- The global hair care market is following two paths—the trading down and discounting often seen in more developed regions and the aspirational purchasing and trading up of emerging regions.
- A key feature of the hair care category in emerging markets is that manufacturers are developing a more sophisticated middle ground.
- Brands are looking more closely at niche categories, where market maturity is not a barrier to growth. This will encourage further boutique M&A deals.
Global retail sales of hair care products increased by 5% in 2011 to reach $73.7 billion, according to the latest data from Euromonitor International. Overall, lackluster growth rates in the U.S., Japan and most of Western Europe were offset by more enthusiastic spending in the emerging markets—notably China, India, Brazil, Russia and Mexico.
This trend has been the marked pattern of the past five years, with the emerging markets, in effect, propping up the global hair care industry. North America, Japan and Western Europe (excluding Turkey) showed collectively flat growth (-0.1%) between 2007 and 2011, and an increase of only 0.3% last year (all growth rates are based on U.S. dollars at fixed 2011 exchange rates).
Notably, the U.S. economy is gradually picking up momentum, which is buoying consumer confidence; however, austerity measures are set to deepen in much of Western Europe, with global implications radiating from this slowdown. The net result is hair care is unlikely to see any significant return to growth in developed markets during the next five years.
What seems increasingly clear is that hair care brands and manufacturers are faced with the strategic challenge of two parallel but fundamentally different global playing fields. On one, the beauty industry is witnessing widespread trading down and discounting, which is squeezing industry margins. On the other, there is increased trading up and aspiration-fueled purchasing patterns.
The hair care brands of leading Western-based brand owners—in particular Procter & Gamble, L’Oréal and Unilever—are becoming ever more dependent on emerging market consumers to beef up revenues and bottom lines, and the stakes have never been higher. At the core of the market share battleground is the quest for broader and more sophisticated segmentation.
Tapping Into Status Consumption
In 2011, for the third year in a row, Brazil was the strongest growth market in the world for hair care, based on incremental retail value. Between 2008 and 2011, Brazilian expenditure on hair care products rose by $2.3 billion, according to Euromonitor International. That was equivalent to more than a quarter of the industry’s global incremental growth.
The fact that Brazil has become such a powerhouse for the hair care category is indicative of a strong away-from-home beauty culture there. There are around 1.5 million beauty salons dotted around Brazil, for example, and Brazilian women typically get their hair done once a week.
What is most striking about Brazil is the democratization of beauty culture. Women from all socioeconomic backgrounds tend to spend a big chunk of their discretionary income on looking good. You are just as likely to come across a beauty salon in a low-income neighborhood as in a middle-class one.
The popularity of beauty salons has given Brazil’s hair care category a natural platform to build growth. Consequently, there is more and more retail penetration of so-called “salon-in-the-supermarket” brands. Unilever’s TRESemmé brand rolled out in Brazil last year, for example (following the integration of the Alberto-Culver brands into Unilever’s portfolio), and it will help Unilever’s position more effectively against P&G’s Pantene Pro V brand, which, together with L’Oréal’s Elsève brand, has been performing well in Brazil.
These type of salon-in-the-supermarket brands, which present a premium image but at an affordable price point, tap into the aspiration-fueled consumption of Brazil’s new C class, which has become more economically empowered over the past decade. Similar brand trends are also happening in Mexico, China, India and Russia.
In short, a key feature of the hair care category in emerging markets is that brand owners are developing a more sophisticated middle ground. It is a segmentation model that aligns with aspiration-fueled consumption patterns. Unilever now has an aspiration bridge between its mass-market brand Seda and status brand TRESemmé, for example.
Opportunities in Affordable Luxury?
Hair care has been going in the opposite direction in most developed markets though, where cash-strapped middle-class consumers typically seek out the most attractive value-for-money deals. Oftentimes this “deal of the week” culture has sounded the death knell for brand loyalty.
True, there is a trend toward affordable premium branding in Western Europe and the U.S., as evidenced by the bullish results of fashion and accessory players such as Mulberry, Coach and Michael Kors, but it is not visible in beauty and personal care categories, at least not to date.
The affordable luxury trend might present an opportunity going forward, however, as consumers in developed markets are increasingly prepared to treat themselves to luxury items, provided they are positioned at accessible price points. This is very different from the aspiration-fueled consumption of emerging markets. It is more a nostalgia-fueled consumption that harkens back to better times. The question is whether a category such as hair care can successfully tap into it.
The best opportunities would be for colorants, conditioners and styling agents—which, as non-staple hair care products, can more realistically leverage “treat yourself” consumption patterns, and there is already some evidence of this happening. Colorants was the best performing hair care category in Western Europe in 2011, for example, based on incremental growth. And conditioners, colorants and styling agents each outperformed shampoo in the U.S. in 2011.
Eco-friendly products are another potential way to beat the downward curve in Western markets. Despite weaker real spending power, the sustainability agenda is getting bigger, fueled by a Facebook culture of online opinions and consumer reviews. There is little doubt this sharing has brought the sustainability debate—and its relevance to consumer products—to a much wider and more influential mainstream audience.
Brands such as P&G’s Pro-V Nature Fusion, a line packaged in sugarcane-based bottles, illustrate how sustainability is increasing in importance in the hair care category. Brands that flex biodegradable credentials (free from silicones, parabens, sulfates and dyes, for example) are also coming increasingly into the market. Timotei Organic Delight and Garnier Fructis Pure Clean are recent cases.
Boutique M&A and Niche Categories
Beauty brand owners are looking more closely at niche categories too, where market maturity is not a barrier to growth. Hair loss treatments, for example, generated value growth of 5% in Western Europe last year, and it was one of only three categories to stave off a contraction in Japan. These types of niche products have a small revenue footprint, but they present attractive margins.
Boutique M&A represents a way to build a profile in these lower-profile markets. Church & Dwight’s 2011 acquisition of the Batiste Dry shampoo brand in the U.K. is a case in point. Retail sales of Batiste summed around $43 million in 2011, according to Euromonitor International.
And PZ Cussons’ purchase of male hair care and grooming brand Fudge was another boutique deal in a category where there is plenty of room for growth. Approximately half of Fudge’s sales were in the U.K. last year, and the other half in Australia and New Zealand.
Both Batiste and Fudge are low-impact players in the bigger hair care picture, but they present attractive value-enhancing potential in markets where growth in mainstream products is stymied. Crucially, they can expand into new territories under the control of bigger distribution systems.
Over the next five years, we could see more of this type of boutique M&A. Although a dominant share of new business will continue to be located in emerging markets, the battle for share is up for grabs in developed markets, and the development of niche categories, eco-friendly brands and products that showcase affordable pampering could make all the difference.
Ultimately, consumers put plenty of stock in looking good; to that end, they have a propensity to spend money on their hair, even when times are tough. In developed markets, that is the silver lining of opportunity. In emerging markets, it is the springboard for new product development, with the challenge of satisfying the preferences of numerous consumer groups.
Rob Walker, senior fast-moving consumer goods analyst, Euromonitor International, can be contacted at firstname.lastname@example.org.