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A Tipping Point for Beauty

Contact Author Rob Walker, Euromonitor International
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  • The strength, depth and diversity of a company’s emerging market footprint will become ever more critical to global market share.
  • Spreading risk in emerging markets could be key to maximizing future opportunity in beauty care.
  • The BRICs have been pivotal to the beauty industry, fueling 45% of absolute growth 2007–2012.
  • There’s an increasingly competitive middle ground in Brazil and China (in terms of price points) as C-class consumers trade up from economy brands.
  • With an emerging middle class that’s aspirational in its purchasing habits (the core of beauty’s opportunity), Mexico could overtake Brazil as Latin America’s biggest economy.

More than a game changer for the industry, the fact that sales of beauty and personal care products will be higher in emerging markets than in developed markets by 2015 is a remarkable turnaround when one considers that in 2008, only five years ago, sales in developed markets were double those in emerging markets.

The BRICs (Brazil, Russia, India and China) have been pivotal to the story, fueling 45% of absolute growth 2007–2012 (based on fixed U.S. dollar values), and they will continue to be key going forward, despite indications of cooler economic growth (the Brazilian economy only grew approximately 1% in 2012). In the specific case of Brazil, widespread access to credit is helping keep consumer confidence comparatively high.

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At the same time, a number of second-tier emerging markets are growing in strategic importance. The MINTs (Mexico, Indonesia, Nigeria and Turkey) are generating frenzied investor interest, for example, and could be hot spots for new product development in beauty care to 2020 and beyond.

In early 2013, there are value-enhancing opportunities still up for grabs in developed markets, especially in niche sectors such as hair loss treatments and anti-aging skin care. However, it is clear that international manufacturers will need to weigh up stronger positions across a raft of emerging markets if they are to beef up their top lines.

A number of the world’s leading players are overexposed to developed markets. In hair care, for example, L’Oréal and Henkel are heavily dependent on Western Europe. By contrast, Unilever has built strong positions in fast-growing Latin America and emerging Asia, diluting its exposure to lackluster markets. As the power shift from developed to emerging markets gets stronger, so the strength, depth and diversity of a company’s emerging market footprint will become ever more critical to global market share.

Lynchpin of Growth

The emerging middle class has been a lynchpin of growth in the BRICs. In Brazil and China, the two biggest growth markets in absolute terms, the shift to a more sophisticated and aspirant consumer culture has been tangible. As a result, Euromonitor International has seen an increasingly competitive middle ground (in terms of price points) as C-class consumers trade up from economy brands. On the back of this, Unilever’s Tresemmé, for example, is on course to become a billion-dollar brand in 2013 (in terms of global retail sales).

Beauty spending in Brazil and China has also been spurred by the dispersal of wealth from first-tier consumption bases. Brazil’s northeast, home to 30% of the population, has emerged as a key regional battleground for beauty products due to its growing economic confidence. Meanwhile in China, wealth has filtered from the coast into the interior, which accounts for two-thirds of the population. Southwest China’s Chongqing and Chengdu municipalities, with populations of around 28 million and 14 million respectively, are two of the fastest growing consumption bases in the world, and present hugely attractive opportunities for beauty product development.

The spread of wealth is also critical to the growth story in India, with branded shampoos and conditioners pushing with increased regulatory and more deeply into rural areas, which account for 69% of the population.

Russia remains the weakest of the BRICs. Its increasingly value-conscious consumers are applying downward pressure on prices and squeezing margins. However, the market is still forecast to generate well over $1 billion of growth a year to 2016.

New Frontiers

During the past decade, Mexico has been outshone by Brazil as Latin America’s darling of investors. But a power change is taking shape, and in the next 10 years Mexico could overtake Brazil as Latin America’s biggest economy. The emerging middle class, which is aspirational in its purchasing habits, is again at the core of the opportunity for beauty brands. Based on Euromonitor International forecasts, Mexico will be one of the fastest-growing beauty care markets in the world to 2016, in absolute terms.

Indonesia, with its youthful demographics, is another second-tier emerging market in ascendency. Unilever is well positioned to capitalize on the upside, accounting for more than a third of the total market thanks to strong demand for Pond’s, Pepsodent, Lifebuoy and Sunsilk. L’Oréal is behind the pace, but could look to ramp up participation through mergers and acquisitions. Distribution is a big challenge in Indonesia; hence leveraging the local know-how of national players could be crucial.

Developing new positions in emerging markets that lie off the beaten track, such as those in sub-Saharan Africa, could also yield highly attractive returns, certainly into the long term. Sub-Saharan Africa has a newfound global confidence, fueled by its burgeoning economic prowess. GDP in Kenya, for example, is projected to grow more than 200% to 2020, at U.S. dollar prices.

Over the next five years, compound annual growth rates in beauty spending are expected to rise in double digits in a host of frontier African markets. The region’s footprint might be small in the big picture, but the speed at which Latin America and emerging Asia has grown over the past decade is a measure of how fast global market dynamics can change.

Spreading risk in emerging markets could be key to maximizing future opportunity in beauty care. The BRICs have been a powerhouse of growth, and their participation in the growth story will continue to be strong. But, the middle class in the BRICs has become more discerning in its consumption habits, and that has made brand development more challenging and margins tighter.

Second-tier and frontier markets are some years behind the BRICs in terms of retail modernization and consumer sophistication, and, precisely because of that, they present some of the most attractive new investment opportunities.

Rob Walker, senior fast-moving consumer goods analyst, Euromonitor International, can be contacted at rob.walker@research7.euromonitor.com.