SAO PAULO — Brazil is getting ready to dance.
Buffeted by three years of recession, heavy taxes, soaring unemployment and lingering political turmoil, the country’s beauty industry — ranked number four in the world — is beginning to find its footing and regain its rhythm.
“Last year was the year of recovery in Brazil,” said Artur Grynbaum, chief executive officer of Grupo Boticário, one of the country’s leading beauty companies, who noted that gross domestic product has suffered severe contractions since 2014 and predicted it may take a decade for the overall economy to reach prime condition. As for now, though, “It’s more normal.”
Daniel Rachmanis, president of Latin America for the Estée Lauder Cos. Inc., is also bullish. The company has notched nine consecutive years of growth in Brazil — even during the two worst recession years, 2015 and 2016 — since establishing the Latin American region in 2009. “After three very, very bad years economically for the country in terms of investment, consumption and business in general, we are starting to see the end of the tunnel, probably at the end of 2018, beginning of 2019,” said Rachmanis. “We’re looking at a favorable outlook for the country and for our business in Brazil.”
Such optimism is not unfounded. Historically, the beauty industry in Brazil accelerates two to three times faster than the national economy, according to João Carlos Basilio, president of ABIHPEC (the Brazilian Association of Industry of Personal Hygiene, Perfumery and Cosmetics). For example, when the GDP eked out a slim 1 percent gain in 2017, the industry grew 2.77 percent. This year, GDP growth is seen hitting 3 percent, partly due to the money expected to be spent around the presidential election in October, and Basilio predicts Brazil’s beauty industry will show a sales gain of 6 to 9 percent.
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In total, Euromonitor International estimates the size of the Brazilian beauty and personal-care market at $32.1 billion for 2017, putting it behind the U.S., China and Japan among single countries. Brazil was third before the recession hit and its currency, the real, was devalued. Euromonitor is projecting 2018 sales of $33.5 billion.
In terms of product categories, the country has slipped from first to second in fragrance on a monetary value basis, but remains the leader in fragrance volume measured in tons. Various market sources expect the country to regain the lead in value as well within two to four years. Brazil is third in hair care behind the U.S. and China and fifth in color cosmetics, trailing the U.S., Japan, China and the U.K.
“Brazil posted a positive GDP growth in 2017 and the scenario ahead points to growth figures as well,” said Elton Morimitsu, senior research analyst at Euromonitor. But concerns about unemployment persist and shoppers are still cautious, meaning “that demand is not yet expected to post a significant boost over 2018,” he said. “Many still argue that the crisis is not over.”
João Paulo Ferreira, ceo of Natura Cosmeticos SA, Brazil’s beauty leader, according to Euromonitor, is one person taking a wait-and-see note. “We have to be cautious,” he said. “Two years ago, 2016, was the worst year in history for our sector.”
There are clouds of worry on the horizon. Although he is overall confident about growth, Basilio said one concern is that some of the 26 state governments will be tempted to raise their already record high tax rate, which go up to 42 percent. Many of the budgets are in the red from the recession and beauty already pays the highest amount of any of the industries, he said. The tax codes fluctuate from state to state and the levies differ from product to product.
Those are the local charges. Import duties charged on foreign products can double the price of a product, according to some estimates.
Taxation is also a persistent issue. “If there is one thing that would increase the penetration of the category and the development of the biggest sector here, it would be an understandable, simple, stable tax system,” said Ferreira.
Despite astronomical taxes, executives talk about Brazilian consumers’ resiliency. Consumers here see beauty as an integral part of their habit, particularly since it is not unusual to take two or three showers a day, driving a desire for a clean and fresh look that applies to not only hair and body products but fragrance, too.
Nor have people stopped buying beauty because of the recession — they are just purchasing differently. Grynbaum calls the consumer tactics “smart shopping,” when a customer opts for a lower-priced item she can live with to save room in the budget for a premium fragrance or other product she really wants.
Consumers are becoming increasingly sophisticated in their tastes, too. “Twelve years ago, Brazil was following what was going on outside,” said Dionisio Ferenc, vice president of global fine fragrance at International Flavors & Fragrances. “Now, over the last few years, it has been creating its own olfactive identity, a Brazilian way of freshness. It’s not a typical freshness, a citrus note as in Europe,” he continued. “It’s much more of a functional kind of freshness because it is connected to the feeling of clean.”
