THE GREENING OF PERSONAL CARE: SEPARATING PERCEPTION FROM REALITY

THE GREENING OF PERSONAL CARE: SEPARATING PERCEPTION FROM REALITY A Presentation to: April 15, 2008 www.klinegroup.com

Agenda Overview of Kline & Company Key Drivers for Natural/Green Personal Care What Does Natural/Green Mean? Green Personal Care Ingredients Outlook 1

Agenda Overview of Kline & Company Key Drivers for Natural/Green Personal Care What Does Natural/Green Mean? Green Personal Care Ingredients Outlook 2

Kline & Company is a leading management consulting and market research firm with domain expertise across the personal care value chain. Kline Management Consulting Kline Market Research Working with individual clients to resolve tough issues and help implement solutions Generating information and insights for multiple clients through syndicated research Managed flow of people, ideas and data 3

Kline Management Consulting combines industry expertise with world class service delivery. Kline Management Consulting Industry Practices Energy Chemicals & Materials Life Sciences Consumer Products Strategy Consulting Services Technology Manufacturing & Supply Chain Customer Relationships 4

Our personal care domain expertise covers the whole value chain RAW MATERIALS FINISHED GOODS RETAIL OUTLETS Antimicrobials Conditioning polymers Emollients Hair fixative polymers Rheology control agents Skin whitening agents Specialty actives Specialty delivery systems Specialty surfactants UV absorbers Fragrances Hair care Makeup Nail care Oral care Skin care Toiletries Department stores Direct sales Drug outlets Food stores Mass merchandisers Pharmacies/ perfumeries Salons Spas/beauty institutes Specialty stores 5

We Serve Clients Around The Globe We can handle local research engagements or global assignments Global Headquarters Little Falls, NJ Kline Europe Brussels, Belgium Oxford, United Kingdom Prague, Czech Republic Milan, Italy Kline Asia Shanghai, China Tokyo, Japan New Delhi, India Dubai, UAE Kline Latin America São Paulo, Brazil 6

Agenda Overview of Kline & Company Key Drivers for Natural/Green Personal Care What Does Natural/Green Mean? Green Personal Care Ingredients Outlook 7

Evolution of personal care industry Fashion Ingredients Pigments, dyes, natural oils, soaps Natural Surfactants, uv absorbers, polymers, antimicrobials Synthetic Natural/green Functionality Competitive landscape Decoration Performance Emergence of leading brand owners 8

Key growth drivers for natural personal care Greater supply of natural ingredients Widespread concern about toxic ingredients Marketers staking a claim Consumer awareness Media hype celebrities/ politicians 9 9

The environment is increasingly part of our conscience. 10 10

Major marketers are taking notice via key acquisitions. Kiehl s (2000) The Body Shop (2006) Sanoflore (2006) ) Aveda (1997) Bumble and bumble (2000) Darphin (2003) Ojon (2007) Tom s of Maine (2006) ) Burt s Bees (2007) 11 11

Agenda Overview of Kline & Company Key Drivers for Natural/Green Personal Care What Does Natural/Green Mean? Green Personal Care Ingredients Outlook 12

Today, natural personal care products represent a small, high-growth segment of the overall global personal care market. Personal Care Sales by Sector Growth Natural Natural, 2% $180 billion manufacturers sales level Overall market 0 5 10 15 13

In a recently published market research report, Kline assessed 26 natural cosmetic and toiletry brands with sales ranging from $2 million to > $500 million. Alba Aubrey Organics Arbonne Avalon Natural Products Aveda (Estee Lauder) Burt s Bees Care by Stella McCartney Jason Natural Products John Masters Organics Jurlique Kiss My Face Kneipp Korres Natural Products Dr. Hauschka Lavera L Occitane Lush Nature s Gate Organix Primavera Pangea Organics The Body Shop (L Oreal) Tom s of Maine (Colgate-Palmolive) Sanoflore (L'Oreal) Weleda Zia Natural 14 14

Contained within each brand s overall profile, is an ingredient analysis and assessment. First, a cross-section of products were selected from each of the 26 brands that were profiled in our report Where possible, like product categories were chosen across all brands Each brand s profile contains the brand s ingredient analysis and assessment as well as its overall natural rating Sustainability was not part of the assessment The ingredient assessment was performed by a member of our specialty chemicals practice who also developed our 10 point rating system 15 15

Kline s 10 point rating system... Rating Criteria 1 Majority of or all ingredients are synthetic; comparable to competitive products which are not marketed as natural ; virtually no naturals or botanicals 2 Rely on performance ingredients from the full range of synthetic raw materials as major ingredients; also use natural ingredients, often as minor ingredients 3 Similar to 2 rating but greater emphasis on natural ingredients and ethics of supply chain (Continued) 16 16

