Emerging Markets Soft-Soap the Growth Picture of Global Bath and Body Care

  • In 2012, Brazil leapfrogged the U.S. as the largest market in the world for bath and body care products.
  • Even as BRIC markets push expansion, slower economic growth is putting a pinch on these countries’ middle classes, leading to more cautious spending patterns and possible trade downs from middle-market products.
  • In light of Brazil and China’s slowdowns, India and Mexico are picking up steam in the bath and body category.
  • In developed markets such as the U.S. and Western Europe, more consumers are continuing to move away from bar soap and toward body wash.
  • During the next five years, emerging markets—propelled by Brazil, China, India, Russia and Mexico—will continue to dominate the global growth picture of bath and body care, though sales will almost certainly be softer than during the preceding five years, reflecting a squeeze on the middle ground.

In 2012, Brazil leapfrogs the U.S. as the biggest market in the world for bath and body care products. This writing has been on the wall for some time, with demand in Brazil generating growth in absolute terms of $4 billion between 2006 and 2011 (at fixed exchange rates). That is approximately five times more than in the U.S. and three times more than in Western Europe.

Emerging markets as a whole accounted for 85% of the bath and body care segment’s absolute growth in 2011 and for 82% over 2006–2011. This is a gargantuan contribution that has triggered a major re-weighting of strategic focus from beauty companies. For example, Brazil fueled 23% of Unilever’s deodorant sales in 2011, while China fueled 32% of P&G’s bath and shower sales.

Where margins have been squeezed in the U.S. and Western Europe by fierce discount and promotional pressures, pricing has been more flexible in first-tier emerging markets. As a result, the BRICs have not only propped up global growth in bath and body care but also have been critical to the profitability of leading brands, including Dove, Safeguard and Axe.

The big question is whether the growth surge of emerging markets is on the verge of fizzling out. Certainly, there are ominous signs. First, there is evidence that middle class Chinese consumers are applying stronger value-for-money criteria to their purchasing patterns, creating a more aggressive discount culture. And second, consumer confidence in Brazil is getting weaker, especially in the southeast region, which encompasses Rio de Janeiro and São Paulo.

Middle Ground At Risk as Brazil’s Economy Slows

During the past five years, Brazil alone accounted for more than a quarter of global bath and body care growth. And in the specific case of deodorants, Brazil is the biggest consumer in the world, generating retail sales of $4.5 billion last year. That was two-thirds more than in the U.S., which is the world’s second largest deodorant market.

The men’s deodorant segment plays an important role, fueling sales of $1.6 billion in 2011. Brazilian men often use deodorant sprays as a low-price alternative to aftershave or fragrance, and some brands, notably Unilever’s Axe, effectively market themselves as fragrances even though they position as standard deodorants (Axe costs around $3 for a 90 mL spray.)

Last year, retail sales of Axe reached $400 million in Brazil, an increase of 23% over 2010 at fixed U.S. dollar prices. That pushed Brazil above the U.S. as the biggest market in the world for Axe deodorant  (sales in the U.S. were $352 million). Axe is, therefore, indicative of how the scales of consumption have tilted from developed to emerging markets.

What’s more, Axe ought not to be adversely affected by slower economic growth in Brazil. A shift into more cautious spending patterns could even be a catalyst to gains for spray deodorants as growing numbers of consumers trade down from fragrances. Bar soap, which is nearly a $3 billion category in Brazil, is unlikely to be affected either, as it has a fundamentally low-price structure.

The brands most at risk from weaker spending power in Brazil are those positioned in the middle ground. This price tier has performed strongly over recent years, as lower-middle income consumers traded up to more aspirational brands. That trend will reverse if C-class household spending comes under significant downward pressure.

Strategically, the bigger picture in Brazil relates to the opportunities in the northeast and center-west regions. Large numbers of low-income consumers in these parts of the country have been dragged from the margins of formal retailing into the mainstream over recent years, fueled by the expansion of modern retail channels and hikes in minimum wage. This relatively new consumer base will continue to expand during the next five years—the northeast is now home to around 30% of Brazil’s population—and will help offset softer middle income spending in the southeast.