Olfactively, scents are becoming more complex, and there is a demand for quality, like an insistence that a spritz last eight hours, which is increasingly reflected in the selling price. A 100-ml. fragrance from Boticário or Natura can cost $60, $70 or even $80 a bottle, Ferenc said, versus about $30 12 or 14 years ago. “You can define it as masstige,” Ferenc said, “but it’s getting higher and higher.”
The remarkable diversity of Brazil’s population of 209 million people has created the need for broad makeup ranges. Rachmanis said Brazilian women use on average eight makeup products on a regular basis and that lip products, mascara and eye shadow are all “huge.”
Despite the barriers to doing business, Brazil’s competitive landscape is filled with a cast of international giants duking it out, led by Unilever, and a remarkable bench of local players — Natura & Co., Grupo Boticário and Grupo Granado in particular. In Euromonitor’s ranking of market leaders by sales for 2017, Natura was first, Unilever second and Grupo Boticário third.
The Brazilian beauty conglomerates have transformed over the last 10 or 12 years, entering markets in Latin America and Europe, building stores, adding brands, making acquisitions and upgrading product quality.
“We want to be one of the top companies in cosmetics in the world,” said Ferreira. “Hopefully we’re going to be in the top 10 companies.” WWD’s Beauty Inc. 2017 Top 100 ranking of the world’s largest beauty companies puts Natura in 18th place with 2017 consolidated net revenue of 9.85 billion Brazilian reals, or $3.09 billion.
Natura started its global push in 2010, quickly realizing that to grow the business organically and diversify in terms of brands, channels and geographies would take too long. So the company looked around for acquisition targets that shared its commitments to community, social responsibility, and environmental sustainability. In 2012, it acquired Aesop, and in September, bought the Body Shop from L’Oréal.
After the Aesop acquisition, Natura, which controls nearly 60 percent of the direct-selling business locally, turned its attention back to Brazil “to revamp our home business and the Natura brand, primarily in Brazil,” Ferreira said. The answer was to modernize the value proposition for Natura’s army of 1.7 million sales consultants. Most recently, that has meant digitizing operations, allowing sales reps to plug into Natura’s new platform. A huge glass-enclosed information center towers in the center of Natura’s São Paulo complex, the walls covered with digital screens glowing with real-time analysis on sales activities in the field.
The sales representatives go onto the Natura network for business, creating contacts by a factor of almost 10 and a possible increase in sales by 20 percent. But they also participate in company-supported causes like public education and environmental protection, particularly in the rainforest, Ferreira pointed out.
So far, 500,000 representatives have plugged into the new platform and Ferreira expects that number to reach one million by yearend.
The efforts appear to have worked. Natura, the brand, has resumed growing market share in Brazil.
“We recovered the leadership in core categories for us,” Ferreira said.
In terms of geographic expansion, 1.2 million of the 1.7 million consultants are working in Brazil. Natura is now in Argentina and Mexico — the company’s two best markets outside of Brazil — plus Chile, Peru and Colombia.
Across Latin America, direct-selling represents roughly 30 percent of the cosmetics, fragrance and toiletries market, Ferreira said. But he admitted that “no matter how good we turn around our direct-selling experience, some shoppers will not use it.”
So Natura has started opening stores. Thus far, there are 26 in operation: 19 in Brazil, one in Argentina, one in Chile, three in the Paris area, one in New York and one in New Jersey — with ambitions to build many, many more. The French and American stores also can be used to build brand awareness and test those markets.
For instance, Roger Schmid, global adviser on sustainability and innovation for Natura, is getting ready to launch a collection of luxury fragrances, a first for the company. Priced at $95 for a 1.7-oz. eau de toilette, the scents will be showcased in the brand’s two New York-area stores as Natura’s first luxury-priced fragrances. The launch is set for the end of this month, and the purpose is to give consumers a fuller taste of Brazil, beyond bikinis and soccer. The fragrances are positioned as sensual memories of experiences from a journey across the vast Brazilian landscape, as if the wearer has a notebook left from a trip. The names of the scents include Terra, Angelica, Nectar and Jacaranda and are meant to trigger those images. Schmid expects to launch a sixth fragrance in June and three more in September; he expects to have 10 fragrances forming an olfactive collage.
