Germany's shaky economy has impacted sharply on the country's cosmetics and toiletries industry, with a series of disastrous losses and analysts forecasting a bleak year ahead
?While 2007 was a good year for the beauty industry and forecasts for 2008 were initially quite hopeful, the year got off to a weak start and things are now starting to look rather bleak.
In the second quarter the German economy registered negative growth for the first time in four years and industry observers say that Germany is hovering on the brink of a recession. Not surprisingly consumer confidence has also slipped, according to a recent study by market researcher Gfk. In August 2008 the all-important indicators ‘consumer confidence’, and ‘propensity to buy’ both took a hit and although ‘income expectations’ recovered slightly, ‘economic expectations’ slid to their lowest value for five years.
However, 2007 at least marked a return to form for the mass market C&T sector. According to industry association Industrieverband Körperpflege und Waschmittel (IKW) the market grew 3.6% to €12.328bn in 2007, with a per capita expenditure of €144.45 and every category, with the exception of soaps and syndets turned in a strong performance.
HAIR CARE
Hair care (including styling and salon sales) is the biggest category in the C&T sector with sales worth €2.98bn according to IKW. And IRI figures show that total turnover of the hair care sector grew 2.8% to €1.092bn in 2007, while volume sales climbed 1.98% to 162.32m litres. However, first quarter sales for 2008 already reflect a downturn in consumer spending. Total turnover for hair care and colourants grew 4.3% to €256.154m but volume dipped 0.06% to 36.819m litres which means that the solid looking value turnover has more to do with price increases than actual sales.
Despite these worrying figures there have been plenty of new launches over the last year. The sector is dominated by about half a dozen manufacturers, including Schwarzkopf & Henkel with Gliss Kur, Poly and Schauma and the styling ranges Shockwaves and Taft; Beiersdorf with Nivea; P&G with Pantene, Herbal Essences and the styling brand Wellaflex; L’Oréal with Garnier, L’Oréal Paris and Fructis; and Kao’s Guhl portfolio.
All these big companies were well represented in the NPD sector. L’Oréal brought out Anti-Schädigungs (anti-damage) and just a few months ago launched Re-Nutrition, a hair care range with gelée royale. Nivea introduced the Diamond Gloss care and styling range and added the moisturising Intensive Repair hair care range to its portfolio, while Pantene brought out Breakage Defense which is claimed to reduce hair breakage in one month.
Intensive treatments – and especially night-time products – were also popular. New arrivals included Fructis’ Night Repair Kur and Guhl’s Feuchtigkeits Balance moisturising bi-phase spray. Schwarzkopf & Henkel extended three Gliss Kur ranges with Spülkur, hybrid products claimed to combine the deep moisturisation of an intensive treatment with the speed of a wash-out product. Finally the naturals trend has also reached the hair care sector and Schauma was the first conventional hair care brand to launch two product ranges formulated with ingredients from certified biological cultivation.
SKIN CARE
According to IKW the facial skin and body care segment grew 2% to €2.889bn with skin care putting on 4.5% and body lotions also registering good results. And IRI’s figures for January to October 2007 show that facial skin care grew 6% to €626.100m, while volume put on 2% to 10.624m units.
The big manufacturers in the mass market facial skin care sector are Nivea and stable-mate Florena, Schwarzkopf & Henkel with its Aok young skin care range and the Diadermine anti-ageing portfolio but also L’Oréal Paris, P&G with Oil of Olaz and Dr Scheller (Kalina) with Manhattan Clearface, another young skin care brand. Dermatological brands like Beiersdorf’s Eucerin, J&J’s RoC and L’Oréal’s Vichy range, which in Germany are retailed primarily through pharmacies, are also very popular.
Like other C&T segments the facial skin care sector has seen increasingly tight product segmentation. L’Oréal, for example, launched the five-sku Demaq’ Expert range featuring different types of cleansers, while Diadermine introduced the caviar-based Age ExCellium skin care range. In the anti-ageing category Nivea came up with Oxygen Power and L’Oréal Paris launched Derma Genesis, a cosmeceutical-inspired range containing hyaluronic acid and Pro-Xylane. And over in the luxury market Coty’s Lancaster brand went the natural route and based its Differently Nutri-Dermo Skin range on vitamins, trace elements and omega acids.
The young skin care brands concentrated on another big trend – face peels. Both Aok’s Pur Lift range for women aged 30+ and Manhattan Clearface were extended with a pore-refining face peel each. And Oil of Olaz brought out a novel type of face mask in its Total Effects range harnessing the perennially popular ‘instant effects’ trend. 7x Vlies-Maske is a cloth mask saturated with moisturising ingredients that is placed on the face for an instant freshness boost.
