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Cosmetics market to grow by 25% to $20 billion by 2025

PTI|
Feb 08, 2018, 07.15 PM IST

The country's cosmetics and cosmeceutical market is expected to register annual growth of 25
per cent touching USD 20 billion by 2025, according to industry experts.
"The Indian cosmeceutical and cosmetics industry has an overall market standing of USD 6.5
billion from a global market of USD 274 billion. It is expected to grow to USD 20 billion by
2015 at a compounded rate of 25 per cent," UBM India managing director Yogesh Mudras told.

The rising awareness of beauty products, increasing premium on personal grooming, changes in
consumption patterns and lifestyles and improved purchasing power among women are expected
to boost the industry.

The market will maintain healthy growth due to rising preference for specialised cosmetic
products such as organic, herbal and ayurvedic products. Principal areas that are expected to
grow include colour cosmetics, fragrances, specialised skin care and make-up cosmetics, he
said.

The Indian industry is growing rapidly at a rate of 13-18 percent, more than that of US or
European markets.

Seeking business opportunities here, international exhibition organisers Bologna Fiere, and UBM
India are joining hands to launch Cosmoprof India, an event for the international beauty
community. The signature trade show in Bologna in Italy, Las Vegas and Hong Kong is now
entering into India.

The Cosmoprof India preview scheduled in Mumbai between September 10-11, will represent a
new opportunity for brands of finished products, especially for cosmetics and toiletries, beauty
salons, hair, nail and accessories, and for the supply chain, with the leaders in raw materials and
ingredients, contract manufacturing and private labels, applicators, primary and secondary
packaging.

The show will include an international buyer programme by Cosmoprof Worldwide Bologna to
facilitate B2B meetings between companies, distributors, buyers, importers and suppliers from
India, United Arab Emirates and South East Asia.

Source:
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Why Is L'Oreal Increasing Its Focus On India?

Trefis Team ContributorGreat SpeculationsI, Oct 20, 2015, 08:44am 8,715 views
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L'Oreal is planning on ramping up its investments in India. The company’s target is to make
India one of its top 5 global hubs and it also aims to increase the export of products and
technologies from the country to the greater Asia-Pacific region. In 2014, L’Oreal had assumed a
stronghold in China with its Magic Holding acquisition. In India, L’Oreal’s Garnier brand is a
massive hit and the company is looking at India’s huge scope for growth, due to the low
penetration of beauty products. India is expected to be among the top 4 beauty markets by the
next decade or so. Also, it is slated to become the most populous country in the next few years.
The increasing spending power of women on cosmetics, the rising consciousness among men for
grooming products, and India’s soon-to-be a $10 billion beauty market might be some of the
reasons for the company to increase its focus on India.
L’Oreal Is Focusing Eastward For Further Growth

 L’Oreal Assumed A Dominant Position In China With The Acquisition Of

Magic Holdings

L’Oreal has been increasingly looking towards the east to fuel its growth. In April 2014, L’Oreal
completed the acquisition of Magic Holdings in China. China is currently the third-largest beauty
market in the world, after North America and Japan. Though L’Oreal held a 9% market share in
China in 2013, the company faced intense pressure from domestic players within the mass-
market cosmetics space and bowed out of the Chinese hair care market by shutting down its
Garnier brand. To counter this strengthening competition from domestic players and to grow its
market share, L’Oreal announced its acquisition of Magic Holdings International Limited for
$850 million in 2013. This is the company’s largest acquisition in the Chinese market. Magic
Holdings is the leader in the Chinese facial care market and its acquisition indicated L’Oreal’s
stance against domestic competition.

 L'Oreal's $1 Billion Revenue Target In India By 2020

L'Oreal's 2020 roadmap in India is to become a billion dollar company in terms of revenues and
this aim had propelled the company to ramp up its research and innovation (R&I) activities in the
country. According to L?Oreal India Managing Director Jean-Christophe Letellier, the R&I
centers in Mumbai and Bangalore are striving towards sustainable innovation, in order to meet
the company's target of reducing carbon emissions by 60% from its plants and distribution
centers by 2020. L'Oreal aims to make India one of its top five markets by the next few years
(currently India is among top 15). It aims to generate revenues to the tune of Rs 7,000 crore (~$1
billion) from India by 2020.

