Exploratory analysis of global cosmetic industry: major players, technology and market trends

Technovation 25 (2005) 1263 1272 www.elsevier.com/locate/technovation Exploratory analysis of global cosmetic industry: major players, technology and market trends Sameer Kumar* College of Business, University of St Thomas, Mail # TMH 343, 1000 LaSalle Avenue, Minneapolis, MN 55403-2005, USA Abstract Humans for time immemorial have used cosmetics, an industry dominated by a few major players. The study reviews main characteristics of this industry and also the key players in the world marketplace. Comparative financial and SWOT analyses provide an enhanced understanding of the industry. In addition to technology and innovations, current conditions and trends in the cosmetic industry are explored. The study also analyzes in depth the impacts of globalization on this industry. q 2004 Elsevier Ltd. All rights reserved. Keywords: Cosmetic industry; Toiletry industry; Cosmetic industry analysis; SWOT analysis; Cosmeceuticals; Globalization 1. Introduction Why study Perfume, Cosmetic and Toiletry industry? The answer is straightforward (Perfumes, Cosmetics, and Other Toilet Preparations, 2003). It is a significantly vital industry not necessarily in terms of its contribution to global GDP but by its striking influence on the colorful social lives of humans globally. The use of cosmetics, fragrances, and personal care products can be traced back to ancient times as early as Egyptian, Greek, and Roman eras. Here are some examples from history. Neanderthal man painted his face with reds, browns, and yellows derived from clay, mud, and arsenic. Bones were used to curl hair. Makeup, tattoos, and adornments conveyed necessary social information. Galen, an ancient Greek physician, invented cold cream. The Romans used oil-based perfumes on their bodies, in their baths and fountains, and applied them to their weapons. Crusaders of the 13th century brought fragrances back to Europe from the Far East. The perfumes developed during the 16th century were powders or gelatinous pastes. Natural perfumes were made from a variety of ingredients containing aroma. It will be of interest and value to get familiar with the characteristics and background of this industry. * Tel.: C1-651-962-4350; fax: C1-651-962-4710. E-mail address: skumar@stthomas.edu. Financial and SWOT analyses can provide additional insights to the industry. Probing current conditions and trends and also the level of sophistication in the deployment of technology and innovations would unfold some misconceptions about the industry. The impacts of globalization on this industry is yet another important issue to explore. Once equipped with this knowledge, a few industry projections can be made. The rest of the paper presents analysis of the points introduced above. 2. Industry background When people mention about the cosmetic industry, it mostly refers to only color cosmetic or makeup segment, which values just slightly over 18% of the whole market of the personal care industry (Toiletries and Cosmetics: Industry Snapshot, 2003). The structure of this industry, in terms of product classification and using global market size for various product families in 2001, is illustrated in Fig. 1. In 2001, Cosmetics (Makeup) products constituted roughly 18% of total global market for Cosmetics, Toiletry, and Fragrance. Table 1 reports Global Cosmetics (Makeup) Sales trends (including compound annual growth rates (CAGR)) during the period 1997 2001 in the major regions. 0166-4972/$ - see front matter q 2004 Elsevier Ltd. All rights reserved. doi:10.1016/j.technovation.2004.07.003

1264 S. Kumar / Technovation 25 (2005) 1263 1272 Fig. 1. Classification of industry products and global market size (total and by products) in 2001 (Source: Datamonitor (Lepir, 2003)). Let us review some more facts about this industry. USA is the biggest market in the world, but France is the biggest exporter of cosmetic products worldwide. The growth of market has shifted from Western hemisphere to developing regions in South America, Eastern Europe, and Asia especially China; having consumption more than 10.4% CAGR per year during past 5 years. Despite global economic crisis, the cosmetic and fragrance industry still performed well with average growth rate almost 5% across the industry. Cosmetic, Toiletry, and Fragrance Association (CTFA, 2003) is the world organization that supports cosmetic firm members on scientific, legal, and regulatory services. The cosmetic industry, under the sponsorship of CTFA, developed the Cosmetic Ingredient Review (CIR, 2003) in the mid-1970s to gather information about ingredient safety and make the information available to manufacturers. In fragrance segment, there are: Research Institute for Fragrance Materials (RIFM, 2003) and International Fragrance Association (IFRA, 2003) supporting fragrance manufacturers and distributors on researching and testing services. During 19th century, chemicals were used to replace more expensive natural ingredients; making cosmetics more widely used. Innovations and technologies in producing cosmetics in 20th century brought the industry growing quickly, concurrently creating a lot of concerns to users in terms of health, safety, environment, and animal testing. Since the USA is the biggest market of the industry, Food and Drug Administration (FDA, 2003) founded in 1906 became the main regulator for this industry; protecting consumers in health and safety aspects. 