BW Confidential - Issue #2 - May/June 2010 - (Page 58)

Last word What’s next? In our guest column, Morning Star equity analyst Erin Swanson gives her views on how the market is shaping up and what beauty players need to watch out for credit: istock • Main growth opportunities Skincare products should continue to be a bright spot and beauty firms are positioning themselves to capitalize on this. Avon, recently acquired Liz Earle Beauty, a UK skincare company, to expand its presence in this space. Faster-growing emerging markets should also offer opportunities. Estée Lauder’s fiscal 2009 sales in China increased almost 30% year over year and it recently launched Origins there it to ensure that this growth continues. • Pricing in beauty Trading consumers up to higher-prices will likely take a back seat to brand retention over the next years. It’s cheaper to keep an existing customer than to try to re-acquire one that leaves a brand. A large number of brand “defections” over the past year were due to price, so I doubt there’s much of an appetite to push consumers to higher prices. Because many consumers equate value with price, more lower priced items are likely, as are packaging changes to better address the price/value proposition. In terms of consumer trade down, beauty isn’t as susceptible to private-label competition, as other consumer items, because R&D investments make them less easily imitated. At the same time, there is a willingness to trade down from department store to mass-market offerings because the quality at mass has improved dramatically over the years. P&G’s new Olay Pro-X commands a top mass-market price at $50, but this is still below most department store offerings. As a result the product has been successful, achieving 5% all-outlet value share (excluding Wal-Mart) in its first three months on the market. 58 opportunities in emerging markets given the lack of infrastructure for sales there. While Avon generates 80% of its sales outside North America, including more than half of revenue from Latin America and Asia Pacific, further expansion there is possible given the growing middle-class. “ When consumers are even more selective in their purchase decisions you cannot afford to cede ground from an advertising standpoint Morning Star equity analyst Erin Swanson • Development of distribution Distribution will shift from traditional channels, like department stores, to pharmacies, mass merchandise stores, club stores, and online. Consumers are experimenting with where they buy beauty, and again, the quality of the offering has improved outside the traditional channels. You now have pharmacies with beauty sections that rival department stores. This shift could particularly impact Estée Lauder, which generates more than half of its sales from traditional channels. From what we’ve seen though, Lauder is adapting its distribution. Avon’s direct-toconsumer model can take advantage of ” Over the past 10 years, beauty companies have repositioned toward higher-priced products where consumers have been willing to pay a premium resulting in higher gross margins—that is, until recently. With an uncertain economic climate, consumer spending has softened and weak retail traffic will pressure beauty sales and profitability. It’s critical companies invest in marketing their core brands. When consumers are even more selective in their purchase decisions you can’t afford to cede ground from an advertising standpoint. Beauty firms will need to increase their advertising and promotional spending over the longer term. L’Oréal invests 3% of sales in R&D and 30% in advertising and promotions. These expenditures exceed those made by Estée Lauder, and certainly P&G which also sells a large portfolio of non-beauty products. • What to watch out for • Outlook for the market in 2010 We think higher-end products will continue to be hurt by soft global consumer spending, while brands sold through mass should show relative strength. New value-oriented launches are resonating with consumers and growth in emerging markets is accelerating, and travel-retail sales are improving. Given this, we don’t expect large, transformational deals, but further consolidation of niche players is certainly possible. n May-June 2010 - N°2 - BW Confidential

Table of Contents for the Digital Edition of BW Confidential - Issue #2 - May/June 2010

- Brand and retail news recap
Take note
- Market facts, figures and trends
The latest fragrance, skincare and make-up launches
Best of BW
- Market highlights
- Clarins Fragrance Group president Joël Palix
Insight : skincare
- Category overview
- Industry viewpoint
- Trends
- Training in spas
- Spa case studies
Market watch : Asia
- Regional analysis
- Japan
- China
- South Korea
Focus : Fragrance creation
- Fragrance regulations
- Perfumer roundtable
- Six up-and-coming beauty brands
Travel retail
- Asia regional roundup
- Interview with Korea duty-free
Last word
- Morning Star equity analyst Erin Swanson on beauty’s threats and opportunities

BW Confidential - Issue #2 - May/June 2010