COLOUR COSMETICS
IKW puts the colour cosmetics sector up 10% to t1.247bn in 2007, and IRI’s figures for 2007 paint a similar picture with turnover up 7.1% to t1.035bn, while volume grew 5.9% to 166.268m units. And the first half of 2008 has also been very successful, with value sales growing 6.5% to t545.37m and volume shooting up 9.7% to 90.203m units. This is less surprising when you consider that a dire economic situation traditionally boosts colour cosmetics sales.
The mass market is dominated by German companies with a good sprinkling of foreign brands as well. First and foremost there is, of course, Nivea Beauté, but Dr Scheller’s Manhattan, Coty’s Astor together with stable-mate Rimmel, L’Oréal Paris and Maybelline Jade and P&G’s Max Factor by Ellen Betrix also vie for consumer favour, while budget brands P2 (Palmers) and Essence (Cosnova) are targeting a more teenage market.
As in previous years lipsticks and mascaras were amongst the most popular product categories. German masstige brand Art Deco launched the two-sku Fabulous Mascaras collection, whilst P2 introduced the Beauty Insider Mascara range comprising four lengthening, curling and volumising variants. In the lip segment Maybelline Jade brought out the duo product Superstay Powergloss and stable-mate L’Oréal Paris came up with Indefectible Kompakt Lip Duo, another two-step product. Manhattan celebrated the 100-year anniversary of the lipstick by overhauling its lipstick portfolio and adding two new products to the line-up, the lacquer-gloss effect Intense Moisture & Gloss lipstick and a lipstick based on minerals.
In fact, minerals are a hot trend in other make-up categories, particularly in foundations and powders. Art Deco recently brought out the five-sku Pure Minerals collection; L’Oréal Paris launched a minerals-based blusher and a selection of shimmering loose eye shadows; Maybelline Jade followed with the Pure.Makeup Mineral foundation; Astor with Mineral Match Makeup; and Manhattan introduced the limited edition Trendwelt Minerals comprising a face powder, eyeshadow and lipliner as well as a compact blusher and lip cream.
WOMEN'S FRAGRANCE
According to IKW women’s fragrance grew 6% to €964.6m in 2007. IRI Germany, however, says that although value sales in this sector grew 3.7% to €1.053bn volume dipped 1.8% to 49.658m units, which indicates that price increases are responsible for the value results. And industry association Bundesverband Parfümerien confirms that fragrance grew more slowly in 2007 than initially anticipated. Since most fragrances come from the luxury sector and carry a matching price tag the VAT increase and general reluctance in consumer spending is more visible in this sector than other C&T categories.
Despite or perhaps because of this development Fragrance Foundation Germany says that luxury and indulgence are the key words for fragrance in 2008 and that there will be a return to high-quality ingredients and opulent fragrances especially in the luxury sector. There were certainly some extremely feminine and voluptuous fragrances amongst the new launches last year. Max Mara (P&G), for example, launched Le Parfum, a combination of nutmeg and musky accords with a floral heart. Juicy Couture offers fruity and floral notes combined with a gourmet base. And Coty Prestige introduced the luxurious La Voce, a floral oriental to honour US opera soprano Renée Fleming, while designer Jette Joop’s Dark Sapphire (Coty) contains rose, aniseed and a gingerbread accord.
Limited editions and flankers are always popular in Germany and there were new entries from Jil Sander and Eternity (Coty Prestige) and Escada (P&G). Celebrity fragrances were also much in evidence including offerings from Celine Dion, Kylie Minogue, Christina Aguilera and Kate Moss. Several young fashion brands have successfully branched out into fragrance ventures and these masstige products are a distinct feature of the fragrance market as well. Fashion brands Mexx and s.Oliver (Mäurer + Wirtz), Coty’s Puma, Adidas and Esprit and Benetton (Selective Beauty) all regularly launch new fragrances aimed squarely at a young sporty target group.
MALE GROOMING
As in the previous year men’s C&T was one of the most successful categories with a 9.6% increase to €883.5m. And IRI’s figures for 2007 show that the segment (including shaving preps and fragrance) grew 7.3% to €494.955m. Facial skin care proved to be especially popular and put on 5.1% to €22.023m while fragrance grew 8.9% to €403.121m. And these results come as no surprise as Gillette’s 2007 European Grooming Report found that Germans spend 24 minutes per day on grooming, more than any other European male.
The men’s skin care segment is now displaying a segmentation similar to its female counterpart, with manufacturers increasingly launching more sophisticated products such as eye gels, hydrating serums, 2-in-1 products, masks and scrubs in their ranges. L’Oréal’s Men Expert, for example, introduced a hydrating eye product and a light self tanner for the face, while Comfort Max is a moisturising concentrate for dry and sensitive skin. Florena decided to address the problems of sensitive skin with a new men’s range containing aloe vera and panthenol. In the luxury sector Estée Lauder’ Lab Series for Men launched an oil-free moisturiser, lip care balm and cooling eye gel with a roller ball applicator, while French brand Nickel brought out an intensive moisturiser with watermelon extract.