Meanwhile, back in São Paulo, Ferreira outlined a future that could make use of synergies offered by The Body Shop’s and Aesop’s far-flung store networks. He envisions Natura stores in 70 countries within 10 years.
The job of tuning up the Body Shop belongs to David Boynton, who has been recruited as the ceo of that division. After the acquisition, the company reorganized under the banner of Natura & Co. and appointed separate ceo’s for the divisions — Aesop and Body Shop, with Ferreira heading up Natura.
“We want all the three businesses to be very healthy before we start doing things together, or lots of things,” said Ferreira. While praising Body Shop managers for doing an “excellent job,” especially in Asia and the Middle East, he conceded that a few markets like the U.S. and Germany are underperforming.
“The Body Shop needs a complete overhaul, and Aesop is doing great, but it’s growing fast and it has this challenge of companies that grow fast and need to grow profitably and still be true to their choices,” he said of the U.S. “2019 will be the year where you’re going to see a lot of synergies, primarily in developing additional businesses. “
Asked about fixing the U.S. business, Ferreira mentioned two main streams of attack for The Body Shop. The first has to do with the efficiencies of closing stores, optimizing costs and opening units in various geographies.
The other stream is renewal. “It is a brand whose causes would talk very well with young consumers, Millennials,” he said. “But it requires a new speech because it’s sort of in the Nineties.”
While Natura was transforming itself into a multibrand, multichannel global player, the competition was also busy.
Grupo Boticário, based in Curitiba, Brazil, launched a 10-year transformation drive, consisting of building two factories, a distribution center and a research and development lab. The result: a flotilla of new brands, some with their own chain of stores.
Most recently, in early March, it acquired Vult Cosmética, an accessibly priced brand with distribution in drugstores, supermarkets and department stores. Grynbaum described it as a brand for customers who love makeup but lack the budget.
Vult is the sixth-largest color cosmetics brand in Brazil, according to Euromonitor.
The acquisition was the latest move in a market segmentation designed to focus and extend Boticário’s reach, not only with different retail channels but varying price ranges — entry, regular and premium prices — within the brands, Grynbaum said.
Previous launches included Eudora, designed as multichannel, but functioning as the group’s entry into the direct-selling field. Then came Quem Disse, Berenice? (meaning “Who said, Berenice?”) a provocative makeup brand positioned as a cosmetics specialist; Beauty Box, a chain of stores selling internationally, similar to Sephora, and Multi B, (as in beauty) that supplies product for multibrand stores and pharmacies. Drugstores are rapidly growing as retailers buy up units and create American-style drugstore chains. Vult is meant to work through the Multi B network.
Between 2013 and 2017, the Quem Disse, Berenice? brand opened 240 shops, and Beauty Box has 53 stores. “We are performing better than the average of the market because we are much more dynamic in [our] multiplatform with multibrands and multichannels,” said Grynbaum.
Internationally, Boticário has more than 100 shops and expects to open 40 more. There are eight units in Colombia with plans to open 30 more single-brand stores there in the years to come. Boticário’s strongest foreign foray is in Portugal, where it has 54 O’Boticário stores and eight Quem Disse, Berenice? shops.
There are thoughts about opening retail units in Europe, aside from Portugal, or the U.S. perhaps in California, Grynbaum said, stressing a new concept would be required. The company does business in the U.S. through a web site.
Brazilians are very aware of their market’s transformation. Grynbaum says product quality is more important than in the past. “When we talked about quality in the Eighties, it was very good if you had [it]. Now the Brazilian customer has had the opportunity to compare the local products with the international products. Because of this, the industry here has a very high level of innovation and of quality.”
Brazilians certainly have been traveling. Rachmanis of Lauder said Brazilians spend $2 on the road for every $1 they spend at home. While Lauder is clearly dug into Brazil for the long haul, some other foreign firms see the country with its many headaches and lack of predictability as more of a duty-free and travel-retail play.
