Euromonitor International

Beauty and Personal Care 2010 edition

MARIA ELVIRA NUEZ FORERO

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Euromonitor International

Annual Beauty and Personal Care Survey 2010 edition

Euromonitor International is currently updating its global survey of the Beauty and Personal Care industries. Our survey covers 80 countries and measures: Market sizes Value and volume sales in Retail and Manufacturer prices Company and brand value shares Forecasts to 2014 Data on distributor/wholesaler and retailer mark-ups Retail distribution breakdowns by product category With accompanying insights and quantitative and qualitative analysis We would greatly appreciate you time and input into this years survey

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We give all key opinion formers the chance to participate We value your expert opinion on the market We want to ensure that you are accurately represented Please note that sources are not quoted directly. We strictly adhere to industry guidelines on anonymity We as industry analysts offer the chance to engage in a mutually beneficial dialogue on the industry, an exchange of opinions on data and insights Our preference is always to build a long term relationship with all key opinion formers as we consolidate our position of the leading authority on the industry at global level We are happy to follow up our discussion with a summary of key findings from this years research

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Beauty and Personal Care: Key findings

Global Snapshot

Industry Growth Shielded from Late Arrival of Recession

Growth in the global cosmetics and toiletries market slowed to 5% in 2008, from 6% in 2007, on increased price sensitivity among consumers. Already in 2008 there were sharp declines in selected leading countries and categories such as North American fragrances and Japanese skin care and colour cosmetics. There was, however, offsetting buoyancy in emerging markets due to their relative immaturity, and also because the effects of the global credit crunch were felt with greater delay there than in developed markets. The full brunt of the global recession will be felt from 2009 onwards. In many countries, media coverage of the economic slowdown only gathered speed during the second half of the year, meaning that prior to that consumer spending was largely in line with that of previous years. As the bear market mentality set in among consumers, however, many beauty product manufacturers posted fourth quarter results that were far lower than those of the same period the previous year. In 2009 the effects will be far more evident as growth of only 0.7% in constant terms is forecast for the declines in premium sales. Western European premium sales (34% of global) grew by 3% in 2008 versus 5% in 2007, but they will fall by an estimated -0.3% in 2009. As a result, global premium CT sales are expected to contract by -1.3% in 2009.

Global Snapshot

Categories' Resilience Varied Markedly Across Regions

Deodorants and baby care were the best performers globally in 2008 with growth rates of 8% and 7% respectively. These two sectors, along with bath and shower, were also the only ones to outperform their percentage rise of the previous year. Latin American's love for scents underpinned strong growth in deodorant roll-ons and sprays. Unwillingness by parents to give up quality on their children's products together with increased purchases for adult consumption (baby lotion) boosted baby-care products demand. Premium cosmetics and toiletries bore the brunt of the impact of decreasing consumer confidence and disposable income and rising unemployment rates. The category's growth rate more than halved to 2% in 2008, as consumers sacrificed luxury brands for mass or masstige alternatives. While global skin care spend slowed to 5.5% growth (7.1% in 2007), nourishers /anti-agers remained star performers, expanding by 9.7% or only 0.6 percentage points less than in 2007. This adds substance to the belief that most consumers will sacrifice on many other fmcg's before they will alter their facial care routines. Other resilient sectors included under-developed men's grooming (-0.3 or +6.1% in 2008), and sun care that despite declining 1.3 percentage points, remained the most dynamic sector over the 2003-08 review period. Though global hair care spending decelerated by 1.3 percent points and was the slowest growing category, the sheer magnitude of this relatively mature sector determined it was the second largest contributor to absolute value growth during the review period.

Regional Overview

Leading Regional Markets in Retreat

Economies with advanced, integrated credit markets are suffering the brunt of the current economic downturn. It is these countries that also enjoy the highest per capita consumption of cosmetics and toiletries, are mature, sophisticated and price sensitive, and are being hardest hit, as consumers curtail overall expenditure. Though Canadians showed unwillingness to cut back in their personal care regimens, the overwhelming incidence of the US within North America, resulted in an estimated -2.4% decline in the region's CT market in real terms (-0.4% in current prices) during 2008. Americans of all income levels began tightening their belts, leading to massive discounting even in premium cosmetics (never seen before). The region's CT market is projected to contract by a cumulative 1.7% over the next five years. In all, half of CT world sales are in leading markets that will contract or stagnate during the forecast period. CT sales in Japan fell -1.4% in 2008 as consumers reduced premium cosmetics purchases. Japan accounts for 40% of Asia Pacific's CT market, causing a sharp slowdown there over the next five years. For the largest five countries that together account for three quarters of the West European market, CT sales will either contract or come to a near stand-still over the forecast period.

