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The Brazilian beauty market is undergoing a major transformation—and U.S. and European companies are in danger of being left behind.
Already one of the most challenging markets for international beauty brands to sell in, because of high duties on imported goods and a lack of retail infrastructure, the landscape looks set to swing even more in favor of local firms who are aggressively pursuing ways to take advantage of the country’s ever-expanding opportunities.
“Brazil is booming,” says Felix Mayr-Harting, executive vice president of fine fragrances worldwide of Givaudan. “You’ve got an economy that continues to grow and a stability in politics that is embedded to consumer confidence.”
Already the country is number three globally in terms of beauty sales, behind the U.S. and Japan. As the latter grapples with the aftereffects of the devastating earthquake and tsunami, some observers say it’s possible that Brazil will be the secondlargest market by the end of the year.
“The Brazilian beauty and cosmetics market has exploded in the last few years,” says Carlos Ferreirinha, president of MCF Consultoria & Conhecimento, a luxury goods consultancy based in São Paulo. “Brazil as a country has been growing on average of 5 percent in the last 10 years. But beauty and cosmetics are growing on average 12 percent, outpacing the overall market.”
Fueling the growth? The rise of the middle class, which is drastically changing consumption patterns when it comes to beauty. “Until three years ago, the middle class wasn’t that important in Brazil,” says Ferreirinha. “We were a country of extremes. Extreme wealth and extreme poverty. In the last three years, the middle class has become the leading consumption class in Brazil.”
Dionisio Ferenc, regional general manager for LatAm fragrances at IFF, estimates that about 30 million people have moved into the middle class over the last three to four years. “Thirty million people constitutes a country in a lot of geographies,” he points out. “Right now, the level of unemployment in Brazil is the lowest in history, inflation is reasonable and the purchasing power has improved drastically.”
That’s the good news. But as interviews with the major fragrance suppliers who are most finely attuned to the ever-changing nuances of the market revealed, the picture isn’t as rosy for international brands, who must wait for a viable retail structure to be constructed even as the local companies—already dominant—tighten their grip on the country. Moreover, the historically high duties imposed on imported goods show no immediate signs of being lowered.
That means that the local companies, which already control more than 60 percent of the market overall, have a prime opportunity to further increase their market share.
The largest beauty brands in Brazil are Natura, Avon and O Boticário, numbers one, two and three, respectively. The first two are direct-sales companies, while O Boticário operates close to 3,000 franchised stores in Brazil, but isn’t considered traditional retail. When it comes to the fine fragrance market, Ferenc says 70 percent of the market is via direct sales, with Natura accounting for 50 percent of that figure and Avon, which has about one million representatives in Brazil, 20 percent.
In a country as large and culturally diverse as Brazil, direct sales has become the most powerful channel in beauty, one with a very distinct character versus in the rest of the world. “Direct sales in Brazil isn’t really someone coming to your door, like the Avon lady,” says Mayr-Harting. “It is woven into the fabric of your life. Your Avon or Natura consultant is the same person who does your hair or nails, or a she’s a friend at work who you have lunch with. So every time you go to the nail salon, you look at the brochure, place an order, and when you go the following week, it’s there. It’s not a stranger coming to sell you something,” he continues. “It’s people who you know and interact with and that’s the power of it.”
That dynamic leaves non-direct brands in a conundrum. “Access to the market is a real question,” says Mayr-Harting.
Whereas in most developing markets, the local companies generally don’t possess the same sophistication in product development or marketing prowess as international brands, that isn’t the case in Brazil. “One very real issue for international brands is the strength of the local companies,” says Mayr-Harting. “They really know the market. They are incredibly established and respected brands. So you’ve already got a supercompetitive market in Brazil.”
“What is truly different about Brazil is the quality of the management of the local companies,” agrees Armand de Villoutreys, president of the perfumery division of Firmenich. “They were all created about 30 years ago and today are multibilliondollar companies. The quality of management, vision, leadership, strategy is absolutely amazing and truly different.”
The market share competition looks set to heat up even further this year, as the Boticário Group launches its first foray into direct sales with a brand called Eudora. Meanwhile, Belcorp International, based in Peru, and Oriflame, based in Stockholm, also have plans to enter the direct-sales market this year. “Direct sales for the next few years is going to be really interesting,” says Eder Ramos, Symrise’s president of scent and care for Latin America. “Boticário has launched a new company. Avon has announced plans to double sales. As new players arrive, it means it will not be so easy for the retail companies to come and take market share.”