As for the third major Brazilian group, Grupo Granado, having products that can compete with the best goods from Europe and the U.S. is the game plan of its ceo, Christopher J.O. Freeman. He’s had a shop on the Rue Bonaparte in Paris for nearly five years, and uses it for many things, including a barometer. Freeman believes the international experience will help him escape the pitfall of manufacturers in other Brazilian industries that felt safe in simply copying best-selling foreign goods because Brazil was a closed economy and consumers were not going overseas like they are now.
“My goal is to make sure that we are as competitive as possible, compared to our international rivals,” he said, “so that if one day the economy opens — which gradually it will have to — then we are prepared in terms of quality, efficiency and everything else to compete with other people.”
Granado was founded in Rio in 1870 and is considered Brazil’s oldest pharmacy. It operates out of the spacious, original store in Rio’s picturesque port, decorated with colonial furnishings and assortments of eye-catching, colorful products.
In Europe, Granado has a 900-square-foot Paris shop, a kiosk in Bon Marché, a pop-up shop in Lisbon. In Brazil, there are 60 stores, which have been opening at the pace of about 10 a year.
Freeman and his daughter Sissi Freeman, Granado’s marketing and sales director, have mapped out a retail rollout plan for Europe. This month they start entering Sephora with the intention of opening 220 doors. In addition, they plan on opening Granado stores in Europe at the rate of two to four stores a year, then gradually step up the pace to 10 annually, like in Brazil. In the meantime, they intend to keep opening stores at home.
They have plenty of help, thanks to a partnership struck up with the Barcelona-based Puig, which bought a minority stake that could amount to 30 percent of the company, for an estimated 1 billion Brazilian reals, or $306 million. That helped Granado reduce the bank debt for its new $150 million factory, which at least doubled production capacity, according to Christopher Freeman, who declined to comment on the sale numbers.
The Freemans have entered into a cross-selling venture with Puig, in which the Granado staff sells Puig’s masstige fragrances — like Antonio Banderas and Shakira — into pharmacies, while Puig personnel sell Granado’s premium-priced products into upscale perfumeries. The total sales turnover was $150 million last year, the second year in the row of 12 percent increases. Prior to that gains averaged 20 percent, he said.
Granado also owns a historic brand, Phebo, that was created in 1930, consisting of a bar soap that became ubiquitous. The Freemans bought it in 2004 from Sara Lee and have been developing it as a perfumery-style brand — focusing on fragrances — while Granado is more representative of personal and body care, skin care and pharmacy brands. A Phebo concept store has been created, which focuses on fragrance rather than soap. Sissi Freeman said the organization expects to build the fragrance business into the number-one category in the shops within three years.
With so much of the beauty world’s volume still being done through direct-selling and e-commerce and social media gaining traction quickly, little attention seems to be paid to the tiny luxury segment, which occupied 4 percent of the market and is dominated by international brands. Lauder, with a 34.9 percent market share, according to data from Segmenta, is the market leader. Puig is second with 16.9 percent, followed by L’Oréal with 11.3 percent. While conceding that the prestige market is small, Rachmanis said it is growing faster than the total market, 9 percent versus 5 percent.
When Lauder launched its first MAC store in Brazil 15 years ago, it was a prestige pioneer. Because Brazil had neither traditional department stores nor premiere perfumeries, the company had no choice but to create its own distribution. Today Lauder operates 77 freestanding stores — 60 MAC units, 10 Clinique, six Jo Malone and one La Mer. In a country dominated by door-to-door selling specialists, Lauder does 80 percent of its business on a direct-to-consumer basis. MAC also does brick-and-mortar through Sephora, which is expected to have about 36 stores by the end of the year. E-commerce is a strong channel, too, growing three times faster than brick-and-mortar.
The company markets 12 brands in Brazil and is coordinating the launch of Too Faced with Sephora later this year; in fragrances, the push is behind Tom Ford and Jo Malone. It doesn’t sell its hair-care brands, Aveda and Bumble and bumble, in Brazil, but Rachmanis said he is actively looking to do so.