BATH & SHOWER
According to IKW bath and shower products grew 3.4% to €817m. IRI Germany, on the other hand, posted slightly lower figures for the sector with total sales from January to October 2007 reaching €626.034m, up 0.8% while volume fell 1.06% to 125.192m units.
The bath and shower sector is dominated almost exclusively by German manufacturers. The big brands include Merz Pharma’s TeteSept, natural cosmetics stalwart Kneipp, Beiersdorf’s Nivea and Florena brands and, of course, Schwarzkopf & Henkel with Fa and Bac. Other well known players are Chefaro Pharma’s Claire Fisher, Colgate’s Palmolive range of aromatherapy bath and shower additives and J&J’s Bebe shower gel range which has cornered the younger market with its playful brand image and packaging.
LUXURY MARKET
The luxury sector reported subdued results for 2007 especially when compared to the very successful previous year. Industry association Bundesverband Parfümerien says that although last year started on a high note sales began to dip around the second quarter and even the all-important Christmas sales didn’t manage to turn things around. As a result overall luxury sales were sluggish with value turnover climbing a very slender 0.7% to €2.65bn and volume dipping 0.5%. Most categories registered dismal results. Women’s fragrance (the biggest slice of the market with 29.7%) fell 0.5%, facial skin care (21.9%) dropped 1.1% and body care (6.1%) slid 1.8%. The only categories to register any growth were colour cosmetics (13.5%) and men’s products (16.1%) which grew 3.1% and 3.9% respectively, while the others category (primarily accessories with a 13.4% market share) increased 0.9%.
And luxury perfumery association Verband Kosmetischer Erzeugnisse VKE posted very similar results. Combined 2007 turnover amongst VKE member companies showed a slight increase of 0.9% to €1.565bn. The strongest performers were again men’s products, up 10.1%, and colour cosmetics with an increase of 5.8%. Body care grew 1.4% but facial skin care and sun care fell 3.8% and fragrance dropped 3.6%. The association says that it expects the market to grow up to 2% in 2008 with about half of its members anticipating a stable sales performance.
The big perfumery chains which account for 55% of the sector yet again managed to increase their market share last year. The market leader here is the Douglas group with some 442 stores across Germany. The retailer posted a 5% increase to t881m for its perfumery division in 2006/2007 and announced that sales grew 3.2% to €707.8m between October 2007 and June 2008. And Douglas is planning to aggressively drive forward its expansion both in Germany and in Europe. This is bad news for Germany’s independent perfumeries which have been struggling with sluggish sales and falling margins over the last few years anyway. The pricing war is still on in the perfumery sector and while the big chains can afford to offer lower prices on luxury goods, the independents with their much slimmer margins are suffering from this price pressure.
In fact C&T pricing issues keep making news headlines this year. In July the German federal anti-trust authority Bundeskartellamt fined the German subsidiaries of Chanel, Clarins, P&G Prestige Products, Coty Prestige Lancaster, Estée Lauder, L’Oréal, LVMH, Shiseido and YSL Beauté a total of €10m for exchanging internal data and market information including sales figures, planned product launches, advertising budgets, pricing and even strategic advice on how to deal with the perfumeries retailing their brands. And earlier this year Henkel & Schwarzkopf and the German subsidiaries of fellow multinationals Unilever and Sara Lee were slapped with a total fine of €37m for fixing prices on several C&T products.
DISCOUNTERS & DRUG STORES
The retail market in Germany is traditionally very competitive and the last year has seen increasing consolidation across all channels. In the grocery sector the discounters, and particularly heavyweights Aldi and Lidl, continued to tighten their grip on the market.
Aldi is the discount market leader and it is estimated that there are some 4,200 outlets nationwide with a combined turnover of €27bn, followed by Lidl with 2,800 outlets and a €12bn revenue. However, earlier this year a new competitor appeared on the scene. The German Edeka group merged its Netto discounters with the Tengelmann group’s Plus discount chain to create a new discounter network with over 4,000 outlets, bigger by far than either Aldi or Lidl. Bundeskartellamt has consented to this merger provided that Tengelmann will sell some 400 outlets in selected locations.
Like the discounter segment the drug store channel has been one of the few consistently successful C&T retail channels over the last few years. The market is dominated by the big three - Schlecker, DM and Rossmann. There are also some regional chains like the Müller group which is based in Ulm in southern Germany and operates 440 stores with retail spaces ranging from 400 to 4,000 sqm and the family-owned Budnikowsky chain which runs some 125 stores (300-600 sqm) in the Hamburg area.
