For global beauty and cosmetics companies, emerging markets present an attractive target as consumers yearn for luxury products and premium brands. Developing global markets have been the buzz in the industry for some time – especially the usual suspects, i.e. the BRIC countries – yet few have explored the dynamics that define these markets. Through our exclusive analysis, The Smart Cube has identified the top performers beyond the BRIC quartet, enabling you to pinpoint the best opportunities for growth.
The findings below are an excerpt from a white paper published by The Smart Cube, The Premium Beauty Care Industry: Emerging Markets, December 2011. To request a complimentary copy of the full report, or for questions and comments, please contact us.
More Than Just India and China: Developing Markets in Asia
Premium beauty brands, like Lancome and Estee Lauder, have already entered developing markets in Asia such as the Philippines, India, and Vietnam. A few countries, however, offer potential yet remain untapped. Others present marginal opportunities at best, such as those with a small consumer base, like as Vanatu, Tonga and Fiji while still others, such as Nepal, Myanmar and Laos, face considerable hurdles, including political upheaval, social issues and very modest consumer spending.
A note on the charts: as the average GDP (PPP) per capita of advanced economies was $38,014 (2010), the vertical axis has been moved to 0.08 on the x-axis to separate middle- and high-income countries from low income nations. Therefore middle income countries lie between 0.08 and 0.26 on the horizontal axis, while low- and high-income countries have value of less than 0.8 and more than 0.26, respectively.
Two markets present significant upside for mass market and premium beauty: Sri Lanka and Bangladesh. In the former, the economy grew by 8.2% in 2010 and is expected to grow by 9.5% in 2011. Further, the Dow Jones classified Sri Lanka as an emerging economy in 2010. The GDP per capita has doubled since 2005, while poverty and unemployment have dropped by 7.6% and 2.3%, respectively. Internal strife ended with the defeat of Liberation Tigers of Tamil Elam (LTTE) in 2009, giving way to a more conducive environment for social and economic development. With a cosmetic market valued at only $150 million in 2010, Sri Lanka shows plenty room for growth. But Sri Lanka has not gone unnoticed, as major brands are picking up share.
Goldman Sachs identified Bangladesh as one of the Next Eleven countries poised to become some of the largest economies in the 21st century. The report selected Bangladesh based on macroeconomic stability, political maturity, openness of trade and investment policies and the quality of education. Bangladesh has a GDP (PPP) of $257 billion (according to the IMF) and a population of about 142 million. What is otherwise a favorable demographic characteristic has become a hindrance as the economy struggles to absorb the working population. That issue notwithstanding, World Bank figures on Bangladesh report an average annual growth rate of 5% since 1990. In recent years, Bangladesh witnessed an expansion of the middle class, rapid growth in the consumer industry, and an increase in foreign direct investment.
Opportunities in the Commonwealth of Independent States
Azerbaijan, Kazakhastan, Belarus, and Russia have been the top performers of the former Soviet Union over the past decade, with the highest GDP per capita in the region. Along with Mongolia, included in the CIS for our purposes, Kazakhstan and Azerbaijan appear to be the most promising markets for beauty care. Many have looked into Russia’s future prospects, and thus we will set aside that market.
Of the other three, Belarus is unlikely to become a lucrative beauty market in the near future as an authoritarian regime and a state-controlled economy provides significant roadblocks, though it is one of the most industrialized nations in the world with a highly skilled and educated population. However, both Kazakhstan and Azerbaijan have displayed robust economic growth, have high GDP per capita and rank favorably in terms of human development and low unemployment. Kazakhstan’s estimated luxury market size was a substantial $800 million in 2010, with make-up and perfumery accounting for 15% to 20%. Many multinational cosmetic companies have already entered the markets to leverage the expected growth.
Mongolia is expected to grow at an accelerated pace by at least 20% annually until 2020 from a current GDP of $7 billion. Mongolia’s open market structure is conducive to the entry of foreign players, and lately investors have shown great interest. High end brands, such as Louis Vuitton, Burberry, Zegna, and Hugo Boss, have already opened shops but only a few manufacturers, such as Oriflame and Shiseido, have a significant presence.
The Needle in Central and Eastern Europe’s Haystack
In the haystack that is Central and Eastern Europe, Turkey is the proverbial needle. Due to sustained economic growth and a favorable demographic makeup, Turkey’s consumer spending is expected to increase significantly in the next decade. According to industry reports, in 2010, Turkey’s beauty care market grew by more than 10% to $2.8 billion and although the sales of premium beauty products have recently declined, rising disposable income is likely to cause consumers to “trade up” into the premium beauty segment over time. Thus, Turkey may present a strategic opportunity in addition to the relatively well-known leader in the region: Poland. Poland is the largest beauty care market in the region ($3.9 billion) with a per capita beauty product spending of approximately $125.
Most other markets in the region offer moderate potential due to their strong economic growth over the past decade and high disposable income. Outside of Poland and Turkey, the region’s consumer base remains relatively untapped yet recent trends indicate consumers are moving towards cheaper mass market products. Many markets also struggle with declining population due to falling birth rates and emigration and a high old age dependency ratio resulting in a shrinking consumer base.