While many companies have kept their footing during the recession, others just can’t seem to find the beat. Although Avon Products Inc. has long been a force in Brazil, and has been identified as the leader of the color cosmetics category by Euromonitor, the subsidiary took a blistering on May 3 during the company’s first-quarter investor’s call. The relatively new ceo Jan Zijderveld reported a 4 percent revenue decline, largely driven by continuing falls in Brazil, and other top markets, as “simply unsatisfactory.”
For its part, Coty Inc. is looking to establish itself in the mass market as the third-largest personal care and beauty manufacturer, behind Unilever and L’Oréal. The global marketer became a major Brazilian manufacturer in February 2016 when it acquired a half-dozen top-ranked Brazilian brands from Hypermarcas SA. The mix includes heritage brands like Monange, which is 50 years old; Paixo; Risque, the nail-polish leader; Biocolor hair colorant, and Bozzano men’s care.
Although global in scope, Coty Inc. has gone local with 80 percent of its business being done in the country by Brazilian brands. The company is looking for more acquisition targets and it is knitting together its São Paulo-based culture of 2,500 employees, building its infrastructure, particularly by investing in digital. “Digital has really democratized beauty globally and women now can access new trends, new looks, fashion tips at the click of a smart phone,” said Al Symington, senior vice president of ALMEA (Asia, Latin America, Middle East and Africa), adding that few people have credit cards and a lot of e-commerce retailers do not accept cash on delivery in Brazil. “It’s still very much a cash economy. But that’s going to change.”
Symington predicted that a “tipping point” will be reached when consumers look for “a more enlightened and exciting beauty shopping experience.” He concluded, “there needs to be a safer method of paying for purchases.” One solution would be to allow customers to deposit money into a social network account, then pay by smartphone like a debit card.
“E-commerce will play a big role in that and digital in general. But there’s still a role to play, obviously, in the more traditional retail,” Symington said. “The way you coordinate your off line traditional retail with your online e-commerce is really the key.”
In a fast-moving, complex market like Brazil, local knowledge is king. At least that’s the belief of Procter & Gamble. “Our key competitive advantage is the understanding that we have of the consumer,” said Isabella Zakzuk, marketing beauty director of P&G Brazil.
She ticked of the daily habits of consumers, who drive Brazil’s $4.4 billion hair-care market. P&G ranks third in the market behind Unilever and L’Oréal, according to Euromonitor.
“We are talking about a consumer that uses from six to seven different brands of hair care in one year —14 to 15 bottles of hair care. More than half of these consumers use more than four products in their hair every day,” she said.
Women use so many treatments in their hair after shampooing that Brazil has become number-one in the world for post-shampoo conditioning, treating and repairing, a category P&G is targeting with problem-solving technology.
The strategy is working. The P&G hair-care division has increased its sales by 20 percent in the last three years and Pantene has been trading number-one and number-two rankings in a dance with Unilever’s Seda.
Part of the strategy was to launch the Three Minute Miracle Daily Conditioner with ampoules and to ramp up Pantene TV advertising. Another innovation was to add digital content to extend reach. In 2017, P&G launched a reality show which featured 10 women rhapsodizing about the beauty of their hair. It’s now in its second edition.
Conversations about the future of Brazil usually end with questions of what comes next with the economy, if not the presidential election. “Brazil is going to be the country of the future,” said Alex Serodia, a young entrepreneur who founded the Beleza na Web e-commerce company. “You’ve always got to focus on the long term in Brazil, because you can get too excited with the short term and then get frustrated afterward.”
It seems like the opportunities have not gone unnoticed. Juliana Martins, beauty and personal-care senior specialist at Mintel, remarked how new points of sale are popping up. Not only are pharmacy chains and malls being built, but foreign brands are moving in. She pointed to Kiko Milano, a November 2016 entry; the French-based L’Occitane au Brésil, which in four years has begun expanding by opening new franchises, and the French Yves Rocher, which inaugurated its first franchise in the south region of Brazil in December 2016.
“For the next few years,” Martins concluded, “the beauty and personal-care sector will have the chance to resume sales growth just as before the economic crisis.”
She described the state of the Brazilian industry as “dynamic and competitive.”