Italy: a leading industry facing a sluggish domestic demand

Beautiful young couple relaxes.Despite being a competitive segment whose players heavily invest in the research and development areas and displayed an overall 5% growth in overseas sales last year, the Italian cosmetics sector must now deal with the poor market performance shown by few of its typical best-selling products. According to figures released by the Italian Trade Agency or ICE last March the tri-colored cosmetics industry involves today some 1,200 brands and 15,000 employees, plus a broad supply chain made of third party players and private label producers. Most players in the arena are typical family companies and small or medium businesses mainly based in the Country’s Northern regions, such as Lombardy, Veneto, Emilia-Romagna and Piedmont. Described as a vast and fragmented scenario, the Italian cosmetics and personal care industry hosts a number of highly specialized firms and can rely on skilled and experienced resellers or distributors, in order to fulfill customers’ requests in a variety of channels ranging from the pharmacy and herbalists’ shops to hairstylists’ salons and, last but not least, super or hypermarkets and mega-malls. Last year, as the Italian Trade Agency reported, overall revenues were up 2.9% in the segment, basically thanks to overseas sales, that after reaching their +17% record-high in 2010, still managed to show a 12 percentage points growth. In 2013, Italian exports totaled some 3.2 billion euros revenues and the Agency is confident this trend will continue in the near future too, driven by some emerging markets’ rocketing demand. ICE forecasted that in the short-medium term Italian cosmetics will show steady growth in such areas as China, Hong Kong, Taiwan, Singapore, Peru, Chile, Brazil, Argentina, Russia, Iran, South Korea, Thailand; but will also display positive results in North America and Europe. The Italian industry represents the third largest cosmetics system in the European Community, preceded by France and Germany respectively and can leverage its important expertise in research and development, thanks to an annual average 6% of overall revenues entirely addressed to innovation.
Dealing with a polarized consumption
Despite the industry’s encouraging performance and despite the Italian Trade Agency’s optimistic forecasts, the tri-colored beauty and personal care segment is presently to deal with other more challenging issues, depicted by a series of reports Euromonitor released last June. According to the London-based independent research company, «beauty and personal care performed poorly» in the Country «during 2013, due to the economic crisis, as Italian consumers suffered falling disposable incomes and avoided purchasing anything not considered an absolute necessity». Euromonitor also noted that economic slowdown is «polarizing consumption», and although a number of products and channels showed significant losses, others were, at the same time, gaining momentum, «with increases noted in demand for premium and economy products at the expense of mid-priced products». That’s also due to the Italian taste for quality and excellence: «A substantial proportion of the Italian population are still very interested in high-quality products and premium brands», Euromonitor’s researchers pointed out, whilst on the other hand noting that «the majority of Italians are increasingly looking for better value for money». Thus, it is a challenging scenario local and multi-national players are about to face, in which the price factor is becoming more prominent with time: «The beauty and personal care industry», as Euromonitor reported, «has seen high levels of price competition among the leading manufacturers and retailers in recent years. In fact, consumers are now becoming increasingly price-sensitive and more interested in offers and promotions». According to the company’s studies, «price promotions» emerged as one of the most important drivers for sales in the beauty and personal care segment, largely impacting on producers’ margins and creativity could turn up to be the only ace up the industry’s sleeve: « The only way to increase margins has been to offer innovative products which provide higher levels of functionality, including multipurpose products, which are generally sold at higher unit prices», Euromonitor said.
Waiting for the ethnic cosmetics wave
