Make-up keeps looking good

Cosmetics and toiletries are based on a solid foundation, and the segment’s trend looks set to stay in fashion. By JASON BAKER of IBISWorld.

Cosmetics and toiletries are based on a solid foundation, and the segment’s trend looks set to stay in fashion.

The $1.9 billion cosmetics and toiletries retailing industry grew 3.3% in 2007. Increased popularity of “masstige” products and strong consumer demand fuelled growth. 

The outlook is good, with IBISWorld forecasting that this industry will grow at an average annual rate of 2.9% over the five year period to 2012-13, thanks to increased disposable income and increased demand from ageing baby boomers.

Recent industry performance

The industry has grown at an average annual rate of 3.4% over the five years to 2007-08.

Growth on a year-by-year basis tended to fluctuate in line with general economic activity levels, growth in private consumption expenditure levels and associated discretionary expenditure patterns, although generally strong growth was experienced overall.

The highest growth is estimated to have been during 2003-04, with a low in 2005-06 as high petrol prices may have had an impact upon the industry as consumers moved away from the higher end luxury/premium cosmetics and toiletries products in favour of cheaper priced alternatives as their purchasing power waned.

A number of market segments are near or at saturation point, while others are becoming crowded. Market saturation in some product segments has also seen the level of competition intensify within the industry.

There has been a considerable growth in the number of cosmetics and toiletries retailers over the past five years.

There was a growing trend towards new “masstige” products – high quality mass market products possessing the appearance of prestige or premium items. Overall, industry revenue increased during each of the past five years.

Industry outlook

IBISWorld forecasts that this industry will grow at an average annual rate of 2.9% over the five year period to 2012-13.

Underlying economic, demographic and social trends bode well for this industry in the immediate to medium term future.

In particular, an ageing population, changing community attitudes to skin care and holistic wellness, various psychological motivations, continued product development and innovation are expected to contribute to the continued strong growth of the industry.

As in the past, one of the key variables influencing industry performance will be the state of the Australian economy.

While relatively strong economic growth is currently anticipated for 2008-09, a weakening of economic activity levels in the following year will have adverse implications for industry participants and will serve to restrain growth.

Competitive pricing structures, particularly for those products subject to commodification, will also restrain growth during times of difficult trading conditions.

However, continued growth in the youth segment and in the ageing baby boomer segment will continue to drive growth. There will also be an ever increasing range of cosmetic and toiletries products targeted at men.

“Cosmeceuticals” will act as another growth driver in line with the growing consumer focus on wellness, while natural/organic skincare, hair care and cosmetics sales will also experience strong growth.

Market players

The industry is fragmented and the only really big player is Australian Pharmaceutical Industries, with 7% market share. API owns 145 Priceline cosmetic stores and Price Attack specialist haircare franchise. Retailing is just one of API’s four business units which include pharmacy and healthcare distribution, and healthcare manufacturing.

In the 12 months to 31 April 2007, API generated sales revenue of $2649 million compared with $1881 million five years earlier, reflecting a number of recent acquisitions as well as organic growth. In the most recent financial year ending in April 2007, retail sales amounted to $618 million, up from $521 million in the previous year.

API also supplies more than 575 affiliated pharmacies under the banners API Health Care Chemists, Pharmacist Advice, Chemworld Chemists, Soul Pattinson Chemist and Priceline Pharmacy.

In October 2006 API rejected a takeover bid from rival wholesaler Sigma Pharmaceuticals and in May 2007, API’s major shareholder Washington H Soul Pattinson & Company, received a number of approaches by healthcare companies, investors and private equity firms to sell its entire 19.9% stake in API.

In July 2007 API sold its House franchise brand to Global Retail Brands for $8.5 million. In the four months ended 31 August 2007, sales for the retail division were 6% higher.

