Frontier markets a new beauty hotspot as the BRICs cool down

Author: Diana Dodson

Date published: 2 Jul 2007

The so-called frontier markets could become the new focus for cosmetics and toiletries industry expansion as the BRIC countries show signs of economic slowdown.

The frontier markets are far smaller economies than the BRICs (Brazil, Russia, India and China) and with smaller populations they hold less potential for beauty firms looking for opportunities beyond the maturing developed countries. However, economic growth is accelerating at pace in these markets, and amid optimism that more governments will embrace capitalism they have become lures for foreign investors. The frontier markets, being less exposed to swings in the global economy, can also be a way for cosmetics firms to reduce their risk. Most importantly, they offer the multinationals new options for global expansion at a time when a question mark hangs over the future of the BRIC economies.

Brazil, Russia, India and China have become a focus for most cosmetics giants' long-term strategies, offering strong economic growth, vast populations and underdeveloped consumer markets. Brazil topped global cosmetics and toiletries growth in absolute terms over the 2001-2006 period, whilst the BRICs combined accounted for more than a third of total global growth.

Slowdown in the BRICs?

However, China's economy is at risk of overheating. The signs are already appearing and include excessive increases in money supply, banking loans and fixed-asset investment, as well as rising inflation. If not brought under control, these could end the country's economic boom. Recession in China cannot be seen in isolation either, and would impact across the global market with a drop in demand for imported goods and raw materials. Russia, Brazil and India sent a combined US$37 billion worth of exports to China in 2006.

China is not the only BRIC that may fail to live up to expectations. Brazil's economy underperformed the global average in 2005 and 2006 in real GDP growth terms and is expected to see stagnant average annual per capita disposable income over the 2006-2011 forecast period. The result will be a significant slowdown in cosmetics and toiletries growth (although it will still remain dynamic), according to Euromonitor International forecasts, and longer-term the impact is expected to be even more dramatic.

In India, while real GDP growth is strong (second only to China among the BRICs) it is off a small base and there are barriers to the country becoming an economic heavyweight. Most significantly, unemployment is high (above 9% since the late 1990s) and the majority of those employed are still locked in the unproductive and stagnating agricultural sector.

The next big thing

Even if the above scenarios do not bear out and economic prosperity in the BRIC countries continues, there may still be difficulties further down the road. As living standards rise, so too will production costs and the factors making these countries so attractive to foreign investment will diminish, undermining economic growth (although domestic demand may be enough to continue fuelling the economy).

Enter the frontier markets, of which there are 22 including Vietnam, Ukraine, Croatia, Nigeria and the resource-rich CIS countries, such as Azerbaijan and Kazakhstan. A Bloomberg survey in January 2007 found that the stock markets of these countries are already outperforming those of the BRICs, and some companies have begun pushing into their fledgling cosmetics and toiletries markets. Examples include PZ Cussons, which is targeting Nigeria, Kalina, which is pushing into Kazakhstan and other CIS nations, and Procter & Gamble and Oriflame, which are both rapidly expanding in Ukraine. Of the frontier markets, Vietnam, Ukraine and Nigeria are among those offering the greatest potential for the cosmetics and toiletries industry.

Key frontier markets

Vietnam is one of the fastest growing economies in Asia-Pacific, achieving real GDP growth of almost 8% a year between 2001 and 2006, and its accession to the World Trade Organisation in November 2006 highlights its determination to integrate into the global economy. The impact on spending power and private consumption is already being felt. The cosmetics and toiletries market enjoyed 14% growth in 2001-2006 in local currency terms, to VND7.9 trillion (US$483 million) as consumers spent more, particularly on premium brands and non-essentials. Vietnam, like India, is a youthful market, with almost half of the population aged below 25 years, and it is this group that is expected to drive the cosmetics and toiletries market to 2011.

Ukraine is a far larger prospect, with sales of around Hr12.7 billion (US$2.5 billion) in 2006, making it number three in Eastern Europe's cosmetics and toiletries market. It is also one of the region's most dynamic beauty markets. Natural ingredients and a competitive local manufacturing market are helping to propel cosmetics sales during a time of economic growth. Ukrainian GDP has been on the upswing since 2000. The market has also been benefiting from the wider availability of products and an increasingly sophisticated consumer base that is prepared to spend on expensive trade-ups, including anti-agers and skin firming creams.

The NGN27.9 billion (US$218 million) Nigerian cosmetics and toiletries market is the smallest of the three. However, the country holds strong prospects in this period of greater political stability, with real GDP growth of 5% in 2006 and forecasts showing an upward trajectory. Nigeria also has population size in its favour; at 132 million it is the largest country in the Middle East and Africa. With hair and skin care being the country's largest sectors, it holds real opportunities for expansion of the ethnic beauty market.

Migration of local BRIC firms abroad

Frontier markets with large youth populations will also be lures to manufacturers' long-term global strategies. Besides Vietnam, these include countries such as Ecuador, Bangladesh (where 58% of the population is under 25) and many of the African markets including Tunisia.

A slowdown in the BRICs may also provoke leading local manufacturers in Brazil, Russia, India and China to expand abroad. Examples include Kalina and Faberlic in Russia, Natura Cosméticos and O Boticário in Brazil and Jiangsu Longliqi in China. Indian firms such as Godrej and Dabur are already fanning out across the globe, particularly targeting other Asia-Pacific markets, Eastern Europe and the Middle East and Africa.

Diana Dodson, Cosmetics and Toiletries Senior Industry Analyst: diana.dodson@euromonitor.com