Middle East – hey, big spenders

Published: 21-Oct-2010

Personal care products are stabilizing in Gulf countries, and where consumers are spending they tend to spend quite heavily. Paul Cochrane reports from Beirut

Personal care products are stabilizing in Gulf countries, and where consumers are spending they tend to spend quite heavily. Paul Cochrane reports from Beirut

The multi-billion dollar cosmetics and fragrance industry in the Middle East’s six Gulf Cooperation Council (GCC) countries has had a mixed few years in the wake of the global financial crisis, made more unpredictable by demographic change and purchasing behaviour shifts.

In the years leading up to 2008’s downturn, the personal care industry in the region – Saudi Arabia, Bahrain, Kuwait, Oman, Qatar and the United Arab Emirates (UAE) – had one of the highest growth rates in the world at some 12% per annum over three years. This was driven by strong growth in the Gulf economies, high oil prices and a surge in affluent expatriates living and working in the region, particularly the UAE. In 2009, regional sales contracted around 4%, according to global cosmetics giant Beiersdorf, as purchasing power and consumer confidence plummeted. The decline was in line with changes at a macro level with the combined nominal GDP of the GCC countries hitting an all time high of US$1.054 trillion in 2008 but dropping to US$841bn in 2009, according to a 2010 report by the Saudi American Bank Group.

Table 1: Bahrain market size, RSP, US$M, 2009
Beauty & personal care – modelled65.414.8
Colour cosmetics – modelled9.216.1
Fragrance – modelled10.915.8
Hair care – modelled10.114
Skin care – modelled13.213.3
Premium cosmetics – modelled16.77.4
Source: Euromonitor International

Table 2: Kewait market size, RSP, US$M, 2009
Beauty & personal care – modelled199.313.2
Colour cosmetics – modelled19.712.4
Fragrance – modelled31.115.8
Hair care – modelled33.512.5
Skin care – modelled42.114.4
Premium cosmetics – modelled44.614.7
Source: Euromonitor International

But following government stimuli, market consolidation and renewed consumer confidence, the sector appears to be re-bounding in 2010, with the International Monetary Fund (IMF) predicting 4.8% economic growth in the GCC this year.

“Fragrance and cosmetics sales have remained stable in the GCC, but we are seeing a recovery and this should be more significant towards the end of the year,” says Salah al Sagha, general manager of beauty retail at the UAE-based Chalhoub Group, which sells commercial, luxury and Arabic-oriented brands. According to Euromonitor, fragrance accounts for a 31% share of the C&T market in Saudi Arabia and 21% in the UAE, while premium cosmetics command shares of 38% and 26% respectively.

“In beauty, we have budgeted our sales to grow by 6% in 2010, which is an improvement from last year,” continues al Sagha. “Sales by market segments in 2010 have remained almost the same compared to 2009, with fragrance leading followed by make-up, skin care and body care. Fragrance sales have increased (up 2%) whereas cosmetics have suffered versus last year.”

The value of the cosmetics and personal care sector in the GCC was estimated at some $2.1bn in 2008 by a paper released by German trade fair organiser Epoc Messe Frankfurt. Meanwhile, while a recent report by the International Journal of Business Strategy (IJBS) estimates fragrance sales in the region at $3bn a year in 2009, approximately 20% of the global market. The luxury cosmetics and fragrance sector is estimated to be worth $1bn, according to al Sagha.

Table 3: Oman market size, RSP, US$M, 2009
Beauty & personal care – modelled238.29.1
Colour cosmetics – modelled34.810.3
Fragrance – modelled38.210.1
Hair care – modelled43.28
Skin care – modelled41.17.7
Premium cosmetics – modelled59.32.2
Source: Euromonitor International

Table 4: Qatar market size, RSP, US$M, 2009
Beauty & personal care – modelled53.925.3
Colour cosmetics – modelled13.324.6
Fragrance – modelled6.128.4
Hair care – modelled7.724.8
Skin care – modelled9.926.7
Premium cosmetics – modelled10.726.5
Source: Euromonitor International

The biggest indicator of change in the market has been in consumer purchasing behaviour for the perfume sector, with consumers buying a product on average once a month before the recession compared to once every two months today. As a result, the average transaction has dropped from $136 to $81, according to the IJBS report.

“The spending power decline within our core target segment has undoubtedly affected the movement and volume of sales,” says Abdulla Ajmal, deputy general manager of Ajmal Perfumes in the UAE, one of the region’s leading oriental perfume manufacturers and retailers. “Where before a customer would pick up five or six big ticket items, they now prefer to buy one or two and come back to replenish. I don’t think our core customers have lost their spending power. I think it has more to do with taking a cautious approach and evaluating every purchase decision with much more scrutiny than before.”