Other sources, namely the global information company NPD Group, reported sharper declines in the Italian Prestige beauty sector, recording a -3% fall in terms of value during the first half of 2013, when revenues in the segment topped 883 million euros. The same New York-headquartered research firm recorded declines in the Italian skincare, fragrances and make-up markets too, that saw their sales decrease by six and two percentage points respectively between 2012 and 2013. Crisis and price competition were also among the reasons for cosmetics’ recent success in the supermarkets and hypermarkets channel, since scale economy policies allow retailers to offer such lines of products at «competitive prices», as researchers also noted. Also, newly introduced stores such as the para-pharmacies; or Internet-based direct selling models are today about to increase their market share, although it is Euromonitor’s opinion that the Italian cosmetics’ perspectives remain, at the moment, uncertain, with no sign of a robust recovery on the demand side. One exception is represented by color cosmetics, whose success was driven last year by a variety of items: «Color cosmetics», researchers noted, «managed to post positive current value growth, rising by 2%. This positive growth was driven mainly by strong sales of BB creams, eye make-up and nail products» and observers expect manufacturers to increase their investments in the quoted segments, after launching a series of new generation BB creams known as CC creams. The market is also influenced by the growing number of immigrants settling in the Country and this is also why Euromonitor suggested that ethnic color cosmetics could reveal a real bestseller in the near future. L’Oréal Paris remained the leading color cosmetics brand in Italy throughout 2013 with its 22% market share in terms of value. But remarkable is Kiko’s performance too. Focused on nail and eye make-up products the Italian brand has been, in Euromonitor’s own words, «outperforming since it was introduced» back in 1997 and, six years later, was able to climb up to a 10% value share. Signs of recovery were also shown by Procter & Gamble Italia, that gained last year a 0,5% share after a period of decline, while the world-renown Rimmel product line kept driving Coty Italia’s success: the company ranked fourth in an ideal top-producers’ list. Outlooks for the color cosmetics arena are negative and a further slowdown is expected: «The gloom anticipated in the Italian economy», researchers wrote, «is set to have a negative impact on the choices of vast numbers of Italian consumers encouraging them to turn to less expensive color cosmetics and limiting the frequency with which they purchase color cosmetics. Nevertheless, the category’s leading brands are expected to take steps to maintain high levels of volume sales through advertising and innovation in all of the most promising color cosmetics categories, specifically nail products and other facial make-up».
Fragrances: premium products prevent steeper declines
Other product lines recorded slight declines during 2013 and among those Euromonitor’s analysis considered the above mentioned fragrances, whose market performance throughout the year faithfully witnesses the ongoing changes in consumers’ behavior. In fact, if it is true that current value sales fell by one percentage in the period, then it was the «favorable performance of premium fragrances» that prevented «steeper declines» in the sector. Competition is becoming more aggressive with time and this is possibly one of the reasons why leading manufacturers are increasing their marketing and communication-oriented budgets and enhancing their research and development, while focusing on brand awareness or visibility in a mature and challenging scenario. It is considered unlikely that Italian consumers «will trade down from premium fragrances to mass fragrances due to the adverse economic situation»: instead, they could «purchase fragrances less often», with many «expected to simply use the fragrances they have in their existing collections». Number one player in the field was Chanel (with a 12% share), whose momentum was due both to such traditional blockbusters as Chanel n°5 and to novelties like Coco Noir. A 10% share is held by Procter and Gamble and Christian Dior, both ranking second and both leveraging, according to observers, the success of two particular product lines: Dolce & Gabbana’s Light Blue and J’Adore.

OVERSEAS SALES
Grew by 12 percentage points last year, after reaching their +17% record high in 2010, and thus helped the Italian cosmetics industry climb up to a +2,9% in overall revenues, according to figures published, last March, by the Italian Trade Agency or Ice.

THE ITALIAN COSMETICS INDUSTRY
Is poised to penetrate new markets such as China, Hong Kong, Taiwan, Singapore, Peru, Chile, Brazil, Argentina, Russia, Iran, South Korea, Thailand. But it will also display positive results in North America and Europe, according to recent forecasts.

Sources
Euromonitor International: www.euromonitor.com/
ICE – Italian Trade Agency (Newsletter, March 2014): newsletter-ice.com/

 

by R. Carminati in collaboration with Euromonitor Internatinal

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