Case: Natura and CF&T market

São Paulo, 28 de agosto de 2010

DRAFT
 Market overview

• Western Europe, North America, Japan and South Korea contributed with
61% of global cosmetics, fragrances and toiletries (CF&T) sales in
2007. However, the combined growth rate of under 3% was well below
the global average in 2007. Furthermore the economic slowdown of 2008 is
Global Market expected to hit the developed world more adversely, with Western Europe and
North America most affected.
• Emerging markets remain the growth engine of the global
cosmetics market. Accounting for only a third of the global market,
they added over two-thirds of absolute growth in 2007.

• Brazil is expected to add US$9.5 billion to global sales over the period 2007-
2012. Growing beauty and health consciousness are set to fuel demand for skin
care, hair care and fragrances .
• Mass brands dominate the Brazilian market; premium products accounted
for just over 1% of total value sales in 2007.
Brazilian • Brazil spends well above the global average on hair care because
Market Brazilians typically wash their hair at least twice a day or more. Spending on
deodorants in Brazil is also 2x global average.
• Beyond its increasingly noticeable consumer propensity to spend heavily on
cosmetics and toiletries products, factors such as recent sustained economic
growth and rising purchasing power, particularly among consumers in the lower
C and D socioeconomic groups, have underpinned this strong performance.

Source: Euromonitor SAO 090406 Case competition 2009 - Handouts v16 2

Desafio_estrategico_2010
 Company Background: Natura

• Natura is a 100% Brazilian-owned company, and was founded in 1969. The

company now has sizeable operations in a number of Latin American
Company countries, including Argentina, Bolivia, Chile, Colombia, Mexico, Peru and
Venezuela.
Background
• The company went public on May 2004, with preference shares being listed
on the Brazilian Stock Exchange.

• Natura has two industrial plants, located in Cajamar (São Paulo state) and
Benevides (Pará state). The Cajamar complex produced around 250
million units in 2007.

Production • Natura is revisiting its operational strategies. This includes the alteration of
the working process by creating production cells, which should increase
productivity. The company is also building a new research laboratory in the
city of Campinas, which was scheduled for completion in 2008.

• A lack of high impact new product developments, coupled with fierce

competition from Avon, were the main obstacles faced by Natura in 2007.
Competitive
• The company is adopting a new acceleration program, including a revision of
Positioning
its organizational structure and a focus on three business units, with
greater autonomy: Brazil, Latin America and New Markets.

Source: Euromonitor SAO 090406 Case competition 2009 - Handouts v16 3

Desafio_estrategico_2010
 The global market for CF&T grew 8% yearly
from 2002 to 2007
WORLD

Global market size for CF&T

CAGR
02-07
US$ 400B

316
300 285
267
249
227
204
200

9%

100

0
2002 2003 2004 2005 2006 2007

Source: Euromonitor SAO 090406 Case competition 2009 - Handouts v16 4

Desafio_estrategico_2010
 Skin care is the biggest segment in the global
market and has grown faster than others
WORLD
Global Cosmetics and Toiletries Market CAGR
Size (US$B) (02-07)
204 227 249 267 285 316 9%
100% 5% 5% 5% 5% 5% 5% Others 11%
4% 5% 5% 5% 5% 5% Deodorants 11%
7% 7% 7% 7% 8% 8% Men’s
11%
grooming prod.
80 9% 9% 9% 9% 9% 8% Bath & shower 7%

10% 10% 10% 10% 10% 10% Oral hygiene 8%

60 11% 11% 11% 11% 11% 11% Fragrances 9%

14% 13% 13% 13% 13% 13% Colour cosmetics 8%

40

19% 19% 19% 19% 19% 19% Hair care 8%

20

20% 21% 21% 21% 22% 22% Skin care 11%

0
2002 2003 2004 2005 2006 2007

Source: Euromonitor SAO 090406 Case competition 2009 - Handouts v16 5

Desafio_estrategico_2010
 Brazil is the third biggest market for C&T
WORLD
2007
C&T world biggest markets, 2007

US$ 125B

102.6
100

75

50 45.8

25 22.2
14.5
9.9 7.1 6.6 4.7 3.7
0
USA Japan Brazil France Russia Mexico South India Australia
Korea

% GDP 0.7% 1.0% 1.7% 0.6% 0.8% 0.7% 0.7% 0.4% 0.4%

Source: Euromonitor, Brascan SAO 090406 Case competition 2009 - Handouts v16 6
Desafio_estrategico_2010
 Skin care is only the third biggest segment in
sales in Brazil
BRAZIL
Brazil's Cosmetics and Toiletries Market CAGR
Size (R$B) (02-07)
22 26 31 36 40 46 15%
100%
6% 5% 5% 5% 6% 5% Others 14%
8% 7% 7% 7% 7% 7% Bath and shower 13%

