Consumer Sector Personal Care Industry. Senior Analyst: Joyce Chan Junior Analysts: Brandon Neimark, Carlota De Villa, Olivia Roman and Adam Martinez

Transcription

1 Consumer Sector Personal Care Industry Senior Analyst: Joyce Chan Junior Analysts: Brandon Neimark, Carlota De Villa, Olivia Roman and Adam Martinez 1

2 Agenda Industry Definition Industry Information Revenue Generation Industry Revenue Porter s Five Forces Trend 1: Consumer Willingness to Pay Trend 2: Demand for Men s Grooming Trend 3: R&D Tax Credit Risks and Sensitivities Comparable Companies Conclusion 2

3 Industry Definition The personal care industry prepares, blends, compounds and packages beauty products and cosmetics. Most firms in the industry conduct their own research and development for new products and manufacture them as well. Firms in this industry develop and sell personal care products through retailers, directly to the consumer and through third party distributors. Personal care products include: skin care, make up, hair care, oral care, and fragrances. The largest player in this industry is an international company, L Oréal, with 13.6% market share in North America. Estee Lauder Companies Inc. Ticker: EL Market Cap: Bn Avon Products, Inc. Ticker: AVP Market Cap: 2.98 Bn Coty, Inc. Ticker: COTY Market Cap: Bn L Oreal Ticker: Or Market Cap: Bn Revlon Inc Ticker: Rev Market Cap: 1.87 Bn 3

4 Industry Information Industry breakdown by Market Cap Consumer Staples Market Cap: $3.6 T Companies within the personal care industry do not focus on one product, but a mix. Household & Personal Care Products Market Cap: $844.4bn 2015 Personal Care Product Segmentation 12.20% 1.10% Skincare Personal Care Market Cap: $458.9bn 17.30% 36.10% Haircare Make-up Perfumes Oral Cosmetics 22.90% *Percentages based on total personal care industry revenue: $56.63bn Sources: Statista; S&P Net Advantage; IBIS World 4

5 Revenue Generation Companies incur costly marketing and ad expenses to reach the consumer audience Identify ingredients Develop the product Manufacturing Marketing Consumer Raw materials include essential oils, packaging, and chemicals. Consult professionals. Ex. Dermatologists and marketers. Transform raw materials into products. Manufacture in-house at least 50% for quality and reduced production time. High capital intensity with focus on automated procedures. Regulation: Cosmetics and beautifying products are not subject to FDA testing before the product s release. They are only subject to labeling and ingredient disclosure laws. All other products within the industry are subject to regulation. E-retail, Retail Outlet, and/or Distributor Firms deliver goods to multiple retail outlets, including their own, to reach establish brand presence and reach target audience. Common consumer characteristics: Fast changing preferences. Demand for more value for less cost. Highly influenced by celebrity preferences. Identify Transform Create Sell Sources: EY Consumer report, IBIS world; Food and Drug Administration 5

6 Industry Revenue Industry Revenue in $ Millions $ in Millions 30,000 25,000 20,000 15,000 10,000 5, ,000 20,000 15,000 10,000 5,000 0 Industry Revenue CAGR 5.17% CAGR 4.36% Industry Revenue vs. Consumer Confidence Index Revenue CCI CCI Revenue grew at a CAGR of 4.36% between 2007 and Revenue projected to grow at a CAGR of 5.17% between 2016 and The Great Recession in 2008 did not have adverse effects on the Personal Care industry. Largely due to a firm s diverse brand lines that include luxury and low-end goods. Consumers continue purchasing cosmetics despite reducing budgets. Despite changes in the CCI, the industry revenue has increased steadily. The revenue earned within this industry has low level of volatility due to diverse brand lines. Sources: IBIS World; OECD Data 6