As a result, Brazil will continue to be a major growth engine for bath and body care, albeit with a probable shift down market in terms of the segmentation mix.

India, Mexico, China Sharpen Growth Curve

There also are myriad opportunities for new product development in China, and not least because of the vast untapped growth potential in the interior regions—specifically mid-China, southwest China and northwest China—which, in 2011, collectively accounted for around a quarter of the country’s total bath and body care sales.

Stronger demand for commodity toiletries in these less-developed regions has the capacity to act as revenue ballast to weaker spending in the big coastal consumption bases of east China and south China. As with Brazil, the most vulnerable brands will be those priced in the middle segments, because they will be under growing pressure to position aggressively.

Elsewhere in the emerging markets, the bath and body care category has potential to build substantial new business—notably in India, which was the second strongest growth market in 2011 (in absolute terms) after Brazil. Most strikingly, India was the largest growth market in the world for bar soap, with spending increasing by $313 million. Sales of deodorants also rose precipitously, up 43% on the preceding year, with men’s brands—spearheaded by Axe—fueling more than three-quarters of the growth.

Mexico is another market where international brands will look to build stronger positions to 2016. Crucially, its economy is now growing faster—and looking more resilient—than Brazil’s. Bar soap was the dominant growth segment here last year, with sales rising 13% (at fixed U.S. dollar prices). Overall, Mexico’s bath and body care sales climbed 10% in 2011 to $1.3 billion.

Body Wash: Glimmer of Opportunity in Developed Markets

The strength of bar soap in Mexico and India highlights another key strategic differentiation between developed and emerging markets. Specifically, bar soap is losing ground in Western Europe and North America, with retail value sales dropping 1% and 2%, respectively, in 2011. This is because consumers are drifting increasingly into body washes in the U.S. (up 6% in 2011) and liquid soap in Western Europe (up 4% in 2011).

Stronger development of body wash, in particular, has been one of the few silver linings of growth for leading bath and body care players in developed markets. And the segment was energized in 2011 by burgeoning demand for men’s brands, notably in the U.S., Germany and the U.K. This created welcome new revenue streams for brands such as Irish Spring, Dove, Axe and Old Spice.

Emerging Markets Continue to Drive Strategic Agenda

During the next five years, emerging markets—propelled by Brazil, China, India, Russia and Mexico—will continue to dominate the global growth picture of bath and body care, though sales will almost certainly be softer than during the preceding five years, reflecting a squeeze on the middle ground.

Premium and luxury brands (of commodity toiletries) are well-insulated in the BRICs, as their core consumer base is less affected by lulls in economic confidence. And at the other end of the price pyramid, economy brands will pick up down trades from middle brands, some of which will need to reposition in order to maintain market share.

In developed markets, discount and promotional activity will remain highly visible as brand loyalty weakens further in the face of more widespread belt-tightening. This will present opportunity for private label brands to grab market share, especially in its comfort zone of Western Europe. In the deodorant category, private label accounted for 6% of sales in Western Europe last year.

Competitive points of differentiation also will become more important in the developed markets as brands battle to win over consumers. Naturally sourced ingredients and eco-friendly packaging could start to grow in importance, for example, as issues of sustainability and social responsibility gain traction, fueled, in turn, by consumer pressure propelled by social media forums and the blogosphere.

What seems clear is that the global economy is entering a new era of tighter growth, characterized by mounting austerity in developed markets and weaker consumer confidence in emerging markets. The main implication for bath and body care will be a new squeeze on margins in linchpin emerging markets, notably Brazil and China. But global growth is unlikely to be derailed. On the contrary, there will be myriad opportunities to unlock new demand.

Rob Walker, senior fast-moving consumer goods analyst, Euromonitor International, can be contacted at [email protected].

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