SAO PAULO — Brazil’s beauty sales could shrink next year as consumers cut spending in a stinging recession, industry observers said, adding that the world’s third-largest market will grow at it slowest pace in 15 years.
“This is the first time in 15 years that we will dip below 10 percent,” said Guilherme Campos, founding-partner of Dr. Jones, a fledgling men’s brand, adding growth has typically hovered in the high double digits. “The middle and lower classes are starting to suffer, losing their jobs. There is a lot of [political and economic] uncertainty, so some people are thinking, ‘why buy now when I could get fired tomorrow.'”
Things could get worse in 2016 with a possible market contraction, said Vinicius Basilio, a managing partner at consumer-industry M&A boutique Camaya. “Growth will be 5 percent this year, but it’s already flat on a dollar basis.”
Fitch Ratings’ Deborah Jalles, who recently slapped a negative outlook on beauty giant Natura, agreed. “We expect revenue [volumes] will be flat or slightly lower as a migration to mass-market brands offsets losses for premium and imported products,” she said.
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Jalles noted beauty retailer Hypermarcas (which has a BB+ rating with a positive outlook) is well poised to survive the downturn because of strong operating cash flow and a diversified portfolio of discount brands, though its 23 percent earnings before interest, taxes, depreciation and amortization margin will likely be pressured.
Last year, the industry grew 11 percent to $102 billion reals, or $26 billion at current exchange, industry lobby Abihpec said. However, former president João Carlos Basilio forecast the market could fall 50 percent in 2015 amid a worsening economic scenario expected to bring gross domestic product down 3 percent this year and 1 percent in 2016.
In July, the group warned that a July increase in the industrial IPI tax will force fragrance, makeup and personal-care brands to raise prices as much as 20 percent, further pressuring the industry.
Abihpec did not return comment requests.
Basilio and others warned against sounding the death knell, however, adding that 5 percent is still a decent growth number for 2015.
“The industry is very healthy; even in a bad economy, people don’t stop buying cosmetics,” Basilio said. “Products are not very expensive and Brazil has a very strong beauty and ‘express yourself’ culture.”
Campos insisted there could still be a 1 to 2 percent gain next year as the industry restructures to stay afloat. However, if the political and economic picture darkens further (there are growing calls for President Dilma Rousseff’s ouster on corruption and economic mismanagement charges), growth could move into negative territory in 2017, he noted.
Meanwhile, beauty firms are scrambling to offer discounts and promotions to entice consumers as sentiment drops to its lowest level in a decade and inflation ticks to a 12 percent gain this year.
“There are going to be a lot of aggressive discounts and marketing and brands will team with retailers like Wal-Mart, Carrefour or Pão de Açúcar to do huge promotions,” Campos added.
The downturn, combined with the recent tax hikes, will squeeze profit margins to 10 to 20 percent of sales down from 20 to 30 percent on average before, Campos said.
Mass-market giants like Procter & Gamble and Unilever, which lead sales in the breadwinning hair category, will take a big hit, Basilio said, while door-to-door sellers Natura and Avon Products will continue to suffer amid brutal competition from growing players such as Grupo O’Boticário.
Premium brands like Lancôme or Chanel, which import products from the U.S. or Europe, will also hurt from the dollar’s recent doubling to nearly 4 reals, or $1.06 at current exchange.
“They are going to have to raise prices in 2016. A 20 to 30 percent increase in the middle of a recession is going to be tough to achieve,” Campos said.
Mintel analyst Juliana Martins agreed the premium and masstige circuits will suffer most while mass-market players could fair better amid growing innovation.
That said, she emphasized the market is still sitting pretty, at least in relative terms, and will likely benefit from the “lipstick” effect in which consumers favor beauty over other discretionary items to beat the recessionary blues.
According to Martins, the hair-care market will grow 9.2 percent to 14 billion reals, or $3.71 billion at current exchange, down from 11.6 percent last year and as much as 19 percent in 2012 when the industry was still flying high from Brazil’s decadelong boom.
Meanwhile, fragrance sales will increase 9.7 percent to 18 billion reals, or $4.78 billion at current exchange, versus a 13.7 percent hike the previous year, Martins said. Makeup will see the smallest drop, with sales rising 7.4 percent to 6.8 billion reals, or $1.8 billion at current exchange, from an 8 percent jump in 2014.
Brazil’s hair-care market is now the world’s third after the U.S. and China, Martins said, adding that brands are boosting investment on marketing and innovation to woo customers in the downturn.
“They are accelerating innovation,” launching new compressed and curly-hair treatments as consumers demand fewer hair-straightening products, a reversal of past trends.
Hair and personal-care items also remain cheap, retailing as low as 7 reals, or $1.86 at current exchange, and set to decline further, analysts said, helping shore-up sales in the largest sales category.
Martins doesn’t expect near- to medium-term sales to shrink, adding Brazilian women are so enamored with beauty, they will limit spending and bargain-hunting before stopping buying altogether. To benefit from the falling real, wealthy Brazilians are also increasing local purchases, helping offset losses in the luxury category, which also remains resilient, underpinned by huge growth in A and B consumers during the go-go times.
Martins said the men’s market is also flying high, growing 11.8 percent from 2015 to 2019 amid a growing metrosexual culture.
Campos agreed, saying he expects sales to leap 15 percent to 10 billion reals, or $2.65 billion at current exchange, this year, adding that the men’s deodorant market was becoming the world’s largest in value terms before the real plunged.
“Some men are starting to buy their first cream or hair product,” he said, with grooming, shaving and hair product sales particularly brisk, notably in the masstige and mass markets.
“Next year won’t be easy,” he conceded, adding that the firm will rush to launch new products to beat competitors in a market that remains relatively untapped with a dearth of men-focused brands.