Regional Overview

North America and Western Europe Suffer Hardest

The CT market in North America is forecast to decline by US$1 billion in 2008-2013, driven by US premium cosmetics (9%), fragrances (-17%) and colour cosmetics (-6%). The West European CT market will remain flat in 2009, though France (17% share of regional CT sales) will fare worst, posting negative growth through 2011, and Germany (17% share) is expected to grow a meagre cumulative 0.9% during the forecast period. Italy, Greece, Sweden and Portugal will also decline in 2009, to recover in 2010, while the UK, the Netherlands, Spain, Norway, Finland and Turkey will show healthy growth rates. Private label has been a large beneficiary in the US (bath & shower, oral hygiene, baby and sun care) and in countries such as Germany, Netherlands, France, Spain and the UK, where major retailers show increasing sophistication in their private label offer and are expanding their ranges to include natural and organic products (Carrefour, Tesco, Sephora, amongst others). Major branded manufacturers are responding differently across countries and sectors, as price points fall with new launches (US, premium cosmetics), or innovations in mature sectors such as hair care and skin care underpin unit price growth in the Netherlands and Germany, or greater consumer segmentation reaps above-average value growth in Spain (+5 % in 2008).

Regional Overview

US and Japan: Erosion in Share of World Market to Accelerate

The Japanese CT market is expected to contract by 5.1% or US$1.7 bn over the next five years, in constant value terms. Although there are pockets of growth in 'preventive' products such as anti-ageing, oral care and sun care, as well as depilatories, these are small in the overall context of the Japanese market. Consumers' trading down from premium to mass and masstige products is affecting most sectors, but the bulk of the brunt is being felt in skin-care (excepting nourishers/anti-agers), and colour cosmetics, that are also the largest sectors (42% and 20%, respectively, of Japanese CT spend), where average unit prices are declining. The US CT market is expected to be US$1.6 bn smaller by 2013, however, this will be a comparatively modest 0.6% decline from 2008. The CT mix is less concentrated than in Japan as well as fragrances and men's grooming products take a greater share of CT spend. Discounting and lower volumes in fragrances (80% are premium, and considered a luxury) will reduce the CT market an estimated US$970 mn by 2013. The men's grooming sector will be a growth driver in the US, as young men become more comfortable with grooming regimens and the idea of cosmetics lines tailored for men becomes more mainstream.

Regional Overview

A Diverse Environment in Asia Pacific

In 2009, Asian economies (ex-Japan) will grow their lowest since 2001, nevertheless, above 5%. Public debt has been reduced (excepting India) and foreign reserves are mostly ample. A more rapid recovery than in other parts of the world, should thus be possible as governments are better able to cope with recession through increased spending. The region remains dependent on and vulnerable to foreign investment flows. Skin care is the key sector taking up 37% of CT spend, and the share is higher in mature markets. Catering to Asian women's traditional preference for clear and pale skin, majors P&G, Amway, and L'Oral launched several new whitening skin care products during 2008. Products with whitening function are penetrating into nearly every area of facial skin care moisturisers, cleansers, toners, face masks, and even nourishers/anti-agers - as manufacturers seek to add extra benefits to basic functionality. Sales will slow sharply but the high importance of facial skin beauty will continue to make skin care the star performer of the Asia Pacific CT market (37% of projected five-year absolute growth), followed by hair care (20% of absolute growth).

Regional Overview

China Sees Highest Absolute Growth Potential

Around half of CT purchases in developed Asia Pacific markets (per-capita CT spend above US$120) are premium products, that will do poorly such as in Japan (US$252 CT per-capita spend) and Taiwan. In contrast, countries such as China and India, where premium product penetration is low, will see premium products outperforming mass even in the economic downturn. Broadly speaking, developing countries whose CT markets are very large yet per capita CT spend remains low, will see the greatest absolute growth.