Kline s 10 point rating system... (Continued) Rating Criteria 4 Like 1-3, uses a number of non-naturals such as silicones, synthetic polymers, SLS, ethoxylates, alpha-olefins or other non-conforming ingredients but high proportion of natural and botanical ingredients 5 Higher proportion of natural ingredients than 1-4, but also uses some less desirable ingredients such as silicones and polysorbates 6 Leans strongly towards use of botanical extracts but also uses some non-naturals ingredients such as ethoxylates or chemical derivatives 7 Minor use of non-natural ingredients such as UV filters, emulsifiers, surfactants (Continued) 17 17

Kline s 10 point rating system... (Continued) Kline s 10 point rating system... (Continued) Rating Criteria 8 High use of natural ingredients, limited use of non-naturals such as chemical UV filters when few natural alternatives to synthetic technology 9 Uses a high proportion of natural ingredients or derivatives which are made using acceptable physical or chemical processing. In addition to avoiding harsh surfactants, opts for the mildest and most environmentally friendly alternatives. 10 Many of the botanical extracts are from organically farmed sources. Minor ingredients also considered natural. 18 18

The most common ingredients that are avoided in natural products are the following... Parabens preservatives Propylene glycol moisturizing agents Petrolatum gives emollient properties Synthetic oils (mineral oils, isohexadecane, etc.) Organic sunscreens Silicones Harsh surfactants sodium lauryl sulfate 19 19

We found that of the 26 brand profiled in our report, the degree of naturalness ran a broad spectrum Nature-inspired. Heavy use of synthetics Some use of non-naturals Organic, and green 20 20

Agenda Overview of Kline & Company Key Drivers for Natural/Green Personal Care What Does Natural/Green Mean? Green Personal Care Ingredients Outlook 21

Personal care ingredients are an $8-10 billion industry, of which ~ 30% are green Ingredient Market Ingredient market: Green vs Non-green breakdown 50 45 40 35 100 80 Green % Of total 30 25 20 15 % Of total 60 40 10 20 5 0 Commodities Fine chemicals Specialties 0 Undifferentiated 22

Selected ingredient segments and leading products Surfactants Emollients Emulsifiers Hair-fixative polymers Anti-microbials Rheology control agents Solvents/carrier s Conditioning polymers Cosmetic actives Fatty alcohol sulfates Mineral oil Fatty acidd and derivatives Vinyl polymers Parabens Cellulosics Ethanol Silicones Vitamins Fatty alcohol ether sulfates Synthetic oils Sorbitan esters Acrylic polymers Phenoxyrthanol Silicas Propylene glycol Polyquats Botanical extracts Alkanolamides PEG esters Polyesters Ureas Bentonites Guar derivatives Hyaluronic acid Betaines Esters Fatty acid/alcohol ethoxylates Polyurethanes Hydantoins Starch derivatives Protein hydrolysates Beta-glucans Sarcosinates Lanolin Ethoxylated glyceryl esters Copolymers Pyrithiones Xanthan gum Isoflavones Isethionates Natural oils Ethoxylated sorbitan esters Alginates Synthetic peptides Taurates Lecithin Carragennan Sulfosuccinates Sucrose esters Guar Alkyl polyglucosides Acrylic polymers Amine oxides Quats 23

What makes natural personal care an attractive market to ingredient companies? Marketing appeal of certification seal Ability to differentiate and extract value Corporate social conscience Growing consumer eco-awareness Business opportunities in growing market 24 24

Natural versus green There is a realization amongst brand owners that the natural concept can not be applied across all personal categories and retail channels Natural may not be better for the environment and local economies. Further, other factors arise when an ingredient is harvested from fragile environments For leave-on skin care, a natural formulation can provide a satisfactory level of performance for the consumer, but for many other personal care categories, natural ingredients have performance limitations 25

Kline s guideline definition of a green ingredient Ingredients are from a plant or renewable source Some chemical modification acceptable (e.g. hydrolysis, hydrogenation, esterification) But some chemical modifications are unacceptable (e.g. ethoxylation) Minerals and inorganic materials acceptable Ingredients made by fermentation using plant raw materials acceptable Organically farmed plant sources not essential Animal products are not excluded e.g. silk and milk proteins, beeswax Excludes: Synthetic ingredients Petrochemical derivatives and synthetic solvents Preservation considered to a minor extent as preservatives such a small part of formulation No account made of: Biodegradability Farming ethics Genetic engineering of plant source material Purification methods for natural oils Based on this definition, we can look more closely at selected personal care ingredient product categories to see how they contribute to the greeness of a finished product 26

