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Health and Beauty We examine the trends underlying the growth of the global marketplace in health, beauty and hygiene. Our analysts will point the way forward by highlighting critical innovations and behaviours that are driving industry evolution.

First-Half 2013 Results Show a Streamlined Beauty Portfolio to be More Favourable to Growth

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First-half results in 2013 increasingly reveal that manufacturers with a more streamlined beauty focus are better placed to benefit from growth potential in the beauty industry. The market is witnessing an increasing level of specialisation as manufacturers drive growth on the basis of scientific and targeted product developments. This is now becoming the norm and manufacturers with a streamlined focus on beauty are able to dedicate more resources to R&D and product development than those with a cross-market presence and whose resources are spread across different categories.

Companies with an exclusive beauty focus better placed to drive growth

On a comparable platform (using a 2013 euro to dollar exchange rate to measure growth for the first half of 2012 and 2013 for the equivalent beauty and personal care categories), L’Oréal’s growth rate of 5% was above that of Procter & Gamble, Unilever, Beiersdorf, Colgate-Palmolive and Estée Lauder. L’Oréal is increasingly aligning its products with science, claiming to have the highest R&D budget in the industry, at over €800 million. It claims to have developed 130 molecules over the past 40 years, putting it ahead of its competitors in terms of patenting active ingredients. L’Oréal’s exclusive focus on beauty enables it to dedicate all its resources to R&D, thus making impressive strides in product development, which have worked in the company’s favour as consumer demand is being driven by product sophistication.

Similarly, Estée Lauder and Colgate-Palmolive have also performed well, posting respective growth rates of 4% and 2%, with both investing in product development and regional expansion to help buck recessionary trends, although Colgate-Palmolive has suffered partly from macro-economic volatility in Latin America in 2013. A streamlined beauty focus should not however be misunderstood as a narrow beauty focus, which could also pose a threat. For example, Beiersdorf has been heavily focused on skin care in Western Europe, which limited its resources for R&D and product development to compete with the likes of L’Oréal. Consequently, Beiersdorf has for a while suffered from stunted growth, but has aptly decided to expand in categories such as deodorants and bath and shower, in which it can leverage its skin care expertise. This has worked well for the company, helping to drive value share growth in deodorants.

Market increasingly difficult for manufacturers with a cross-industry presence

Procter & Gamble and Unilever, on the other hand, have a wide-ranging cross-market presence, from home care to beauty and personal care. Procter & Gamble’s performance in the first half of 2013 was the least encouraging, at -1%, with the company finding itself in an awkward position as a new wave of changes sweep across the beauty industry. Procter & Gamble’s portfolio has been traditionally skewed towards the premium segment (particularly in home care but also in any market in which it is present) and consequently, at the onset of the recession, it had limited options to retain consumers at a time when they were trading down. This triggered a string of problems, starting with shrinking revenues and operating margins limiting its resources for R&D, particularly at a time when growth was increasingly being driven by product sophistication. Subsequently, Procter & Gamble embarked on a restructuring programme, which has been bearing fruit - in fact, Procter & Gamble was the only company in the group to show an improvement on its first-half 2012 results, with growth up from -2% in 2012 to -1% in 2013. The key issue, however, is that its beauty growth rate is still negative and Olay and Pantene continue to perform below expectations. The restructuring programme can help generate more resources for Procter & Gamble but can it match L’Oréal in terms of R&D investment given that it also needs to allocate resources to a number of other industries?

Unlike Procter & Gamble, Unilever, however, reported 3% growth in personal care, although it is present in mass categories such as bath and shower, deodorants and oral care, which have traditionally been less driven by product sophistication. Unilever’s strategy has been to consolidate its global operations and roll out existing brands in new markets, while its innovation pipeline has been relatively slow. This has worked well so far, but the question going forward is whether it can sustain this growth. Unilever faces competitive threats from the likes of Beiersdorf and Colgate-Palmolive, which are targeting specific commodity categories to drive growth through product sophistication. To retain its market share, relying solely on existing products to roll out in new markets may no longer suffice and Unilever will need to dedicate further resources to R&D. Whether this warrants any future divestments on Unilever’s part so as to achieve a more streamlined portfolio remains to be seen.

Future growth prospects

The outlook for the industry in 2013 is less optimistic, as per the companies’ full-year guidelines. The growth rate for combined sales of the above-mentioned companies in the first half of 2013 was down to 3% from 7% in 2012. A proportion of growth in the first half of 2012 was driven by mergers and acquisitions, but also emerging markets, which are now slowing, while Western markets continue to remain volatile. In the face of growing macro-economic challenges, the need for products which promise more has become increasingly important, and this will require greater investment in R&D and marketing. To this end, a streamlined beauty focus will prove beneficial.

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