Spain - treading water

Few countries are totally immune to this recession and Spain is certainly suffering. The hope is that the industry can find more innovative ways of doing business to help its survival

With a population of approximately 45 million inhabitants, the Spanish cosmetics and toiletries industry is the fifth largest in Europe. However, contemplated from an Iberian perspective, which would include both Portugal and Spain, the market rivals those of Italy, France and the UK in importance. Interestingly, per capita expenditure of €171.85 on cosmetics and toiletries in Spain is among the highest in Europe with Spain ranking third just behind Denmark and Switzerland.

Market turnover at manufacturers’ prices amounted to €4.8bn in 2008 which at retail prices is estimated at nearly €7.9bn, according to the Spanish Association of Perfumery and Cosmetics, Stanpa. The Spanish trade association comprises 223 C&T companies which is virtually the whole of the sector in Spain. Member companies provide direct employment for 19,200 workers and indirectly for 8,100.

In 2008 sales of cosmetics and toiletries began to feel the impact of a significant drop in consumer spending as a result of the current recession. While every market category posted positive growth in 2007 with an overall average increase of a healthy 5.67%, 2008 brought a general decline of 1.15%. Stanpa spokesman and statistician, Oscar Mateos attributes the negative results not only to an unfavourable economy but also to a market that has reached near maturity.

A decade earlier, double-digit growth in the year 1998 marked a stellar year for Spanish cosmetics and fragrance. Since then, growth patterns have declined steadily. Mateos is quick to point out: “Over the ten year period between 1998 and 2008, our market size has doubled. Virtually every sector has been hit by the recession though cosmetics and fragrances have not been hit as hard as other consumer segments of the Spanish economy.”

One sign of the times is the recent announcement by cosmetic giant L’Oréal to close one of three Spanish production centres. Productora Albesa, maker of selective cosmetics and perfumery located in San Agustín de Guadalix in Madrid, will be converted from a production to a logistics centre for L’Oréal. The factory’s production will be relocated to three L’Oréal plants in northern France as part of a restructuring plan to concentrate luxury production to one area so as to improve competitiveness in a difficult market setting. With production winding down in 2010, the Albesa plant will be managed as a distribution centre by logistics firm DHL.

On a further significant note, L’Oréal’s reference centre for hair care products, the Burgos plant in northern Spain, reported a 1.6% decline in volume sales when in 2007 volume sales had risen by 8.7%. Last year, L’Oréal’s turnover in the Spanish market amounted to €790m while in the previous year sales had amply surpassed €800m.

L’Oréal products can be found in every major distribution channel ranging from professional hair salons, super and hypermarkets and department stores to pharmacy channels. In all, the company commercialises 27 different brands in Spain. As a measure to stimulate demand, the company this year plans to modify the size of some product formats to offer more or less quantity at a better price. This measure will affect all channels and prices.

Advertising will also be stepped up, according to top executives. L’Oréal is already one of the largest advertisers in the Spanish market. In the latest study carried out by Infoadex, which monitors advertising expenditure, L’Oréal, which spent €107m in 2008, ranked third in total expenditure behind Telefónica (€173.8m) and Procter & Gamble (€131.9m). In fact three C& T companies, which also include Johnson & Johnson as well P&G and L’Oréal, are among the top 20 companies with the deepest pockets for publicity campaigns in Spain. Even so, overall advertising expenditure fell by 7.5% in 2008.

Despite difficulties for L’Oréal, other major manufacturers have fared better. The Barcelona-based multinational perfumery company, Puig reported record sales in 2008. Net income broke the psychological barrier of €1bn with sales of €1.036bn, an 8.5% increase over 2007 when sales had amounted to €954m. For Puig, 35.4% of its business stems from the Iberian market. Puig attributes its success to fulfilment of its master plan to reach greater profitability, expansion into new markets and to the success of the latest product launches, in particular the new Paco Rabanne fragrance One Million. Indeed One Million is behind a 43% surge in sales for the designer’s signature fragrance. Still, Carolina Herrera continues to be the leading Puig brand which has extended its presence to Brazil, India, the Middle East and China and captured a 5% share of the global fragrance market. But even though 2008 was a splendid year for Puig, the company expects 2009 to be particularly difficult as a result of falling demand, especially in the US and Spain.

CATEGORY PERFORMANCE

By product category according to Stanpa, fragrance sales were hardest hit in 2008 with a decline of nearly 4%. Selective perfumery was especially affected, in part due to the increasing popularity among Spaniards of so-called masstige brands offering attractive products at competitive prices. A decline in the number of tourists visiting Spain – 20% according to principal airport retail operator Aldeasa – has also had an impact on selective perfumery, especially at airport shops. Fragrance currently represents 22.2% of the ‘sell-in’ market, down from 22.8% in 2007.