Hair Fixatives 27

Hair fixative polymers are used singly or combined to provide the optimal compromise in terms of price and performance Sample Formulation Hair Gel PVP/VA 12% Additives ~1% Aqua to 100% Sample Formulation Hair Spray Amphomer 5% Alcohol 66% Propane/butane 25% Other 4% Aqua to 100% Hair fixative polymers give hair styling products their high level of functionality and performance Formulations are fairly simple consisting of mainly of the resin/fixative polymer(s) in a carrier Sprays contain a high proportion of alcohol and aerosols are propellant based Sample Formulation Hair Gel Strong Hold VP/methacrylamide/vinyl imidazole copolymer 10% PVP 1% Other ~4% Aqua 85% * Based on as sold basis 28

Hair fixative polymer choice is based on several parameters Decreasing order of importance Styling performance required Film flexibility Product type (gel, spray, pomade, etc) Trade class Lack of flakiness Water-proofability Low/no odor Ease of processing 29

Less than 1% of the hair fixative polymers used today are green Monomer Product Vinyl PVP PVP/VA Esters of PVM/MA VA/crotonates/vinyl neodecanoate copolymer Green, 1% Acrylic Acrylates/octylacrylamide copolymer Acrylates/C1-2 succinates/hydroxyacrylates copolymer Acrylic acid/ethylacrylate/n-tert.-butylacrylamide terpolymer AMP-acrylates/allyl methacrylate copolymer Polyurethane Polyester Biopolymer Starch Acrylamide sodium/acryloyldimethyl laurate acrylic acid copolymer MDI, TDI Terephthalic acid Dehydroxanthan gum Modified corn starch 30

How can hair fixative polymers be natural or green? Natural: No hair-fixatives directly derived from natural sources in commercial use Green: Modified corn starch Dehydroxanthan gum Greenwashing: Reducing VOC levels in US hair styling products 31 31

Surfactants 32

Several surfactants are combined to find the optimal compromise in terms of price and performance Sample Formulation Shampoo Ammonium lauryl sulfate 30%* Ammonium laureth sulfate 10% Cocamidopropyl betaine 4% Cocamide MEA 1% Other 50% Aqua to 100% Sample Formulation 2-in-1 Conditioning Shampoo Sodium laureth sulfate 25% Sodium lauryl sulfate 15% Lauryl glucoside 4% Cocamidopropyl betaine 3% Coco-glucoside 1% Other 52% Aqua to 100% Foaming wash products typically contain a high proportion of surfactant, typically ~15% by weight Generally, a number of surfactants are included Commodity surfactants Co-surfactant Formulation often contains a foam booster or stabilizer e.g. ethanolamines Foam characteristics are central to consumer perception of performance Surfactant accounts for a high % of formulation; rinse off applications are a lot more cost sensitive If surfactants are not green, the shampoo can not be green because the surfactants are present in such a high % of the formulation * Based on as sold basis 33

Surfactant choice is based on several parameters Price Decreasing order of importance Foaming characteristics Irritability properties Compatibility with other ingredients After-feel on the skin Ease of processing Product positioning (economy shampoo) Channel to market Greenness 34

Between 5% and 10% of surfactants commonly used in rinse-off products are green Segment Commodity Specialty Anionic Alkyl ether sulphates Acyl isethionates Alkyl sulphates Alpha olefin sulphonates Sodium laureth sulphate Sarcosinates Ether carboxylates Sulfosuccinates Taurates Green, 5% to 10% Amphoteric - Betaines Sultaines Amphoteric acetates Nonionic Alkanolamides Amine oxides Alkyl polyglucosides Cationic - Quats 35

How can surfactants be natural or green? Natural: No surfactants directly derived from natural sources in commercial use Established chemistries Green: APGs are well-established but account for a small proportion of the total market. These are based on renewable sources, glucosidation chemistry, biodegradable, meet Ecocert requirements Newly introduced chemistries Green: Acylated proteins e.g. sodium cocoyl glutamate Other sugar derivatives e.g. pentosides 36 36

Can surfactants be greenwashed? Greenwashing: Accelerated move away from petrochemical sources of fatty chains towards vegetable source which are sustainable and renewable Increasing % solids to decrease transport pollution and fuel consumption e.g. betaines (Degussa and Cognis) Introduction of enzymatic production processes Improved production methods to decrease emissions and fuel consumption 37 37