As an adjunct, the online market is growing ever stronger, too. Brazil is already the country with the highest online expenditure in Latin America, says Ferenc. “People here are very used to buying through the Internet,” he says. “The average [online] sale last year was close to $200. That’s because of electronics, but in the past two years, this is changing, and increasingly we see other categories becoming important.” The strength of the direct-sales market hasn’t stopped retail players from making inroads, and bringing beauty along with them. In the mass market, a market share war has erupted between three giants: Pão de Açúcar, Wal-Mart and Carrefour, as each looks to dramatically expand its footprint. Founded in 1948, Pão de Açúcar has more than 1,300 stores, including hypermarkets, supermarkets, specialty stores, cash-and-carry stores, gas stations and drugstores, the last a channel in which chief executive officer Enéas Pestana is particularly pursuing as a means to increasing the company’s beauty business, according to Ferreirinha.
Wal-Mart entered Brazil in 1995 and today has 480 stores over five formats: hypermarkets, supermarkets, cash-andcarry, soft discount and membership clubs. In terms of beauty, hypermarkets are its primary beauty outlet, says a spokesman, while supermarkets, soft discount and membership clubs have an extremely limited assortment and cash-and-carry has limited to none. In terms of growth, she says expectations for organic growth include 23 million to 24 million new square feet in the retailer’s current markets, including significant investments in soft discount formats in Mexico and Brazil.
Carrefour is very strong, too—Brazil is one of its largest markets. Its first store opened in 1975 and today has more than 170 stores and a thriving e-commerce business.
The growth of these channels is good news for mass players like L’Oréal, Unilever and Procter & Gamble, all of whom have firmly established their presence in the country. “Distribution is becoming ubiquitous,” says Michel Mane, president of Mane Americas. It’s a dynamic that works for the mass market, Mane points out, for companies that are able to generate enough sales to manufacture locally and thus avoid high import duties. “If you don’t manufacture in Brazil,” he says, “forget it. It’s impossible to import products from outside of Brazil, in terms of service and profitability.”
While some brands have explored opening free-standing stores in Brazil, the great hope of the prestige market is Sephora, which bought 70 percent of Sacks.com.br, the leading site for prestige beauty in Brazil, in July and rebranded it Sack’s Presented by Sephora. Starting next year, Sephora will open brick-and-mortar stores in Brazil, first in São Paulo and Rio de Janeiro. Sephora declined to reveal its strategy, although according to Ferreirinha, plans call for 50 doors over the next five years.
“The market today is very fragmented, mainly composed of small chains of perfumeries and a limited department store offering,” says Paula Larroque, senior vice president of Latin America for Sephora Americas. “Sack’s is the market share leader, which is why we knew acquiring it marked a clear opportunity to immediately acquire market presence, size and customer access in Brazil.”
This year, Sephora is focused on broadening the product offering of Sack’s, and will launch a number of brands online during the last quarter of 2011, among them, Sephora Collection, Benefit and Make Up For Ever.
In terms of categories, Larroque notes that fragrance accounts for more than half of all prestige sales. The retailer is looking to develop makeup and skin care. “Makeup has been growing in the past years, but it is still not meeting its full potential,” says Larroque. “A larger makeup offering combined with better distribution channels will increase penetration. Skin care is the smallest category in the Brazilian prestige market,” she continues. “This is due to the small product offering, which, combined with high retail prices, has discouraged consumers from purchasing in a category where a great deal of understanding is required to select the appropriate products.”
Doubtless that will change as the country develops and external forces become stronger, which is expected to happen quickly as Brazil will play host to the World Cup in 2014 and the Olympics in 2016. Experts agree that President Dilma Vana Rousseff has shown herself receptive to lowering the punishingly high levies imposed on imports. “We have high taxes for everything,” says Ferreirinha, who is a co-founder of ABRAEL, a Brazilian association of luxury companies. “But in the last 10 years, there has been pressure from all sectors on the government to fix that. There is high hope with our new president, and an understanding that within the next three to eight years, we will see an improvement, which will enable us to improve our retail formats.”
