Personal care companies should tackle downturn with best business models

Beating the downturn

16 April 2009 00:00  [Source: ICB]

Consultant's corner
Gillian Morris/Kline Group

The personal care sector is more recession-resistant than most. But companies still need to get their product portfolio and business model right

IN THIS uncertain economy, personal care continues to be a bright spot and represents an attractive space for the chemical industry. While many chemical sectors experienced severe sales declines in the latter half of 2008, personal care ingredients did nicely.

Chemical companies that have high exposure (over 40% of sales) to "care" industries, which include personal, home and fabric care, such as the UK's Croda, Germany's Cognis and Symrise, US-based International Flavors & Fragrances, and Switzerland's Givaudan, released solid results for 2008, despite the grim environment for other chemical players with business skewed to construction and automotive industries.

Over the past 10 years, many classes of latex polymers, plastic additives, thermoplastic elastomers, and engineering plastics that were once designated "specialty" have transitioned to commodity or commodity-plus status. But personal care specialties, which represent around 40% of the over $10bn (Є7.4bn) personal care ingredients industry, have maintained their specialty status and margins (10-30%). This sector includes an array of performance products, including actives, delivery systems, film formers, sensorial agents, rheology-control agents and specialty surfactants.

Over the past 15 years, we have also seen the personal care, pharmaceutical, and nutrition industries converge with the evolution of new market spaces like cosmeceuticals, nutraceuticals, and nutricosmetics.

KEYS TO SUCCESS
Characterized by a low-capital-intensive asset base and high return on capital, these specialty businesses compete on the basis of differentiation. Successful companies participating in this space operate "high-touch" customer sales models where relationships are a fundamental key success factor. They must also have in-depth know-how for specific personal care applications of focus (for example, skin care leave-on products such as moisturizers, hair and skin care rinse-off, hair styling, and oral care).

They should have the ability to substantiate performance claims; and be perceived by customers as innovative. The relative importance of these key success factors varies by ingredient segment, functionality, personal care application and trade class.

Specialty margins increase the more chemical firms invest, whether manufacturing high-value/low-volume differentiated products and services, or in R&D to develop new offerings, or in marketing and sales to convince customers that their premium pricing is justified. Reducing investment in these areas will lead to decreased operating margins.

DOWNTURN RESISTANT
to be an attractive chemical sector with the resilience to downturns? Part of the answer lies in the fact that personal care is underpinned by several strong and sustainable growth drivers: demographics, innovation, and sustainability/biorenewability.

Demographic trends drive the $270bn retail personal care business. Baby boomers in the US, mature EU countries, and Japan have increasing antiaging and health and wellness needs. This demographic sector has driven the robust growth of cosmeceutical and nutricosmetic products. Increasing disposable income and professional populations in emerging countries such as China and southeast Asia, drive the expansion and growth of the personal care segment.

Personal care offers substantial scope for innovation as brand owners across all trade classes seek innovative ingredients that enable differentiated performance label claims and/or the next personal care mega trend.

Key enabling technologies that have changed the face of antiaging personal care products over the past 10 years include delivery systems (nanoparticles, microcapsules, microsponges, patches, and films) and cosmetic actives (specialty vitamins, enzymes, proteins, peptides, biopolymers, and botanical actives). Many of these technologies have been leveraged from pharmaceutical, nutrition, and industrial sectors.

For example, peptides have revolutionized the antiaging sector over the last five years. Leveraged from the pharmaceutical sector and once confined to luxury personal care brands, peptide-containing formulations currently transcend all trade classes - from luxury to mass. Key personal care ingredient firms benefiting from the growth include Spain's Lipotec, Croda (Sederma), Dutch group DSM (Pentapharm), and International Specialty Products.

Actives have also been developed to confer Botox- and Restalyn-like performance properties from topical formulations, thereby attracting consumers who prefer topical antiaging treatments over injectables. Nano and micro-particle delivery systems, leveraged from pharmaceutical and industrial applications, have also driven antiaging product performance improvement and in many luxury and specialty brands there is a high level of sophistication in active release and penetration via targeted delivery systems.

UNDERSTANDING GREEN
Sustainability, biorenewability, and "natural" are also increasingly top of mind for many brand owners and consumers alike. Sustainability and biorenewability are key factors for personal care ingredients. Upstream brand owners continue to improve product and brand eco-footprints in order to differentiate from competitors and comply with retailer mandated targets and consumer perceptions.

Personal care products positioned as "natural" have exhibited very strong double digit-growth in the US and Europe over the last five years but will likely remain a very small portion (less than 5%) of the market.

Within the "natural" segment, we must be careful to separate those brands that are positioned as "naturally inspired" and those that are truly natural. In the US and Europe, truly natural brands, like Weleda, Dr Hauschka, and Burt's Bees, represent only 40% and 35% respectively, of the naturals market on a manufacturer's sales level respectively. Going forward, natural will remain a niche sector of the overall personal care industry and it will be interesting to see if growth starts to taper off in 2009.

This year will be a tougher business environment for the chemical industry than 2008. With strong and sustainable drivers, personal care will remain an attractive segment and is probably better positioned than any other sector of the chemical industry to withstand current recessionary factors.

But ingredient suppliers will face challenges. Pricing is one area where suppliers, particularly those with businesses heavily skewed to mass markets, are facing increased pressure as global brand owners make concerted efforts to secure price concessions for commodities and specialties alike.

TEMPTATION CALLS
Other challenges will likely come from within a supplier's own organization. Large chemical companies with have smaller, highly profitable specialty personal care ingredients businesses face two temptations in the current business environment:

1. To take cash from personal care to support poorly performing segments
2. or to slash prices across the board in order to scale up from a volume perspective, leading to commoditization.

Both temptations will lead to margin erosion, long-term damage to and even destruction of a specialty business.

2009 is year for tough decisions. One recommendation is for companies to continue to invest in components that are critical to the success of the business and ensure that they are grounded in adding value to customers.

Key questions facing companies include: what sort of specialty chemical business model is best for us? Should we adopt a "high-touch" customer model or an R&D-intensive model? If we can not maintain investment in R&D and sales and marketing, where should we focus? How can we ensure that we have flexibility in cost control so that we can reverse it later without undermining the business?

Gillian Morris is a director in the Chemicals and Materialspractice of Kline Management Consulting and is expert in personal care ingredients, pharmaceutical excipients and synthetic latex polymers.

For the latest chemical news, data and analysis that directly impacts your business sign up for a free trial to ICIS news - the breaking online news service for the global chemical industry.

Get the facts and analysis behind the headlines from our market leading weekly magazine: sign up to a free trial to ICIS Chemical Business.

Printer Friendly