3. Industry leaders Despite the economic slowdown in the US, the largest geographic consumer of color cosmetics, most top global cosmetics makers are seeing positive growth. They are embarking on a common strategy of select product launches, core brand re-marketing, and expansion in Asia, South America, Latin America and Eastern Europe to sustain and increase growth. Coming off a record-setting 2000 in both sales and profit, L Oreal SA remains the global leader in cosmetics with a 16.8% market share and 2000 gross sales of roughly $4 billion, according to Euromonitor International, a global market research firm with offices in Chicago, London and Singapore. Estee Lauder Company (10.9%), Procter & Gamble Company (9.3%), Revlon Inc. (7.1%), and Avon Products Inc. (4.7%) round out the top five. Shiseido Company Limited (4.2%), Coty Inc. (3.3%), Kanebo Limited (2.1%), Kose Company Limited (2%) and Chanel S.A. (1.7%) round out the top 10. Together these producers account for 62.1%, or $15.15 billion, of the total $24.4 billion global cosmetics market. The balance of the top 20 global cosmetics companies LVMH, The Body Shop PLC, Mary Kay Inc., Kao Corp., Yves Rocher SA, Pola Cosmetics Inc., Beiersdorf AG, Oriflame International SA, Alticor Inc., and the Boots Company PLC account for a roughly combined 11% of market share, according to Euromonitor International. Overall, the top 20 cosmetics producers accounted for roughly 73% of the global marketplace. Fig. 2 illustrates the market share of various cosmetic companies. Table 1 Global cosmetic sales (including compound annual growth rates) during 1997 2001 in the major regions Region Sales ($ million) %CAGR 1997 1998 1999 2000 2001 1997 2001 North America 6,689.0 7,027.0 7,264.7 7,523.9 7,768.8 3.81 South America 2,050.1 2,185.7 2,407.1 2,651.2 2,897.5 9.03 Europe 4,729.3 5,142.6 5,618.5 5,898.4 6,105.9 6.60 Asia 5,115.3 5,188.5 5,387.7 5,525.3 5,716.8 2.82 Total 18,583.7 19,543.8 20,678.0 21,598.8 22,489.0 4.88

S. Kumar / Technovation 25 (2005) 1263 1272 1265 Fig. 2. Global color cosmetic sales (market share) in 2000 by leading multi-nationals (Source: Euromonitor (Sauer, 2003)). With the exception of consumer goods conglomerates Procter & Gamble, which sells mass merchandising brands Cover Girl, Max Factor and Oil of Olay, and Japan s Kanebo Limited, the leading producers are solely cosmetics producers or cosmetics and fragrances producers. The market leaders are mass merchandisers, prestige sellers or a combination of both. Overall, color cosmetics (face, lip, eye, and nail) account for 14% of the $175 billion global cosmetics and toiletries market. Lipstick has been the best performer in 2002, with growth of 10.6% based on second quarter 2001 sales performance, according to Deutsche Banc Alex. Brown. Eye makeup grew at only 2.5% growth, and facial makeup declined 0.3%. In the lipstick segment, the Revlon brand holds the top market spot in the US with a 21.7% market share, according to estimates by Information Resources Inc., a Chicagobased market research firm, and Deutsche Banc Alex. Brown. L Oreal is next at 13.5%, followed by L Oreal s Maybelline (12.9%), Procter & Gamble s Cover Girl (12.3%), Procter & Gamble s Max Factor (5.0%), Procter & Gamble s Oil of Olay, (5.0%), Revlon s Almay (3.8%) and Estee Lauder s Jane Megabites (1.9%). These five brands from these four companies L Oreal, Revlon, Procter & Gamble, and Estee Lauder account for roughly 76% of all dollar sales for lipstick in the US. Revlon lost the most market share in a year-over-year second quarter analysis of 5.3%. Procter & Gamble s Max Factor gained the greatest in market share by 3.2%, and Procter & Gamble s Cover Girl gained the second largest by 2.5%. The other brands rounding out the Lipstick segment are Bonne Bell, AM Cosmetics, Del Labs, Johnson & Johnson s Neutrogena and private label brands. In the eye makeup segment, the leading US brand as of the year 2002 was L Oreal s Maybelline, with 33.9% of the market. This was followed by Procter & Gamble s Cover Girl (17.8%), L Oreal (16.2%), Revlon (9.6%), Revlon s Almay (8.1%), Procter & Gamble s Max Factor (2.6%), Estee Lauder s jane Eye Zing (1.8%), Procter & Gamble s Oil of Olay (1.2%) and Coty s Rimmel Special Eyes (1.1%). These brands account for 92.3% of the total market. L Oreal had the greatest percentage change from the prior year 2001 at a modest 0.6% gain. In facial makeup, the US market leader is Procter & Gamble s Cover Girl (27.1%). Revlon is next at 16.8%, followed by L Oreal s Maybelline (12.5%), L Oreal (10.3%), Revlon s Almay (6.5%), Procter & Gamble s Oil of Olay (3.9%), Procter & Gamble s Max Factor (3.9%) and Coty s Coty Airspun (1.2%). Of the remaining brands, Johnson & Johnson s Neutrogena had the largest market share of 6.8% and the highest change in market share at 0.8%. Overall, these companies and brands accounted for 82% of the market. Although color cosmetics is the third largest cosmetics and toiletries sub-segment after hair care and skin care, it is the fastest growing sub-segment in the sector, accounting for 12.9% annual growth rate in 2000, compared to the sector s overall performance of 3.4%. Increased growth of 24.4% is expected from the sector between 2000 and 2005, according to Euromonitor International, with the ratio of premium brands versus mass-market brand remaining fairly constant at a 2:1 ratio. 4. Financial and SWOT analyses It is important to look at the financial statements as a whole than just the profits. We should be concerned about future performance of companies. Financial analysis of major players in cosmetic industry is important as one uses it to anticipate future conditions of industry. Table 2 shows a summary of important financial figures providing comparison among the major players in cosmetic industry. The SWOT (strengths, weaknesses, opportunities and threats) analysis is an important tool in analyzing businesses. The SWOT analysis allows us to analyze a company, their objectives, business plans and decisions. It also facilitates reviewing the positives and negatives of the industry and the company itself. Table 3 presents a comparative SWOT analysis for the cosmetic industry leaders and the industry itself. 5. Current conditions and trends As the perfume, cosmetic, and toiletry preparations industry entered the 1990s, it faced many challenges including regulatory changes, product safety concerns, calls for scientific data to document product claims, increasing environmentalism, natural ingredients, pressure from the growing animal rights movement, economy and market channels for product distribution. Lawmakers in USA began investigating possible revisions to the traditional

