State of the Industry

  • Many consumers have converted to DIY and home beauty treatments, contributing to the growth of nail care and other beauty categories.
  • The nail care category and its growth could be on the verge of a tipping point, particularly given the probability of long-term economic sluggishness in developed markets and the untapped opportunities presented by emerging markets.
  • Western markets will be at the frontline of continuing growth for nail care.
  • Globally, retail sales of premium beauty were up 5% in 2011, the best performance since 2007, with hair care and fragrance posting strong numbers—10% and 6%, respectively.
  • Brazil continues to be one of the globe’s strongest beauty markets, and its profile is set to rise with the upcoming World Cup and Olympics.
  • Consumers in developed markets are responsive to affordable premiumization but also are trading down; the result is a squeeze on the middle ground, and an industry characterized increasingly by its polarization.

Latin America and emerging Asia continued to prop up the global beauty industry in 2011, driving collectively more than 60% of worldwide incremental retail revenue, according to data from Euromonitor International. However, developed markets also played their part, notably the U.S., which posted its best beauty performance in more than five years on the back of strong sales of premium brands. Furthermore, austerity-hit Western markets were the key drivers of nail polish, the industry’s fastest-growing category.

The Nail Polish Effect

Nail polish seems to have replaced lipstick as a more accurate barometer of austere times. In 2011, nail polish recorded global retail growth of 11%, double the growth rate of lipstick, according to Euromonitor International. And between 2008 and 2011—a period characterized by the global financial meltdown—sales increased by 43% (based on current U.S. dollar prices at fixed 2011 exchange rates), compared with 7% for lip products, 11% for facial makeup and 17% for eye makeup.

Nail polish has become the fastest-growing category in the global beauty market for three consecutive years. What is most striking—and the reason why nail polish, rather than lipstick, is a window into the health of the macro economy—is that its heaviest demand over the past year has come from the U.S. and Western Europe, not from the BRICs.

The U.S. even dethroned Brazil last year to become the largest nail polish market in the world, with retail value sales climbing by 31% to reach $778 million. At the core of this bullishness was the growing perception of nail polish as an affordable fashion accessory and a quick-fix morale booster for these tougher economic times.

From Salon to Supermarket

Significant growth in nail care culture first became visible in developed markets in the wake of the 2008 financial crisis, although it was primarily in away-from-home beauty salons, not in the retail channel. This salon pampering has now filtered into DIY nail care, fueled in the U.S. by wider retail availability of the salon brands such as Sinful Colors, OPI and Essie, which were rolled out in more mainstream shopping channels following acquisitions by Revlon, Coty and L’Oréal, respectively.

L’Oréal’s Essie, for example, grew its U.S. market share from 1% in 2010 to 5% in 2011, according to Euromonitor International. Salon brands also lifted the premium nail polish segment in the U.S., with sales more than doubling in 2011 to reach $191 million. That was equivalent to 25% of the total nail polish market, compared with less than 10% five years earlier.

Although nail polish is still a comparatively small category, accounting for 9% of global color cosmetic sales in 2011, its growth story could be on the verge of a tipping point, particularly given the probability of long-term economic sluggishness in developed markets and the untapped opportunities presented by emerging markets. China and India have low impact retail nail care, for example. There could be more M&A activity in 2012 and 2013, following the U.S. model of bringing salon brands into main retail channels. Independent salon brands to watch include the UK’s Nails Inc, France’s Nailstation and Germany’s Art Deco. What is clear is that Western markets, not simply first-tier emerging markets, will be at the frontline of growth. And that alone makes new investment in nail polish attractive.

Growth in Prestige

Globally, retail sales of premium beauty care were up 5% in 2011, the best performance since 2007. Premium hair care was a standout category, growing by 10% in 2011 thanks to upbeat demand for brands such as John Frieda and L’Occitane, notably in Western Europe. And among the weightier premium segments, prestige fragrances were big winners, generating global growth of 6% in 2011. That was equivalent to $1.4 billion of incremental value against $1.1 billion for mass fragrances.

Concurrent with trends in nail polish, the U.S. was the key growth story in premium fragrances, fueling $582 million of incremental value compared with $184 million across Western Europe, which was dragged down by contractions in Spain, Portugal and Greece. Armani Code (L’Oréal) and Prada For Women (Puig) performed particularly well in the U.S., with sales climbing by 70% and 126%, respectively.

There was a stronger strategic focus on developing premium fragrances with an artisanal, unconventional or limited edition profile in the second half of 2011 as brands sought points of competitive differentiation. Armani Prive La Femme Bleue, for example, was limited to 1,000 bottles. This type of limited edition branding could become more visible as companies look to create a buzz around their umbrella brands.

Of the emerging markets, the most significant growth in premium beauty care was seen in China, where sales increased by 18% in 2011. Artistry (Amway), Lancôme (L’Oréal), Estée Lauder and Shiseido showed the biggest incremental value. China is now the sweet spot of premium and super-premium beauty care investment, with multinational companies falling over themselves to entice the country’s one million millionaires and burgeoning middle class.

Brazil Retains Top Spot

Brazil retained its position as the biggest beauty care spender of the emerging markets in 2011, although growth softened in line with a stuttering of the economy and inflationary pressures. Brazil is, however, still on course to leapfrog Japan as the second biggest market in the world (after the U.S.) by the time it hosts the FIFA World Cup in 2014. The leading beauty companies and retailers in Brazil will ramp up their advertising and promotional activity around the World Cup with its vast global television audience, and also around the Olympics, which will be hosted by Rio de Janeiro in 2016. As a result, both events could trigger new surges in Brazilian consumption of beauty products.

Direct sales continue to be a major distribution channel in Brazil as well, particularly in the prospering (but still fundamentally low-income) states of the northeast and central-west. This reflects the positive way Brazilians respond to the personal touch of one-to-one selling. Sales agents also typically live in the same neighborhoods as the households they sell to, which is a big advantage when it comes to building relationships with consumers.

Both Avon and direct sales specialist Natura have been experiencing supply and logistical problems in Brazil, however. And both are coming under new competitive pressure from Eudora, a recently established direct sales arm of the local beauty retailer (and franchiser) O Boticário.

There is a culture of beauty in Brazil that is visible across all socioeconomic groups. Vast numbers of beauty salons, even in low-income neighborhoods, bear testimony to this. Brazil is also one of the biggest markets in the world for plastic surgery. In addition, beauty retailers are leveraging the country’s long-standing tradition for away-from-home beauty care, but it is a long way from maturity. This means Brazil will be one of the key battlegrounds for global beauty companies in the long term. Indeed, Brazil is forecast to generate higher incremental growth in beauty care than any other market to 2016.

A Polarized Industry

China, India, Mexico and Russia are also key projected growth markets for beauty spending, according to Euromonitor International. In particular, India is shaping up to be an investment hot spot with growth last year of 20% and a projected CAGR of 8% to 2016. Commodity toiletries are at the core of India’s surging sales, with mass brands fueling more than $1 billion of incremental value last year.

As austerity measures begin to bite in Western Europe, weakening discretionary spending power and hurting consumer confidence, the performance of India, China, Brazil, Russia and a host of second-tier emerging markets will become ever more critical to beefing up the industry’s bottom line. Equally, one of the key lessons of 2011 is that cash-strapped consumers in developed markets, especially the U.S., are responsive to affordable premiumization. That trend is showing signs of continuing, but at the same time, consumers are displaying more trading down activity. The result is a squeeze on the middle ground, and an industry characterized increasingly by its polarization.

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

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