Emerging Markets Still Hold Promise for Beauty

August 24th, 2012

CA1_BlogAnalyst Insight by Rob Walker, Senior FMCG
Analyst at Euromonitor International

The global beauty
and personal care industry
generated some US$21 billion of incremental retail
value in 2011, of which the emerging markets fuelled a whopping 81%, according to
the latest data from Euromonitor International. Click to Tweet!  But, as the world's economy
teeters on the edge of a new downturn, triggered by debt crisis in the
EuroZone, can the industry continue to count on consumers in emerging markets
to offset lacklustre demand in Europe and North America?

Emerging markets
have been a silver lining of growth since the 2008 financial crisis

There is an overriding sense of unease surrounding
the global consumer goods market at the moment as international investors and
multinational companies alike get jittery about the prospect of a global
recession, and in particular its effect on fast-growing emerging markets.

The primary concern is that an economic slowdown in
could prove more damaging than the 2008 financial crisis, firstly because emerging Asia – and China in particular –
looks more exposed than four years ago, and secondly because high commodity
prices are applying upward pressure on inflation almost everywhere in the
world. As a result, even if the emerging
markets continue to post upbeat GDP
growth, their consumers are unlikely to feel as insulated as in 2008.

Since 2008, emerging
markets have been essential ballast to
the weakness of developed markets.
Total beauty and personal care spending
is still higher in developed markets, at around US$226 billion in 2011
compared to US$177 billion, but growth in the emerging
markets was 10 times stronger over the
2008-2011 period, according to Euromonitor International.

That emerging
market growth translated into an incremental retail value of US$46 billion
compared to US$7 billion in developed markets.
It would be fair to say that in the post-Lehman Brothers global operating
environment, consumers in emerging markets have thrown the beauty and personal care industry a lifeline
of new business.

Exposure to China and Brazil
is key

The exposure of leading multinational beauty and personal care companies to emerging markets
varies widely, ranging from 74% of global retail sales in the case of Avon to
30% in the case of L'Oréal, according to data from Euromonitor International.
The key question is which of these players will be most insulated from a
possible global economic slowdown.

L'Oréal's comparatively weak exposure to emerging markets
has been, arguably, its biggest strategic weakness since 2008. But, with the emerging markets
looking more vulnerable to contagion than four years ago, could L'Oréal's lower
exposure be viewed as a strategic strength in 2012?

The most unpredictable emerging market region is the Middle East and Africa, but none
of the leading players are heavily positioned there and ought to be able to
absorb any short to medium term sales slowdown. By far the most significant
exposure is in Latin America and emerging
Asia, fuelled by Brazil and China, the two fastest growing beauty and personal care markets in the world since 2008, based on
incremental value. Were demand in either of those markets
to slow significantly, there would be negative reverberations for a raft of
companies, notably Unilever, Avon and Colgate-Palmolive.

Spreading emerging market risk will be increasingly

In the third quarter of 2011, China's economy grew
year-on-year by 9.1%, down from 9.5% in the second quarter but still a powerhouse performance. And even if
economic growth continues to slow in 2012, pushed down by slower export demand
from Europe, it would need to fall a long way before having any major downside
impact on domestic demand, which is booming in the coastal regions and
spreading inland too.

Brazil could be more vulnerable than China to a
European recession. Indeed, the country's President, Dilma Rousseff, has been
warning of tougher times ahead. And the latest figures seem to bear this out,
with the economy contracting marginally in the third quarter. However, Brazil
has a strong banking sector, substantial international reserves and, crucially,
consumers that are fundamentally spenders rather than savers.

All things considered, exposure to China, Brazil
and other first-tier emerging markets should continue to yield a positive
rather than a negative influence on the balance sheets of beauty and personal care companies in 2012.
Growth might well be weaker than in 2011, but strong BRIC positions will
continue to be a central factor in how well a company performs globally.

Emerging market growth is not all
about the BRICs, however. In 2011, those four countries fuelled collectively
some 54% of incremental beauty and
personal care growth in the emerging markets, but that still left second and third-tier emerging
markets accounting for an incremental
growth value of some US$8 billion. Of those, key growth markets included Mexico, Argentina, Indonesia, Thailand and
Turkey, according to data from Euromonitor International.

Going forward, beauty
and personal care companies ought to look at strengthening their positions
across a broad range of second-tier emerging
markets, not least to dilute some of
their growth dependency on the BRICs. Some of these second-tier emerging markets
carry significant investment risk. But, as the global economy tilts toward a
potentially protracted downturn, risk is central to strategic planning if
companies with a global outlook are to keep their bottom lines looking healthy. 

Have a question or a thought to add? Leave us a comment below.

Lydia Gordon

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