Jurlique International, which was founded in Adelaide in 1985 by Jurgen Klein, manufactures and markets high-end natural-based skin care and aromatherapy products and herbal medicines in 20 countries via 30 or so company-owned concept stores plus a further 5000 retail outlets.

About 75% of products are also sold in various department stores, pharmacies, health food stores, aromatherapists and beauty clinics. Profit margins are thought to be in the order of 30%. In February 2007 the Federal Court fined Jurlique $3.4 million for resale price maintenance.

The Perfume Connection is fast growing chain more than 55 fragrance specialists. It was founded in Brisbane in 1991 and has since expanded in Queensland and New South Wales. It claims to hold 13% of the Australian perfume market. It plans to open 100 stores by 2008, including 30 within NSW.

Styled on first class international perfumeries, The Perfume Connection stocks 700 fragrances including exclusive international brand names. It has recently launched an interactive online shopping website. It is exploring the idea of a new chain of stores (by the name of EDP), purely targeting the discount market.

Petra Hair Care was established in 1966 as a hairdressing salon but has progressively shifted from hairdressing to hair care product retailing, and now sells more than 2500 specialised hair care products. The chain has 14 stores in Victoria (two of which still have salons), plus an online web site.

The Body Shop Australia is a subsidiary of the British company The Body Shop International (which in turn is owned by the French-based L’Oreal group). Since opening its first store in Australia in 1983 operations have grown to include 71 stores (all which are franchised), a mail order service, an online shopping service and The Body Shop at Home direct selling network.

In the year to February 1999 (latest actual results available), sales for the Australian operations amounted to $82 million, up from $80 million in the previous year, and up from $70 million for the year ended February 1995.

The group is currently re-positioning its operations within the “masstige” segment of the market. While The Body Shop remains a standalone entity within the L’Oreal group, it is possible that the number of Body Shop outlets may double to 5000 plus under L’Oreal’s ownership.

Lush: With origins dating back to the 1970s and initial sales to The Body Shop, the British-based Lush group has over 370 shops in 30 countries around the world, including 12 in Australia. Total sales for the year to June 2005 amounted to $US134 million.

The Estee Lauder group: Various subsidiaries of the Estee Lauder group of prestige cosmetic and skin care products have stand-alone stores in Australia. For example, Clinique and Aveda Estheques. First established in 1946, Estee Lauder has enjoyed several decades of consecutive growth with net sales amounting to $US7037 million in the fiscal year ended June 2007. In fiscal 2007, makeup accounted for 39% of net sales, skin care 37%, fragrances 19% and haircare 5%.

Operating a distribution facility in Rosebery, NSW, Estee Lauder sells its products in department stores and specialty stores throughout Australia, including company-owned stores. The 6600 unique products brands sold in Australia include Aramis, Bobbi Brown, Clinique, Donna Karan, Estee Lauder, MAC, Tommy Hilfiger, La Mer and Origins.

In the year ended 30 June 2004 the Australian operations generated sales revenues of $136 million, up 5% on the previous year. The largest product segment was make-up, which generated revenues of $52 million (or 35% of company revenues), followed by skin care with revenues of $44 million (32%) and fragrances (26%).

Net profits for the year totalled $10.1 million, down marginally on the previous year ($11.3 million). In the following two years, sales revenue for the company has been estimated at $141 million (2004-05) and $134 million (2005-06).

Crabtree & Evelyn: Originally a small, family-run business selling fine soaps from around the globe, though now a subsidiary of the Malaysian-based company Kuala Lumpur Kepong Berhad, Crabtree & Evelyn today is an international company with more than 350 shops in 40 countries, including 21 stores in Australia.

In addition to its retail stores, C&E products are also marketed via specialty stores, catalogues, private label accounts, third party distributors, the internet, and in-flight and duty free shops. In 2006 Crabtree & Evelyn generated worldwide revenues of £115 million.

IBISWorld supplies business information databases, including industry reports, company reports and business indicator reports. www.ibisworld.com.au