8% 8% 8% 8% 8% 7% Colour cosmetics 13%

80 Men’s
9% 8% 8% 8% 8% 13%
8% grooming prod.

9% 9% 9% 9% 9% Deodorants 17%
9%
60 10% 10% Oral hygiene 15%
10% 11% 10% 10%

10% 11% 11% 11% 12% Skin care 18%

11%
40
17% 16% 15% 15% 16% 17% Fragrances 16%

20
24% 25% 26% 25% 25% 25% Hair care 16%

0
2002 2003 2004 2005 2006 2007

Source: Euromonitor SAO 090406 Case competition 2009 - Handouts v16 7

Desafio_estrategico_2010
 CF&T in Brazil grows more than consumer
expenditure, even in though times

Market y-o-y growth indicators CF&T sales growth (total)

Consumer expenditure growth
20% Real GDP growth
18.7

16.8

15
12.6
12.0

10

6.3
5.7 5.7
5.2
5 4.5
3.8 4.0
3.2

0
2004 2005 2006 2007

Source: Euromonitor, Brascan SAO 090406 Case competition 2009 - Handouts v16 8
Desafio_estrategico_2010
 Brazilian market for CF&T was worth R$46B in
2007…
BRAZIL

Sales of cosmetics and toiletries by sector

CAGR
(02-07)
R$50B
46 15%
Other* 2.4 14%
40 Bath & shower
13%
3.2
40 2.3 Colour cosmetics
36 3.4 13%
2.9 Men's grooming
1.9
3.1 prod. 3.6 13%
31 2.6
Deodorants
3.3 17%
30 1.6 3.0 4.1
26 2.2
3.0 3.7 Oral hygiene
15%
2.5 4.6
22 1.9 2.6 3.3 4.0 Skin care
2.2 18%
2.8 3.7 5.3
20 1.7
2.3 4.6
1.8
2.4 3.2
1.9 4.0 Fragrances
2.0 2.8 3.3 7.8
16%
2.3 6.6
2.8 5.5
10 2.3 4.6
4.1
3.7 Hair care
10.0 11.2 16%
8.2 9.2
5.3 6.4
0
2002 2003 2004 2005 2006 2007

*‘Other’ are Baby care, Sun care and Depilatories

Source: Euromonitor SAO 090406 Case competition 2009 - Handouts v16 9
Desafio_estrategico_2010
 … and is expected to reach R$66B by 2012
BRAZIL

Sales of cosmetics and toiletries by sector

Bath & shower 3.7
R$80B CAGR
Men's grooming prod. 4.5
(02-07)
Colour cosmetics 4.7
8%
66
62 Other* 3.5 8%
60 58 3.3 3%
54 3.1 3.6 4%
50 2.9 3.5 4.3 6%
46 2.7 3.3 4.1 4.4
3.3 3.9 4.2
Deodorants 5.8 7%
2.4
3.7 5.5 Oral hygiene
3.2 3.9 5%
40 3.4 3.8
5.2
5.6
6.0
4.9
3.6 4.6 5.3 Skin care
5.0 8.8 11%
4.1 8.0
4.6 7.4
4.6 6.7
5.9 Fragrances
5.3 10.4 11.2
8%
20 8.9
9.7
8.1
7.8
Hair care 9%
14.4 15.5 16.5 17.6
11.2 13.2

0
2007A 2008E 2009E 2010E 2011E 2012E

*‘Other’ are Baby care, Sun care and Depilatories

Source: Euromonitor SAO 090406 Case competition 2009 - Handouts v16 10
Desafio_estrategico_2010
 Premium market in Brazil presents a different
historical behavior…
BRAZIL

Sales of premium cosmetics and toiletries by sector

11 CAGR
11 Others 10
586 02-07
R$600M 10 570 582
10 8
537 Premium colour
-4%
64
66
518 516 cosmetics 51

61 Premium skin
54 45 care 54 -11%
100
93 50
96 66
400

Premium
fragrances 6%
383 370 393 447
200 336 366

Premium
hair care 19
34 28 30 23 20 -10%
0
2002 2003 2004 2005 2006 2007

Source: Euromonitor SAO 090406 Case competition 2009 - Handouts v16 11

Desafio_estrategico_2010
 …but is expected to grow steadily at 6% per
year
BRAZIL

