s data illustrates that merger and acquisition activity has shifted the landscape of the global C&T industry. The industry’s largest acquisition to date was Procter & Gamble’s takeover of Gillette for $57 billion in January 2005. This has had a huge impact on the C&T ranking, knocking L’Oréal from its number one spot in the industry. Other merger and acquisition activities saw Kao buy both Molton Brown and Kanebo. Coty signed a deal to acquire Unilever’s fragrances division, and the flurry does not look set to waver following L’Oréal’s acquisition of The Body Shop in February 2006, a move perceived as an attempt to fight back against the new superpower of personal care as well as to tap into the naturals trend.

Year of Megabrands