The Chalhoub Group has noted similar trends. “All customers in the Middle East are now looking for value. It doesn’t mean they are looking for more affordable items, but items that feel durable and feel like they are offered at the right price, whether these are basic or luxury items,” says al Sagha. “People are also looking for choice rather than price so we aim to optimise what we offer in substance.”

Retail scene

The retail environment in the Gulf, which has matured in recent years, has also been affected by the slow-down, with less successful malls and outlets closing down while segment differentiation has become more apparent due to the recession.

“The past few years saw incredible growth in retail outlets, fuelled by incredible demand and also due to the willingness of consumers to try new products,” says Ajmal. “As the demand slowed down, the more established players in the market have managed to hold their positions, resulting in consolidation, while small retailers have suffered the most. But the divide between the different segments is clearer now. Luxury retailers continue to stock luxury products and value-based propositions are now offering added value to entice consumers into making purchases.”

Companies have adapted business strategies as a result by offering a greater array of products to suit certain economic demographics, opting for strategic partnerships instead of tactical agreements and investing in service, marketing and brand promotion.

Client base

In such a multi-demographic market as the UAE - catering to locals, GCC citizens, expatriates and tourists - the sector has been affected in different ways from other Gulf countries. This was reflected in the biggest change in Chalhoub’s UAE clientele being a drop in tourists from eastern Europe. “We used to have 20% of our customers coming from Russia and eastern Europe, but since 2009 they represent 3%,” says al Sagha. Emirati and GCC citizen clientele has in contrast increased by a few percentage points, rising above 20% each of overall customers, offsetting the decline in tourists. Benefiting both local and visiting shoppers, the UAE imposes no VAT and has low import tariffs on its cosmetics and fragrances so prices are around 25% cheaper than in western Europe.

A turnaround in sales to UAE bound tourists has occurred this year however in the second biggest cosmetics and fragrance market in the GCC after Saudi Arabia, indicated by duty free sales at Abu Dhabi airports, up 19% in the first half of 2010 on the previous year, and at Dubai Duty Free, up 16%. Perfumes, which account for 14% of total sales at Dubai Duty Free, had sales of $84m in the first half of 2010, representing an 18% increase over the same period last year, while cosmetics sales rose by 26%.

Table 5: Saudi Arabia market size, RSP, US$M, 2009
Saudi Arabia
Beauty & personal care2491.49.5
Colour cosmetics267.410.2
Hair care360.28.4
Skin care389.77.7
Source: Euromonitor International

Table 6: UAE market size, RSP, US$M, 2009
Beauty & personal care8639.9
Colour cosmetics110.79.6
Hair care1089.8
Skin care109.110.6
Premium cosmetics – modelled254.98.8
Source: Euromonitor International

Despite the slow-down since 2008, the Gulf still has one of the highest per capita spending on perfume in the world at $326 annually, according to IJBS. While sales to expatriates and tourists in the UAE have dropped, it is Emirati citizens who are keeping cosmetics and fragrance sales buoyant, with disposable incomes staying high due to secure public sector jobs and government endorsed employment programmes.

It is a similar story in other Gulf countries, which were not as exposed to the international markets and have fewer affluent expatriate workers and less developed tourism sectors.

“Perfume sales in the Gulf continue to grow, albeit at a much slower rate than before,” says Ajmal. “There are a few countries within the Gulf that are primary drivers of this growth – for us it has been Saudi Arabia which was up by 27% for the first quarter compared to last year.”

In cosmetics, Saudi Arabia has also remained strong, with sales reaching $2.4bn in 2009, while analysts predict the cosmetics market will grow by 11% this year, according to figures published by the Financial Times.

Table 7: Leading brands (by umbrella brand name), RSP, 2009
Saudi Arabia
Arabian OudArabian Oud Co
Al QurashiAbdul Samed Al Qurashi Co
NiveaBeiersdorf AG
Johnson'sJohnson & Johnson
L'Oréal ParisL'Oréal Groupe
NiveaBeiersdorf AG
LuxUnilever Group
ColgateColgate-Palmolive Co
DoveUnilever Group
Christian DiorLVMH
Source: Euromonitor International

Fragrance dominates

A recent survey focused on affluent female customers, carried out by Chalhoub in conjunction with research firm Nielsen in the group’s key three markets of Saudi Arabia, the UAE and Kuwait, highlighted the continued high spending on cosmetics and fragrances in the Gulf.

