Beauty and Personal Care: Quarterly Statement Q4 2016

December 2016

The Forecast Model’s Q4 update reinforces the industry downgrade to US$4.4 billion, when compared to the Passport Baseline. The marginal cut points to core markets hit by spending cuts that are likely to persist over the short-term. While prospects remain robust, dynamic categories had their CAGR over 2015-2020 levelled in strength. This calls for a rethink of innovation in favour of fewer but higher-value SKUs, and greater emphasis on niche brands that typically target resilient growth pockets.

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Brazil dragging industry growth down, exacerbated by a weaker outlook in some developed markets

The Industry Forecast Model’s Q4 2016 revision underpins Brazil’s 2015-2020 growth downgrade by US$1 billion, as its GDP moves further into negative territory. In constant value terms, the BPC downgrade is equivalent to -0.7% in CAGR terms. GDP recovery and consumer confidence are expected to rebound from 2018.

Thrifty spending likely to impact discretionary categories hardest

While discretionary categories such as fragrances and skin care continue to exhibit strength, their resilience is limping as markets that fuelled growth witness lower demand. This is the case of fragrances in Brazil and Saudi Arabia, and skin care in China and the US.

Q4 growth downgrades widen mass players’ exposure as consumers cut personal care routines

Key players such as Unilever and L’Oréal are more exposed to market lapses, due to their heightened activity in terms of investment over the past decade. While their broader geographic coverage helps cushion exposure, their innovation pipeline needs to offer more segmented value-added lines to make purchases more worth spending on.

Core markets will persist as the beauty industry’s growth engines despite macroeconomic risks

China and Japan will remain notable opportunities in terms of product sophistication, innovation and value-driven solutions. However, adverse scenarios such as high public sector debts and ageing demographics pose risks to FMCG as lower overall disposable incomes will eventually feed into demand for consumer goods. Meanwhile, India is forecast to fuel growth dynamism, ripe for industry players seeking fresh revenue sources, stemming from greater demand for discretionary items, even if within the mass segment.

Amid lacklustre industry growth, major players are adopting strategies aimed at competing on quality

Acquisition activity points to a growing strive for high value, low volume ventures in the beauty industry. Estée Lauder and Unilever now boast a greater share of high equity niche brands in their portfolios, to target resilient growth pockets and bolster revenue prospects. P&G has divested several premium brands, but its recent streamlining activity suggests it is in pursuit of maximising revenues from fewer but more impactful SKUs.

Key findings
Executive Summary
GDP Forecasts – Revisions Over Last Quarter

Forecast Update

Shaky growth forecasts persist in core beauty markets
Brazil hit by US$1 billion growth downgrade; US withers
Skin care downgrade rises as Western market projections flatten
Consumer rationing flags size of the prize of non-staple categories
Volume analysis reveal downgrade correlates to spending curbs
US prospects slightly down as consumers spend more rationally
Japan’s adverse demographics call for targeted growth avenues
China remains bastion of growth but high debt escalates risk
India a diamond in the rough as beauty industry outlook is bright
Mass players’ exposure up in Q4 forecast downgrades

Industry Developments

Revenue-secure high-end and local brands fuelling M&A activity
Unilever in pursuit of high-yield ventures in developed markets
Beauty players seizing opportunities in robust growth markets
Niche reprisal hitting Estée Lauder blockbuster brands?
Mac needs reinvention
Estée Lauder needs to spotlight its niche portfolio to win in the US
P&G’s divestments grant more resources to its power brands
Beauty industry to thrive but growth cuts call for adapted product mix

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