Cosmetics Industry

Read through my extensive research report for the Cosmetic Industry and how the market is changing and the opportunities for cosmetics brands in 2010. A big thank you to Ram Veluchamy for helping us with this extensive report!

1. Introduction

Cosmetic definition:

The 1976 cosmetic directive defines a cosmetic product as any “any substance or preparation intended to be placed in contact with various external parts of the human body, or with the teeth and the mucous membranes of the oral cavity, with the purpose of cleaning them, perfuming them, changing their appearance and/or correcting body odours and /or protecting them or keeping them in good condition”.

Cosmetics:

Colour cosmetic products were primarily designed for personal adornment, but many industries claim their products to have scientific benefits like reversing or delaying signs of ageing. These cosmetics are clinical strength skincare products that claim to make a visible change to the skin, removing blemishes, spider veins, lifting wrinkles etc.

Decorative Cosmetic products can be classified into:

• Facial make-up
• Eye make-up
• Lip products
• Nail products

2. Demographics:

When compared to other European companies, the UK has an ageing population in which the average age in mid 2006 was 39 years compared to 34.1 in the year 1971. Approximately, one in every five people in the UK was aged under 16 in mid 2006, and one in every six people were aged 65 or over. Although it is an undeniable fact that younger women tend to ot only do these sites offer products for sale, but some also offer consultations with experts, advice and gossip. This combines a shopping trip to a beauty shop with reading an online `magazine’. Examples include www.cult-beauty.com and www.beautique.com.use cosmetics, older women who have used cosmetic products in their young age are unlikely to stop using them due to the maturity in their skin. In fact, older women may have more disposable income to spend on premium –priced products, especially on those products that claim to have medical or pharmaceutical benefits.

Another demographic feature of the UK is the growing percentage of ethnic minorities, According to the National Census 2001, 7.9% of the UK population was from a non-white ethnic group, the largest of these groups being Indian. The percentage by 2007 was more likely to increase to 10%. Non-ethnic groups are projected to represent 12% of the UK population by 2011. According to a study by Weber Shandwick Worldwide, in the UK ethnic groups aged between 18 and 35, 71% of black people and 67% of Indian communities believed consumer brands used ethnic faces in advertising as a token gesture (Marketing week).

Product availability is also limited and largely confined to areas with a high ethnic             population. (45% of non-whites lived in London at the time of the 2001 Census.) According       to Marketing Week, mainstream retailers such as Boots are reluctant to dedicate much shelf          space to ethnic lines and manufacturers are unwilling to invest in developing new products.

3. Industry Background

The mass cosmetics industry officially emerged in the year 1950s with vibrant multi colour head. Form then the penetration level of the cosmetics industry has always been higher till now. The use of advent synthetic cosmetics caused the industry to be more chemical based and popular among consumers in beauty salons. The recent hype of decorative cosmetics products among consumers has not differentiated the small from the multinational companies. However it appears that the range of products produced by these companies has attracted both young and old crowd potentially. As the young crowd shows more interest in colours, price and brand they purchase, the older people are more interested in ageing and clear skin effects to maintain a youthful effect and image. The cosmetics products varied from the year the cosmetics industry have emerged. But the companies such as NO7, L’Oreal, Dove, Body shop and others strive their best to keep the products in the market by investing potential amount for new product development, R&D , packing and advertising.

Latter in 1970, the industry became subtle and sales rate was diminishing because the cosmetics industry was closely scrutinised by the environmentalist and animal rights commission. Over the period the cosmetic industry regained it authentication, hence the amendments were dissolved and a new set of laws was passed. According to the Cosmetic Product (Safety) Regulations of 1996 in UK, the products should not “cause harm to human health, and each product must undergo a safety assessment prior to being placed on the market” Keynote (2008). However, now the industry is now daunted with health scares relating to its products due to chemical bonds used in the products and many more consumers are turning eco-friendly. Hence many consumers have started perceiving natural and handmade products.