“For beauty items, the Saudi shopper spends $650 on average every three months, but is far behind the Kuwaiti customer with an average monthly spending of $800. Across all territories, fragrance is the most important item (a minimum of 40% of the beauty budget) followed by make-up (35%) and skin care (20% to 25%, depending on the country). It is interesting to note that skin care is still mainly bought in supermarkets in the Gulf,” says al Sagha.

With fragrance so important to the sector, particularly among Gulf citizens, a wide variety of French, American and oriental perfumes are on sale in the region. This has particular impact on the oriental sector, which brings out new perfumes every year to meet consumer demand.

“We have over 100 perfumes within our stores today,” says Ajmal. “Some of these products are classics, like Dahn Al Oudh Moattaq, which have been on the shelves for more than ten years, and other products which are newer introductions. Typically we create up to ten products within a calendar year. This is a lot if you look at the industry standard, but this is primarily because of the way the local market operates. Our consumers are always in search of something new.”

The region’s burgeoning young population has also helped to retain sales and provides for a positive long-term outlook for the cosmetics and fragrance sector.

“The youth market is significant in the Middle East, where over 50% of the population is younger than 30, and we constantly adapt our offer to answer these needs,” says al Sagha. “In beauty, we are very much helped in this regard by the major brands in the industry, with their strategic launches in 2010 targeting the young generation, so that helps us to reach out to these customers. For example, this June we launched exclusively at our Faces stores the latest fragrance by Lancôme, Trésor In Love. This fragrance is a ‘younger’ version of Trésor, aimed at the 15-25 year-old women, so it was very strategic for us but also very successful.”

Cultural issues
A lack of personal debt helps while the lack of a middle-class is a hindrance, says Euromonitor International’s Carrie Lennard
One of the main reasons behind the Middle East’s resistance to the credit crunch is that consumers there don’t have the kind of high levels of personal debt seen among their western counterparts. This means that the Middle Eastern love of lavish lifestyles and displaying wealth will not be replaced by the kind of cautious, frugal attitudes seen in many other countries, which is good news particularly for manufacturers in the fragrance and premium cosmetics sectors.
But one major obstacle to C&T growth in the region is the difference in disposable income between rich and poor, particularly in oil-rich countries like the UAE and Saudi Arabia. A middle-class here is largely non-existent, meaning that unlike many other regions growth is not being generated by a general rise in personal spending capacity among the masses. This could limit development over the medium-term, though the Middle East still represents a stable growth prospect for manufacturers.

Multinationals vs domestic manufacturers
Multinational manufacturers still lead beauty and personal care in the UAE, benefiting from long established customer loyalty as well as a lacklustre domestic manufacturing environment. The biggest four multinationals – Unilever Gulf FZE, Procter & Gamble Gulf FZE, L’Oréal Middle East FZE and Beiersdorf Middle East – collectively account for nearly half the market’s value sales. Domestic manufacturers are notably present in fragrance in light of sustainable demand for Arabian perfumes among the local population. The major domestic manufacturers are Rasasi, Ajmal and Designer Shaik.
Fragrance and prestige cosmetics are traditionally the biggest sectors. Fragrance is set to remain the most valuable sector accounting for 21% of total UAE C&T market value, with a predicted 12% value CAGR over 2008-2013. However hair care is set to outperform all other C&T sectors in the UAE, largely driven by female consumers trading up to increasingly sophisticated products with specific benefits.
The Saudi beauty and personal care environment is very competitive, featuring hundreds of companies from around the globe as well as domestic and regional players. Most notable in share movement in 2009 were the gains achieved by companies with mass/masstige brands such as Binzagr Lever Ltd (Unilever Arabia), Procter & Gamble Arabia and Beiersdorf AG, at the expense of those with premium offerings, such as Lancôme Parfums Beauté et Cie, Givenchy SA, Christian Dior SA and Chanel SA. The country’s economic slow-down and the activities implemented by companies with mass brands contributed to this.
C&T growth may slow but is likely to remain healthy as there is still room for expansion in terms of per capita consumption. Strong advances are predicted in both well established categories such as fragrance, hair care and skin care, as well as in emerging niches such as male grooming, sun care and depilatories. The demand for premium offerings in colour cosmetics, skin care and fragrance is projected to start recovery due to the improving economy and the increasing number of Saudi adults joining the workforce.
Source: Euromonitor International

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