Personal care markets expect a swift recovery from recession

Recession respite

04 May 2010 14:24  [Source: ICB]

Personal care has been hit by the recession. But a speedy recovery is in sight, especially if product innovation can play a significant role

Consultant's corner
Gillian Morris/Kline & Co.

PERSONAL CARE remains a very attractive sector for the chemical industry. Global sales of finished products are $200bn (€150bn) at the manufacturers' level, or nearly $300bn at the retail level, realizing global growth of at least 4.5%/year over the past five years.

From the chemical standpoint, specialties comprise 40% of the $10bn and $15bn global ingredients market. The market is characterized by highly sustainable industry drivers, such as demographics; a low capital-intensive asset base; and a high return on capital. Thought by many to be relatively insensitive to economic cycles, 2009 proved to be a "wobbly" year for some personal-care ingredient firms, proving that the business is not recession-proof, but instead offering a higher level of resilience compared with other markets for commodity and specialty chemicals.

In the US and Europe, the personal care ingredients market started to show signs that it was faltering late in the fourth quarter (Q4) of 2008 through Q2 2009, primarily caused by inventory reductions among mass and luxury marketers and retailers as consumers tightened their belts. Destocking among mass-market players was complete by the end of Q2, but luxury brands, which were more acutely affected by the economic recession, completed destocking by the end of Q3 2009.

The extent of the impact on personal-care ingredient suppliers varied, depending on product portfolio. Those suppliers with a portfolio skewed towards functional ingredients such as surfactants and rheology control agents for everyday, mass-market categories like body washes, soaps, shampoos, and toothpastes weathered the recession much better than ingredient suppliers with portfolios skewed towards specialties for luxury skin-care brands, for example.

The luxury personal care market was under pressure even before the recession took hold, with consumers trading down to mass-market brands. This phenomenon was exacerbated by the recession. Many consumers have found mass-market and private-label brands that offer equivalent performance, and certainly there are a wide variety of technologies available in the mass market. Peptides that provide excellent antiaging properties for skin care are an example.

The key question for many industry observers and participants is: "When will the industry fully recover?" One thing's for sure: Recovery will be much quicker than other chemical end-use sectors, such as construction and automotive, and we should look to other recessions to obtain some useful benchmarks for the personal care industry.

If we look at the impact of previous recessions on the overall US personal care market as an example, we can divide the market into three stages of maturity over the past 40 years: (1) growth; (2) crisis and recovery; and (3) stagnation. During this period, five recessions have affected the US personal care industry.

"There will be a great need for innovative technologies by mass and luxury brands alike"

The only recession that had a similar impact on personal care sales as that of 2008 (when sales declined by 3.2%) was the 1990-1991 recession (sales declined on average by 3.2% in both 1990 and 1991). The 1990-1991 recession was caused by such drivers as the 1987 stock-market crash (Black Monday), uncertainty in the US banking system (a savings and loans crisis), and the Gulf War. For the 1990-1991 recession, the length of the recovery was five years, with introduction of affordable, high-performance skin care in the mass market playing a key role in boosting sales and lifting the industry out of recession.

The recession that started in 2008 and the 1990-1991 slump are both characterized by a low growth rate of women in the labor force (0.5% on average in 1990-1991; 0.3% in 2008). In all other recessionary periods shown in the graph, above, women joining the labor force increased at an average rate of about 2%/year. So an indicator and driver for recovery could be an increased growth rate for women in the labor force. The increase in working women appears to be an element characterizing growth, recovery, and stagnation.

Skin-care has proved to be more resilient in US recessions than other personal care categories, such as fragrances, which can be viewed as a dispensable item.

Looking forward, many in the industry believe the US and EU markets will experience a full recovery in 2011-2012. Based on Kline's analysis of previous recessions, we believe that innovation will provide a stimulus to recovery, especially for the US market. This will benefit existing and potential suppliers of ingredients and technology to the personal care market. In the leave-on skin-care sector in particular, there will be a great need for innovative technologies by mass and luxury brands alike - mass marketers to maintain brand loyalty and prevent customers trading back up to luxury brands; luxury marketers to lure back those customers that traded down to mass brands before or during the recession.

True innovations, those that represent a step change in the industry and have the potential to invent or revive a category, are rare. Examples include teeth-whitening systems, sunless/gradual tanners, pore strips, and antibacterial hand sanitizers, among others. Given the strong similarity between the 1990-1991 and 2008 recession, one can assume that the industry needs a game changer to catapult the personal care market out of the recession. In the 1990s, this was the introduction of affordable and high-performance skin-care in the mass market.

Natural personal care products have been the bright spot globally during this recession - sales grew in all countries in 2008-2009, albeit from a relatively small base compared with the global personal care market. According to Kline, natural personal care represents almost 10% of the global personal care market on a manufacturers' sales basis in 2009, and can be 25-30% in some countries, for example China and Brazil. The US market for natural personal care products grew by 8.3% from 2008 to 2009; China, South Korea, and Brazilian markets grew at double digits. There is speculation that natural and/or sustainable personal care could be the next growth platform for the industry and the cornerstone on which the recovery will be built.

Based in Chicago, Gillian Morris is a director in the Chemicals and Materials consulting practice at Kline where she focuses on her key areas of expertise: personal care ingredients, biocides, excipients for pharmaceuticals, and synthetic latex polymers.

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Author: Gillian Morris

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