Introduction to the Cosmetic Industry Practical Cosmetic Formulating Perry Romanowski Hello and welcome to the introduction to the business of cosmetics lesson. The cosmetic industry is a huge business world wide and by some estimates selling over $400 billion a year. This means that there is lots of room for new formulators and entrepreneurs. In this short lesson I m going to introduce you to the business of the cosmetic industry. This will give you an idea of how formulators fit in to the overall picture. In later modules we will discuss the industry in more detail, however, this introduction will get you started with the least amount you ll need to know. Welcome to the cosmetic industry. Cosmetics is big business and affects nearly everyone on the planet in some way. It s more than just skin coloring products. Indeed the cosmetic industry represent all types of personal care products from colors to perfume to skin lotion and even shampoo. There are a number of different types of companies that make up the cosmetic industry but this chart gives you a good idea of the types of companies and the the way they interact. Notice that the end goal of all cosmetic companies is to get a product in the hands of consumers who want to buy them. Beyond the consumer, the industry really revolves around the finished goods manufacturer. All the other companies either rely on the manufacturer to buy their products or services, or they rely on them to supply them with products for consumers. Although the finished goods manufacturers sometimes sell directly to consumers, they typically use retailers and distributors to get the product to their customers. That makes retailers some of the most powerful companies in the cosmetic industry. Product retailers are the places that sell cosmetic products to consumers. The cosmetic manufacturers supply them with product which makes retailers important customers to the manufacturers. In fact, the retailers are often so important to the manufactures that these retailers sometimes are involved in the decision about what products get made. If you rely on a retailer like Walmart to make your product a success, they better approve the product you want to make. There are a number of different types of retailers and they differ in the types of products they sell, the volume and the cost. In the business most retailers fall under the category of Food, Drug or Mass. Food stores are grocery stores and in the United States represent a large share of the cosmetic market.
People like to buy their personal care products at the same place they buy their breakfast cereal. Drug is another type of retailers. These are companies like Walgreens, CVS or Boots. They typically have a pharmacy attached and you can get most personal care products. The next type is Mass market stores. These are companies like Walmart and Target who sell a large volume of cosmetic and personal care products. In fact, Walmart used to be responsible for over 40% of the sales at my former company. You can see that that level of sales gave them a lot of influence on the types of products that we produced. There was more than one occasion when we changed direction on a new product because Walmart wanted us to do something different. The biggest brands in the world are almost all sold in mass market stores. Another type of retailer who sells a lot of cosmetics is department stores. They typically sell lower volume but much higher priced products. They cater to a consumer who has a lot more money to spend on their cosmetics. The final type of retailer is gaining a lot of influence in today s beauty market. These are the online sellers like Amazon.com or Beauty.com. Here consumers can get any type of cosmetic that they want. In fact, if you are interested in starting your own line of products, selling it online first is a great way to go. It will quickly give you an idea of whether the product could be successful or not. While the retailers are important the companies that actually make cosmetics are the finished goods makers. They are the industry leaders and are customers to nearly all the other companies in the industry. These are the companies that are responsible for coming up with new products, setting prices, advertising and marketing products. The finished goods cosmetic makers are some of the highest advertising spending companies. These are large companies like P&G, Unliver, and L Oreal. These companies are also the ones who are most likely to employ a cosmetic formulator so if you spend any time in the industry you may end up working for one of these companies. Here is a recent list of the top cosmetic companies. You can see that P&G is the biggest cosmetic company in the world. Note that those numbers are in billions of dollars. And P&G is actually a bigger company than just $28.5 billion. That number just represents the amount of sales they have in cosmetic products. They also sell a significant amount of household products like Tide laundry detergent. The other two large companies include L Oreal and Unilever. Then you can see that there is a significant drop off after that. Estee Lauder is a $9.7 billion company and Avon is $8.5. The smallest company in the top 10 is Henkel with sales around $4.4 billion. There are also a number of smaller companies but some of the significant brands include Coty, Mary Kay, and Limited Brands (the makers of Bath and Body Works).