1266 Table 2 Financial data comparison of five major players in cosmetic and toiletry industry Company L Oreal Estee Lauder Procter & Gamble Revlon Avon Fiscal year end 31-Dec 30-Jun 30-Jun 31-Dec 31-Dec Fiscal year 1999 2000 2001 2000 2001 2002 2000 2001 2002 1999 2000 2001 1999 2000 2001 Earning data Total revenues, $ million 11,469 11,720 12,318 4,440 4,668 4,744 39,951 39,244 40,238 1,710 1,448 1,322 5,328 5,715 5,995 Operating income, $ million 1,350 1,425 1,458 516 496 341 5,954 4,736 6,678 (212) 16 16 549 789 794 Net income, $ million 883 951 1,102 314 305 192 3,542 2,922 4,352 (371) (130) (154) 302 478 430 Net income to common stock, 883 951 1,102 291 282 169 3,408 2,786 4,241 (371) (130) (154) $ million Cash flow data Cash flow from operating 700 712 884 443 305 518 4,675 5,804 7,742 (82) (84) (87) 449 324 755 activities, $ million Per share data Earnings per share: basic, $ 1.31 1.41 1.63 1.22 1.18 0.71 2.61 2.15 3.26 (7.12) (2.49) (2.94) 1.18 2.01 1.82 Earnings per share: diluted, $ 1.31 1.41 1.63 1.20 1.16 0.70 2.47 2.07 3.09 (7.12) (2.49) (2.94) 1.17 1.99 1.79 Shares outstanding: basic, shares 676.0 676.0 676.0 237.7 238.4 238.2 1,305.9 1,295.7 1,300.8 52.1 52.2 52.2 352.6 354.5 356.3 Shares outstanding: diluted, shares 676.0 676.0 676.0 242.5 242.2 241.1 1,379.9 1,345.8 1,372.4 52.1 52.2 52.2 Balance sheet data Working capital, $ million 2,459 2,896 3,185 717 882 968 3,246 3,276 3,193 961 674 612 (375) 186 428 Total assets, $ million 11,605 12,611 13,333 3,043 3,219 3,417 34,366 34,387 40,776 1,558 1,102 998 2,529 2,826 3,193 Total debt, $ million 2,042 3,167 2,635 425 417 411 12,253 12,025 14,932 1,800 1,594 1,661 1,007 1,214 1,325 Stockholders equity, $ million 6,185 6,096 6,454 1,160 1,352 1,462 12,287 12,010 13,706 (1,015) (1,107) (1,283) (406) (216) (75) Per employee data Number of employees 43,038 48,222 49,150 40,500 43,000 43,800 Revenue per employee, $ 266,474 243,038 250,627 131,553 132,898 136,861 S. Kumar / Technovation 25 (2005) 1263 1272 Source. Corporate annual reports (L Oreal Management Report, 2003; Management s Discussion and Analysis of Financial Condition and Results of Operations, 2003; Financial Review, 2003; Annual Report 2001, 2003; Management s Discussion and Analysis, 2003).

Table 3 SWOT analysis of major players and the overall cosmetic and toiletries industry Company Strengths Weaknesses Opportunities Threats L Oreal (France) High rank on market position: Number 1 worldwide and Europe Average manufacturing efficiency Attempts to expand market outside Europe and North America, which are now maturing Maturing West Europe market mainly impacts 50% of company sales Strong investment in R&D: major labs in Challenges in Latin America, Asia and Acquisition of niche companies who are specialists Merging of Clairol to P&G France, Japan, and USA create O3000 new formulas/year Japan in ethnical markets Growing strategy: M&A to achieve economy of scale and scope Aiming to aging baby-boomers who have high spending power Strong potential of Euro currency will lower values of oversea incomes Heavy market promotion and advertisement Estee Lauder (US) Well known for high-quality, innovative products Recent cost control reflects ability to promote and sell products Most profitable products come from recently launched products and new brands Growing trends of shopping at low-scale stores Products ranked in prestige level Relatively low operating margin Acquisitions of premium, niche brands Internet channel was not really effective for promotion Leader in US fragrance segment Maturing fragrance market in USA Projects to joint venture with local cosmetic makers like Shiseido and Nu-Skin Procter & Gamble (US) Best known global brand for consumer products Too large to be innovative despite of 4% of sales on R&D Buying Clairol to strengthen hair color product line Despite of huge free cash flow, debt per equity ratio reaches 103% Company is sustainable from consumer products Company bureaucracy hinders quick decisions Strategy to grow through M&A increases global presentation Cosmetic contributes to only 5.6% of company net sales Relative high operating margin: 14.5% It takes w5 years to bring a new product to market! High demands of consumer products globally ensure company finance New executive is more externally focused: Benefit from market share and large budgets more growth outside USA Revlon (US) Leader in mass-market cosmetic brand Too much focus on streamlining operations rather than improving revenues New executive team appointed to boost sales Recently downgraded by S&P from CCC- to CC Strong relationship with retailers Low spending on promotion and marketing Recently, more spending on ads and promotions JC Penny cut cosmetics (incl. Revlon) out of shelves due to low sales Relatively low R&D spending!2% McAndrews & Forbes financial support to improve cash flow Avon (US) World s largest direct sales covering 143 countries with O3.5 million representatives 60% of total sales come from international markets accounting to only 50% of total assets Leader in initiative of restructuring and business process design Overall industry High level of inventories due to the nature of direct sales business Growing E. Europe, South America, and Asia markets During economic crisis, Avon s