Beauty Industry Facing New Paradigm

Core Western markets are weighed down by recession and debt while emerging markets power ahead.

MILAN — Even as it continues to grow, the beauty and personal care industry is facing a new paradigm as core Western markets are weighed down by recession and debt while emerging markets power ahead.

In this context there are four ways in which the industry is changing, according to analysts at market research firm Euromonitor.

Euromonitor’s global head of beauty and personal care research, Irina Barbalova, and senior personal care company analyst, Oru Mohiuddin, said successful companies are driving sales with mergers and acquisitions, looking at new product positioning that takes an holistic approach to cater the needs of consumers, capitalizing on high-tech claims and exploring new retail concepts to combat an increasingly competitive retail environment.

Not that the industry — a total of 13 sectors, as defined by Euromonitor, including toiletries, cosmetics and baby care — is in any trouble at the moment.

In an interview with WWD, Barbalova said that in 2011 global beauty and personal care sales continued their upward trend, rising five per cent, to just over $426 billion. By 2016 that figure is expected to reach $489 billion, in constant, inflation-adjusted terms. Reflecting the industry’s strong performance, Barbalova added that this year’s five-year forecast was revised slightly upwards compared to the five-year forecast issued last year.

Industry growth in 2011 was mainly on the back of strong performance by premium products, which outperformed mass cosmetics — in terms of growth rate — in the key markets of Western Europe, North America and the Asia-Pacific region. However growth in these areas is slowing, penetration remains strongest in more basic categories, like perfumes and skin care, and demand is stronger in emerging markets, which are still largely terrain for mass market products.

One of the ways the industry is changing to adapt to this scenario is by offering multifunctional products, such as two-in-one beauty creams with sun protection, Barbalova says. Another trend in this direction is the tendency to “replicate some high-tech benefits of premium products in lower cost platforms, like serums, which have entered the mass market strongly.” Yet another approach is to target lower budget consumers by offering at-home salon treatments, from hair coloring to nail polish, “which have evolved in highly sophisticated ranges.” In terms of product strategies, offering more holistic products — skin care or brightening products, for example, instead of just anti-wrinkle — is another emerging approach to attracting more consumers. As is promoting green credentials. “We’re seeing lots of products which are eliminating silicon and other synthetic ingredients in favor of more natural ingredients,” explains the analyst. Examples of this new thinking include Mary Kay, with its Botanical Effects skin care line, and Eco-Beauty, with its Organics lines. And many companies are investing in more environment-friendly packaging.

While these initiatives are largely consumer-facing, there are other big changes taking place behind the scenes: companies buying each other. “We see mergers and acquisitions as more opportunistic,” Barbalova explains. Estée Lauder’s 2010 purchase of Smashbox, for example, helped the cosmetics giant get in touch with a younger, hip target. Another key mergers and acquisitions driver is getting into new product categories, as exemplified by L’Oréal’s December 2011 acquisition of Clarisonic face cleansing systems maker Pacific Bioscience Laboratories. Equally important is using acquisitions to enter new geographic markets, explains Barbalova, like Unilever’s October 2011 purchase of Kalina (a strong player in the Russian beauty market), while its purchase of Alberto Culver helped the consumer goods giant strengthen its position in hair conditioning.

Lastly, beauty and personal care companies are also having to rethink their distribution strategies — especially in light of the emergence of internet and mobile commerce. Not only do players have to develop coherent online retail, they also have to compete with pure-play e-tailers, which are developing their own beauty sections. And with the increasing penetration of smartphones and e-commerce enabling apps, mobile commerce is also emerging as a competing — and complementary — sales channel.

Although Euromonitor expects e-commerce to make no more than a four per cent contribution to global sales in 2016, companies need to take steps. “Channel shifts are marginal,” Barbalova says. “But since 2000 that four per cent gained by the internet will be lost somewhere else. This is the only channel which is gaining share, while department stores and supermarkets are probably losing at the moment. In the bigger picture and in the longer-term scenario, it makes a strong case.”