Beyond this list there are literally thousands of smaller companies with sales in the range of a few million or even under a million. You will remain a blip on the cosmetic radar at least until you have annual sales of over $10 million. The nice part is that you don t have to have a huge amount of sales in this business to be able to make a living. The suppliers in the cosmetic industry are responsible for making all of the component products that cosmetic chemists use to create their formulas. The industry is filled with literally hundreds of cosmetic raw material suppliers. They make everything from surfactants to fragrances to natural oils. It s very rare that a cosmetic manufacturer makes their own raw materials. Rather it s much easier to buy it from a specialty company. In addition to the raw materials, these suppliers also can get you packaging components, laboratory equipment and supplies. Pretty much anything you need to do the job of a cosmetic formulator you can get from your suppliers. Unfortunately, suppliers prefer to work with very large companies so it is sometimes hard to get smaller quantities of equipment and supplies. This is particularly challenging for raw materials. Sometimes big suppliers are companies that are too big to call on small accounts. For this reason they work with chemical distributors. Distributors are companies assigned to a specific area and a specific company sales size for which they represent chemical raw material makers. Often they are a crucial middleman for chemical entrepreneurs and smaller manufacturers. Some examples are Nexeo and the Glenn Corporation. If you are a small producer it is most likely that you will get your chemical raw material supplies from one of these distributors. And speaking of manufactures, there are other companies in the cosmetic industry who make finished products but they don t sell them themselves. These companies are called contract manufacturers and they are hired by companies to produce smaller runs of products. Large companies will use them to make special advertising packages or they may use them to just to fill the product in special packaging. Many small companies rely solely on contract manufacturers to produce their product. This allows them to focus on the marketing aspects of business rather than have to invest in production equipment. There are some very large cosmetic brands which are made solely through contract manufacturers. If you are a starting entrepreneur the best thing you can do is to work with a contract manufacturer to make your products for you. It will require a much smaller upfront investment. One of the most important aspects of the cosmetic industry is that you are not allowed to produce unsafe products. In the United States there are very few guidelines on what this means but one of the industry standards is that you have your products safety tested by an independent testing house. For
this reason there are a number of companies who supply the industry with product testing services. You can use testing houses to do safety tests, consumers testing, claims testing, and even stability testing. These types of companies are perfect for smaller labs or entrepreneurs who it doesn t make sense for to invest in a lot of expensive equipment up front. Some example companies include Clinical Research Labs or In Vitro Research labs. You can find suppliers, contract manufacturers and testing house resources in things like the Industry Buyers guide which is produced by a few of the industry magazines. Just to round out the cosmetic industry discussion we should mention that the rules for making products in the cosmetic industry are guided by various governmental regulatory bodies. We ll discuss these more specifically in module number one but you should be aware the in the US, cosmetics are regulated by the FDA. They allow the industry to set most of their own rules about what constitutes safety and this is done through an organization called the Personal Care Products Council (PCPC). Around the world there are also governmental agencies that regulate cosmetics. In the EU it is the European Commission. In Canada, it is Health Canada. The Ministry of Health in Japan and the Department of Health and Ageing in Australia. Each country has slightly different rules so you ll need to investigate your particular cosmetic market before selling your products there. We ll end our brief look at the cosmetic industry with a discussion of cosmetic brands. Above all else sales in this industry are driven by well developed brands. Branding is so important to the sales of a product that you could put exactly the same product in two bottles of a different brand and consumers will instinctually choose one over the other even though they are the same product! Building your brand is the most important thing you can do to create a successful cosmetic line. As I said the industry is dominated by brands. In fact, the creation of brands in the early twentieth century is the number one thing that helped exponentially grow the cosmetics industry. Brands are important because they spend the most money on advertising. This advertising was crucial in the early development of television programs. In fact, daytime shows were called soap operas because they were sponsored by cosmetic brands. Brands also help to set the innovation direction of the market often coming out with new products every year. The big brands always attempt to appeal to the largest market segment they can capture. It s very difficult for a small cosmetic brand to compete against a big brand in terms of a general market. That s why the smartest small brands focus on niche markets. Remember that you don t have to have a huge amount of sales every year to be a successful cosmetic brand.
Here is a look at the top beauty brands from around the world. Unsurprisingly, the biggest cosmetic companies are also the ones with some of these largest brands. P&G is the owner of the Olay brand. L Oreal and Avon are brands themselves and Unilever owns the Dove brand. It is the goal of every huge cosmetic company to get their brand name on this list. Well, there you have a brief tour of the cosmetic industry. We covered details about the types of companies in the industry and how they all interact. You should now understand where you fit in this cosmetic world. Are you a supplier or producer? Never forget that branding and advertising are the things that sell cosmetics. And ultimately, whether a cosmetic is a success or a failure depends completely on whether consumers buy the product or not. Now, let s get started with lesson number one and get you set up to become a cosmetic formulator.