Consumers worldwide spent over $14 billion on baby and child-specific personal care products last year, which is $1 billion more than in 2011 (measured at fixed U.S. dollar exchange rates), according to data from Euromonitor International. It was an impressive performance given the dual challenge of declining birth rates and cooling economic growth across so many key consumption bases, including Brazil, which has been the fastest growing market in the world for baby care products over the last five years.
Furthermore, the category’s global retail sales are forecast to increase by more than a fifth over the next five years, a higher rate of projected growth than in any other beauty and personal care category. Baby booms in countries as diverse as Russia, the U.K. and Nigeria will beef up global performance, but there is also the possibility of a relaxation of China’s one-child policy. This would be a huge deal for the industry, with potentially game-changing strategic implications for multinational players.
A Fertility Surge In the Waiting
China will leapfrog the U.S. this year as the biggest diaper market in the world, with sales on course to break $6 billion. Remarkably, only five years ago the U.S. diapers market was worth three and a half times more. The same transfer of power is building momentum in baby and child-specific personal care products too. Last year, the Chinese market was worth $1.4 billion against $2.4 billion in the U.S. By 2017, the Chinese market will be bigger, according to forecast data from Euromonitor International.
China’s growth story is all the more remarkable when one considers that the state has applied strict population controls for more than three decades. The labur force is starting to get squeezed, however, which poses a threat to long-term economic growth. The dependency ratio—comparing the potential workforce with the population of children and retirees—rose in 2012 for the first time in 40 years. Sustainable economic growth, not over-population, is now China’s biggest challenge.
A revision to the one-child policy is starting to look inevitable. Pilot programs are already in place in some Chinese cities whereby two children are permitted for parents who are both single children themselves. This could be rolled out nationally within the next two years, paving the way for further revisions.
Johnson & Johnson is in a strong position to benefit from such change. Last year the company accounted for 30% of baby care sales in China, driven by its portfolio of skin care and toiletries. But a cluster of other multinational players, including Kimberly-Clark and Procter & Gamble, as well as China’s domestic manufacturers, will be keen to grab a piece of the action too, fueling potentially big increases in investment over the next five years.
Sales of baby care products are set to rise sharply in Russia too, with the government offering cash incentives for bigger families. Mothers bearing a second child currently qualify for around $10,000 to spend on education or real estate. No wonder more babies were born in Russia in 2012 than at any time since 1990. This helped fuel 10% growth in baby care sales at fixed U.S. dollar prices.
Russia is not the only country in the midst of a baby boom. The number of births in the U.K. shot up by 23% over the last decade, fueled mainly by high immigration but also by more multiple births as growing numbers of couples opted for fertility treatment. In 2012, births in the U.K. (at more than 800,000) were the highest in half a century. This is a big boost to the baby care market at a time of lackluster economic growth.
Margins will continue to be tight in the U.K., however, due to strong competition from private label and the growing penetration of economy brands. Avon, with its low price model, was the fastest growing brand in 2012, for example. Avon’s sales climbed by 22% compared with 5%, 4% and 2% for Huggies, Pampers and Johnson’s, respectively.
The United Arab Emirates (UAE), Ukraine, Australia, Kenya and Nigeria have also seen a surge in births in recent years, which signals new opportunity for baby care brands going forward. Building stronger positions in these markets could help offset slower growth in some of the world’s bigger consumption bases, such as Brazil, Japan and France.
Brazil Looks Vulnerable
Birth rates do not necessarily correlate with the performance of baby care. Over the last five years, the world’s two biggest growth markets in absolute terms have been China and Brazil, where births have been in decline. This is because the middle-class in both markets expanded rapidly, bringing retail modernization to key regions such as Brazil’s northeast and China’s lower-tier inland cities.
There is no such thing as a safe haven of growth, however, and going forward, the industry could see a stronger correlation between market performance and declining birth rates, especially in Brazil where middle-class confidence is at its lowest in more than a decade. The recent rioting, involving large numbers of educated, middle-class Brazilians, bears testimony to a growing sense of domestic frustration.
Some of the fastest growing emerging markets for baby care products over the next five years have been identified as Mexico, Turkey, Indonesia, Saudi Arabia and Iran, according to data from Euromonitor International. The birth rate is in decline in Mexico and Indonesia, but a burgeoning and economically confident middle-class will fuel new demand for products such as wipes, diaper rash treatments and toiletries.
In the wider picture, each of these growth markets will be small if China’s one-child policy is revoked. China’s spending on baby and child-specific beauty and personal care is already forecast to double between 2012 and 2017, implying growth of more than $1 billion in absolute terms. That growth trajectory could spike to unparalleled levels over the latter part of the decade.
For further insight, please contact Rob Walker at [email protected].