Multinationals Challenged to Penetrate Developing Markets in Africa
Although South Africa has a thriving luxury and beauty market, the average consumer elsewhere in the region, such as in Gabon and Botswana, has not adopted premium beauty products. South Africa has a large consumer base (50 million), and a mixed vibrant economy, resulting in a premium cosmetic market valued over $300 million in 2009. Yet the dominance of local manufacturers in luxury products has inhibited foreign players. Global beauty and personal care companies looking to grow business in South Africa may need to invest heavily to research the preferences of the local consumer.
Other potential markets, such as Kenya and Nigeria, have limited potential due to inadequate economic diversification while still others, including Namibia, Angola, Congo, and Swaziland, face severe challenges including internal strife, corruption, unemployment and severe public health issues.
With Government Support, Prospects Improving in Latin America
Panama, Uruguay, and Argentina have been the best performers in terms of an increase in GDP per capita in Latin America. Beauty companies have well penetrated the high- and medium-income economies of Latin America such as Argentina, Brazil, Uruguay, Dominican Republic, Venezuela, Chile, Columbia, and Mexico. However, there is tremendous growth potential in economies such as Peru, Paraguay, El Salvador, and Costa Rica.
Peru and Paraguay have displayed sustained economic growth driven by a market-oriented economy. The government has also pushed economic diversification efforts to move the economy away from agriculture; this is likely to bring sustained growth in future. Small central economies have also exhibited sustained economic growth, such as El Salvador, Panama, and Costa Rica. Consumers in these developing markets are likely to migrate to premium beauty products soon.
The Middle East: Wait and See?
According to market reports, countries with high growth potential for beauty products in the Middle East are Egypt (market size of $819 million in 2010), Iran (estimated market size of $2.1 billion in 2009), Libya, Tunisia, Oman, and Morocco. Others, such as Jordan, Lebanon, Saudi Arabia, Bahrain, Qatar, Kuwait, and the UAE, are already well penetrated by beauty companies; nevertheless, revenue from such markets is expected to grow steadily.
Growth potential aside, marketers must consider two key issues: the mindset of the young consumer and ongoing political and social upheaval in the region. The young consumer in the Middle East, a key demographic for beauty and personal care, is troubled: 60% of the Middle East population is less than 25 years old and most face bleak economic prospects. Shortly before the outbreak of the “Islamic spring”, a report from the ILO referred to them as “a lost generation of unemployed young people”. Changing attitudes among the younger generation has, in turn, contributed to the charged social and political atmosphere of the Middle East. Nearly all the Middle Eastern countries are experiencing upheavals, which may be economically beneficial in the long term but will create significant economic and political uncertainty in the medium term. Political factors are also important; for example, the political elite in Iran have a deep anti-Western stance and have banned make-up and imposed prohibiting duties on imported cosmetics with obvious ramifications for Western brands. However, the beauty market in the Middle East is likely to benefit from the recent developments in the region to improve women rights and achieve greater political and economic freedom.
Outlook on the Future
Growth in the global cosmetic industry, developed economies will remain the most valuable beauty markets, emerging countries provide beauty and cosmetics companies with a rapidly increasing population, an expanding middle class consumer base, and a population opening up to spending on beauty care products. While the BRIC nations are likely to remain the main growth drivers of the beauty care industry, many developing countries pose intriguing challenges to marketers seeking new markets and new consumers. For those countries identified above, a younger and more affluent population will be well suited to ideal for premium beauty products in the next decade. That said, marketers will need to invest heavily in various types of consumer and market research to understand the local dynamics and preferences prior to focusing on new target markets. Such efforts may distinguish the leaders, who may grab the most market share, from the followers.
A Note on Methodology
To identify beauty care markets that are likely to exhibit accelerated growth over the next decade, The Smart Cube analyzed changes in GDP per capita over the past decade and the current demographic makeup of each market. GDP per capita and its evolution over the past decade clearly indicate public disposable income and variation in it. Meanwhile, the demographic makeup, in terms of old age dependency ratio and population change over the past five years, provides a good estimate of the future consumer base. As there is no ideal old age dependency ratio (ratio of population aged 65 and above per 100 population between 15 and 64 of age) in place, this report compares each country’s dependency ratio to the world average of 11.6 in 2010 as a basis to compare the dependency ratio. To provide further insights into the demographic characteristic of countries exhibiting dependency ratio more than 11.6 (in 2010), population change during 2005–2010 has also been indicated. Countries identified as high growth prospects have been selected assuming that rising disposable income and large working population are good omens for predicting the sale of non-essential products such as beauty care. Through our study, we have observed:
- That beauty product spend is highly correlated to the average disposable income of the population and the working population (in the age group of 15 to 65 years)
- Consumers in countries with middle income (per capita GDP between $3,000 and $10,000) show an increased tendency to spend on non-essential products or aspirational products such as beauty care
- Consumers that buy mass consumer beauty products migrate to premium beauty products as disposable income rises
- Expenditure on premium beauty products further increases as a country’s population moves into the high income bracket (per capita GDP of above $10,000)
Also essential for the development of the economy and a pillar of consumer spending is the working age population (between 15 and 65 years) of a country. A healthy working age population impacts economic growth in two ways—increase in per capita labor input leads to accelerated per capita growth and higher savings, resulting in more investment and spending. This working population is a key target segment for beauty care companies as it has a high disposable income and is willing to invest on appearance, along with being brand conscious.