The global cosmetics market has grown by 3.8% over the past ten years to €181 billion, a report from EY finds. L’Oréal is globally the largest luxury brand and is expected to show continuous strong business growth as consumers seek higher quality and more innovative cosmetic products. The report further finds that while EBITDA margins remain high across the industry, from demand for higher quality brand names, high advertising costs at more than 25% of sales, continues to be a drag on margins.
To map out the future of the industry, EY released its annual survey of the luxury and cosmetics industry, titled ‘Seeking sustainable growth: The luxury and cosmetics financial factbook 2015 edition’. As the title suggests, the industry is maturing, with growth in the cosmetics marker remaining sustainable. The report is made up out of three components: several standard valuation parameters and operating aggregates; industry characteristics (in terms of growth forecasts and drivers); and an overview of 29 major actors within the industry.
Cosmetic market growth
The cosmetics market has seen relatively stable growth over the past ten years of 3.8%, pushing up the total market value from €127 billion in 2005 to hit a projected €181 billion in 2014. The latest growth figures, expected for 2014, put growth slightly behind the average, at 3.6%. Only in the early crisis years of 2008 and 2009 was there a significant slowdown in growth at 3% and 1% respectively.
The market’s resilience over the past decade is mainly due to consumer behaviour around the need for cosmetics remaining stable. Internally, change is afoot as consumers are starting to focus on quality performance and perceived results, and are open to new technology, more sophisticated dermocosmetic products and new retail distribution models. The research finds that the market is mainly supply-driven, and fuelled by innovation.
The largest cosmetic good by type is the skincare market, which accounts for 35% of total market share, followed by hair care at 23%. Makeup and fragrance make up the following two largest segments at 17% and 13% respectively. Hygiene items come in at 11%, while all other types make up 1%. In terms of growth rates, dermocosmetics comes in at 5.1%, followed by makeup at 5.0%.
Most cosmetics are sold in the Asia/Pacific market, which represents 35% of the overall market. Western Europe comes in second at 22%, followed by North America at 21%. Latin America comes in with 12% of market share and Eastern Europe with 7%. Growth in Western Europe remains sluggish though, at a below average 3%.
Top 7 cosmetic companies
L’Oréal continues to dominate the top 7, and is and larger than the rest of the top 7 put together, at €93 billion in market capitalisation. The leader saw below the median 2.4% long term growth at 2%, and has a weighted average cost of capital (WACC) of 7.9%. Estée Lauder comes in second with market capitalisation of nearly €29 billion and 2.5% growth. Beiersdorf is the third largest seller of cosmetics with a market capitalisation of around €18 billion and just below median 2.3% growth. Coty comes in at number 4 with almost €7.5 billion in market capitalisation and 1.8% growth. Shisedio tops off the top five with €6.7 billion in market capitalisation and a WACC of 4.1%.
L’Oréal has two divisions that account for 76% of the group’s revenues and 90% of the EBIT: Consumer Products and L’Oréal Luxe. L’Oréal Luxe accounted for an actual 28% of total sales of €22.5 billion. The division is expected to grow at 7.8% between 2013A and 2017E to hit 29% of total sales by 2017. Consumer Products last year generated 48% of the company’s sales, but with CAGR of 4.6% will see the division’s share of total sales drop to 47% by 2017.
In terms of operating income, L’Oréal Luxe is anticipated to grow from €1.17 billion in 2013 to €1.65 billion in 2017, with a CAGR of 8.9% over the same period. Consumer Products will continue to see relatively stable growth of 5.5% on net operating income over the same period.
When looking at EBITDA of the various cosmetics dealers, Natura is expected to continue its strong growth position to hit 21.9% over the coming decade. L’Oréal comes in at number two at 21.2% and Estée Lauder at number three, with EBITDA of 19.3%. The average across all companies stands at 17.4%, with Shiseido pulling down the average on low 9.8% margins.
The key drivers for improvement in the operating margins are the higher prestige products (which bear higher price tags and margins) in emerging markets and the aspiration of consumers for high-quality products.
One interesting aspect of the cosmetics market is the relatively high spend on advertising by the largest players, relative to the largest players in the luxury goods market. The average spend on adverting as a % of total sales stands at 6.6% for luxury companies and 25.1% for cosmetic companies. According to EY’s analysis, advertising costs remain a major topic within the operational units of companies whose focus is on top-line growth and brand awareness sustainability, with a significant correlation between advertising expense and mass-market positioning.
A previous analysis from EY featured by Consultancy.uk revealed that the global luxury goods market is valued at €224 billion.