products are preferred due to lower prices compared to department stores Direct sales are still looking good in US Aging baby-boomers, who have high spending power, tend to spend more on beauty Emerging markets, that have high economic growths i.e. E. Europe, Latin America, and Asia; replace the maturing, developed, western markets Growing trends of shopping at discount stores where many mass products take advantages China can be both opportunity and threat because it has high capability to develop products and compete in global markets Consumer concerns on health, environment, and animal tests raise manufacturing costs More intense regulations by FDA L Oreal Management Report of the Board of Directors for 2001, 2003; Management s, 2003; Financial, 2003; Annual Report 2001, 2003; Management s Discussion and Analysis, 2003; Weaver, 2003; Cosmetics and Toiletries in Europe, 2003. S. Kumar / Technovation 25 (2005) 1263 1272 1267

1268 S. Kumar / Technovation 25 (2005) 1263 1272 drug and cosmetic definitions established under the Food, Drug and Cosmetic Act. The distinction between cosmetics and drugs was sometimes vague. According to FDA guidelines, products claiming to offer medical benefits or physiological effects were over-the-counter (OTC) drugs (What are the differences between an over-the-counter (OTC) drug product and a cosmetic, 2003). Examples of items with controversial classifications included antiperspirants, which were classified as OTC drugs in the late 1970s, sunscreen products that listed a Sun Protection Factor number, hair care products claiming to protect or restore hair, and shampoos professing to cure or remove dandruff. If the FDA deemed a cosmetic product to be an OTC drug, it was regulated as a new drug. The manufacturer was then required to demonstrate product safety and efficacy to gain FDA approval. A report titled Classification and Regulation of Cosmetics and Drugs: A Legal Overview and Alternatives for Legislative Change included provisions for a third category of Cosmeceuticals (What are Cosmeceuticals, 2003) to include products like sunscreens that fell in the gap between drugs and cosmetics. Some industry analysts welcomed legislative changes to clarify product distinctions but doubted whether manufacturers would accept proposals that would require safety and efficacy testing to substantiate label claims. 5.1. Safety concern The FDA continued compiling complaints from customers about neurological reactions to perfumes including symptoms such as burning of the eyes, nose, and throat; flushing; dizziness; nausea; difficulty in breathing; memory loss; and drowsiness. Some hospitals banned the use of perfumes by operating room nurses. A group calling itself the National Foundation of the Chemically Hypersensitive wanted to ban the use of fragrances in public meeting places. Although the industry s safety record before the 1990s had been good, some seasoned industry watchers expressed concern about continued safety as many small, new companies emerged. 5.2. Environmental issues Growing concern about environmental issues also affected the industry. Several surveys demonstrated increased awareness of pollution and related issues. In 1990, Find/SVP (a New York survey group) estimated that 18.8 million US households were environmentally interested shoppers. These consumers, called Green consumers, accounted for about 20% of the US population and their number was expected to increase. In a report on Green consumers, Find/SVP cited three main concerns: animal rights and species preservation, availability of clean air and water, and waste management. One of the most controversial environmental matters facing the fragrance industry was pressure to reduce its use of volatile organic chemicals (VOCs). The most popularly used VOC was ethyl alcohol, which functioned as a solvent. The industry claimed that water was not a good substitute for ethyl alcohol because many fragrance ingredients were not water-soluble. Ingredients designed to help materials dissolve in water affected product texture and also presented possible safety concerns. Propellants and many other ingredients used within the industry were also VOCs. VOCs were blamed for contributing to ground-level ozone. In California, VOC emissions from colognes, perfumes, toilet water, aftershaves, and body splashes were estimated at almost 1700 pounds per day. Consequently, in the early 1990s, California proposed limits on VOC usage in fragrances (Donegan, 2003). New York and other states were expected to follow (Approval and Promulgation of Implementation Plan, 2003). In California, regulations took effect January 1, 1995, that limited VOCs to 70% of perfumes, colognes, and toilet waters; 60% of aftershaves; and 50% of other fragrances. Colognes, perfumes, and toilet waters that were on the market before the regulations took effect were exempt. In addition to planned compliance with VOC regulations, many fragrance and cosmetic companies brought green products to the market place. Estee Lauder introduced its Origins Natural Resources (Origin Natural Resources, 2003) line of skin care, body products, aromatherapy, and makeup. The line was promoted as natural and non-animal tested. Items were sold in recyclable containers. Revlon brought out New Age Naturals, skin care products made of all degradable ingredients, and Pure Skin Care, a line of products developed without animal testing (Cosmetic Testing, 2003). Revlon was one of the first large companies to fund research for alternatives with a $750,000 contribution to the Rockefeller University in 1979. While animal testing is still very much in existence at large corporations such as Procter & Gamble and Lever Brothers, there are now several hundred cruelty free consumer product companies. Mary Kay Cosmetics Countryside Colors line emphasized its use of recyclable packaging made from recycled materials. Mary Kay also eliminated most external packaging on men s skin care products. As some companies eliminated, reduced, or redesigned outer packaging to emphasize their concern about waste disposal problems, others, particularly fragrance manufacturers, expressed concern about the trend because packaging contributed to their image. Critics claimed that many of the environmental efforts advertised by cosmetic and fragrance manufacturers were exaggerated, false, or meaningless. For example, biodebiodegradable packages were incapable of degrading under conditions present in most landfills. Some products were labeled ozone friendly because they did not contain chlorofluorocarbons (CFCs), but CFCs had been banned since the late 1970s. Recyclable notations on plastic