Emollients 38

Several emollients are combined to find the optimal compromise in terms of moisturization, price, and elegant skin feel Sample Formulation Hand Cream Mineral oil 10% Oil/wax blend 10% Vaseline 2% Isopropyl palmitate 7% Dimethicone 2% Other <5% Aqua To 100% Sample Formulation Sun Care Emollients to 20% UV absorbers to 15% Carriers for UV absorbers/alcohols to 10% Emulsifiers to 10% Other < 5% Aqua to 100% Emollients are amongst the most widely used personal care ingredients Key ingredients in Facial creams Facial cleansers Wipes Sun care products Body lotions The proportion of emollient varies considerably depending on several factors including: Oil-in water formulation Water-in-oil formulation Presence of UV absorbers Relative proportions of the emollients classes varies significantly from product to product Silicones are not included here * Based on as sold basis 39

Several emollients are combined to find the optimal compromise in terms of moisturization, price, and elegant skin feel. Sample Formulation Facial Moisturizer Esters 5% Wheatgerm oil 2% Mineral oil 1% Other ingredients <10% Aqua To 100% Sample Formulation Rich Night Cream Petrolatum 10% Esters 11% Mineral oil 4% Sodium PCA 1% Other 20% Aqua To 100% Sample Formulation Bath Oil Mineral oil 60% Esters 30% Silicones 7% Other ingredients To 100% Sample Formulation Eye emulsion Silicones 20% Mineral oil 1 Lanolin 1% Other ingredients 5% Aqua To 100% * Based on as sold basis 40

Emollient choice is based on several parameters Product type Decreasing order of importance Moisturization level required Sensorial properties/aesthetics Compatibility with other ingredients Presence of UV absorbers Product positioning- natural image? Greenness Trade class 41

55% of emollients commonly used in personal care are green Type Commodity Specialty Natural Mineral oil Natural oils Natural oils Fatty acids/alcohols Lanolin Lanolin derivatives Squalane Shea butter Synthetic Synthetic oils Silicones Silicones Esters Squalane Green, 55% 42

How can emollients be natural or green? Natural: Yes, natural oils, butters Mineral oil is nature-derived but not considered green Green: Yes, Esters Semi-synthetic, considerable portion of molecules are of vegetable origin Esterification chemistry accepted by most certification bodies Green: Lanolin Not directly derived from animals (sheep fleece) Used more widely in pharma market due to traditional rumours regarding sensitivity 43 43

Global consumption of personal care ingredients Fragrance Surfactants Decreasing market size Solvents Emollients Conditioning Polymers Actives Humectants Rheology Control Antimicrobials Hair Fixatives UV absorbers Emulsifiers 44

Global consumption of personal care ingredients Solvents Emollients Decreasing level of greeness Rheology Control Actives Humectants UV absorbers Conditioning polymers Surfactants Hair fixatives Antimicrobials Fragrance Emulsifiers 45

Agenda Overview of Kline & Company Key Drivers for Natural/Green Personal Care What Does Natural/Green Mean? Green Personal Care Ingredients Outlook 46

Brand owners 1 Anita Horst Redeberker (Aveda founder) Roddick (The Body Shop founder) Being natural goes beyond having natural ingredients 2 Often, there is a compromise on ingredients in order to maximize performance 3 Mass retailers will be a high growth channel in the future for natural care marketers 4 Asia is a high priority for many marketers 5 Meaningful penetration into this market can best be achieved through acquisition 47 47

Ingredient suppliers 1 Higher growth opportunities than traditional ingredient segments 2 3 4 5 Many of the high performance personal care ingredient suppliers are not currently aligned from a product standpoint with the natural trend The big volume ingredients are being sold into low-priced finished products and therefore green is a realistic goal; natural is not There is industry uncertainty regarding how natural/green will play out. Many suppliers are waiting to see what will happen short term Formulators are driving the natural/green trend; with few exceptions, ingredient suppliers are not leading it 48 48

Questions &Answers 49 49

Kline is a worldwide consulting and research firm dedicated to providing the kind of insight and knowledge that helps companies find a clear path to success. The firm has served the management consulting and market research needs of organizations in the chemicals, materials, energy, life sciences, and consumer products industries for nearly 50 years. For more information, visit www.klinegroup.com. If you require additional information about the contents of this document or the services that Kline provides, please contact: Name: Gillian Morris Title: Director, Chemicals and Materials Phone: +1-973-435-3432 E-mail: Gillian_Morris @KlineGroup.com Americas Asia Pacific Europe Middle East Kline Global Headquarters Kline & Company, Inc. Overlook at Great Notch 150 Clove Road Little Falls, NJ 07424-0410 Phone: +1-973-435-6262 Fax: +1-973-435-6291 www.klinegroup.com 50