Kline predicts uneven fallout from economic downturn

By Guy Montague-Jones

- Last updated on GMT

Related tags: Low consumer confidence, Economics, Carrie mellage

Rising costs and low consumer confidence are poised to dampen the
quarterly results of leading beauty companies but the damage is
likely to be spread unevenly.

As second quarter results begin to trickle in, CosmeticsDesign.com asked Kline analyst Carrie Mellage who will take the brunt of the downturn. While a sluggish retail environment and high oil prices are not goods news for anyone, some companies are better positioned than others to ride out any financial storms. "I expect that the fragrance market will be the hardest hit, along with department store and specialty store brands,"​ said Mellage. Expectations for different products and retail channels​ Consumers are tightening their purse strings and are therefore less likely to step inside department stores and boutiques where they will be surrounded by expensive luxuries. Manufacturers aiming at these retail channels may struggle while beauty players selling products door to door such as Avon and Oriflame may benefit from the slow down. Mellage said: "Direct sales firms often do well during economic downturns, as a rise in unemployment means a larger pool of prospective beauty consultants." ​ In terms of product portfolio, Mellage predicted that toiletries would fare comparatively well because they are essential items that cannot be avoided. She also suggested that although customers may now opt for less expensive items in skin care, there was enough momentum in the market to carry it through the bad times. The outlook is less rosy in luxury cosmetics and fragrance where high-end distribution channels and low consumer confidence may drag sales figures down. On the other hand, the lipstick theory would suggest consumers may turn to inexpensive luxury goods to console themselves when the economy is putting high priced luxuries out of reach. Historical data compiled by Kline from peaks and troughs over the past 50 years indicates that lipstick sales really do rise when the economy drops. The theory is once again being put to the test and the upcoming quarterly results will give an early indication of how the luxury market will fare. Predictions for biggest palyers and strategies​ Looking at specific businesses and how they will perform in the second quarter, Mellage said some of the biggest beauty firms are well placed. The Kline analyst said: "I expect P&G and L'Oreal will continue to perform above average. They have deep pockets, innovative products, and strong relationships with retailers and customers." ​So far both companies have suffered at the hands of the prevailing economic chill. Earnings at P&G Beauty fell 2 per cent to $589m in the first quarter, which it blamed on rising material costs and the loss of a number of Wella fragrances. L'Oreal also reported lower than expected sales in the first quarter after its US operations dragged its top line down. Analysts and investors will be watching carefully the performance of these two leading companies in the second quarter to gage the overall health of the beauty market. High raw material costs and a sticky retail environment will undoubtedly depress the market but sales and earnings growth is far from impossible. Mellage advised firms not to sit back. She said: "They should be careful not to be too guarded when it comes to new launches, innovation and marketing support. All are necessary to be successful in this market, and holding back now would only aggravate losses."

Related topics: Business & Financial

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