- Growth in China’s beauty and personal care market dropped below 9% last year (at fixed U.S. dollar values), its weakest performance in two decades.
- In Brazil and India, middle-class consumers have been trading down across beauty and personal care categories.
- Spending on beauty and personal care in the emerging markets was expected to overtake spending in developed markets by 2016. Although the shift is expected to be delayed until 2018, emerging markets, overall, still present myriad opportunities for growth into the medium and long term, despite the trickier operating conditions.
Make no mistake about it. The emerging economies are going through a painful structural readjustment, and, as a result, the emerging middle class (a key engine of growth for the beauty and personal care industry over the last decade) is losing some of its swagger. Softening economies, rising food prices, lackluster job creation, mounting consumer debt, currency depreciation, declining foreign investment... The headwinds are growing stronger by the month. Inevitably, there will be downside implications for global beauty and personal care brands, but how bad will things get?
Exit From China
For Revlon and L’Oréal’s Garnier, things are already bad enough to warrant pulling the plug on China. Few would have predicted that outcome at the start of 2013. The combined pressures of a cooling economy and more aggressive competition from homespun and South Korean brands in the mass market, such as Herborist and Innoherb, have proved too much.
Revlon and L’Oréal are not alone in finding the going tough. All the big multinationals are getting squeezed in China, including market leader Procter & Gamble, which has lost share. Tellingly, newly released data from Euromonitor International shows growth in China’s beauty and personal care market dropped below 9% last year (at fixed U.S. dollar values), its weakest performance in two decades.
Better news from China is the relaxation of family planning laws, which will have a positive knock-on effect for baby- and child-specific beauty and personal care over the next five years. Furthermore, in the longer term, the country’s gender imbalance could start to stabilize, triggering potentially big increases in demand for women’s makeup, hair care and fragrances.
Trading Down in Brazil, India
Market conditions are tougher still in Brazil and India. In both cases, middle-class consumers have been trading down across a raft of beauty and personal care categories. In Brazil, low-cost cash-and-carry stores—known as atacarejos (a hybrid retail-wholesale channel)—are at the forefront of a sharp rise in bulk buying, especially in the northeast region and interior of the São Paulo state. These outlets are ramping up competition in the mass market while dampening demand for mid-range and premium brands.
In India, lower-income rural consumers are buying fewer razors, deodorants and shampoo sachets than they were in 2013. It is a big deal because rural India accounts for more than two-thirds of the population. Households here represent a major pipeline of growth for Hindustan Unilever and Gillette India, with their shampoo sachets and low-cost disposable razors, respectively.
The negative tilt in market conditions in India has taken the industry by surprise. Only last year, Unilever paid €2.5 billion to increase its stake in Indian subsidiary Hindustan Unilever from 52.5% to 67.5% (a price that valued the company at 36 times forecast earnings). That level of bullish investment was a measure of Unilever’s long-term confidence in India, where as many as one million young adults are entering the job market every month. The problem is that this huge influx of young people into the job market, theoretically an asset, could turn into a liability if too few jobs become available.
Global Power Shift Delayed
According to the latest forecasts from Euromonitor International, spending on beauty and personal care in the emerging markets will be higher than in the developed markets by 2018. A year ago, this power shift had been expected to take place in 2016, but the choppier economic waters (triggered by a confluence of events—the U.S. Federal Reserve’s tapering of quantitative easing, notably) have held things back. The key point, however, is that emerging markets, overall, still present myriad opportunities for growth into the medium and long term, despite the trickier operating conditions.
There were also some strong individual emerging market performances last year. For example, sales of beauty and personal care in Indonesia climbed 16%, fueled by a booming middle class in secondary cities such as Balikpapan, Makasassar and Medan. The Indonesian economy has been weakened by lower commodity prices and weaker export demand from China, but its new middle class is proving resilient.
Getting the Strategy Right
Across the emerging markets, the big challenge is in adapting planning strategy to the changing climate and in tailoring products and marketing to the specific profile of consumers. L’Oréal’s Garnier and Revlon failed in China because their strategies for growth were flawed from the outset, and that made them highly exposed when market conditions changed for the worse.
In particular, Garnier and Revlon were out of tune with local beauty care issues. Penetration in China’s secondary cities also was poor. Revlon, for example, was present in 50 cities when it needed to be in three times that number to maximize its opportunities. These are important lessons for global brands as they look to overcome new challenges in China.
What seems clear, however, is that the emerging middle class in Brazil and elsewhere will look to spend more prudently than in recent years—and that means brand owners will have to be clever in their segmentation strategies and innovative in distribution, marketing and production.
Innovation More Important Than Ever
For brand owners thinking of scaling back their emerging market footprint, it is important to keep in mind that the millions of consumers who have been dragged from the margins of poverty into the middle classes are not about to stop buying beauty and personal care products altogether. In Brazil, especially, beauty is as ingrained in consumer culture as samba and soccer—this is visible in low-income and high-income neighborhoods.
While consumers in emerging markets look to spend more prudently, developing unique, engaging products will be paramount. Innovation has always been key to competitive differentiation in the emerging markets, but it has never been more important than it is now.
The planned partnership between Avon and Coty in Brazil is a good example of brands leveraging their strengths to beef up participation in difficult conditions. On the one side, Coty’s premium brands will have a huge new distribution footprint in a market where door-to-door selling is big business. On the other, Avon’s army of direct sellers will feel empowered with a broader range of products—and price points—for their customers.
The Long Game
From an investment perspective, the emerging markets have always been a long play. Indeed, anyone who thought emerging markets were safe havens of growth was destined to get a nasty wake up call. The growth rates we have seen in the last decade were not sustainable, but that does not mean growth has run its course. Far from it, the emerging markets will weather the current period of structural shifts, and brand owners that also weather them will be stronger as a result.
There are plenty of twists and turns ahead, of course. But the emerging markets overall still present myriad opportunities for product development into the medium and long term. The big difference from the past decade, perhaps, is that brand owners will have to chase down growth rather than have it handed to them on a plate.
Rob Walker, senior fast-moving consumer goods analyst, Euromonitor International, can be contacted at firstname.lastname@example.org.