The skin care category, the largest and most profitable market segment, also lost value share in 2008 falling slightly from a 26.8% share to the current 26.3%. Skin care sales for manufacturers fell nearly 3%. While sales of sun care remained relatively stable despite fewer tourists, bargain hunting consumers coupled with a mature market segment pushed facial and body skin care into the red. In a similar manner, but to a lesser extent, a flat market in hair care was affected by the same underlying mature market current where sales declined by less than 1%.

In contrast to the general market slump, colour cosmetics and personal hygiene reported year-on-year growth of a respective 2.5% and 2.3%. Colour cosmetics sales have benefited from an increased demand for facial foundation which for some consumers has doubled as a skin care product. Stanpa’s Mateos has had to debunk the myth that the current recession has not brought about a jump in lipstick sales as is often reported in the press during tough economic times. “What may have been true in the 1930s when lipstick sales apparently soared is not necessarily true in the current scenario,” he says. “There is a very different market dynamic today.”

In respect to personal hygiene, sales have been driven by the rising tide of large distributor’s own label brands. This trend has had a tremendous impact, especially in food distribution. However, competitively priced personal care products have also seriously challenged branded goods in bath gels, body lotions, deodorants and shampoo. This consumer shift to private label brands is not expected to abate any time soon as high unemployment and job insecurity continue to take a toll on consumer spending.

DISTRIBUTION DYNAMICS

In distribution, a leading Spanish perfumery chain, Bodybell, is reportedly in the red for a second consecutive year as sales fell by 5.6% in 2008. Even so, Bodybell forms a part of Spanish cosmetics and perfumery distribution which is undergoing a process of greater consolidation and concentration. In 2007, Bodybell gained significant market share with the acquisition of rival Juteco, adding 87 more outlets to boost the company’s outlets to approximately 160. The number of retail outlets in the Spanish market has been steadily declining for years. Industry sources point out that by 2007 there were little more than 15,300 points of sale for cosmetics and perfumery, which represented 5000 fewer outlets than in 1999. According to market research firm DBK, large commercial outlets already concentrate 44% of total perfumery sales, led by Spanish department store chain El Corte Inglés and hyper/supermarkets Mercadona, Carrefour, Grupo Eroski and Schlecker.

Among the leading perfumery specialist chains operating on a nationwide basis are Sephora (which has entered a joint venture with El Corte Inglés), If Perfumerías (an Eroski division), Recio, Douglas, Marionnaud and Bodybell. Regional chains such as La Balear in Catalonia, Grupo Cardoso in Andalucia or Disperfum in Madrid, Zaragoza and Barcelona also play an important role in Spanish cosmetics distribution. Among these perfumery chains, the growing trend toward greater differentiation in generalists and exclusive points of sale is likely to continue, according to industry sources. How these players will react to an already saturated market will determine their future.

By distribution channel, as reported by Stanpa, only mass market and pharmacy channels had a positive evolution in 2008 though sales in these channels were basically flat with less than a 2% increase for each category. Products sold through mass market channels account for approximately half of total sector turnover while pharmacies account for another 10% share.

Selective channels with a 27% share make up the second largest form of distribution. While upmarket sales were relatively robust in 2007, Stanpa reports a year-on-year decline in this market of 3.43%. Professional hair salon outlets also experienced a drop in sales of 3.56% as customers tighten belts and limit their visits to the hairdresser. Aesthetician salons were particularly hard hit with sales dropping by 12%. In recent years, professional aesthetician salons have had to contend with fierce competition from medi-spas and private medical clinics offering a wide range of non-invasive aesthetic procedures in addition to cosmetic surgery. Spain is actually one of the largest markets for cosmetic surgery procedures after the US, Brazil, Mexico and Argentina. The Spanish Association of Plastic Surgeons, SECPRE, places the number of annual procedures at 400,000, a figure which up until now has grown at an 8% yearly rate. In the words of El País, Spain’s largest newspaper, aesthetic procedures have become “just another consumer product”.

As for direct sales, these channels account for a mere 3.5% share of total turnover and experienced a decline of 4.4%. This niche market has never really taken off in Spain because of cultural barriers as Spaniards prefer to buy cosmetics and fragrance through nearby shops rather than resort to catalogue or internet shopping. The largest purveyor of direct cosmetic sales, Avon Cosmetics, recently announced a plan to lay off 113 of the company’s 700 employees as well as the closure of 16 of 20 Avon beauty centres in Spain as a result of declining profitability.

Looking ahead to the rest of 2009, Mateos hopes manufacturers and distributors don’t enter into cutthroat promotional campaigns to stimulate demand. “A price war at this critical time would be counterproductive,” he says. “These past practices have done more harm than good. It is crucial that the industry find more innovative ways of doing business.” Indeed in a recent article published in the Spanish business weekly, Cinco Dias, Mariano Puig, ex-president of the Puig Group and president of the Puig Foundation states: “We are currently in a very tough period and whoever says the contrary is simply not telling the truth. I believe the state of the current economy obliges companies to strive for excellence, now more than ever. This current crisis could drag out longer than we anticipate.”