Challenge Ahead for Coty to Revive Procter & Gamble Beauty Brands
Coty’s reported acquisition of select Procter & Gamble beauty brands is set to double its market value share in global beauty in 2015; however, it will face the challenge of low or negative growth of the iconic labels in core Western markets. In order to reignite growth, Coty will need to realign its offerings with premium focus on developed markets and continue to build its portfolio with multiple price tiers in emerging markets.
Despite its global presence, Coty remains overexposed to the mature markets of Western Europe and North America, which generated a combined 72% of its 2014 value sales. With the integration of the Procter & Gamble beauty brands it is set to acquire, this ratio will change to 67%, and it will not mean a major diversification away from saturated markets.
In the visual below, taken from Euromonitor Analytics, the most significant expansion of Coty’s sales due to the enlarged brand portfolio is in the Middle East and Africa and Latin America; the company nearly triples its sales in these two dynamically growing regions. In Asia Pacific, sales nearly double, but in such a large market it still ranks outside the top 25 beauty companies.
Coty Inc Global Beauty Footprint by Region, 2014: Before and After the Integration of Select Procter & Gamble Beauty Brands
Procter & Gamble beauty brands struggling in core markets
The brands Coty is to integrate into its operations have especially weak performance in core Western European and North American markets. The treemap below shows Coty’s relative dynamic growth both in Western Europe and North America, at 3% and 4% CAGRs respectively, over the 2009-2014 review period, thanks to its predominantly premium-positioned portfolio. Prior to the bid for the Procter & Gamble labels, some 60% of Coty’s North American and 45% of its Western European retail value sales were generated by premium ranges, such as Calvin Klein, philosophy or OPI, benefitting from the more dynamic growth of premium beauty. However, with the exception of the prestige fragrances, all the other brands are mass offerings and have registered near or below zero growth over the 2009 to 2014 review period.
In emerging markets, mass price positioning was necessary to reach a wide consumer base, especially Wella in Latin America and Middle East and Africa, registering 14% and 9% CAGRs (2009-2014), respectively. Max Factor has also sustained high growth rates in emerging markets due to its price appeal and strong brand image.
Similarly, Bourjois, purchased from Chanel and following completion of the acquisition in April 2015, adds positive growth across all regions; 22% CAGR in the Middle East and Africa, also benefitting from premium product perception but mass price positioning.
As such, the set of mass positioned Procter & Gamble brands Coty is to acquire is expected to continue benefiting from their accessible pricing to a wide consumer base in emerging markets but will need new growth initiatives to revive growth in developed markets.
Coty Inc and Select Procter & Gamble Beauty Brands: Growth Performance by Region, 2009-2014
How will Coty revive the brands?
Coty’s most immediate challenge following the integration of the iconic Procter & Gamble beauty brands will need to be geographic expansion and strong innovation in core developed markets. Both in North America and Western Europe, premium beauty is forecast to outperform mass categories. Coty will need to align its portfolio to trends in premium beauty, including exclusivity, personalisation of product experience and more tailored solutions.
In emerging markets, Coty will need to continue to optimise its positions in multiple price tiers from mass to lower end of premium to premium platforms to capture a wide consumer base. For example, Latin America remains both dynamic and a large-scale opportunity for fragrances, expanding at a 4% CAGR (2014-2019) and adding US$2.5 billion in new sales during this period. Although premium fragrances is expected to be more dynamic, mass fragrances is set to add three times as much value growth, at US$1.9 billion over 2014-2019. Coty‘s new prestige fragrance brands, such as Hugo Boss, will be well-positioned to compete with leading brands like Paco Rabbane and Ralph Lauren on similarly lower-tier premium price platforms in the region. Coty’s current distribution agreements should help the Procter & Gamble prestige fragrance brands to expand their go-to-market capabilities in the region. In May 2014 Coty entered an agreement with Avon whereby select Coty fragrances are marketed and sold through Avon Brazil’s network of 1.5 million independent sales representatives. It followed the establishment of a joint venture in Brazil in 2013 with Brazilian cosmetics distributor Frajo Internacional to distribute and market Coty mass brands in retail channels. Strengthening its presence in prestige outlets will be required from Coty to capture premium opportunities in Latin American fragrances.
The continuous development of multiple price tiers across Coty’s core categories, fragrance, colour cosmetics and hair care, and the expansion of its distribution infrastructure for its premium portfolio will be essential to benefit from long-term growth prospects.