L’Oreal Is Planning On Increasing Investments In India

In 2011, L'Oreal invested Rs 1,000 crore in India for a five-year period. The fund is utilized for
the growth of its manufacturing and distribution facilities and marketing activities. The company
is planning on a second level of investment in order to accelerate its export activities from India.
L'Oreal India is valued at Rs 2,100 crore currently and the division grew at 18% in 2014. The
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company has 500,000 retail outlets in India. L'Oreal aims to grow this number with increased
penetration into the lower-tiered Indian cities.
India Is A Good Market For Lower Priced Products
L’Oreal has manufacturing units in Pune and recently set up another one for hair color in
Himachal Pradesh. Some of the noteworthy innovations in India include non-sticky hair oil and
hair cream, and face washes which were later released in other markets, as well. For example, its
Garnier for Men, which was a grooming set for men, and developed in India, has now been
launched in several South East Asian markets. The company sees significant growth for its lower
priced Garnier range in the Tier II and Tier III Indian cities. Also, the introduction of products
such as the hair color, shampoo, and face wash in the sachet format had helped L'Oreal in
penetrating further into the Indian markets. It also sees good growth opportunity in men's
grooming products.
L’Oreal Will Ramp Up Export Opportunities From India
With the growth of the company in India, L'Oreal is also planning to increase its export of
products and technology from India into the Southeast Asia and larger Asia Pacific region. India
is a key hub for L'Oreal's South Asia-Pacific region, which includes Australia, New Zealand,
Cambodia, Indonesia, Singapore, Malaysia, Myanmar, India, and the Philippines. Its North Asia
region comprises of China, Japan, South Korea, and Taiwan.
Indian Beauty Industry Size And Growth Prospects
The global beauty market is estimated to double its size in the next 10 to 15 years with the top
markets being China, U.S., Brazil, and India. Also, by the year 2020, over 50% of beauty
consumers will belong to tropical and hot climates and around 60% of the global population will
inhabit major urban areas that are prone to pollution. These factors will increase the demand for
good quality cosmetics products.
According to a KPMG Wellness sector report, India's beauty and wellness sector will nearly
double from Rs 41,224 crore (~ $6 billion) in 2012-2013 to Rs 80,370 crore (~ $12 billion) by
2017-2018. The hair care market size is estimated to be around Rs 3,630 crore (~ $500 million)
with around a 20% average annual growth rate as per AC Nielsen.
According to L'Oreal, the Indian beauty market presents significant opportunity for growth as
beauty products still have a lower penetration -approximately 50% of the Indian households use
shampoo and close to 25% use skin care products. [6]Indian Women’s Cosmetic Market Is
Projected For Double-Digit CAGR Growth
Women in India are becoming more receptive to new and innovative cosmetics products that
help them maintain youthful appearances. Along with the traditional make-up fares, new
products to protect the skin from harmful effects of the sun and pollution, are also gaining
precedence, especially among working women. According to a report titled, India Women’s
Cosmetics Market Forecast & Opportunities, 2020, the market for women's cosmetics is
projected to grow between 2015 to 2020, at a 16% CAGR. The main growth drivers would be
increased consciousness of women about enhancing their looks and the aggressive advertisement
campaigns. The Indian women's cosmetics industry faces stiff competition, and hence beauty
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companies focus on innovation and attractive packaging to gain a competitive advantage over
their peers. Another rising trend is the endorsement of beauty products by female celebrities as
the aspiration to follow a celebrity's beauty regimen in order to look like her, has been an
important growth factor for sales of cosmetics in India.

WHAT HAS CHANGED? 2016 Report

The year 2016 ended on a strong note for L'Oreal having been boosted by positive growth (~4%)
in the global beauty market. The company outperformed the performance of the global beauty
market. L'Oreal's luxury segment, L'Oreal Luxe, remained its best performer with its innovative
products and iconic line of products, while the mass markets recovery continued due to the
adaptation of the segment to the contemporary market demands. Though its Active Cosmetics
segment slowed down a bit towards the end of last year, it was still a growth driver. With
L'Oreal's recent acquisitions of three brands under this category, its strong leadership position in
this segment might continue to flourish.

