Economic hardship means margin pressures will hit cosmetic players
Rising commodity and fuel prices have already affected personal care companies for much of 2007 and 2008, mainly due to high oil prices, but as commodity prices drop off, market research provider Kline and Company believes another problem is rearing its head.
This time its consumer spend. And as more and more retailers report shrinking consumer demand stemming from the global credit crunch Kline predicts this will counteract any benefits from falling commodity prices.
In its latest research report, Personal Care US Competitor Cost Structures 2008, the market research company is predicting that the problem is likely to be further exacerbated by the greater need to spend on marketing and advertising during these periods.
Price wars here we come!
Likewise, the fact that personal care providers are going to have to be extremely price competitive to secure the shrinking consumer spend, is likely to lead to significant discounting and price wars.
The result of all this is that manufacturers and marketers of personal care products and suppliers are likely to continue to feel significant pressure with respect to margins throughout 2009.
Under these circumstances, players targeting the premium end of the market are also likely to be heavily impacted by the downturn, as many consumers go for cheaper mass market alternatives.
Premium the loser, mass market the winner
In particular this scenario is likely to hit big players such as Estee Lauder and Elizabeth Arden, whereas concurrently, mass market giants such as Johnson & Johnson, P&G and Avon are likely to benefit from these market conditions.
Unless a product is really innovative or attention is drawn to unique product benefits, Kline believes there will be very little opportunity to raise retail prices as long as the current economic conditions persist.
"Companies that continue to employ effective marketing, efficient operations, sustained R&D expenditures, and steady innovation are the ones that will remain profitable and hold market leadership positions in uncertain times," said Laura Mahecha, industry manager for Kline Market Research division.
