Beauty has met the beast.
This week alone, two of the world’s major beauty products companies have slashed jobs and announced restructuring plans, just the latest fallout from an overcrowded, sluggish cosmetics market, particularly in North America.
On Tuesday, Elizabeth Arden Inc. announced plans to discontinue some products, eliminate jobs, and close a unit in Puerto Rico. The day before, Avon Products Inc. said it would cut 600 jobs, after reporting a net loss of $168-million (U.S.) in the first quarter, dragged down by plunging sales in North America.
Globally, the cosmetics industry is forecast to grow by 3.5 to 4 per cent in 2014, on par with previous years, according to L’Oréal CEO Jean-Paul Agon. But in North America the picture is drearier: U.S. growth is expected to flatline as demand lags behind that of Europe and emerging markets.
Big brands are struggling to compete in what has become a very mature North American market, plagued by slow population growth. Huge product lines and a multitude of brands are crowding the aisles of Shoppers Drug Mart and Wal-Mart, squeezing the profits of multinational beauty giants.
“You can really only do so much in driving sales,” said Svetlana Uduslivaia, senior research analyst at Euromonitor International. “People only need so much shampoo and mascara.”
As shoppers face a deluge of product offerings, building brand loyalty becomes an even greater challenge for companies. Major retailers, such as Shoppers Drug Mart, are becoming more selective in which brands they list and sometimes downsizing the number of brands featured based on sales thresholds, said Ms. Uduslivaia.
Investors have caught on: Avon Inc.’s shares have plummeted by 30 per cent from a year ago, and earnings have disappointed in five of the last eight quarters. Elizabeth Arden has fared even worse, with shares down 42 per cent from a year ago. Even Proctor & Gamble, whose revenues have consistently beat expectations, has seen its stock price barely budge, up 2 per cent since last year.
The 2008 financial crisis was a blight on all retailers. Six years later, consumer confidence has recovered somewhat. But postrecessionary tactics, such as promotional pricing, are still in place, further pressuring profits.
In Canada, total beauty and personal care sales grew by a tepid 3 per cent to $9-billion (Canadian) in 2013, according to Euromonitor. With the Canadian and U.S. market oversaturated with beauty companies, big players have shifted their eyes toward emerging markets to tap new shoppers. China’s cosmetics industry grew a healthy 13 per cent in 2013, and has more than doubled in size between 2008 and 2012, according to the National Bureau of Statistics of China.
Large multinational players have already enjoyed impressive success in China’s cosmetics sector: Procter & Gamble takes up 15 per cent of the market, followed by L’Oréal with 11 per cent, according to a report from the Fung Group.
But navigating China’s fiercely competitive mass market has proven tricky, prompting a few major brands to step away recently. Revlon Inc. pulled out of China in January, and a week later, L’Oréal scrapped its Garnier product line there. In its financial statement from October last year, L’Oréal noted that its Chinese market was “slowing, although still dynamic.”
“Both [L’Oréal and Revlon’s exits] were driven by lack of scale and reflect a more challenging Chinese mass market,” said Bloomberg Industries luxury analyst Deborah Aitken.