4. Manufacturers and Retailers

The keynote 2008 denotes that there are more than 250 manufacturers and 695 retailers in the UK who manufactures and sells cosmetics at retail stores. In many case it appears that premium cosmetics are often subjected to selective distribution and confined to limited manufacturers and retailers. For example, Selective Beauty SAS manufactures distributes cosmetics via a global network. In June 2007, the company announced an exclusive 10-year licensing agreement with the shoes and accessories brand Jimmy Choo. Apart from these selective retailers and manufacturers, we also have high street stores, department stores, supermarkets and direct selling cosmetics at varied price and options.

4.1. High Street Stores

High street stores such as Boots, Super drugs and Body shop sells cosmetics at a large scale to their consumers at varied level. Each of the stores had its unique style and varied cosmetics options for their customers. Most often they sell their cosmetics through both company-owned and franchise.

4.2. Department stores

Department stores selling cosmetics include Debenhams, the House of Fraser group, Harrods, Harvey Nichols, Selfridges and the John Lewis Partnership. The above mentioned stores sell their cosmetics at a premium range where consumers are given an option to purchase their cosmetics and toiletries of all cosmetic which include Mac, L’Oreal, Barbara Daly and others under one head.

4.3. Supermarket

As a part of the cosmetic market, the supermarkets such as Waitrose, Tesco and ASDA and others are increasingly intruding on the cosmetics market legitimately. These stores avoid selling the big name beauty brands due to high price range, since this could conflict their own brand image (although larger Tesco stores also offer staffed beauty counters selling discounted premium brands such as Clarins and Vichy). However, chains such as ASDA, Tesco, Waitrose and Sainsbury’s stock their own exclusive ranges at reasonable prices.

4.4. Direct Selling

Cosmetics and toiletries that are popular, and with high level of brand awareness, sell their products through specialist websites, for e.g. Mac.com. Subsequently, these websites are often interfaced which other networking sites such as Face book and Twitters. Not only do these sites offer products for sale, but some also offer consultations with experts, advice and gossip at a discount rate. This combines a shopping trip to a beauty shop with reading an online `magazine’. Examples include www.cult-beauty.com and www.beautique.com.

5. Market Size for Decorative Cosmetics Sector:

As previously noted the decorative cosmetics can be further dived into sub sectors and they are: Facial make-up, Eye make-up, Lip products and Nail products. The key note market report denotes that the cosmetics industry in the UK was worth 1.03 pounds in 2007, and now the cosmetics industry has increased in the value by 9.6% from the previous year.

Table: Total UK Market for Cosmetics by Sector by Value at Current Prices (£m at rsp), 2004-2007

Source: Keynote 2008

5.1. Facial Make-Up

Face make-up holds the largest value of share among the decorative cosmetics ranges; it has increases from 40% in 2006 to 42 % in 2007 over all. Although the growth rate was modest in this sub sector, however the growth rate was at constant increase. The growth in facial cosmetics continues to be driven by innovations in formulations and constant customer support, particularly those promising anti-ageing properties and facial moisturisers has brought revolutionary changes in the cosmetics sectors. The acute distinction between the premium and mass-market facial care is often determined by its nature of the product. The majority of the value of retail sales comes from products perceived as premium or sub-standard by their price, brand image, promotion and method of distribution.

5.2. Eye Make-Up

Eye make-up includes mascaras, eye shadows, pencils, kohls, and eye shades. The sales of eye make –up products accounted for 30.1% in 2007, having increased in value by 1.4% from the previous year. Mascara is the largest subsector in the eye- make-up cosmetics, the sale in which accounts more than half of the value of retail sales of eye make-up.

5.3. Lip Products

Lip Products includes lipsticks, glosses and lip shades, etc. The retails sales accounted for plus 22.5% of the value of total sales of decorative cosmetics in 2007. The retail sales value of lip products had increased since 2006, however, the growth of lip products was at a slower rate than other categories of decorative cosmetics such as face and eye make-ups. However, they do contribute a smaller percentage to the total.

