Spain – the trouble with maturity

Published: 8-Jul-2010

Having reached maturity during the economic crisis, Spain’s domestic players are looking beyond their traditional heartland for development, as Alice Corson reports

Having reached maturity during the economic crisis, Spain’s domestic players are looking beyond their traditional heartland for development, as Alice Corson reports

Last year was a particularly complicated year for the Spanish C&T industry. Accustomed to a long run of important growth which has seen market size double since 1998, the sector has been forced to come to terms with a new market reality. The latest annual report released in April by the Spanish Perfumery and Cosmetics Association (Stanpa) revealed not only negative results for all product categories but also a negative evolution for every distribution channel in 2009. Total ‘sell-in’ turnover for Stanpa amounted to €4.5bn, which represented a 7.45% decline over the previous year and a retreat to where the market had stood in 2005. In terms of domestic consumption, total sales are estimated to be in the area of €7.5bn marking a 4% decline over the previous year, according to industry experts.

Stanpa data is based on turnover at ex-factory prices for the more than 200 manufacturing and distributing member companies that represent over 90% of the Spanish perfumery and cosmetics industry through more than 3,000 brands representing some 250,000 product references. According to Stanpa spokesman Oscar Mateo, declining sales can be traced to a market that has reached maturity during a global economic downturn. Mateo points out: “we are faced with a market which has come of age during a particularly delicate and complicated economic crisis.”

Heading into a third year of economic doldrums with an unemployment rate topping 20%, no Spanish industry has been left untouched by the current crisis. Tourism, a backbone of the Spanish economy as well as an important driver of fragrance and cosmetic sales, has felt the negative impact of declining tourist visits. These developments have in turn affected the Spanish C&T sector which is not only considered a pillar of the Spanish consumer market but also a major player within the EU.

<i>Ricci Ricci, the latest offering from Nina Ricci</i>

Ricci Ricci, the latest offering from Nina Ricci

The Spanish C&T industry is the fifth largest market behind Germany, France, the UK and Italy and represents approximately 11% of total turnover within the EU27. The industry employs 33,000 workers directly and a further 50,000 workers indirectly. Production is centred primarily in Spain’s north eastern ‘autonomous community’ of Catalonia with 45% of total activity being located in and around Barcelona. A further 30% of activity is situated in Madrid, 15% in Valencia and the remaining 10% in other areas of the country.

For Stanpa manufacturing companies, the market segments hit hardest by declining sales were perfumes/fragrance, colour cosmetics and hair care products with year-on-year drops respectively of 11.8%, 10.19% and 8.26%. The impact for fragrance sales was particularly hard as this market segment represents a higher portion of the total market than in other EU countries; a 22% share in Spain compared to an average 15% for other European markets. Inversely colour cosmetics, which reported the second largest decline in sales, command an 8% share of the market versus an average 12% for other European countries.

Despite a negative performance, skin care and personal care products managed to stay ahead of the curve to increase weight within the market. Overall share for skin care rose from a 26.35% share in 2008 to the current 26.57% of total turnover while toiletries gained more than a percentage point rising to an overall share of 21.34%. At the same time, competitively priced marcas blancas or own label brands have steadily captured a larger portion of the toiletry market and account for 23% of turnover and are expected to continue to gain share in line with the overall market where private label takes 38% share on total sales.

“Own label brands have not reached a ceiling yet,” comments Mateo. “In the German market own label brands for cosmetics and toiletries capture approximately 27% of the market. So I believe there is still room for these products to run their course in Spain where own label share for cosmetics and toiletries stands at approximately 23% and where lower prices increasingly determine sales.”

<i>Fragrance, which accounts for an unusually high percentage of the Spanish C&T market, fared poorly in 2009 dropping 11.8%</i>

Fragrance, which accounts for an unusually high percentage of the Spanish C&T market, fared poorly in 2009 dropping 11.8%

Distribution diversity

As for distribution channels, beauty salons, selective and hairdresser channels received the brunt of the negative impact with year-on-year sales declining by 15.4%, 14.81% and 13.22% respectively. In contrast, mass market and pharmacy channels have in a sense benefited from the crisis by increasing total share. Overall weight for the mass market rose from 50.3% to 52.7% in 2009 while pharmacy sales rose from a 10.3% total share to 10.6% during the same period, primarily at the expense of the luxury market. Prior to the crisis, Spain’s selective market had ranked the third largest among the EU27.

Apart from an unfavourable economy, one of the principle underlying factors for the negative trends can be attributed to distributor’s miscalculation and over-extension on increasing point of sale and stocks to meet demand. “Up until a very short while ago, the Spanish C&T market was growing at an annual rate of around 5% or better. Based on these favourable expectations, distributors opened more outlets and increased stock orders to meet demand. At this point, distributors are now reducing stock and eliminating the excess at warehouses,” says Mateo.

The economic crisis has had a significant impact on changes in consumer spending habits. A recently published study headed by José Luis Nueno, IESE business school professor and consultant to more than 20 companies, and distributed by the Spanish Association of Manufacturers and Distributors (AECOC), concludes that Spanish consumer habits are becoming increasingly Europeanised and more home-oriented as opposed to habits characteristic of a Mediterranean culture where leisure time is often spent outside the home in the street. Due to the crisis, Spaniards have become more rational shoppers buying less on impulse and saving more. Products with differential value rank high among consumers who are going out less and shopping nearer to home in neighbourhood stores.

The report points out that personal care products such as hair dyes or spa treatments for home use are growing significantly as a result of fewer visits to hairdressers and professional beauty salons. Per capita spending, according to Stanpa, had at one stage been among the highest in the EU at t170, behind Norway, Switzerland and Denmark. However, due to the precipitous fall in consumer spending, per capita spend now hovers around €160.