Regional Overview

Eastern Europe: Nominal Growth Masking Sharp Deceleration

The cosmetics and toiletries market in Eastern Europe continued to grow a steady, rapid pace in nominal terms, but significant rises in inflation sharply eroded the real value of sales. Real growth of CT sales for the largest 15 countries (97% of Eastern Europe's CT spend) slowed to an estimated 0.9% in 2008 from just over 3% in 2007. The repercussions of the global credit crunch were felt fully in 1Q 2009 with collapsing commodity prices, exports and credit access. The region's economy is expected to contract by 4%, with slight recovery in 2010 (+0.8% real GDP growth). The downturn will be sharper in CIS states including Russia, the Baltics and Hungary. The region's recovery is constrained by inflated fiscal budgets and in some cases large current account deficits, requiring financial rescues by the IMF and government donors. In 2008, CT markets contracted in Ukraine (-0.4%), Czech Republic, Hungary and Latvia, while Russia slowed down sharply. Poland, stands out as a bastion of stability, with steady, even if, low growth (+2% 2008). Romania's CT market also did well (+4% 2008). For the region as a whole CT sales will grow a modest 1% in constant prices in 2009, recovering over the forecast period, driven by Russia, Ukraine and Poland. Annual growth will average 2% over the next five years, one of the lowest amongst emerging market peers.

Regional Overview

Middle East and Africa: Resilient but Not Immune

Lack of a credit/debit culture shielded consumers in MEA from the global credit crunch, and the pace of growth in CT sales actually accelerated during 2008 to a nominal rate of 10%, from 8% in 2007. The collapse of oil prices and global economic downturn, will reduce 2008-13 growth to 2.4% vs 1.8% globally. CT sales of US$13.7 billion are only 4% of the global market, the smallest region, and lowest average per capita spend (US$11.6). Saudi Arabia and UAE are expected to fare best, as surpluses from windfall oil revenues allow them to withstand the crisis. Iran, however, is expected to fare worst as reduced government subsidies (in fuel, electricity and water) bite into discretionary spend. Nigeria, with unofficial unemployment at 40%, will see a sharp reduction in its share of the CT pie. CT sales began decelerating in the mature MEA markets during 2008. Israel (US$149 per capita spend) slowed to 10-year low as discounting hit hair care and fragrances, its largest sectors, and move to masstige impacted skin care and colour cosmetics. South African consumers will be recovering from sharp increases in food, electricity and fuel prices in 2008, and CT spend will slow markedly.

MEA Major Market Performance

Sales US$ mn 13,736 2,396 2,174 2,045 1,088 834 600 523 327 273 255 150 78 2,992 Growth % 2008/07 9.6 11.7 11.2 6.6 2.9 13.7 8.8 7.7 7.9 9.0 5.5 11.0 4.7 11.8 CAGR % 2003-08 7.7 9.2 9.2 6.8 7.7 9.7 9.7 5.3 7.2 9.4 9.7 7.0 6.2 6.4 CAGR % 2008-13 2.4 2.4 4.4 -6.2 2.2 7.3 1.4 6.3 4.4 0.9 -1.4 6.4 2.0 3.7

MEA - Total South Africa Saudi Arabia Iran Israel UAE Egypt Morocco Algeria Kenya Nigeria Tunisia Cameroon Other MEA

Regional Overview

Latin America Set to Weather the Economic Storm

After the region's 2002 financial crisis, most countries (except Argentina, Venezuela) followed orthodox policies, thus Latin America is well placed to withstand the global economic downturn. Brazil, will contract in 2009 on external demand factors, but swiftly return to growth in 2010. Mexico's reliance on the US (76% of exports) will slow its economic recovery. Latin America's CT market grew the fastest globally in 2003-08 (12.3% CAGR), and in absolute terms (US$23 bn to US$52 bn). Hair care continued to dominate CT spend (23% of total). The hair care market, is relatively mature and slowing in the recessionary environment. In Brazil, rising use of progressive blow-dry in beauty salons, that requires reduced frequency of hair washing to achieve smooth and straight hair, is dampening demand for shampoos, conditioners and colourants (an estimated 65% of Brazilian women have curly or afro hair type). The increasing quality of mass fragrances (86% of total), climate and cultural factors, and innovative marketing and segmentation, will drive fragrance sales in 2008-13. In 2009, specialist retailer O Boticario, successfully launched Capricho Day&Night targeting teen girls with two fragrances that create a third when mixed, and introduced a winning Capricho cosmetics range. Direct seller Avon has developed two skin care ranges to target low-income women (Ageless Results), and middle-to-high income (mainly older) women (Avon Renew Ultimate), while adding nourishing/anti-ageing benefits to its colour cosmetics ranges.