5.4. Nail Products

The retail sales of nail products accounted for 6.4% this year alone, of the total decorative cosmetics sector. The retail sales of nail products were valued at £66m in 2007, having increased in value by 1.5% since the year before. Although such growth was un-assuming compared with other product subsectors of decorative cosmetics in spite of its varied options on the products alone, it was nevertheless an improvement on 2006, when the sales volume had declined from the previous year. This product subsector regularly suffers adverse publicity due to health hazards from ingredients commonly found in nail polish and polish remover, which may affect volume sales and individual’s health. However the consumers are not sceptical about these issues regardless of its complaints.

6. Marketing Expenditure (Advertising):

6.1. Mass Market Cosmetics:

6.1.1 Cosmetic Ranges:

Main media advertising expenditure on mass-market cosmetics ranges amounted to around £3.5m in the 12 months ending 30th September 2007, up from just over £1.8m in the 12 months ending 30th September 2006. Maybelline products were supported by the greatest expenditure, accounting for 22.6% of the total in the subsector. As is the case in all product categories, it is quite possible that sub-threshold expenditure included further spending by the brands named in the table.

6.1.2 Eye Make-Up:

Main media advertising expenditure on mass-market eye make-up was significantly increased from £13.5m in the year ending 30th September 2006 to £16.9m in 2006/2007. L’Oréal, Max Factor, Maybelline and Rimmel were the biggest spenders, together accounting for almost three-quarters (72.5%) of total expenditure in the sector — with Max Factor’s Masterpiece Mascara alone accounting for 23.7%.

6.1.3 Facial Make-Up:

Main media advertising expenditure on mass-market facial make-up increased from the £9m spent during the year to 30th September 2006 to £12.6m in 2006/2007. L’Oréal, Max Factor, Rimmel and Maybelline were the biggest spenders in the product sector, together accounting for 90.2% of the total. Single mass-market facial make-up products receiving the most main media advertising expenditure were Max Factor’s Age Renew Foundation (almost £1.8m), Rimmel’s Cool Matte Mousse Foundation (£1.3m), Maybelline’s Dream Matte Mousse (£1.5m) and L’Oréal’s True Match (£1.7m).

6.1.4 Lip Products:

Main media advertising expenditure on mass-market lip products rose from £10m in the year ending 30th September 2006 to £12.1m in 2006/2007. The biggest single spenders were L’Oréal, Maybelline and Max Factor, while Avon increased its spending to above threshold level, at £1.4m. The individual product supported by the greatest investment in advertising was Max Factor’s Lipfinity, at just under £2.2m.

6.1.5 Nail Products:

Main media advertising expenditure on nail products was significantly higher in the year ending 30th September 2007 than had been the case in the previous year (when it was £1.3m). Bourjois and Rimmel between them were responsible for nearly three-quarters (74.9%) of total expenditure in the category on just two variants (1 Seconde Nail Enamel and Wear Maxx Nail Varnish, respectively) and Rimmel spent a further £113,000 on promotion of its 60 Seconds Vinyl Shine Nail Polish.

6.2. Premium Cosmetics

6.2.1 Cosmetics Ranges:

The following table groups together the two NMR categories of premium beauty co/op and premium cosmetic colour ranges. Main media advertising expenditure on these was £6.1m in total in the 12 months to the end of September 2007, considerably increased from the £3.4m seen in the comparable period of 2005/2006. Estée Lauder and Clinique were the biggest spenders in the latter period, together accounting for 43.9% of total expenditure in the category.

6.2.2 Eye Make-Up:

Main media advertising expenditure on premium eye make-up in the year ending 30th September 2007, at £1.4m, was unchanged from the previous year. Estée Lauder was the biggest spender in 2006/2007, accounting for 47.3% of the total.

6.2.3 Facial Make-Up:

At £2.8m, main media advertising expenditure on premium facial make-up for the year ending 30th September 2007 was considerably reduced from the £3.5m spent in the comparable period of 2005/2006. The biggest spenders, Estée Lauder, Clinique and Lancôme, together accounted for more than half (57.8%) the main media advertising expenditure in the category in 2006/2007.