7 Porter s Five Forces Analysis Barriers to Entry Established manufacturers have considerable economies of scale and initial costly investments pose a barrier to entrants. New Entrants Medium Barriers to Exit No considerable barriers. Suppliers Industry Rivalry Customers Low High High Suppliers include: Inorganic chemicals Organic chemicals Soap & Cleaning Compounds Competition build brand reputation to stand out from other similar products. Substitutes High Many competitors in the cosmetic industry exist to capture one consumer Highly swayed by fashion trends, affected by consumer confidence and income. Consumers can easily change from product to product if dissatisfied Firms in the industry are challenged by retaining and attracting consumers who have fast changing tastes. Sources: UK Essay; IBIS World 7

8 Trend 1 Increased Willingness to Pay for Sustainable Goods Consumer Willingness to Pay Demand for Men s Grooming Products R&D Tax Credit 8

9 Increased Willingness to Pay for Sustainable Goods 70% 60% 50% 40% 30% 20% 10% 0% Willingness to Pay a Premium for Sustainable Products 50% 55% 66% Consumers are willing to pay 40.29% more for responsible products in The willingness to pay has continued to rise. 84% seek responsible products whenever possible. 57% of the global population who are willing to pay more for sustainable products are willing to pay for fresh, natural and organic ingredients. Organic personal care market expected to reach $15.98b in Average gross margin: 32.65% Leveraging marketing campaigns to promote sustainability has contributed to a CAGR of 9.8% in the organic personal care industry. Top Sustainability Purchasing Drivers 15 Average % Marketing Expenses of Sales TV ad about social/environmental good 31% Community commitment Environmentally friendly package Known for its social value 41% 41% 43% 36% Environmentally friendly 45% Marketing Expenses Fresh, natural, organic ingredients Known for health/wellness beneifts Brand I trust 57% 59% 62% 0% 10% 20% 30% 40% 50% 60% 70% Sources: Nielsen; In-cosmetics Latin America; MITSloan Does It Pay to be Good? ; Cone Communications Insight Report; Marketing Charts; McKinsey & Co. 9

10 Trend 2 Demand for Men s Grooming Products Cosmeceutical Product Growth Demand for Men s Grooming Products R&D Tax Credit 10

11 Demand for Men s Grooming Products Men s product outlook is positive especially products such as: serum, tinted moisturizers with UV protection, deodorants, and hair molding products Per capita spending is a significant contributor to industry revenue because it is highly correlated. Men s grooming makes up an average 8.01% of the global personal care industry. Global men s grooming segment grew at a historical CAGR of 5.52% between It will grow at a future CAGR of 5.58% from Men s grooming products are growing at a historical CAGR of 5.52% indicating a strong revenue stream for the next 5 years. Industry Revenue in ($B) $ in Billions U.S. Industry Revenue vs. Men's Grooming R^2 = Y = x Spending per Capita on Men's Grooming Global Share of Men's Grooming in Industry Revenue % 6.94% 7.20% 7.58% 7.86% 8.27% 8.70% 9.17% 9.66% Global Industry Men's Grooming Sources: Bloomberg; R&D Taxsavers; IBIS World; Statista 11

12 Trend 3 R&D Tax Credit Consumer Willingness to Pay Demand for Men s Grooming Products R&D Tax Credit 12

13 R&D Tax Credit $ in Billions Revenue ($ Million) 1,600 1,400 1,200 1, R&D Expenditure vs. Nonfinancial Services Corporation Profits R&D Expenditure Coporate Nonfinancial Profits North American Organic Personal Care Revenue Product President Obama signed a permanent extension to the PATH Act of 2015 allowing businesses to credit $ per year in taxes. Tax credit can be applied if four criteria are met: Technical uncertainty, process of experimentation, technological in nature and qualified process. Despite an increase in nonfinancial services profits by a CAGR of 5.06%, R&D expenditure grows at a CAGR of 1.4%. Areas of research: Cosmeceuticals: products that have both functional and beautifying aspects. Nanotechnology embedded cosmetics. Organic plant-based cosmetics. A possible alternative to paraben, a commonly found cosmetic product preservative that has links to cancer. Organic personal care products are growing at a CAGR of 9.8%. Corporate non-financial profit increased 18.12% from and R&D expenditure increased 0.36% Skin Care Hair Care Oral Care Cosmedic Cosmetics Others Tax credit will help alleviate a personal care company s pressure to constantly innovate and can offer a reasonable alternative to paraben. Sources: GMR Insights Report; EY consumer report; R&D Tax savers; Moss Adams LLP; Physicians Committee for Responsible Medicine; Global Market Research 13