However, Schlecker, DM and Rossmann are the strongest forces in the extremely competitive drug store market. The Schlecker group with 11,000 branches is the market leader, primarily because of the immense number of its outlets, many of which comprise just 130-200 sqm. This means that product choice is by necessity limited and there is hardly any space for presentation. And this is what consumers have criticised in recent years, together with Schlecker’s practically non-existent customer service and low product quality.
As a result Schlecker’s German group sales have been suffering of late and in a bid to move away from its cheap discounter image and to boost turnover the retailer acquired the 700-strong drug store chain Ihr Platz in late 2007. Ihr Platz, which declared bankruptcy in 2005 and was then purchased by investment fund Goldmann Sachs, has a strong focus on health, wellness and beauty. Schlecker will retain the chain’s brand name and logo and Ihr Platz will be positioned as the group’s premium drug store brand.
The second biggest chain, DM recently announced that according to a P&G shopping study more consumers have bought drug store goods at DM outlets in 2007 than at Aldi or Schlecker stores and that DM’s share of the drug store beauty market has increased to 17.5% of the total. And Rossmann with its 1,300 stores and an average retail space of 400sqm has also had a very successful year, boosting its turnover by 10.3% to €2.45m in 2007.
DEPARTMENT STORE CRISIS
The department store sector continued on its tumultuous path in 2007/2008. After a period of intense consolidation in the 1990s there are now just three main department store chains in the German market. The two biggest players are Metro-owned Kaufhof group and Arcandor-owned Karstadt. Both chains have gone through some tough years and not just because the German department store sector has been in trouble, suffering from falling sales and empty stores and losing market share to both discounters and cheaper stores and luxury outlets.
The Metro group, which also owns the ailing Real discounter chain, the Media Markt and Saturn electronics stores and, as its only successful business, the Metro Cash & Carry division, has been posting dismal results for years. The department stores in particular have been in trouble, fighting for market share with competitor Karstadt in an increasingly difficult retail environment. In early 2008 Metro announced that it would put the Kaufhof chain on the block as part of its ongoing group consolidation and appointed investment group J.P. Morgan to find a buyer. According to industry sources the purchase price is set around €3bn.
For a while some industry observers speculated that Karstadt might be interested in acquiring Kaufhof. But Karstadt has its own financial difficulties and would probably need external help if it were to purchase Kaufhof. Crisis-torn Arcandor, formerly known as Karstadt-Quelle, has been following a strict consolidation and restructuring programme for several years now, selling off as many ailing divisions and interests as it could and in early 2007 acquiring UK travel group MyTravel for its Thomas Cook tourism division. Arcandor now derives more than half of group revenue from its successful travel business but the department stores are continuing to struggle and in the first quarter of 2008 posted an 8.1% drop in turnover to €1.32bn. In a bid to reduce costs Arcandor has even cut the Wertheim store brand. But the group is still in difficulties and according to recent media reports is even considering selling off some its Thomas Cook shares.
The third chain on the market is Hertie, originally founded in 1882, which changed hands several times in the last 15 years. In 1993 Karstadt-Quelle bought the 74-strong Hertie chain and promptly renamed the outlets Karstadt Kompakt. In 2005 UK investor Dawnay Day acquired the ailing store chain and in March 2007 decided to rejuvenate the Hertie brand name in Germany. Despite initial bullish forecasts Hertie has continued to post losses and in July 2008 finally declared insolvency.
However, Hertie itself appears to be quite upbeat about the whole situation. According to its insolvency administrators there are several interested investors and the retailer has even announced that at present it is considering further expansion rather than cut back on staff or close down outlets. Instead the chain wants to implement a new retail strategy targeting female customers aged 30 to 50 years living in smaller towns and cities, with the goal of posting the first black figures by 2009. But industry observers doubt whether this strategy will be successful since it is rather too similar to Hertie’s previous attempt to make a comeback on the German market, the attempt which ended with this year’s insolvency.
With the international financial crisis plastered across the news headlines it isn’t surprising that consumer confidence is low in Germany. The last year has also seen price increases in the energy and FMCG sectors and for most Germans their real income and purchasing power has actually fallen, due to VAT and tax increases and the necessity of investing more money into health services and old-age provisions. Combined with the ongoing fear of recession these factors make consumers think twice about spending.
Having said that, Germans still love their C&T and this might well be the saving grace. Products like shower gel or toothpaste count as necessities of course, but a recent consumer behaviour study has found women also spend an average of €540 a year on higher priced cosmetics like fragrance, facial skin care and make-up. This should at least ensure that however the next year develops, the C&T market – and certainly the mass sector – will stay in reasonably good shape compared to other FMCG categories. And sooner or later the uncertain economic situation will settle down and hopefully consumer confidence will then return.