6.2.4 Lip Products:

Main media advertising expenditure on premium lip products in the 12 months to 30th September 2007 was, at £2.5m, much the same as in the preceding year. Lancôme remained the biggest spender, increasing its budget from £569,000 to £784,000 in the latter period. However, it was Chanel’s Rouge Allure Lipstick that was the single product promoted to the greatest extent.

7. Strengths, Weaknesses, Opportunities and Threats

7.1. STRENGTHS

• There is a high brand loyalty but a willingness to try new products.
• The leading competitors are huge multinationals with the necessary resources to spend on research, development and advertising.
• Older women retain a pride in their appearance, and men and younger children are also more interested in fashion, cosmetics and fragrances than in the past, thus expanding the potential market.
• The UK has a growing population and an ageing one that tends to have the resources to spend on expensive products.
• The wearing of premium cosmetics, particularly those bearing the names of international fashion houses, has an indulgent feel and, like other luxury consumer goods, part of their attraction lies in high prices and exclusivity.
• Products are indisputably glamorous and can be packaged, displayed, advertised and marketed in such a way to exploit this.
• Products are available in many outlets; the choice is extensive and the price range is also wide.

7.2. WEAKNESSES

• Competition is fierce in both manufacturing and retailing in both the premium and mass markets.
• Sales are seasonal to a great extent, as they tend to be centred on Christmas, Valentine’s Day and Mother’s Day.
• Considerable investment is necessary to bring new products to the market and to maintain their high profile.
• The failure rate of new cosmetic products is high in such a competitive market.
• The safety and efficacy of products is constantly under scrutiny and must comply with increasingly high standards.
• The price and availability of raw materials can fluctuate. For example, severe flooding in Malaysia in November 2007 could affect the supply of palm oil used widely in personal care products.
• Products are non-essential and expenditure is discretionary to a great extent.
• Products can fall quickly out of vogue in a fashion-led market.

7.3. OPPORTUNITIES

• Manufacturers are increasingly looking to the emerging markets of Brazil, Russia, India, Mexico and the People’s Republic of China (PRC) for expansion plans. Eastern Europe is also seen as having considerable potential.
• There is an opportunity to significantly increase the retail sales value of mass-market ethnic cosmetics, with more investment in advertising and marketing and new product innovation.
• There is seemingly no end to the number of `celebrities’ endorsing fragrances such products have proved to be particularly popular, as many consumers seek to buy into the glamour of fame.
• It is a lucrative sideline for fashion houses to extend their brands into premium cosmetics.
• New formulations incorporating anti-ageing ingredients are in great demand by the UK’s ageing population, who prove willing to pay premium prices.
• Manufacturers and retailers alike are increasingly jumping onto the `green bandwagon’, by introducing organic and natural-ingredient products.

7.4. THREATS

• Premium cosmetics are a prime target for counterfeiters. Companies spend considerable sums protecting their upmarket brands.
• The growing involvement of grocery chains in non-food sectors is continuing to exert downward pressure on prices of mass-market cosmetics.
• Scare stories regularly appear in the media about side effects of cosmetic ingredients.
• Discounting premium cosmetics can damage the very exclusivity and image that the consumer is buying into.
• Young consumers are generally the biggest users of cosmetics; thus an ageing population may prove disadvantageous.

8. Future Forecasts:

Forecasts (2008-2012):

The value of retail sales of cosmetics and fragrances is anticipated to grow at a fairly modest rate, after a spurt of growth in 2007. The market is one of maturity and competitiveness, where vast sums must be invested to maintain an existing product’s profile and popularity, and in launching new products, the failure rate of which is high.

Positive growth factors include: an increasing population; a willingness of an ageing population to spend on premium-priced products claiming anti-ageing properties; and the growing interest that many people have in `green’ and organic products.

However, factors having a negative effect on the value of retail sales of cosmetics and fragrances include the growing involvement of supermarkets and online discounters in this market, not only because they keep prices down but also because their involvement threatens the very exclusivity that is such an important factor at the luxury end of the market. Householders have been hit by recent rises in interest rates and increased household bills, particularly energy and transport costs, and are likely to be cutting back on spending, particularly on products at the luxury end of the market.