S. Kumar / Technovation 25 (2005) 1263 1272 1269 containers were meaningless when recycling plants for particular plastics (like polystyrene) were not available. 5.3. Natural ingredients Along with increased environmental awareness came concern for healthy products. Items seen as safe for the environment were perceived as healthy for users. This philosophy drove a trend toward increased use of natural products containing ingredients such as proteins and vitamins. It also brought expanded use of botanical ingredients (BOTANICALS, 2003) such as aloe, cucumber, and berry extracts. In perfumes, the trend led to the increasing popularity of discreet scents, floral freshness, and sea smells. In makeup, consumers began turning to functional products. Cosmetics were expected to do more than add color and cover skin imperfections. Buyers wanted products to contain ingredients such as sunscreens and emollients to nourish and protect their skin. The focus on natural products also led to more realistic product claims. The emphasis on natural ingredients, however, extended only to plant sources. Animal products were shunned and animal testing fell into disfavor. 5.4. Animal testing Many companies promoted cosmetic lines that were developed without animal testing. One example was SafeBrands Inc., which prohibited the use of animal testing in the development of its products and by its raw ingredient suppliers. The European Union s Council of Ministers recently approved the Seventh Amendment to the Cosmetics Directive. Beginning in 2009, the new law will ban animal testing in the European Union. Moreover, the law bans the sale of certain products in 2009, if a product contains an ingredient tested on animals or if the product itself was tested on animals. This sales ban would apply to products tested anywhere in the world and to animal testing conducted after 2009 (Council of Ministers, 2003). The CTFA supported some animal testing. According to the CTFA, even products that claimed to use non-animal test methods relied on models that were acquired as a result of animal testing. The organization believed that human health and safety were more important than animal rights. The CTFA reported that 74% of Californians polled opposed legislation that would prohibit animal testing to insure product safety. 5.5. Economic impact In addition to the social and political concerns surrounding animal testing, environmentalism, and product safety, the industry was also affected by the USA s economic situation. The perfume, cosmetic, and personal care products industry had established a recession proof image when sales of inexpensive cosmetics had outsold mid-priced food items and clothing during the Depression of the 1930s. Cosmetics also did well during the recessions of the 1960s and 1980s. The recession of the early 1990s, however, brought new challenges. Counterfeit products were offered at low prices. Customers resisted high prices and demanded value. The numbers of distribution channels for upscale lines decreased as traditional department stores closed. Costs associated with product promotion increased and marketers turned more often to expensive strategies such as giving free products. 5.6. Marketing and distribution channels In an effort to move away from traditional department store cosmetic counters, upscale manufacturers turned to self-serve packaging and sold greater volumes to discounters. This enabled retailers to place items on sale. Depressed pricing, however, sometimes diminished a product s image. Bridge brands were increasingly aimed at a niche between the upscale and mass markets. Mass-marketers focused on increasing volumes to generate more profit. In 1999, it was reported that one of the major movements in the industry was a trend toward providing consumers with premium versions of health and beauty products (Schervish, 2003). There is a growing trend towards industry globalization; for example, industry leaders have focused product lines and marketing at the ethnic niche market in USA, primarily targeting the specific makeup and skin care needs of Asian, African-American, and Latino consumers. This segment reported sales of $210 million in 1997, and this market is expected to continue its rapid growth. In the USA purchasing power among ethnic groups is also on the rise: African-American buying power jumped 73% between 1990 and 1999 to $533 billion, according to the Selig Center for Economic Growth. This group tends to spend a higher proportion of its income on HBC 10% versus 8% among the general market. During the same period, the Selig Center reports, Hispanic buying power soared 84.4% from $208 billion to a projected $383 billion (O Connor, 2003). 6. Technology and innovations Four important trends on technology and innovations are setting the pace in today s cosmetics market. One is utilization of information systems to enhance market share. Second is growing proportion of transitive cosmeceuticals in the cosmetic market. Last two trends involve special cosmetic products for aging population and ethnic groups. 6.1. Information systems The explosion of different online advertisement formats has helped. Campaign elements range from microsites, SMS