14 Risks and Sensitivities Four main risks are evident in the personal care industry: 1) Fast-changing consumer purchasing behavior Consumers are quick to change their preferences and demands to follow the new trend. Firms struggle to keep up with their unique demands. 2) Steadily increasing pressure to demonstrate greater value to consumers 17% of consumer product companies identify bringing innovations as one of the most challenging barriers to executing strategy. Branding through advertising social media platforms is vital for consumer engagement and presence. 3) Tailoring products to local markets is costly Firms remain competitive by interacting with the consumers in order to gain brand loyalty. Marketing and ad campaigns are significant costs to retain one customer. 4) Limited volume growth Companies are looking at developing markets to grow since developed markets are maturing. However, each region is unique and has its own tailored demands making it more difficult and expensive for companies to expand. Sources: EY Consumer Insight Report 14

15 Key Financials Comparable Companies Ticker Equity Value (b) (11.25) Closing Price EV (%) Gross Profit Margin (%) EBITDA Margin Net (%) EBIT Income Margin Margin (%)Reven ue CAGR (%) '10-'15 ROIC (%) ROE (%) ROA (%) Leverage P/E EV/ EBITDA Inventory Turnover Days in Inventory AVP , REV , NUS , EPC , ELF , n/a High 4.70 N/A Median Low Mean *

16 Summary Industry Rating Personal care products industry rating: Neutral/Overweight The industry has a neutral outlook because the personal care industry is mature with possible growth opportunities. 1) Industry Recap R&D tax credits will help companies reduce the costs they incur when they are pressured to produce more innovative and useful products. Men s grooming is expected to continue growing consistently. Consumer willingness to pay for premium and ethically sourced products is key to reaping higher margins. 2) Industry Outlook Opportunities in the men s grooming segment and producing innovative products offers strong revenue growth. 3) Risk factors Significant marketing costs caused by rapidly changing consumer preferences will force firms to spend more on marketing and reducing product cycle time. 16

17 Q & A 17

18 Appendix Industry Definition Industry Information Revenue Generation Industry Revenue Porter s Five Forces Trend 1: Consumer Willingness to Pay Trend 2: Demand for Men s Grooming Trend 3: R&D Tax Credit Risks and Sensitivities Comparable Companies Conclusion 18

19 International Trade Trade Weighted Index TWI measures strength of the dollar relative to the currencies of its trading partners. Euro, Canadian Dollar, Peso, Yen and Yuan Shows the dollar is getting strong among comparison peers Import Tariffs by Country 2016 Country MFN Duty Rate Sales Tax Canada 6.50% Depends on Province China 2.00% 17.00% France 0.00% 20.00% Germany 0.00% 19.00% Japan 5.80% 8.00% Mexico 10.00% 16.00% Spain 0.00% 21.00% UK 0.00% 20.00% : CAGR 6.2% : CAGR 2.1% The dollar is increasing steadily in the next 5 years, causing more imports than exports. The ongoing instability of the world economy is forecast to foster growth in the value of the dollar. Sources: IBIS World; EconEducation; Global Trade Solutions 19

20 World Price of Crude Oil $ per Barrel World Price of Crude Oil Petroleum and mineral oil are basic ingredients in many cosmetic products. Ex. Foundation, cleanser, moisturizer etc. More specifically propylene glycol is used in shampoo and isopropyl alcohol is disinfectant used in cleansers derived from oil. Parabens cosmetic preserver allowing a minimum 3 year shelf life contained in lotions, deodorants, and ointments. Less expensive oil means more profits for the cosmetic industry because Less transportation costs for deliveries. Lower cost of basic ingredient. Sources: IBIS World; EconEducation; Organic Make Up; Entrepreneur; IBIS World; Breast Cancer Fund 20