Hair Care on the Verge of a New World Order

  • Sales for hair care climbed 6% in 2012, the category’s best showing in the last ten years. Shampoo, conditioners and colorants were all winners, although a few segments, including relaxants and hair loss treatments, were a bit of a disappointment.
  • As has been the story the past several years, emerging market continue to be the growth driver, fueling 92% of growth in absolute terms in 2012.
  • The BRICs—particularly China, India and Brazil—continue to be top drivers, but the slowdown of the Brazilian economy has many also predicting the rise of Mexico as a dominant power in Latin America.
  • Second-tier markets, such as Turkey, are als beginning to attract more attention, but they are more volitile and represent a bigger risk to brands looking to invest.
  • As many consumers are still riding the DIY trend, hair care brands have an opportunity to develop products that attract this market and pick up some of the dollars that are no longer being spent in salons.

In 2012, the hair care category shrugged off global economic volatility to deliver its strongest performance in more than a decade. Sales climbed by 6% on 2011 (at fixed U.S. dollar exchange rates) to reach $75 billion, according to the latest data from Euromonitor International.

Shampoos were dominant, accounting for 35% of spending. Global growth of 7% was driven by strong trading up activity in the emerging markets. But conditioners had the more compelling growth story, with sales up by an unprecedented 10%. This reflected surging demand in the BRIC markets, as well as a positive response in developed markets to products offering intensive and targeted treatments, notably with the use of oils.

Colorants also performed well (up 6.5%) despite sluggishness in the U.S. and France. Burgeoning demand from the world’s emerging middle-class coupled with resilience in the U.K. and Germany, where there was an uptick on the back of weaker away-from-home salon spending, helped the category notch up more than $800 million of growth. L’Oréal Paris, Wella Professional and Garnier were the top performing brands, each generating more than $100 million of retail growth in absolute terms.

Some categories disappointed, however. Perms and relaxants slipped into contraction for the first time in five years, while hair loss treatments—one of the star performers of recent years—grew by only 1% due to a loss of traction in the key Japanese market. Styling agents and salon hair care also put in lackluster performances, highlighting their heavy dependency to the U.S., Japan and Western Europe.

Overall, emerging markets continued to prop up the global performance of hair care, fueling 92% of growth in absolute terms compared with 88% in 2011. Collectively, the emerging markets accounted for 49% of total retail hair care spending in 2012 compared with 38% in 2007 and 29% in 2002. The transfer of power from developed to emerging markets looks unstoppable, with the scales almost certain to tip over the course of this year. By 2017, emerging markets are forecast to account for 60% of the category’s global retail value. By any calculation, it is a remarkable shift in global consumption power.

A Potential Power Change in Latin America

The rising importance of the emerging markets to the industry’s profitability has compelled the world’s leading hair care manufacturers to rethink their global strategies. It is not as simple as ramping up investment in the BRICs, however. The cooling of the Brazilian economy is a warning that operating conditions in linchpin markets can change quickly.

It is an ominous sign that consumer confidence in Brazil has been falling steadily since the beginning of 2013, fueled by concerns about rising inflation. Brazil has been the hair care category’s fastest growing market over the past five years, in absolute terms, with sales increasing by $3.4 billion compared with $1.8 billion in China and $1.1 billion in India.

L’Oréal, Unilever and Procter & Gamble have become increasingly reliant on Brazil to shore up their global growth. Over the past five years, 29% of L’Oréal’s absolute growth in hair care has come from Brazil, according to retail data from Euromonitor International. For Procter & Gamble and Unilever, the corresponding contributions were 19% and 22%, respectively. A year ago, Unilever looked to be in the strongest position of the leading multinational players due to its growing power in Brazil and its comparatively low level of exposure to developed markets. However, as the Brazilian economy slows down, Unilever’s global growth capacity could start to tighten. Last year, almost half (47%) of Unilever’s hair care growth was sourced from Brazil.