L'Oreal's Professional segment continued on its weak note but it is expected to show signs of
improvement as the hair color market starts gaining momentum and the new product launches by
the company last year starts picking up sales. Along with this, there has been management
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restructurings for further boosting the performance of the Professional division. L'Oreal's e-
commerce sales' impressive growth continued in both its mature and New markets. The year
2016 was one where L'Oreal boosted its market dominance and growth with the help of organic
and inorganic growth along with its digital initiatives. L'Oreal is the most advanced beauty
company when it comes to digital progress.

However, one of the biggest highlights of its Q4 2016 earnings call was that L'Oreal has started
looking for strategic alternatives for its The Body Shop brand. With over 3,000 stores across 66
countries, The Body Shop, which was once a celebrated brand, has been suffering in its
performance lately. In 2016, The Body Shop witnessed a 5% decline in its top line to reach
€920.8 million. The slowdown in sales in strategically important regions such as Saudi Arabia
and Hong Kong were attributed to its weak performance.

L'Oreal's growth engine seems to be going ahead at full steam. After a strong 2016, the company
reported a 4.5% like-for-like growth in its total sales to reach €19.5 billion for the first nine
months of 2017. The star performers as usual were the Active Cosmetics and the L'Oreal Luxe
segments. L'Oreal's strategic acquisitions are proving to be key drivers of its performance. One
of the key brands driving its Active Cosmetics Segment's growth was its 2017 acquired brand,
Cera Ve. The four most important brands for the growth in the Luxe segment had been:
Lancôme, Yves Saint Laurent, Giorgio Armani, and Kiehl's, along with its 2016 acquisition, IT
Cosmetics. Geographically L'Oreal's new markets are some of the best performers, particularly
the Asia Pacific market in which China stole the limelight. It is noteworthy that Estee Lauder's
recent performance was also boosted by China. The country is emerging as one of the most
important markets for the growth in beauty sales. Western Europe was also another key market
that drove L'Oreal's growth.

1. Strategic investments are a key to L'Oreal's success

o In January 2017, in an effort to further grow its active cosmetics segment, L'Oreal
announced its intention to acquire the skincare brands, CeraVe, AcneFree, and
Ambi from Valeant Pharmaceuticals for a sum of $1.3 billion.

o The acquisition of the active cosmetics brands might help L'Oreal further
strengthen its leadership position in the active cosmetics market. These brands are
quite popular with health professionals and are expected to almost double the
revenue for L'Oreal's active cosmetics division in the U.S. According to a recent
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report by Research and Markets, the global cosmeceutical market is expected to

grow at a CAGR of nearly 6% between the period of 2017 to 2021.The company's
influence in other geographies gives it the opportunity to expand the footprints of
the acquired brands beyond North America.

o The year 2016 was an active one for L'Oreal in terms of acquisitions. In July
2016, the company announced the decision to acquire 1. premium fragrance
brand, Atelier Cologne, 2. the France-based spa group Société des Thermes de
Saint-Gervais-les-Bains, 3. the US based prestige beauty company, IT Cosmetics
(for $1.2 billion), and 4. the license to use the Saint-Gervais Mont-Blanc beauty
brand.

o In May 2016, L'Oreal announced a partnership with Founders Factory, a global

digital accelerator and incubator based in London. The exclusive partnership
enabled the companies to invest in Beauty tech startups across the world along
with the opportunity to co-create two new companies every year. In January 2017,
L'Oreal and Founders Factory selected five startups to further help them with their
growth. The selected companies range from those helping businesses improve
social media reach and with online campaigns, to those selling customized
skincare and nail art. L'Oreal's own digital initiatives and innovative product
pipeline might receive a boost as a result of these investments.

o Currently, the beauty giant is planning on launching a program in Paris that will
involve the collaboration of start-ups in order to produce more products like
'smart' hairbrushes and skin patches. The company aims at developing a site in
Paris where 10 to 12 startups might work in collaboration with L'Oreal to develop
more innovative technology for beauty every year.

o In January 2016, L’Oreal launched a stretchable skin sensor called My UV patch.

