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June 12, 2013

Diluted Market Focus Affects Coty’s Performance


Oru Mohiuddin, Senior Home and Personal Care Analyst, Euromonitor International

In light of its impending IPO, Coty’s performance makes for an interesting analysis. Coty’s value share in the global beauty and personal care market fell by 10 basis points in 2012, mainly due to it losing ground in some of its key categories, a factor which can be attributed to a relatively slow innovation pipeline. Between 2009 and 2010, Coty embarked on an ambitious growth programme through acquisitions, exposing the company to various different markets and categories. The process of becoming familiarised with a variety of new markets which have their own dynamics and challenges while engaging in a multifaceted complex integration process diverted Coty’s attention away from much-needed product development and marketing in a very fast-paced market environment, resulting in an overall loss in share.

Market focus too wide

Skin care is projected to account for a 25% share of absolute growth in the beauty and personal care industry over 2012-2017, this being the highest contribution of any beauty category, driven by China with around a 45% share of this. Coty in principle was on the right track, aiming to diversify in the lucrative skin care category, including in China, although there is limited brand synergy between Philosophy and Tjoy, the two skin care brands Coty acquired. While Philosophy is positioned in the premium segment of a developed market, namely the US, Tjoy is positioned in the mass segment of an emerging market, China. These segments have different dynamics and hence require separate product development and marketing strategies. By placing itself in two diametrically opposite markets, Coty’s focus was too diluted to concentrate on any one segment in much depth. Although the company’s global share in skin care remained static at 0.3%, this reveals that the company was unable to use these brands to their maximum potential.

China proves challenging

China is a market with unique challenges requiring a different operational structure to that of developed markets, indicating the need for a more exclusive focus. Some of Coty’s predecessors, including L’Oréal and Beiersdorf, have also faced difficulties while developing their operations in China. Coty’s challenges were made more complex by the departure of some key personnel at Tjoy soon after the acquisition, adding to the difficulty of drawing up an effective growth plan. At the time of Tjoy’s acquisition, Coty stated that it intended to expand Rimmel in China by using Tjoy’s distribution channel, but this has yet to materialise. Instead, Coty decided to place Tjoy in a higher price segment, a move which, however, was not accompanied by the necessary product development, thus causing the brand to lose 10 basis points in skin care in China in 2012.

Slow innovation pipeline and falling market share

Coty’s innovation pipeline has been less dynamic than that of its competitors, a fact that can be attributed to the company’s diluted growth focus, eventually leading to a loss in share in some of its key categories. In fragrances, Coty’s leading portfolio, its global share declined from 8.6% in 2011 to 8.4% in 2012, with Calvin Klein losing share to Chanel in the US. Coty also lost share in nail products, its largest colour cosmetics category. Sally Hansen, Coty’s most significant nail care brand, lost share in North America, falling from 34% to 31%, although OPI’s share remained static at 5%. This does not compare well with L’Oréal’s nail care brand Essie, whose share rose from 5% in 2011 to over 7% in 2012. In the US, Philosophy was unable to match the ‘wow’ factor of rival brands, including Lancôme’s Génifique and Clinique’s Even Better Clinical Dark Spot Corrector, with its share remaining static at 0.6% since its acquisition in 2009.

The right course of action

Coty’s growth strategies have, in principle, been prudent, with the company aiming to increase its exposure to fast growing emerging markets and categories. The acquisitions to gain access to these markets, however, were made in quick succession, which not only diluted the company’s focus but also diverted resources away from much-needed product development as Coty invested in a complex integration process involving diverse business structures across the world and across categories simultaneously. Its more recent business moves, which include establishing greater control over the distribution process through the acquisition of StarAsia in Southeast Asia and the creation of a company to partner Frajo in Brazil, are likely to deliver better results. These entities are simply distributors. This will help Coty gain greater control over how its brands achieve deeper market penetration, while making fewer demands on its resources in comparison to its other acquisitions.

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Interesting insight - thanks Oru!

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