Global cosmetics firms must apply foundation for growth

The future looks fragrant for the global cosmetics industry. The market is predicted to sustain a compound annual growth rate of about 4% over next few years, growing to $300 billion by 2010, from $253 billion in 2005. This will be driven by recovering consumer demand in Europe, continuing strong growth in skin care, the industry's largest sub-segment, and increasing contributions from emerging markets like Russia, China, and Brazil (see Chart 1).

Nevertheless, to maximise their chances of growing successfully in this highly competitive and fragmented market, cosmetic companies need to clear a number of hurdles that are key to success in the cosmetics industry. These include:

- Developing and maintaining a strong brand name, as is true of all consumer-goods industries;

- Aligning their branding strategy to their target markets, be it a premium strategy at the upper end of the range and selective distribution, or value strategy focusing on the larger but less profitable mass markets and bargaining power against big retail;

- Balancing their presence in developed markets, which assures profitability, with their presence in developing markets, which are fast growing and underpinned by favorable demographic trends but rather cost-sensitive.

- Detecting and adapting to socio-demographic trends in mature markets, such as the aging and wellness waves;

- Using in-licensing and incremental M&A to help optimise their brand portfolios; and

- Implementing these business factors on the basis of a sound financial risk profile.

Only a few market players are purely integrated cosmetic companies with substantial global reach. They include U.S.-based Avon Products Inc. (A/Negative/A-1), Elizabeth Arden Inc. (B+/Positive/--), The Estee Lauder Cos. Inc. (A/Stable/A-1), and Revlon Consumer Products Corp. (CCC+/Negative/--), France-based L'Oreal S.A. (--/--/A-1+), and Japan's Shiseido Co. Ltd. (A/Positive/A-1). These companies differ strongly in size and financial profile, reflecting not only the still fragmented nature of this market overall but also their different financial policy approaches (see table 1). In focusing on these integrated cosmetic companies with global reach, Standard & Poor's Ratings Services here excludes large industry players from neighboring industries, such as U.S. based Procter & Gamble Co. (AA-/Stable/A-1+) and France's LVMH Moet Hennessy Louis Vuitton S.A. (A-/Stable/A-2), or regional niche players like Bare Escentuals Beauty Inc. (B+/Stable/--), Philosophy Inc., or Concern Kalina (JSC) (ruA-/--/--).