Sales of premium cosmetics and toiletries by sector

CAGR
07-12
R$1,000M Others 15
Premium colour cosmetics 68
Premium skin care 72

800 777
742
709 6%
667 65
623 62 6%
582 59 69
600 55 66
63
51 59
54

400
Premium
575 fragrances 6%
515 549 602
447 480
200

Premium
hair care 19
0%
0
2007A 2008E 2009E 2010E 2011E 2012E

Source: Euromonitor SAO 090406 Case competition 2009 - Handouts v16 12

Desafio_estrategico_2010
 Amongst Brazilian players, Natura is the largest
company in revenues
BRAZIL

Market share* by company in Brazil 2007

10%
9.3
8.5
8.0
8
7.2

5.9
6
5.2
4.9

4 3.4

2
1.2

0
Natura Unilever Avon Procter & Colgate Boticário L'Oreal J&J Beiersdorf
Gamble Palmolive AG

Note: * Company’s market-share = Gross revenues / market size

Source: Euromonitor SAO 090406 Case competition 2009 - Handouts v16 13
Desafio_estrategico_2010
 Natura grew at 25% yearly from 2002 to 2007

Natura's net revenues

CAGR
02-07
R$4B

3.1
3 2.8

2.3

2 1.8

1.3 25%
1.0
1

0
2002 2003 2004 2005 2006 2007

y-o-y growth
n.a. 34% 33% 29% 21% 11%
(%)
Source: Euromonitor SAO 090406 Case competition 2009 - Handouts v16 14
Desafio_estrategico_2010
 Natura competes in a fragmented market
BRAZIL 2007
Sales of Cosmetics and Toiletries by Sector
1.1
in 2007 (R$B) 0.2
11.2 8.1 5.7 4.6 3.9 3.4 3.2 2.8 1.3 Total = 46
100%
Others
Química Geral
1.4 0.4 Reckitt
80 3.4 1.4 Benckiser
2.9 2.1 1.7 0.6 Unisoap
1.6
7.2 AG Beiersdorf
0.5 0.1
60 Embelleze
0.3 0.1 J&J
1.3 0.0
0.3 0.8 0.3 L'Oreal
0.1
40 0.2 0.4 0.3 0.3 0.2 Boticário
0.9 Avon
0.9 1.7 0.2
0.6 0.5 0.4 Colgate

20 1.2 1.8 1.5 Procter &

0.5 Gamble
1.6 Natura
1.7 0.8 0.6 0.6 0.3
1.7 Unilever
0
Hair care Fragrances Skin care Oral Deodorants Colour
hygiene cosmetics Depilatories
Men's Bath and Baby Care
grooming shower Sun
products products care

Natura's relative position 4 2 2 n/a 3 2 4 2 4 2 n/a

Note: Market size based on gross revenue figures
Source: Euromonitor SAO 090406 Case competition 2009 - Handouts v16 15
Desafio_estrategico_2010
 Main driver of domestic gross revenue is
number of salespeople and productivity
ONLY DOMESTIC
MARKET
Number of salespeople
CAGR
07-12
1,000 From 03-07,
salespeople CAGR 876
was 18% 826
800 774
722
664
597
600

8%
400

200

0
2007A 2008E 2009E 2010E 2011E 2012E

Productivity
6.9 7.0 7.2 7.4 7.7 7.9 2,7%
(R$K/salesperson/yr)
Gross revenues
(R$B)
4.1 4.6 5.2 5.8 6.3 6.9
Note: Gross revenues = Net revenues + Deductions (eg. taxes)
Source: Euromonitor, Brascan SAO 090406 Case competition 2009 - Handouts v16 16
Desafio_estrategico_2010
 Natura hasn’t been able to increase margins
significantly over the last years

Natura's net revenues breakdown (R$M)

993 1,329 1,770 2,288 2,767 3,073
100%
121
230 610 622
395 533

75

482 610 796 1,024 1,266 1,455

50

25 EBITDA
Other op.
345 458 575 731 891 992 profit/(exp.)
SG&A
COGS
0
2002 2003 2004 2005 2006 2007

Source: Company annual reports SAO 090406 Case competition 2009 - Handouts v16 17
Desafio_estrategico_2010
 To drive margins up, Natura has struggled to
reduce number of SKUs
Average unit price ranged
Total number of SKUs from R$15 to R$20 in 2007
and is not expected to
1,000 change much in 2008

851
800 780

600

400

200

0
2007A 2008E

Source: Brascan, Morgan Stanley SAO 090406 Case competition 2009 - Handouts v16 18
Desafio_estrategico_2010
 Management expects increasing sales and
EBITDA for coming years

Expected y-o-y growth

20% 19%

17%

15 14%
13%
13%
11%
10 EBITDA
Net sales

0
2008 2009 2010

Source: Company annual reports SAO 090406 Case competition 2009 - Handouts v16 19
Desafio_estrategico_2010