Emerging Markets: A New Spin

From GCI's May Issue

Although the markets in Brazil, Russia, India and China are still going strong, manufacturers are eager to discover the next “it” market for cosmetics and toiletries. Euromonitor International’s latest findings indicate a number of promising markets not currently getting the proper amount of attention. Analysis of the less dynamic markets also reveals countries best avoided if a manufacturer does not already have an established presence. South Africa, Vietnam and Pakistan are among the increasingly hot markets, while both the U.S. and Germany rank, yet again, among the worst performers in global cosmetics and toiletries.

South Africa Emerges
South Africa’s developing middle class has put the country firmly on the C&T industry’s radar, and its strong growth over the past five years is expected to continue through 2011. South Africa has a sizeable and fast-growing black middle class—nonexistent under pre-1991 apartheid—estimated at 15% of the total population of 49 million in 2005. Overall, blacks’ disposable income surpassed that of the white population for the first time ever earlier this decade, and this new-found wealth is stimulating sales across cosmetics and toiletries. The $2.1 billion industry grew by 47% between 2001 and 2005, and is set to grow by an additional 5% each year through 2010. Still one of the lowest-spending markets in the world in per capita terms, South Africa nonetheless offers sustained value growth into the longer term and fresh opportunities in an industry that is increasingly facing tough competition and market saturation in the key, high value countries.

Dynamism in South Africa’s cosmetics and toiletries market cannot solely be attributed to improved economic conditions; industry players can also take some credit. In catering to the unique set of needs of the country’s black middle class, these players have created one of the world’s largest ethnic hair care markets—as well as a sizeable ethnic market in skin care. Black South African consumers have shown a desire for deep conditioning products that will relax and tame unmanageable frizz. Forty-three percent of all hair care sales in South Africa come from the ethnic category, with the strongest demand for conditioners (60%) and up-market salon hair care (58%). However, offering functional benefits is not enough to attract consumers, and this is where South Africa differs from other ethnic cosmetics and toiletries markets.

Historically, products made especially for black South Africans were cheap and poorly made. As a result, this group equates price with quality, and disdains mass brands that overtly cater solely to black consumers. Encouraging these consumers to trade up is, therefore, of little difficulty, but mid-priced brands do have to be careful to keep packaging of their ethnic line extensions similar to that used for their regular range. The sole indication that Unilever’s olive oil Sunsilk shampoo is aimed at the ethnic market is the substitution of a black model for the white model featured on the labels of its other products.

It seems South Africa’s ethnic population is willing to trade up to premium-image hair care tailored to its needs; the challenge for manufacturers is to encourage the same kind of spending from the country’s white consumers. The lessons learned from developing a thriving ethnic hair care market are now being taken into other sectors, particularly skin care—although color cosmetics, depilatories, bath and shower products, baby care and deodorants also hold promise in South Africa’s newly prosperous market. In fact, South Africa could be key to unlocking growth in Africa as a whole.

These opportunities are available equally for both local and foreign cosmetics and toiletries manufacturers. Because apartheid prompted most foreign investors to pull out of the country, the market had been dominated by domestic firms. Since the abolition of apartheid, multinationals have flooded back in and now control the bulk of retail sales. Nine of the top 10 brand owners operating in South Africa are global players, and account for nearly 61% of value sales. While domestic players have the advantage of local knowledge of the market and established brand names and distribution networks, multinationals have the marketing power, internationally respected labels and money to invest in R&D and acquisitions, with no associations to the old regime.

Players across South Africa’s cosmetics and toiletries market can also leverage their positions to expand globally. In particular, South Africa provides a useful launching pad into the rest of the relatively untapped African market. Africa and the Middle East is one of the smallest of the seven regional markets for cosmetics and toiletries in terms of value sales; however, at a time when the beauty products industry is looking for fresh new growth opportunities, Africa provides some of the long-term best. While growth in other emerging markets—such as Eastern Europe, Latin America and Asia-Pacific—is already beginning to flatten out as manufacturers flood into the regions and penetration levels rise, the industry is only just beginning to take off in Africa.

South Africa’s domestic players have the advantage in terms of expansion in Africa—again, understanding the local markets and having a firm base in catering to emerging ethnic markets. The local Moya brand has already made the move into South Africa’s neighboring countries, selling in spas across Mozambique and Zimbabwe. The best chance of success, however, would be through joint ventures between local and foreign players, using the former’s regional expertise and the latter’s spending power as the foundation for growth.

The Dynamism of Pakistan and Vietnam
With 2006 growth rates of 15% and 10% on 2005 respectively, Pakistan and Vietnam are among the world’s most dynamic cosmetics and toiletries markets. The performance of both countries is set in the context of their stellar macroeconomic results. Driven by a combination of exports, investment and consumption, the Pakistani economy witnessed GDP growth of over 17% in 2005. Although growth in Vietnam is not as astounding, the country’s accession to the World Trade Organization in November 2006 marks its determination to integrate into the world’s economy.

Manufacturers looking to succeed in these relatively underdeveloped environments need to be aware of individual peculiarities. Pakistan, for example, is hindered by illegally imported goods from China, India and Afghanistan—the low prices of knockoffs are an inevitable lure for Pakistani consumers. Furthermore, government taxes of 50% on imported products present a barrier to entry. Manufacturers must get creative with ways to keep unit prices low to stimulate consumer demand there.

Vietnam, like India, draws in manufacturers eager to capture a slice of its youth market—over 50% of the population is under 25—and it is this group that is expected to drive the cosmetics and toiletries market forward to 2011. A recent survey from Taylor Nelson Sofres indicates that some 82% of 15–19 year olds and 74% of 20–24 year olds in Vietnam are skilled at using the Internet, suggesting that manufacturers keen to tap into this group could achieve success via Web-based marketing campaigns.

Bad Year for Mature Markets—But Some Hope
Euromonitor International’s 2006 data points to a number of markets that are unlikely to attract new entrants. The performance in a number of Western European nations has been poor—notably the performance of France, Portugal, Italy, Switzerland, Sweden and Germany. The U.S. and Japan also posted low growth rates, and cosmetics and toiletries in Germany, the U.S. and Japan has been struggling to recover from economic difficulties for the past five years—indicating that saturation has almost been reached.
The economic climate is also having an impact on German consumers beyond the immediate purchase decision. Germany’s birth rate, for example, is at an all-time low and is currently one of the lowest in Europe. While Germany’s population is aging, young Germans are concerned about the uncertain political and economic situation. Consequently, the trend is to delay having a family or simply opting to not have a family at all. This, in turn, is affecting demand for related products, with a strong decline in baby care products, for example, while the aging population is increasing the call for nourishers/antiagers and anticellulite body care. In both the U.S. and Germany, the discounter channel is the most popular, for cosmetics and toiletries. Consumers in these markets have become experts at hunting out bargains, effectively shrinking cosmetics and toiletries sales.

The trend toward health and wellness products is another shared characteristic in these markets, and could be considered an opportunity for niche manufacturers. Organic and natural products have entered the mainstream and present a way to at least maintain current levels of sales in harsh economic circumstances.

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From GCI's May Issue

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