Procter & Gamble and L’Oréal have an opportunity to steal a march on Unilever due to their comparatively stronger positions in Mexico. Having been outshone by Brazil for most of the past decade, Mexico is now faring much better economically, and its middle class is brimming with confidence. In the next 10 years, Mexico could even overtake Brazil as the biggest economy in Latin America, fueled by resurgent foreign direct investment and game-changing structural reforms to the energy industry. Total hair care sales in Mexico summed $2.3 billion last year, making it the seventh biggest market in the world (up from ninth in 2011).

China and India Steam Ahead

Jitters over cooler economic growth in China are much less warranted than in Brazil. Over the first quarter of this year, the Chinese economy grew by 7.7%, which is hardly cause for concern.

Indeed, China still has potential to offer a better return on investment than anywhere else in the world, reflecting vast untapped growth potential in the interior municipalities. Retail sales of hair care products were up 9% in 2012, and average annual growth is forecast to remain at that level over the next five years.

The key change in China is in terms of consumer profile. Across fast-moving consumer goods, there is evidence that China’s middle class, especially in first-tier cities, has become more discerning and sophisticated in its buying patterns. This is illustrated by growing demand for functional hair care treatments, such as intensive conditioners. Anti-dandruff shampoo is also a key battleground Additionally, there is strong new demand for hair care products in fast growing cities such as Chongqing and Chengdu. Over the year ahead, the emerging middle class in the interior regions ought to offset any softening of growth in the coastal cities.

Beyond China, an Asian market to definitely watch over the next five years is India. In 2012, it was the 10th biggest market in the world for hair care, with sales summing $2.2 billion. By 2017, it is forecast to be the fifth biggest, with sales on course to double. In particular, low-priced branded shampoos and conditioners are pushing into rural areas, which account for over two-thirds of the population. The high humidity in much of the country is an upside for the category as women tend to channel a bigger slice of their beauty spending into hair care rather than skin care.

There are a number of second-tier emerging markets that also have potential to fuel a sizeable share of industry growth over the next five years, as well. Turkey, Indonesia, Nigeria and Iran each generated double-digit growth in hair care sales last year, for example. Iran and Nigeria present comparatively high levels of risk for new investment, but both markets could yield strong returns into the long term. And the same applies to a cluster of untapped markets in sub-Saharan Africa, reflecting a combination of youthful demographics and burgeoning economic confidence.

The Innovation Battleground

The lack of growth in the developed markets has brought innovation to the frontline of the hair care battleground. Developed markets, after all, continue to fuel a huge slice of global hair care spending (the U.S. is still the only $10 billion market, for example). The key opportunity for hair care manufacturers is rooted in a marked slowdown in salon spending, which is freeing up cash for value-added products in the home and, increasingly, DIY salon-style treatments.

Cue a portfolio shift toward products offering more intensive and tailored treatments. Indeed, the portfolio mix of hair care is looking more like skin care every month, with a growing focus on multi-step routines and anti-aging products, such as thickening treatments for specific areas of the scalp. Hair care strategy has been inspired by the skin care category, but the shift toward greater segmentation is also indicative of a new DIY pampering culture in Western markets coupled with demand for more personalized branding. Both are offshoots of the recessionary climate.

Oils, moisturizers and leave-in conditioning products have become increasingly visible. We are also seeing more shine boosters as well as pre-treatment masks, serums and products geared toward scalp health. With growth getting ever tighter in developed markets, corporate spending behind innovation will ramp up over the second half of this year as brands seek to establish new competitive points of differentiation.

Trading down activity is visible in developed markets, but middle-aged consumers in particular will continue to throw money at products that make them look or feel younger. Middle-aged, middle-class consumers in Western Europe and North America are also the least affected by the poor economic climate as many benefited financially from the pre-2007 boom periods (through real estate equity and attractive pension pots, for example).

If there is a tightening of Brazilian demand—and it is important to remember that Brazil is the second-biggest hair care market in the world—the search for green shoots of growth in developed markets will become more critical. There will also be mounting pressure to build a wider spread of positions across first- and second-tier emerging markets. These are among the biggest strategic challenges facing the hair care category over the next five years.

In short, the category has put in its best global performance in a decade, but the operating environment is getting tougher rather than easier. At the same time, the stakes for getting global investment strategy right have probably never been higher.

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

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