The product, which is currently in beta form, is designed as a wearable, and it will
help educate users about their exposure to ultraviolet rays. The patch will be
released under the company's dermatological skincare brand, La Roche-Posay.
Guive Balooch, L'Oreal's Global VP of Technology Incubator, has indicated that
this might be a start for the company to bring more sophisticated hardware and
software technologies into its products. My UV Patch is the first attempt by a
beauty company to introduce wearables among beauty users.
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o Also in January 2016, L'Oréal USA, the biggest subsidiary of L'Oréal Group,
signed an agreement for acquiring key assets from Raylon Corporation, a full-
service family owned wholesale distributor of salon professional products. This is
L'Oréal's first acquisition for the year 2016, and this is the company's initiative to
further strengthen its professional products segment and distribution coverage
against rising competition.

o L’Oreal is currently conducting research towards connecting its makeup products

through the Internet of Things. The Internet of Things is the network of objects or
“things” which can collect and exchange data with the help of their embedded
electronics, software, sensors, and network connectivity. The successful
implementation of this technology will allow L’Oreal to give connectivity to its
makeup products, such as lipsticks, nail polishes, or mascaras. This, in turn, will
help the company to better track its consumers.

2. L'Oreal Sells Off The Body Shop

o Recently, L'Oreal sold off its The Body Shop brand to the leading Brazilian
beauty company, Natura Cosmetics, for €1 billion. The Body Shop brand has been
persistent in its weak performance under L'Oreal's umbrella, hence, selling it off
seemed like a good decision for L'Oreal. In 2016, The Body Shop's sales declined
by 5% y-o-y to around €921 million and its operating profit declined by 38% y-o-
y to €34 million.

POTENTIAL UPSIDE & DOWNSIDE TO TREFIS PRICE

L'Oreal's Market Share of Global Hair Care Market: Hair Care Market Share for
L'Oréal declined from 24.3% in 2009, to 22% in 2012, and was around to 24%,
23%, and 20% in 2013, 2014, and 2015 respectively. In 2016, the company's
market share stood at 20%. The company pulled out its Garnier brand from China
in a bid to focus exclusively on prestige beauty products in the region. We
currently forecast L'Oréal's share of the Hair Care market to reach 23% by the end
of our forecast period. There could be a marginal downside to the Trefis price
estimate if the market share remains flat at the current level.

L'Oreal's Market Share of Global Skin Care Market: L'Oréal's Skin Care Market
Share expanded from 12.3% in 2009 to close to 14% in 2014 before declining to
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around 12% in 2015 and 2016. We currently forecast L'Oréal's share of the Skin
Care market to grow to about 15% by the end of our forecast period. There could
be a marginal downside to the Trefis price estimate if the market share were to
remain flat at the current level.

BUSINESS SUMMARY

L’Oreal is the largest manufacturer of cosmetics in the world. It manufactures and

sells makeup, fragrances, skin care, and hair care products through over 30 global
brands. It caters to consumers across all income levels and distribution channels
spanning mass volume retailers and drugstores, to upscale perfumeries,
pharmacies, department stores, company-owned stores, and e-commerce websites.

L’Oreal reports and segments its products range on the basis of price range and
distribution channel into: Professional, Consumer, Luxury, and Active products.

3. Professional Products constitute ~15% of net sales and are meant for professional hair
care by stylists at hair salons. The main brands include: L’Oreal Professional, Kerastase,
Matrix, Mizani, and Redken.

4. Consumer Products constitute approximately 50% of cosmetics sales and are sold
through mass volume retailers and drugstores. Consumer products include makeup, skin
care and hair care products, competitively priced and distributed through mass-market
retailing channels. The main brands include: Garnier (skin and hair care for men and
women), L’Oreal Paris (skin care, makeup, hair care, and hair colors under Studio-Line,
Dermo-Expertise, and Elseve product lines), Maybelline New York and Softsheen-Carson
(hair care for African ethnic descent consumers).

