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Kline Predicts Increasing Margin Pressures

Posted: February 2, 2009

Top marketers in the personal care industry spend about 29% of sales on cost of goods, 53% on marketing and 7% on other expenses—including R&D and administration—leaving an operating margin of about 11%, according to new data compiled by worldwide consulting and research firm Kline & Company. High oil prices 2007–2008 drove production and distribution costs for personal care marketers up significantly. Since then, oil prices have decreased, which has helped to expand operating margins somewhat. However, declining consumer demand stemming from the global recession will likely offset any profitability gains from lower oil prices. This, combined with the perpetual need to spend significantly on advertising and promotions in order to drive consumer awareness and demand in highly competitive categories, will continue to lead to margin pressures for personal care marketers.

The recession is also leading to greater levels of discounting and special pricing, which hurts gross margins. Companies whose product lines are heavily focused on luxury products, such as Estée Lauder, will feel the sting of the recession more than those whose products tend to be priced lower—such as Avon, Johnson & Johnson and Procter & Gamble.

Overall, the recession will affect the ability of personal care marketers to increase retail prices, unless unique product benefits are highlighted.

“Companies that continue to employ effective marketing, efficient operations, sustained R&D expenditures and steady innovation are the ones that will remain profitable and hold market leadership positions in uncertain times,” says Laura Mahecha, industry manager for Kline Market Research division.

Kline’s Personal Care: U.S. Competitor Cost Structures 2008 offers additional information.