Why is Unilever Rushing Towards Premium Personal Care Brands?

+11.68%
Upside
50.14
Market
55.99
Trefis
UL: Unilever logo
UL
Unilever

Global consumer processed goods behemoth Unilever (NYSE:UL) is currently pursuing an aggressive expansion strategy to strengthen its position in the premium personal care market. It acquired a number of premium skin care brands in recent months, but indicated that the company may temporarily lift the finger off the acquisition trigger to focus on integrating the newly acquired brands. We have previously explored Unilever’s single-minded focus on the personal care sector, but wonder why is it placing such heavy emphasis on the premium segment? We believe that it is because growth rate of the premium segment is expected to far outpace that of the overall sector. Demand for premium products remains high in the developed markets and is expected to pick up in the emerging markets as well in the near term.

In this report, we explore the trends in the global personal care market (specifically, the premium skin care market) that explain Unilever’s heavy interest and investments in the segment.

Our price estimate of $42 for Unilever is about 10% lower than its current market price.

Relevant Articles
  1. Should You Pick Unilever Stock At $50?
  2. Does Unilever Stock Have More Room For Growth?
  3. Unilever Stock Seems Poised For A Jump
  4. Can Unilever Stock Maintain Its Outperformance?
  5. Forecast Of The Day: Unilever’s Foods & Refreshment Revenues
  6. Forecast Of The Day: Unilever’s Foods & Refreshment Revenues

See our complete analysis for Unilever here

Why the Premium Skin Care Market is More Attractive

The broader personal care industry is an umbrella category for a number of sub-sectors, namely Skin Care, Hair Care, Fragrances, et al. Skin care is the biggest of these sub-sectors and was valued at $87 billion in 2014. [1] The premium segment accounts for approximately 30% of the global skin care market, amounting to a little over $26 billion. [2] Premium skin care products typically include nature-based products, personalized skin care products, and products with specific benefits.

The global skin care market is estimated to have expanded at a CAGR of a little over 4% from 2008 to 2014, [3] and is expected to grow at a similar rate through 2018. [1] While the precise projected growth rate of the premium segment is not clear, it is commonly thought that much of the skin care market’s growth is being driven by high demand in the premium segment. [4] For instance, the natural skin care segment is expected to grow at a CAGR of 10% through 2019, [5] which is more than double the estimated growth rate of the overall skin care market.

Further, the premium segment appears to be on a solid growth trajectory irrespective of the geographical region. Strong demand for premium skin care products has been reported in developed regions like the U.S. and Europe, despite sluggish consumer spending. In fact, demand for mass category products is falling in the developed markets in favor of specialized high-end products. [4] In the emerging markets, demand for premium skin care products is expected to increase rapidly as disposable income and consumer awareness grows.

Capitalizing on the Premium Opportunity

Companies like Unilever, L’Oreal (OTC:LRLCY), Procter & Gamble (NYSE:PG), and Johnson & Johnson (NYSE:JNJ) are jumping on the premium bandwagon in an attempt to ride the wave to the top. Strategies to benefit from the high demand for premium products are not just limited to introducing new innovations in the product themselves, but also extend to packaging, marketing and offering variants. A flashier packaging and adding variants to a common product alone are sufficient to warrant higher pricing in the name of “premiumization”. [6] This strategy is especially effective in the emerging markets, where young consumers are more conscious of the product choices and are trading up as incomes increase.

Another recent trend is to re-brand existing mass-category products as premium ones by claiming to offer a solution to a specific problem. The “specific solution” products are currently in vogue and skin care brands are capitalizing on the high demand by raising prices to “premiumize” erstwhile mass-category products. [7] Thus, consumers get their requirements fulfilled and companies like Unilever get to benefit from higher per-unit revenue and fatter margins.

In summary, Unilever’s rush towards the premium personal care segment is driven by higher growth expectations of the category, as well as a shift in consumer behavior. We believe that the move could result in higher margins for the company if it can successfully navigate the extremely competitive skin care market and protect its market share.

Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap
More Trefis Research

Notes:
  1. Skincare Global Industry Guide, MarketLine, August 2014 [] []
  2. Global Beauty Care Market 2014-2018, Research and Markets, October 29, 2014 []
  3. Datamonitor []
  4. Personal Care Market Analysis, Grand View Research [] []
  5. The natural personal care market moves to truly natural products as sales continue to grow, Premium Beauty News, February 3, 2015 []
  6. Unilever, P&G Try Tweaked Formulas, Higher Prices for Developing World, The Wall Street Journal, January 1, 2015 []
  7. In Aisle Five, $50 Skin Cream, The Wall Street Journal, January 15, 2014 []