5. Luxury Products constitute about 30% of cosmetics sales and comprise prestigious
brands and premium service through department stores, upscale perfumeries, travel retail
outlets, as well as free standing stores and e-commerce websites. The main brands
include Lancome, Biotherm, and Kiehl’s.

6. Active Productsconstitute about 8% of cosmetics sales and include dermo-cosmetic

(cosmetics with medicinal ingredients and recommended by pharmacists and
dermatologists) skin care products sold exclusively through pharmacies, specialty
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drugstores, medi-spas, and even dermatologists. The main brands are La Roche-Posay,
Skinceuticals, Vichy, and Sanoflore.

7. The Body Shop constitutes about 1% of net sales and includes a chain of over 3,100 free
standing ‘The Body Shop’ stores in over 60 countries across the globe. Acquired in 2006,
The Body Shop range of cosmetics is well known for its products based on natural
ingredients and the brand’s strong ethical commitments and fair-trade practices.

L'Oreal also has ~ 9% stake in Sanofi Aventis, the dividend from which contributes significant
value to L'Oreal's stock.

Despite L’Oreal’s global presence, about 35% of its cosmetics revenue comes from Western
Europe and over 25% from North America. Asia accounts for about 23% of its cosmetics sales.
Latin America and Eastern Europe currently contribute around 8% and 6%, respectively.

L'Oréal's main competitors include other major global beauty care products manufacturers such
as Revlon, Estee Lauder, Avon, Shiseido, and Procter & Gamble, among others.

SOURCES OF VALUE GENERATION:

LEADING MARKET SHARE IN SKIN CARE, FRAGRANCES, AND MAKEUP

L'Oreal has the largest market share in the Skin Care segment, the largest and fastest growing
segment within Beauty Care (on account of anti-aging skincare and skin care for men), as well as
in the Fragrances and Makeup segment.

SECOND LARGEST MARKET SHARE IN HAIR CARE, THE SECOND LARGEST

PRODUCT SEGMENT (AFTER SKIN CARE) WITHIN BEAUTY CARE

Hair care is a stable and growing market, and L'Oreal commands the second largest share in the
segment, after Procter & Gamble. Hair care accounts for about 20.5% of L'Oreal's net sales.
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HIGHEST R&D AS PERCENTAGE OF NET SALES AND MARKETING EXPENSES IN

THE BEAUTY CARE INDUSTRY WHICH ENSURES MARKET LEADERSHIP

Launching new and innovative products is crucial to growing or even maintaining share in the
beauty care industry. L'Oreal spends more on R&D as a percentage of sales as compared to its
competitors. This has helped L'Oreal remain a leader in the cosmetics market.

On the basis of revenue, L'Oreal (at ~$30 billion) is much larger than Revlon ($2 billion), Avon
($9 billion), and Estee Lauder ($11 billion). Therefore, L'Oreal has more money to spend on
marketing, which is an extremely important factor for success in the cosmetics industry.

KEY TRENDS

BOOMING SKIN CARE DUE TO ANTI-AGING CREAMS

Anti-aging creams and anti-cellulite skin care products are in high demand among the aging
populations in developed countries, notably Japan (oldest demographic), the U.S., and Western
Europe. A big chunk of L'Oréal's skin-care business comes from anti-aging products. The anti-
aging market comprises of those products that can treat multiple signs of skin aging at one time,
and is a fast-growing segment under the anti-aging beauty products.

GROWTH OF NATURAL PRODUCTS CATEGORIES AND "MASSTIGE" SEGMENT

AS WELL AS MALE PRODUCT LINES

There is a growing demand for natural / organic products in most countries, a trend led by the
developed markets in the U.S. and Western Europe. Additionally, there is an increased preference
for less synthetic, eco-friendly, and more natural products and packaging.

There is a growing trend towards the so-called "Masstige," or premium brands sold at lower
prices through mass distribution. In addition, beauty care products focused on men is the latest
niche being targeted by most players globally. In developed markets, particularly in the U.S. and
Western Europe, the introduction and extension of the men’s product lines is a major source of
growth.