Argentine cosmetics sales plunge on fast inflation

25-Aug-2016

But IMF forecasts 2.8% growth in 2017 after a 1% contraction in 2016

In Argentina, investor optimism has swelled since the arrival of a conservative government in December, but sales of cosmetics and personal care products have taken a hit as soaring inflation cuts consumer spending power.

Argentina fell into a recession this year after four years of slow growth, while a spate of economic reforms by the new President Mauricio Macri has sped up the inflation rate to nearly 40% from 26% in 2015.

“Although we expect a recovery, we do not believe that it will be instantaneous,” said Fernando Cruz, a Research Analyst at Euromonitor International.

The reforms include settling defaulted debts, lifting capital controls and letting an overvalued currency depreciate by more than 40% and float freely, as well as to more than double the prices of bus fares and other public services. This is expected to attract fresh investment, widen access to financing, and drive down inflation and interest rates to help revive the economy in 2017. The International Monetary Fund (IMF) forecasts 2.8% growth in 2017 after a 1% contraction this year.

Even so, personal care product consumers are reeling this year from the faster inflation and concerns of job losses.

Retail sales fell for a third straight month in March year-on-year, dropping 5.8%, with sales down 5.9% at pharmacies and 4.6% at perfume shops, according to the Confederación Argentina de la Mediana Empresa, an industry group for small and medium-sized companies. Supermarket sales fell 8% over the same period, with perfumery and personal care product sales falling the second fastest (hardware sales contracted the most), according to the Asociación de Supermercados Unidos, an industry group for supermarket chains.

Shopping local

With tighter budgets, consumers are not stocking up at large supermarket chains such as Coto and Walmart once a week but purchasing products as needed at nearby shops, said Laura Barnator, Vice President of Sales for Unilever Argentina.

“It’s a lot of money to fill a trolley,” she said. “It’s also extremely frustrating when you don’t have the purchasing power to go to a supermarket chain and you’re not able to buy whatever you want.”

Consumers are still hitting the supermarket chains, but mainly for promotions, she added. Supermercados DIA, an important retail chain, was offering three-for-two on Unilever’s Dove brand of conditioners, deodorants and shampoos in April, and 30% off on soaps.

DIA and other chains, such as Carrefour and Supermercados Vea, are also promoting their own label brands to capture the demand for lower prices, which has been growing fastest among middle and higher-income households, according to Kantar Worldpanel. Own label toothpaste, for example, costs 55% less than premium brands, according to the research company.

To compete, Colgate-Palmolive, Procter & Gamble (P&G), Unilever and other companies are offering discounts and providing more shelf visibility for their products, in particular for cheaper second- and third-tier brands.

This strategy is helping to keep up overall sales of bath and beauty products for Unilever, but there is a preference for smaller sizes, Barnator said.

Argentina fell into a recession this year after four years of slow growth, while a spate of economic reforms by the new President Mauricio Macri has sped up the inflation rate to nearly 40% from 26% in 2015

There’s also been a rise in demand from direct sellers like Avon, Mary Kay and Brazil’s Natura this year, led by fragrances. The key has been consumers buying quality products at discount prices – and to make a side income as sellers during the recession, Cruz said.

On the bright side for the industry, the new government is progressively lifting import restrictions that have stymied sales and profits since 2011. The restrictions made it harder for cosmetics importers to get dollars to buy products abroad, leading to shortages, delayed launches and a reduction in portfolios, such as fewer colours or fragrances. Many multinationals had to outsource manufacturing locally in the bath and shower sector, reducing quality.

“It’s expected that in the coming months the multinationals will restore their supply chains to pre-restriction levels,” Cruz said.

Companies are planning for a rebound. Argentina’s Compañía Americana de Lápices, a maker of cosmetics for private labels, this year acquired Nerova, a local competitor, for US$3m. Switzerland-based Firmenich opened a new fragrance plant this year on the outskirts of Buenos Aires, a $60m investment. P&G said it plans to plow $50m into increasing manufacturing capacity in the country, with a focus on its Gillette and Pantene brands of personal and hair care products.

Internacional Ricky Sarkany, a clothing and shoe designer, has rolled out a new line of fragrances to accompany its Sofia brand, a strategy it’s followed for its Sarkany brand.

“Our fragrance line is doing very well,” said Ricky Sarkany, the company’s President. “We are always adding new products.”

This comes after a standout year for fragrances in Argentina. Sales shot up 22% in real terms in 2015 year-on-year, led by gift giving for birthdays and holidays like Valentine’s Day, as well as rising demand for men’s fragrances, a still under-developed market, according to Euromonitor.

Looking forward, Euromonitor expects Argentine retail sales in real terms (discounting inflation) for beauty and personal care products to rise 4% per year to $7.53bn in 2020 from $6.25bn in 2015.

To capture this expected growth, Unilever is looking at new product lines and an expansion of its manufacturing capacity in the country.

The recession this year “doesn’t scare us because we plan for the long term”, Barnator said. “We need to keep growing because this country is going to keep growing.”