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By: Oru Mohiuddin

It is speculated that Procter & Gamble is planning to divest Wella as part of its strategy to streamline its portfolio, but who stands to gain from acquiring it? And would Procter & Gamble even deign to sell Wella to that company? Based on Euromonitor International’s Competitor Analytics system Kao Corp appears to be the best strategic fit. While Kao poses a minimal overall competitive threat to Procter & Gamble, Kao also stands to benefit on several counts. These are illustrated below with the help of images from Euromonitor Competitor Analytics.

1. Kao’s share losses in global hair care impacting overall beauty position

Globally, Kao’s share in beauty declined in 2012 and 2013, partly driven by a loss in share in global hair care.  The importance of hair care to the company’s global beauty performance can be better illustrated with the help of the visual below. According to the chart, hair care is Kao’s second leading beauty portfolio and overall hair care sales are stagnating, to the detriment of the company’s overall BPC performance. Given the relative importance of hair care to Kao’s overall beauty performance, it is important that the company addresses weaknesses in markets contributing to negative hair care performance globally. The loss in global hair care share has been predominantly driven by negative sales growth in Japan, which comprises approximately 50% of Kao’s global hair care sales. Between 2008 and 2013, Kao’s hair care growth in Japan fell by more than 5%, but it is not just Japan which has been solely responsible for the negative hair care performance at the global level. In Germany, the company’s third leading hair care market, the company recorded negative growth of 1% during the same period.  Hair care growth in its second leading market, the US, was positive, but it was not enough to compensate for the loss in its two other leading markets.

Kao1

2. Relative weight and impact of key markets on global hair care 

The relative weight of the US to Japan and Germany becomes clearer when illustrated with the help of the treemap chart below, which shows the relative positioning and weight of Kao’s individual hair care markets around the world. The sizes of the boxes are proportionate to country sales and the growth is denoted by colour variants.  Green represents positive sales growth, while red represents sales declines. The different shades indicate magnitude of growth – the darker the shade the stronger the rate of increase or decrease. From the chart below, we quickly see that Japan, US and Germany, combined account for two-thirds of Kao’s overall hair care sales. Moreover, the relative strength of Japan and Germany combined contributed greatly to the company’s global sales decline in hair care, while the US, despite the positive growth, was not big enough to offset losses in these two markets.

Kao2

3. Wella can help boost growth in key markets

Wella can provide Kao with a much needed boost in all its key hair care markets. Japan, Germany and the US also form the leading markets for Wella. It is through these common markets that Wella can provide Kao with necessary growth impetus and significant acquisition synergies.

Wella1

The chart below is inspired by the overlap matrices in Competitor Analytics, and illustrates Kao and Wella’s market shares both individually and combined for total hair care and each category therein. The grey boxes indicate where one or both companies is absent from a given market.

Wella2

Based on this matrix view, the key areas in which Kao can be expected to benefit from the acquisition are:

  • Kao has presence across all hair care categories in Germany with the exception of colourants. Through Wella, Kao can establish itself in Germany’s colourants with a 4% value share. This would make it the sixth biggest brand.
  • Kao currently has a small presence in German styling agents with a 3% value share. By acquiring Wella, it will become the third leading player with a value share of 15%.
  • In Japanese colourants, acquiring Wella will give Kao a 20% value share, up from 15% currently.
  • The only hair care category in which Kao lost share in the US in 2013 is styling agents. Meanwhile, Wella’s only presence in US hair care is in styling agents. Wella will not only help to boost Kao’s presence in styling agents, but the brand’s growing share also forms a strong incentive.

4. Kao poses least threat for Procter & Gamble

Divesting Wella to Kao makes good business sense for Procter & Gamble as well, since Kao poses one of the smallest threats amongst all its competitors. The following chart shows the rate at which Procter & Gamble’s top 15 competitors are closing in on the company across global beauty categories. The vertical axis shows overlapping category sales over a period of time (in this case 2008-2013) and the horizontal axis shows overall sales over the same period for each of the companies listed. L’Oréal and Unilever are Procter & Gamble’s closest competitors in beauty and are rapidly encroaching on Procter & Gamble’s market space in global beauty and personal care. Therefore, by divesting Wella to either of them, Procter & Gamble would be increasing competitive pressure on itself. Moreover, Unilever has been expanding its presence in hair care globally, facilitated by its acquisition of Alberto Culver in 2011. Following the acquisition, Unilever’s competitive pressure on Procter & Gamble has increased significantly, particularly in the US. This is Procter & Gamble’s second largest hair care market and a market where it has been losing share since 2009. Wella would strengthen Unilever’s position even more in the US at the expense of Procter & Gamble. On the other hand, Kao is Procter & Gamble’s ninth leading competitor and poses much less of a threat both globally and in the US specifically.

Kao3

Conclusion

In conclusion, Procter & Gamble selling off Wella to Kao seems to be a win-win situation for both companies. This arrangement appears to be the best strategic fit for both Procter & Gamble and Kao in terms of their respective competitive position. Moreover, given that hair care is a significant part of Kao’s overall beauty portfolio, it is important that Kao pays close attention to it to both boost its category performance and reinforce its overall position in the global beauty market.

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