Global Prospects

Masstige Beauty Will Continue to Accelerate

Key Issues Future Impact to 2013 Resilience As growth in the industry's largest markets of the US and Japan is unlikely to rebound until 2013, focus will to recession remain on the BRICs. However, with Russia's economy being severely hit by the recession and the BRIC's

personal care market expected to expand at a much lower pace than seen in the past, company investments need to be more focused and targeted. The most prominent growth potential will be in the rapidly expanding skin care market in Asia (China's premium skin care is set to increase by 11% by 2013), fragrances in Latin America (Brazil is expected to account for over half of the global absolute growth, an additional US$ 2.6 billion in the next five years), and hair care in China, India and Brazil, contributing with a combined extra revenue of US$ 2.9 billion by 2013, nearly a third of global absolute hair care growth. Sun care will continue to align itself with beauty, as many skin care operators venture into this segment with particular focus on anti-ageing benefits. The category's growth dynamics will remain largely unscathed, with sun protection in North America and Asia posting highest revenue gains The only regions to show sustained growth in premium cosmetics in 2009 and most dynamic CAGR for the category by 2013 will be Latin America and the MEA (the latter should contribute with over half of total absolute growth in premium fragrances).

The rise of As consumers increasingly look for better value, acceleration in masstige beauty (particularly successful in antiagers) will continue, while companies focus on investing in more sophisticated formulations 'masstige/ Consumers will continue to trade up from mass to more specialised, but slightly more expensive brands, as well focus on as trade down from department stores to the upper end of mass to benefit companies, such as P&G and value Beiersdorf. While many are opting for lower priced brands, high quality and novelty continue to be a key factor.
The most successful brands will be those that offer something unique, but also put extra emphasis on value, while preserving the 'functional' benefits and a luxury status. The price points on certain premium products may need to come down in order to retain the mid-luxury market, as already evidenced by heavy discounting and promotional activity in the luxury arena. The interest in masstige alternatives to replace premium products will depend on the depth and length of the current recesssion. In many emerging markets, the current halt of the premiumization trend is likely to prove temporary as economies rebound.

Global Prospects

Demand for Both Natural and Scientific Beauty Set to Thrive

Key Issues The rise of cosmeceuticals Future Impact to 2013 The trend towards high-tech formulations and improved product efficacy will continue to spiral,
many consumers will opt for cheaper alternatives to cosmetic surgery procedures and salon beauty treatments. As concerns with health and ageing become increasingly prominent, medicalgrade efficacy and a doctor's seal of approval will become a key factor in purchasing decisions. At -home treatments are surging as consumers are tightening their belts. The expected rise in DIY beauty treatments and devices, now spanning across not just luxury and doctor brands, but also more mainstream masstige offerings, will herald the evolution of cosmeceuticals. There is a backlash emerging against product inefficacy and safety, that can be constraining. As the distinction between drugs and cosmetics becomes more ambiguous the formulations of cosmetics will be under closer scrutiny and products are likely to be treated as strictly as pharmaceuticals. scope for development for both cosmetic and food/dietary supplement manufacturers. However, beauty foods require strong credibility for success. Ingredient formulations in drinks and foods with beauty enhancing properties must be convincing and marketing should clearly communicate the exact benefits and efficacy of products (particularly in Europe and the US, which are still lagging behind Asia). With footfall in department stores and high-end outlets falling, distribution and pricing strategies of such products may have to be readdressed to ensure returns.

Ingestible beauty The convergence between beauty and food will maintain its momentum. This will present further

Demand for natural/organic beauty products will continue to boom, as consumers become more Demand for focused on safety and well-being, as well as more educated about product claims and labelling natural, organic While a strong industry-wide impact will not be felt in the short term, certain categories, such as products

baby care, deodorants and mineral make up have shown resilience in demand for natural product lines and look set to remain strong despite the recession. As more retailers tap into this trend and branch out into natural cosmetics distribution through more mainstream outlets is bound to increase, fuelling further demand. However, the lack of a unified global standard for natural cosmetics will continue to be a hindrance to growth and increasing consumer product awareness.

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