French cosmetics giant L’Oréal Group believes African consumers are worth it. The Paris-based company is expanding its presence on the continent as demand surges for international brands from an emerging and established middle class.
In its quest to reach the “next one billion consumers”, L’Oréal has added subsidiaries in Nigeria, Egypt and Kenya over the past two years. It also has hubs in SA, Ghana and Morocco.
The Economist Intelligence Unit predicts that by 2030, Africa’s top 18 cities could have a combined spending power of US$1,3trillion, making the continent a target for companies seeking growth outside developed countries.
One of the main forces behind Africa’s growth spurt is the increasing pace of urbanisation and consumerisation. “As Africans flock to the cities, and disposable incomes rise, their demand for modern goods and services … will accelerate,” the unit’s “Africa: Open for Business” report says.
Euronext Paris-listed L’Oréal, which sells products such as SoftSheen-Carson’s Dark&Lovely, Lancôme lipstick and Maybelline mascara, reported slightly slower than expected sales growth of 5,2% for the second quarter, reflecting a deceleration in the US. This contrasted with a solid performance from what it calls “new markets” like Latin America, the Middle East & Africa and the Asia Pacific region, which posted a 10,3% rise in like-for-like sales to ?2,1bn. Revenue in Western Europe rose 1,7%.
In 2012, these new avenues of growth became the company’s largest region by sales volumes, overtaking its traditional Western European zone. L’Oréal’s consumer division head for the Middle East & Africa region, Fabrice Megarbane, says Africa is a big priority for the group. “We’re looking at this market seriously; there’s a lot of potential. SA is a very important market to us because it’s the most developed in terms of the distribution of brands,” he says.
The group exports SoftSheen-Carson black hair care and toiletry products throughout Africa, Europe and the Middle East from its manufacturing plant in Midrand, Johannesburg and its distribution centre in Centurion, near Pretoria. The plant, regarded as the group’s gateway to the African continent, also manufactures Garnier deodorants for the local market.
Leigh Ferst, a consumer products analyst at New York’s Wellington Shields, says emerging markets are vital to the growth of most consumer products companies because of the rising number of consumers entering the middle class with disposable income and because of the slowdown in growth of mature markets.
“As the African economies continue to develop, I expect to see substantial investment in brand marketing as well as some local manufacturing,” she says. L’Oréal entrenched its position in East Africa with the acquisition in April of the health and beauty division of Nairobi-based Interconsumer Products.
Turning over about ?15m in 2012, the Kenyan company caters for the domestic market as well as consumers in neighbouring Uganda and Tanzania, bolstering L’Oréal’s expansion drive in the region. With a forecast 5,2% compound annual growth rate, the Middle East & Africa is set to be the second-placed regional market for beauty and personal care over 2012-2017, just behind Latin America with an expected 5,6%.
According to Oru Mohiuddin, a senior analyst at London-based market intelligence firm Euromonitor International, beauty and personal care in the Middle East & Africa is predicted to grow by nearly $7bn in that period.
“The question remains whether further acquisitions are on the horizon,” says Mohiuddin. “L’Oréal may consider making an acquisition in Nigeria as the competitive landscape changes due to increasing interest from other players. There are a number of options, including Soulmate Industries, to choose from in Nigeria … [But] L’Oréal could decide that it would be more commercially viable to make an acquisition in another region altogether and set up a base from scratch in the remaining African markets.”
On L’Oréal’s Africa radar are the fast-growing economies of Algeria, Ethiopia and Angola. The group is also pinning its hopes on Mizani – a premium, ethnic hair-care offering. “Right now Mizani is our baby, but it has great potential to grow,” says L’Oréal SA MD Bertrand de Laleu.
Another international powerhouse driving sales in Africa is New York-listed Estée Lauder, which has a market capitalisation of about $20bn. The group has not been swayed by slowing global economic growth or competitive pressures, as evidenced by its continued top-line growth and margin expansion, Morningstar analyst Erin Lash says. Known for its La Mer and Jo Malone brands, Estée Lauder reported an 84% rise in fourth-quarter profit helped by the swelling middle class in other emerging markets like China and Brazil.
The high-end cosmetics company opened its first MAC store in Lagos, Nigeria this year. The makeup label, whose credo is “All Ages, All Races, All Sexes”, has appealed to brand-savvy Nigerian consumers, and there are plans for a second store in the region. “We are present in many African markets, including Ghana with fragrances. We have already opened full-line beauty doors with Estée Lauder and Clinique in Nairobi and Lusaka, and we will launch in Lagos, Abuja and Maputo for Clinique. We believe there is opportunity for MAC in the sub-Saharan Africa region and will continue to focus on the brand as a growth driver,” says Sue Fox, Estée Lauder’s MD for sub-Saharan Africa.
Much like FMCG producers that tailor and localise products, cosmetics companies are building their knowledge of African consumers and adapting their propositions to suit local markets. According to De Laleu, a common mistake as companies look to Africa is to use a one-size-fits-all approach. “Each country has a different history; they don’t use the same brands, the climates are different – this impacts the curl of the hair and the moisture and elasticity in the skin. It’s a fragmented market, so we have to customise. African consumers want quality and they’re ready to pay, but even though their purchasing power is on the rise, it’s fairly low, so we have to adapt the packaging and size of our products,” he says.
To better understand the market and guide it in formulating products, L’Oréal’s research and development arm this year completed a study of African women’s skin, using state-of-the-art skin analysis equipment. Following the opening of facilities in India, China and Brazil, the group will also launch the L’Oréal Professional African Salon Institute in SA this year.
In addition to catering to diversity, cosmetics companies wanting to gain consumers and market share in Africa have to adapt to distribution challenges, lack of infrastructure, the prevalence of informal retail platforms such as spaza shops and open markets and the deluge of fake products. Other multinationals such as Avon and Unilever are also looking to capture the attention of Africa’s burgeoning middle class. NYSE Euronext-listed Avon, through its direct selling model, has representatives in Nigeria, Ghana and Morocco. Unilever, which has called Africa its next growth market, has ethnic hair-care brands such as Motions and Soft&Beautiful in its stable. It also owns skin-care lines like Ponds and Vaseline.
Unilever Global has two controlling companies – one English and the other Dutch. The former has a primary listing on the LSE, while the latter has a primary listing on Euronext Amsterdam. Both Unilever controlling companies have secondary listings on the NYSE. Unilever also has small historical listings based in Nigeria and Ghana.
On the local scene, the only listed beauty and cosmetics focused company is Imbalie Beauty. Formerly known as Skinwell, it changed its name in May last year. It is a franchiser which markets and distributes its own and independent health and beauty brands. Imbalie, whose brands include Placecol and Dream Nails, reported a decline in headline EPS to 0,58c for the year to February from 1,07c previously. This was a result of a slowdown in consumer spending and the company issuing shares for cash at the beginning of the financial year to fund the acquisition of Perfect 10, a nail and beauty franchise, for R14,35m.