Table 1: Spanish C&T value sales by product category – €bn at manufacturer's prices
Product category2008 sales €bn2008 +/-%2008 %share2009 sales €bn2009 +/-%2009 %share
Colour cosmetics0.416+2.518.60.374-10.198.30
Skin care1.281-2.7926.31.196-6.6426.57
Hair care1.085-0.6922.30.996-8.2622.13
Personal hygiene1.000+2.2820.60.983-1.7621.84
Source: Stanpa

Table 2: Spanish C&T value sales by distribution channel – €m at manufacturer's prices
Product category2008 sales €bn2008 +/-%2008 %share2009 sales €bn2009 +/-%2009 %share
Mass market2.446+0.5250.32.374-2.9652.7
Professional hair salons0.352-3.567.20.306-13.226.8
Direct sales0.168-4.443.50.156-7.093.5
Source: Stanpa

International ambitions

While 2009 was an especially negative year for sales in the domestic market, Spanish companies have taken advantage of the crisis to expand in foreign markets. Weathering the storm, the Barcelona-based Puig Beauty & Fashion Group announced that the company had surpassed a psychological benchmark of €1bn in total sales in 2008. Strengthened by these results, Puig has set it sights on increasing its global market share from 5% in 2008 to a 10% share worldwide over the next five years. During this period, Puig plans to move up in the C&T ranking from the company’s current eighth position to fifth place by concentrating on renowned luxury brands Nina Ricci, Paco Rabanne, Carolina Herrera, Prada and, more recently, the Italian luxury icon Valentino. Puig recently announced a deal with the Italian haute couture designer to create, develop and distribute Valentino luxury fragrances after February 2011 in a move which has wrested the license from US giant Procter & Gamble.

Among other developments, Puig also plans to launch a female version of the wildly successful fragrance 1 Million by Paco Rabanne which generated €200m in sales for the company in 2009 and is the top selling men’s fragrance in Spain, France and the UK. The female counterpart to 1 Million is set to be launched in July in a campaign whose image will be graced by Ernest Hemingway’s great-granddaughter, Dree Hemingway. From this standpoint, Puig will likely meet its ambitious goal of being among the world’s top five perfumery companies.

Other Spanish companies are also looking abroad to compensate for sluggish sales in the home market. Germaine de Capuccini, founded in 1964 by Carmen Vidal in Alicante to produce products sold through professional salon channels, has been highly successful in placing its brands in 60 countries. Currently 54% of total volume for the company is sold abroad through brands Germaine de Capuccini, Lady Rosie and Spa Marine. The company is looking to Asia to open new markets along with other Spanish companies that increasingly rely on foreign markets for growth. Indeed Spanish perfumery and cosmetics export sales amount yearly to €1.7bn. In a small but significant development, in the last year alone, Spanish cosmetic and perfumery exports to Hong Kong rose +5.6% to €14.8m amidst the global economic downturn.

<i>Low domestic consumption is seeing many Spanish brands take advantage of overseas opportunities. Natura Bisse, for example, is expanding in Asia</i>

Low domestic consumption is seeing many Spanish brands take advantage of overseas opportunities. Natura Bisse, for example, is expanding in Asia

On celebrating its thirtieth anniversary in 2009, the Barcelona-based Natura Bissé announced plans to expand in the Asian market with the opening of two new points of sale in Japan through the Hankyo Umeda stores in Osaka and the Seibu stores in Tokyo. Natura Bissé, among the most exclusive brands worldwide, is sold through both professional and retail channels expanding into ‘the most luxurious and sophisticated hotels and spas’ both nationally and internationally. With a natural-based positioning, Natura Bissé aims to cover all the skin’s needs through its 150-product face and body skin care collection.

Another Spanish company with a global projection is the Madrid-based Perfumes y Diseño (PYD). Founded in 1989, PYD creates, develops and commercialises selective perfumery by renowned Spanish designers Jesús del Pozo and Roberto Verino as well as the Barcelona jewellery maker famous for its teddy bear trademark, Tous, through Tous Perfumes. Over a 20 year period, PYD has expanded its portfolio to 15 selective fragrances which are sold in 120 countries worldwide focusing on four principle areas – America, Europe, the Middle East and Asia Pacific.

Shaping the future

Looking ahead, cosmetic and toiletry sales in Spain are likely to continue to be faced with a tough domestic market as long as unemployment and job insecurity remain at the current high levels. The increase in value-added tax from 16% to 18%, which is scheduled to take effect this summer in July, will have negative repercussions on consumer spending and particularly on sales of all products considered luxury items. To compensate for sluggish sales at home, Spanish manufacturing companies are expected to continue to seek out foreign markets for their goods, especially in expanding markets in Asia and in South America.

On the home front, the current crisis has brought about profound changes in consumer spending with Spaniards tightening their belts on discretionary income and spending more free time at home. Do-it-yourself cosmetic and spa products designed for home use will benefit from this growing trend. At the same time, large distributor’s own label brands, and to a lesser extent masstige brands, are expected to continue to drive sales as Spaniards trade down to more competitively priced products and limit purchases to basic items or to what they generally considered to be a necessity. Many experts believe that the longer the economic crisis lasts, the more permanent these changes in consumer habits will be. Asked how future consumers who entered the ‘great recession’ as adolescents and will emerge from this crisis as adults will shop, IESE’s Nueno is quick to respond that this group will certainly have to make do with less than the previous generation and how they react to a changing market reality will be crucial to shaping future spending patterns. “This collective will hold the key to mass consumerism in 2015,” he believes.

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