Beauty Product Players See Big Opportunity In Africa

by Trefis Team
Estee Lauder
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Africa’s economy has grown quickly in the past decade with real GDP growing at more than 5% between 2000 and 2012. This is double the growth rate seen in the ’80s and ’90s for the continent. Sub-Saharan Africa has seen a stronger than average growth in GDP at 5.6% during the period compared to 4.5% in North Africa.

Intense steps to end armed conflicts, improve macro-economic conditions and undertake micro-economic reforms to create a better business climate from the African governments have increased foreign investment flows into the continent. This resulted in rapid growth in sectors such as retail, telecommunications, infrastructure and banking. Lifestyles have improved in sub-Saharan Africa as gross national income (GNI) figures expanded by more than 150% from $518 in 2003 to $1,345 in 2012.

Factors such as rising discretionary income levels, growing urbanization and rapid expansion in middle class households have prompted ambitious investment plans from global beauty players. Following L’Oréal SA (PINK:LRLCY), Estée Lauder (NYSE:EL) is beginning to invest in the continent.

The African Opportunity: Growth Prospects And Existing Challenges

Global sales for most beauty product players has been tepid due to the currency headwinds in the past year. Sales in the Asia-Pacific region are expected to be subdued due to weakness in region’s economies and currency volatility. Despite a recovery in the North American and Eurozone economies in the last few months strengthening sales, high growth markets like Asia-Pacific, Latin America and Middle East & Africa continue to be a priority for beauty product players.

Market research firm Euromonitor expects the African beauty product market to grow at a CAGR of 5.2% between 2012 and 2017, marginally trailing Latin America’s growth of 5.6%. Within the African region, South Africa is the largest market for beauty products, valued at $2.1 billion. This is followed by the Nigerian beauty product market valued at $1.2 billion. While these market sizes are a far cry from the market sizes of bigger markets like India and China, impressive long term prospects in Africa combined with feeble Asian economies seem to be driving investments into the region.

The recent acquisition of Kenyan beauty product manufacturer Interconsumer Products (ICP) by L’Oréal suggests that global players are looking to expand into the African continent given its growth potential. The diversity in consumer tastes between North Africa and sub-Saharan Africa would generally require a company to have an R&D division specifically for the region. However, ICP is a widely recognized beauty player in East Africa with sales in Kenya, Uganda and Tanzania. The acquisition of ICP gives L’Oréal a chance to leverage the existing ICP distributional network and utilize its new Egypt manufacturing facility to manufacture locally relevant products without any additional capital expenditures into an R&D facility.

Currently, L’Oréal has had only hair care product such as SoftSheen-Carson and Mizani to cater for African consumers, the ICP acquisition will strengthen its skin care and hair care product portfolio.

Similarly, Estée Lauder is planning to introduce its multi-billion dollar brands Clinique and M-A-C into major African markets of Nigeria in 2013, followed by Mozambique. The prestige beauty product maker is trying to gain its footing in high growth markets by tying up with retail stores to promote its products. However, we believe the lack of proper retail base and discount chains in Africa excepting South Africa plays to the disadvantage of the company.

Additionally, Estée Lauder does not have a manufacturing facility or a research facility in the region. With consumer tastes for specific products broadening, the lack of manufacturing or research facilities could prove to be another setback to gaining market share within the region. We expect increase in pan-African market share due to existing product expansion (Clinique and M-A-C) to be marginal despite their high demand in Nigeria. However, an acquisition within the African market could help Estée Lauder make deeper in-roads into the market with lower-priced, geographically relevant products.

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