BW Confidential - Issue #1 - April 2010 - (Page 58)

Last word Looking ahead In a guest column, UBS Investment Research global consumer staples analyst Nik Modi gives his views on what’s in store for beauty in 2010 and beyond credit: istock • M&A activity for beauty in 2010 We’ve already seen a series of beauty M&A transactions take place in the past few months, with Shiseido purchasing Bare Escentuals and Alberto-Culver buying Simple Brands. With company valuations still relatively inexpensive versus peak levels, and companies looking to boost growth rates due to a sluggish consumer environment, we expect robust deal activity in 2010 centered more on larger companies making “bolt-on“ deals, as opposed to more large scale M&As. We believe skincare will be a hotbed of M&A activity with its likely higher-than-category-average growth rate over the next five years. • The BRIC markets Region-wise, we continue to see growth in Latin American beauty markets as well as developing Asia. Companies like Avon and Natura have been able to source double-digit growth even in the midst of a difficult consumer environment, due to demographic tailwinds in the region (high cultural emphasis on beauty). Procter & Gamble and Colgate have also seen strong beauty growth in this market. In Asia, particularly in China, we see strength in mass beauty as companies expand into whitespace opportunities. Russia, and Eastern Europe in general has been a bit more challenged by inflationary pressures and we have been seeing greater degrees of trade-down. However, the overall category growth rates seem to be stablizing in recent months and we expect the market to resume growth in mid 2010. 58 “ The market needs to be vigiliant of P&G’s drive to regain share—lower growth rates, pressure from retailers to rationalize assortment, and P&G’s focus on reversing share losses will likely cause dislocation in the beauty space UBS Investment Research global consumer staples analyst Nik Modi Given the intensive stock-keeping unit (sku) nature of beauty, we believe selfinduced sku rationalization should take on a greater focus globally. We believe beauty companies need to take a factbased approach (for example, consumer work) to understand which skus are interchangable in the consumer’s mind. If companies don’t weed out inefficient skus, retailers will do it for them. • Lessons from other industries ” • The evolution of retail For overall consumer products, we see retailers getting more aggressive with sku counts and optimizing product mix. We don’t expect this to drastically impact beauty, largely due to the need for variety in the skincare, haircare, and cosmetics categories. However, we’re seeing players consider new price segments and distribution channels in an effort to accelerate growth. For example, Estée Lauder is contemplating ways to selectively enter mass with some of its prestige brands through the US-based drugstore CVS’s 360 concept, and P&G is launching Fekkai Classic into the super-premium mass haircare segment. We expect to see more companies get more creative with channels and even marketing techniques in these channels. In addition, we believe online will continue to grow as a percentage of beauty’s channel mix. In fact, even during the recession, Estée Lauder was growing double-digits online. • What to watch out for The market needs to be vigiliant of P&G’s drive to regain share momentum—a combination of lower-than-historical category growth rates, mounting pressure from retailers to rationalize assortment, and P&G’s focus on reversing a two-year trend of share losses will likely cause some dislocation in the beauty space over the next 12-18 months. Companies like Alberto-Culver, L’Oréal, Beiersdorf, Henkel and even Colgate could see some direct impact as P&G looks to get aggressive in beauty/personal-care categories. n April 2010 - N°1 - BW Confidential

Table of Contents for the Digital Edition of BW Confidential - Issue #1 - April 2010

Update - Brand and retail recap
Take note - Market facts, figures and trends
Launches - The latest fragrance, skincare and make-up launches
Best of BW - Market highlights
Interview - Sephora international & development md Olivier Schaeffer
Insight: make-up - Category overview
 - Industry viewpoint
 - Trends
Wellness report - Overview
 - Industry roundtable
 - Spa case studies
Travel retail - Europe: little chance of a rebound
Market watch: Western Europe - Regional analysis
 - Germany
 - France
 - UK
 - Spain
 - Italy
Radar - Six up-and-coming beauty brands
Packaging special -  Industry analysis
 - Innovation
Last word - UBS analyst Nik Modi's outlook for 2010

BW Confidential - Issue #1 - April 2010