Maybe. What is indisputable, however, is how the emerging middle class is rewriting the rules of consumption habits and product preferences for fine fragrance. “Penetration of fine fragrance has gone from 54 percent to 62 percent in only three years,” says de Villoutreys. “Women here are beauty addicts with a special relationship to the products they use.”
The North and Northeast regions have the highest consumption of fine fragrance, at about 55 to 60 percent, according to Ferenc. In the central region, around São Paulo, that figure is closer to 50 percent and in the South, it is lower. “It’s not directly related to economic factors,” he says. “There is also the emotional connection of the Brazilians with fragrance. In the north, fragrance is associated with religious matters. People use lavender to clean their houses and their spirts. In the northeast, people take two to three showers a day. Although penetration is only 55 to 60 percent, the level of consumption is high because those who are using it are using it in a high amount.”
Olfactive preferences are evolving rapidly. While splashes still remain extraordinarily popular and freshness is a key attribute, experts say that tastes are becoming increasingly sophisticated. “There are changing influences,” says Mayr-Harting. “As more prestige products come in and are recognized, that drives more daring, more opulence, and richer fragrances, so families like orientals and floral orientals have become more successful.”
While European and American designer names are resonant (“People aspire to those brands,” says de Villoutreys), celebrity scents fall fl at. “Our consumption behavior is very much aligned with the Americans, but our lifestyle is more European,” says Ferreirinha. “Brazilians love to be entertained with events and by creating different experiences. Brands that do that have an advantage.”
IFF’s Ferenc points to some recent successful launches here as an example, such as Natura’s Amó Amasso (amasso roughly translates to “sexy hug” in Portuguese), which aims to inject sexuality with a bit of humor, and O Boticário’s Malbec men’s cologne, which is the best-selling mass cologne in Brazil and uses a special maceration technique developed for wine making. “These companies are innovating in terms of having stories in the fine fragrance market,” says Ferenc. “Real stories, like the story of enfluerage or of wine making. The companies here are really exploring the emotional platforms based on their knowledge of consumers.”
Like other markets, newness fuels fragrance sales. “The Brazilian market is getting into the same incredibly fast cycle of launches that we’ve seen in the U.S. and Europe,” says Mayr-Harting. “One sees a tremendous speed to market and a tremendous number of launches.”
Considering the natural affinity for fragrance, it’s no wonder. “This is a sensorial country. When you walk on the beach, you can smell the perfume on the hair of the women,” says Ferenc, who points out Brazilian women buy products in one kilogram (more than two pounds) packaging. “Shiny skin is very important, so body cream has the highest worldwide penetration here and also an extremely high level of perfumation,” he continues. “Beauty is extremely important in Brazil and people are willing to invest.”
As home to one of the world’s most diverse ecosystems, Brazil represents a bonanza of ingredients for fragrance suppliers. “Twenty-three percent of our planet’s biodiversity is in the Amazon and it’s been virtually unexplored,” says Michel Mane. “There’s an extraordinary sense of things you’ve never been exposed to, because they are endemic to those ecosystems, and if you don’t go there, you have no idea they exist.”
More companies are making the commitment to explore, particularly as Brazilians themselves become more emotionally invested in their heritage. “A recurrent and expanding theme is how Brazilians increasingly see themselves reflected in the products they crave,” says Christophe Maubert, president of Robertet. “They are looking for this ‘Brasilidade’ or Brazilianess found in product concepts marked by a relaxed, tropical, slightly nostalgic vibe.”
For its part, Firmenich is working on eight sourcing initiatives, says Armand de Villoutreys. “Brazil is going to be a source of perfume ingredients like a lot of exotic countries, such as India, Morocco and Indonesia,” he says. “It will also be a source of inspiration.”
Brazil has enacted strict regulations to improve sustainability and ensure local communities benefit from the ingredients being harvested. Even so, the Amazon remains a bonanza for suppliers ever on the hunt for new ingredients and stories. Says Mane, when asked about the future, “It’s just a matter of time and how much you can dedicate to going to these ecosystems and visiting diff erent communities to learn about their traditional knowledge and how they use biodiversity for their well-being and beauty routines.”
Brazil By the Numbers
Population: 190 million (as of 2010)
Life Expectancy: 73.1 years
Ethnic Groups: African, Portuguese, Italian, German, Spanish, Japanese, Indigenous people and people of Middle Eastern descent.
Gross Domestic Product: $2.2 trillion
Per Capita GDP: $10,900
Source: U.S. Department of State