1270 S. Kumar / Technovation 25 (2005) 1263 1272 vouchers and advertorials to the innovative virtual makeover site Easy Make Up launched by L Oreal Paris (www.lorealparis.com) last year. This allows customers to upload their digital photos onto the site to experiment on-screen with the colors on their own faces. Avon has led the field in terms of e-commerce perhaps not surprisingly for a company that has 160,000 door-to-door representatives across the country and a customer base familiar with ordering from a catalogue rather than a beauty stand (Simmons, 2003). One advantage of digital marketing is the speed at which campaigns can be pulled together. Campaigns can be set up in a week, rather than the three month lead-times often required when advertising in glossy monthly magazines, which makes online activity ideal for cosmetic product launches. However, for cosmetics companies, it is potentially a bigger leap than other sectors to market online, as a lot of the sell is dependent on face-to-face consultation. While sampling can be facilitated online, through printable vouchers, it is a bit more of a challenge, particularly as color and texture cannot be accurately conveyed over a computer screen. That is why many beauty online promotions use the web to drive users to beauty counters for makeovers and samples. Moreover, some experts believe that mobile marketing is more suited to cosmetic brands than the web. Internet marketing. Latter is almost inappropriate to this sector because the web is still more populated by young males. Women are researching and buying online, but more for bigger purchases such as cars or holidays. Shopping is a real leisure pursuit, and for beauty products involves smearing lipstick on your hand, not staring at a screen. Rather, SMS is exactly where the target audience of young women is, and it is an ideal tool with which to drive them to the beauty counters. 6.2. Cosmeceuticals Cosmeceuticals are best described simply as functional ingredients, much like aromatherapy has been described as functional fragrance. These products have an effect on the body and by definition cannot be cosmetics, but they are neither formulated nor regulated as OTC-drug products. Some cosmeceuticals are naturally derived and some are synthetic. Global Cosmetic Industry Magazine estimated the size of the US cosmeceutical market to be $2.8 billion in 2001 (Natural Cosmeceuticals, 2003). Consumer attitudes and behaviors are in a constant state of flux. According to the Natural Marketing Institute (NMI), Harleysville, PA, 28% of the general population agree that natural personal care products should be fortified with functional ingredients. However, Well Beings, the primary target for health and wellness products as defined in NMI s Health and Wellness Trends Database, representing 17% of the general population, are 32% more likely than the general population to agree with this statement. Well Beings are the natural cosmeceutical primary target market, although it is important to remember that other segments of the population are also buying these products at differing rates. Research also demonstrates that natural cosmeceutical usage is already fairly prevalent among natural personal care users, and the next few years will show how quickly this area will really grow. 6.3. Anti-aging Consumers in the baby-boom generation, eager to reduce wrinkles and smooth out other skin defects, will help drive up US active cosmetic ingredient demand by 7.4% per year, to $409 million by 2006. The incorporation of active ingredients, such as plant acids and enzymes, into toiletries and cosmetics has become a major force behind growth in an otherwise mature industry. The fastest-growing actives are likely to include polyhydroxy acids, which offer the defect-fighting benefits of alpha hydroxy acids (AHA), but cause less risk of skin irritation. Sales of sunscreens will also be robust, growing 8.1% per year to $62 million in 2006, and more skin care products will include sunscreens (Six Trends Guide Suppliers to Market s Attractive Features, 2002). The aging baby-boomer has been a major force behind the growth of cosmeceuticals, which promise health or physical improvement benefits beyond the merely aesthetic effect of masking. US and Western European sales of cosmeceutical ingredients related specifically to anti-aging claims total about $130 million $150 million, and they will grow 5% 10%/year through 2005 in a study published last year by Kline & Co. (Little Falls, NJ). The study reports about $30 million per year of the anti-aging cosmeceutical ingredient market sales comprise enzymes, coenzymes, and proteins. International Specialty Products last year added a range of natural proteins intended to provide moisturization in skin care and hair care products. The study reports sales of proteins and enzymes generate approximately 20% of total anti-aging sales. Another 60% of this market comprises vitamins and antioxidants, and the remaining 20% includes botanicals or plant extracts, including green tea extract for its phenol content and soy derivatives for their isoflavones. 6.4. Customized cosmetics The cosmetics industry is also boosting sales by adding products that cater to the needs and desires of people with particular ethnic backgrounds, skin and hair types, and genetic characteristics. Market research firm Euromonitor (London) claims that ethnic cosmetics and toiletries market is driven largely by products that whiten the skin of Asia/Pacific consumers, or address uneven skin tone, adult acne, and hyper-pigmentation in African-Americans.

S. Kumar / Technovation 25 (2005) 1263 1272 1271 The ethnic skin care market is also influenced by demand for more gentle formulations. The standard active ingredient for dark spot removal has been hydroquinone, which is now facing tougher regulation a claim made by the Croda Company. This company has been exploring new skin tone ingredients, which are purified, concentrated plant actives (Six Trends Guide Suppliers to Market s Attractive Features, 2002). 7. Impacts of globalization Globalization means more than just being present in many countries, it is about communicating, harmonizing the message given to a customer, and the end-consumer (Cooney-Curran, 2003). One important issue relates to understanding global requirements. For example, for a US company s product to be accepted by Japanese consumers, that is not necessarily only an issue for its marketing personnel in Japan, but also for its marketing personnel in Australia, who sell to a company that sells in Japan. Another issue is global pricing. It often returns to the lowest common denominator. One brings in currency fluctuations, free trade agreements, transport regulations, transportability, freight, shipping, etc. Being global is not a simple step. Globalization of the marketplace and economy has been stimulated by the technology revolution, the instantaneous information flow from Korea to the US to the UK. Consumer goods companies have tried to focus on global brands with a regional twist, to ensure they meet the demands of regional trends. Most suppliers are multinational operating in a global environment. Because of that, the nationalism of each area in the world plays a big part in the business; the company must have people from the country actually operate within the country. The products a firm offers into a particular country have to be directed toward that marketplace by local personnel. Product managers have to integrate with sales on the local level first to implement strategies. This is a sensible, manageable, and, indeed, measurable way of doing it. The most effective way of penetrating markets outside of the US is to tie up with local personnel and account managers, then call on the customers jointly. If a local person calls on customers, there is a higher comfort level than somebody coming from the US and talking in English, even though the customer might be very well versed in English. It is a national issue. key drivers in color cosmetics. Globally, North America accounts for the greatest share of cosmetics sales, but Eastern Europe is expected to be the fastest growing region until 2005, according to Euromonitor International. The US, the largest market for color cosmetics, continues to lose sector share to premium lines. Manufacturers are prone to pursue premium mass lines that narrow the gap between mass and premium products by offering more premium ingredients at reduced prices. Also, mass-marketers are implementing e-business strategies using the Internet as a sales channel, such as Procter & Gamble s Reflect.com, launched in 2000, and L Oreal s renewal with Star Media Network Inc. to provide a Latin American Internet site to mimic personalized consultations performed in department stores. Although premium cosmetics continue to gain share in the US, limited growth is expected in Western Europe. Premium cosmetics in Western Europe account for 31% of the market but are not expected to grow significantly due to the availability of high-quality mass-market brands. In Italy, for example, premium brands account for the greatest proportion of value sales, but premium brands dropped 3 percentage points in 2000 largely due to the increase of mass-market brands such as L Oreal s Maybelline. In France, the use of premium brands decreased 9% between 1996 and 2000 led by the increased popularity of L Oreal s mass-market brand Perfection. Emerging countries in Southern Europe do not use premium brands, which accounted for only 7% of cosmetics sales in 2000. In Eastern Europe, mass-market brands remain the dominant purchasing choice, Western mass-market brands being equated with premium brands by the Eastern European consumer. This purchasing trend is true even among the more developed Eastern Europe countries, such as the Czech Republic, Hungary and Poland. As a region, Asia-Pacific sells the largest amount of premium brands relative to its aggregate cosmetic sales. Forty percent of all sales there are premium brands, with the largest penetration in Hong Kong and Singapore. In China, premium brands account for 16% of total cosmetics sales, a 9% increase in 2000 compared to previous year. Given these trends, it would be prudent to mention that major cosmetic players need to emphasize their core brands, select product launches and continue offshore expansions, and may also need new management to execute these strategies. 8. Conclusion In cosmetic industry, fashion trends, greater demand for convenience and multi-functional products and higher demand among selected specialty consumer segments, particularly ethnic, teenagers and baby-boomers, are the References Annual Report 2001, 2003. Revlon s Annual Report 2001, 2003. Retrieved on March 14, 2003 from http://media.corporate-ir.net/media_files/ NYS/REV/reports/10k2001.pdf. Approval and Promulgation of Implementation Plan; New York State Implementation Plan Revision, 2003. US Environmental Protection

1272 S. Kumar / Technovation 25 (2005) 1263 1272 Agency: Federal Register Environmental Documents: May 24, 1995 60 (100). Retrieved on March 12, 2003 from http://www.epa.gov/fedrgstr/ EPA-AIR/1995/May/Day-24/pr-679.html. BOTANICALS: Cross Reference of Latin Binomials and American Common Names. CTFA Consumer Information. Retrieved on March 12, 2003 from http://www.ctfa.org/viewpage.cfm?idz954&versidz 1318&xsectionidZ75&dosrchZ1 Cosmetic Ingredient Review (CIR). Retrieved on March 12, 2003 from http://www.cir-safety.org Cosmetic Testing: Hidden Ingredient, Animal Suffering. In Defense of Animals, Fact Sheet: Animal Testing. Retrieved on March 12, 2003 from http://www.idausa.org/facts/costesting.html Cosmetic, Toiletry, and Fragrance Association: About CTFA. Retrieved on March 12, 2003 from http://www.ctfa.org/viewpage.cfm?pgnamez3.0 Cosmetics and Toiletries in Europe. Daily Research News Online, Article no. 1830. Retrieved on March 14, 2003 from http://www.mrons.com/ drno/news1830.htm Council of Ministers Approves Seventh Amendment. CTFA News, Issue 3, Vol. 103, February 10, 2003. Retrieved on March 12, 2003 from http:// www.ctfa.org/viewpage.cfm?idz1636&versidz2752&xsectionidz 79&dosrchZ1 Financial Review. P&G on-line 2002 Annual Report. Retrieved on March 14, 2003 from http://www.pg.com/annualreports/2002/pdf/ pg_ar2002.pdf Lepir, J., 2003. State of The Industry Global Cosmetic Industry, June 1, 2002, 2003. Retrieved on March 12, 2003 from http://www.findarticles. com/cf_0/m0hlw/6_170/87509201/print.jhtml. J. Cooney-Curran. Cross section of the industry: how suppliers are facing the challenges of a global economy and the ever-changing trends of the personal-care/cosmetic business. Global Cosmetic Industry, November 2000. Retrieved on March 14, 2003 from http://www.findarticles.com/ cf_0/m0hlw/5_167/67546349/print.jhtml Weaver, K., 2003. Truth & Consequences 170 (10), 47 50. Global Cosmetic Industry, October 2002. Retrieved on March 14, 2003 from http://proquest.umi.com/pqdweb?didz000000257924031&fmtz 3&DeliZ1&MtdZ1&IdxZ3&SidZ1&RQTZ309. Simmons, L., 2003. Beauty: Cosmetic Changes. Revolution, May 8, 2002 2003 p. 22. Retrieved on March 14, 2003 from http://galenet.galegroup. com/servlet/bcrc?cz1&stez25&docnumza90336559&mstz beauty%3accosmeticcchanges&bcontsz0&tabz2&vrsnz2. 0&tbstZtsAS&srchtpZglb&locIDZclic_stthomas. L Oreal Management Report of the Board of Directors for 2001, 2003. L Oreal Annual Report 2001, 2003. Retrieved on March 14, 2003 from http://www.loreal-finance.com/v4/us/contenu/rapport/pdf/ tome3_us.pdf. Management s Discussion and Analysis, 2003. Avon 2001 Annual Report (Financials), 2003. Retrieved on March 14, 2003 from http://www. avoncompany.com/investor/annualreport/pdf/avp01arfinancial.pdf. Management s Discussion and Analysis of Financial Condition and Results of Operations. The Estee Lauder Companies Inc., 2002 Annual Report. Retrieved on March 14, 2003 from http://www.elcompanies.com/htm/ content/el_ar02.pdf O Connor, N., 2000. Culture, Color, & Cosmetics. Exposé Cosmetics/Bath 3 (8). Retrieved on March 12, 2003 from http://www.ecrm-epps.com/ Expose/V3_8/Culture_Color_Cosmetics.asp. Natural cosmeceuticals: driving personal care growth today & tomorrow an overview of the trends and opportunities in this exploding market, 2003. Nutraceuticals World 6 (1), 58. Retrieved on March 14, 2003 from http://web.lexis-nexis.com/universe/document?_mzb411709ddcc9bb 47597904aa34166fe9&_docnumZ1&wchpZdGLbVlb-lSlAl&_md 5Z056782d44096f4b1ffd62ba36b412cc3 Origin Natural Resources. Estee Lauder Company Online: Our Brand. Retrieved on March 12, 2003 from http://www.elcompanies.com/htm/ frameset/frm_m2_origins.htm Sauer, P., 2003. A Makeover of Global Proportions Chemical Market Reporter, Issue: December 3, 2001, 2003. Retrieved on March 12, 2003 from http://www.findarticles.com/cf_0/m0fvp/21_260/80683915/ print.jhtml. Perfumes, Cosmetics, and Other Toilet Preparations, 2003. Encyclopedia of American Industries, third ed., vol. 2. Gale Group, 2001 (SICs: 2844) 2003. Retrieved on March 12, 2003; from http://galenet.galegroup.com/ servlet/bcrc?cz1&cindz2844c-cperfumes%2cccosmeticsc andcotherctoiletcpreparations&stez85&docnumzi2501400 183&bContsZ16171&modeZi&tabZ1024&icdZ2844&iTypeZ sic&vrsnz2.0&tbstztsis&srchtpzind&rcdzsic&locidzclic_stt homas. Research Institute for Fragrance Materials (RIFM). Retrieved on March 12, 2003 from http://ameliaww.com/fpin/rifm.htm Six Trends Guide Suppliers to Market s Attractive Features. Chemical Week, December, 2002 Specialties, Cosmetics, p. 52. Retrieved on March 14, 2003 from http://web.lexis-nexis.com/universe/document?_mzeaed6e6db0646045f77023f781a57eb2&_docnumz21& wchpzdglbvtb-lslal&_md5z1c0ec676d779a6e7d2f9f848043c 7179 Schervish, S., 2000. Trends in cosmetics. Exposé Cosmetics/Bath 3 (8). Retrieved on Marc 12, 2003 from http://www.ecrm-epps.com/expose/ V3_8/Trends_Cosmetics.asp. The International Fragrance Association (IFRA). Retrieved on March 12, 2003 from http://www.ameliaww.com/fpin/ifra.htm Donegan Jr., T.J., 1999. Laws limiting volatile organic compounds in cosmetic. Food and Drug Law Journal 50 (special issue), 160. Retrieved on March 12, 2003 from http://www.fdli.org/pubs/journal%20online/ 50th%20Anniv/art14.pdf. Toiletries and Cosmetics: Industry Snapshot, 2003. Encyclopedia of Global Industries, second ed. Gale Group, 1999 (SICs: 2844), 2003. Retrieved on March 12, 2003 from http://galenet.galegroup.com/servlet/ BCRC?cZ2&cindZ2844C-CPerfumes%2CCCosmeticsCandC OtherCToiletCPreparations&steZ85&docNumZI2501600038& bcontsz16171&modezi&tabz1024&icdz2844 &itypezsic& vrsnz2.0&tbstztsis&srchtpzind&rcdzsic&locidzclic_stthomas. US Food and Drug Administration Center for Food Safety and Applied Nutrition. Retrieved on March 12, 2003 from http://www.cfsan.fda.gov/ ~dms/cos-toc.html What are Cosmeceuticals?. Retrieved on March 12, 2003 from http://www. cfsan.fda.gov/~dms/qa-cos5.html What are the differences between an over-the-counter (OTC) drug product and a cosmetic?. Retrieved on March 12, 2003 from http://www.cfsan. fda.gov/~dms/qa-cos6.html Sameer Kumar is a Professor and Qwest Endowed Chair in Global Communications and Technology Management in the Department of Management, College of Business at the University of St Thomas, Minneapolis, Minnesota. His major areas of interests include optimization concepts applied to product design, process innovation, supply chain management, information technology, capital investment justifications and total quality management effectiveness. Dr Kumar is a registered professional engineer in the State of Minnesota.