SYRIA CONFLICT DISRUPTS MIDDLE EAST COSMETICS MARKET, BUT GULF SALES ARE BOUYANTSeptember 1st, 2012
BY PAUL COCHRANE, IN BEIRUT
It has been a been a turbulent time in the Middle East since the Arab uprisings swept much of the region over the past year-and-a-half, with not only sales of cosmetics, toiletries and perfumeries being depressed by losses in consumer confidence, but also distribution being harmed, especially by the protracted conflict in Syria. But while some markets have been particularly affected by regional instability, notably the Levant, the more stable Gulf market is coming out of recession period and experiencing a return to growth.
The conflict in Syria is having a wider impact on the cosmetics and toiletries trade than just lost sales in a country which had been a burgeoning market for multinationals and regional players since its economy opened up less than a decade ago. The sanctions imposed on Syria by the United States and the European Union in 2011 resulted in multinational corporations (MNCs) such as Proctor & Gamble having to exit the market last November, leaving local distributors with no MNC products for retailers. While the sanctions have directly affected MNCs – which account for an estimated 70% to 80% of the Middle East and North Africa (MENA) cosmetics and toiletries market – what has hit all players is the conflict impeding distribution as Syria was a major transit route for goods moving between Turkey, Lebanon, Iraq, Jordan, Saudi Arabia and the Gulf.
"We’ve made contingency plans for transportation by sea as there is the possibility of Syria blocking the route to Jordan and onto the Gulf," said Nizar Raad, managing director of Universal Metal Products, a Lebanese company that makes aluminum tubes for the cosmetics industry. "We are facing a lot of obstacles – risk, the shortage of drivers, visa delays, and visa costs, all this is adding up. There are also more checks at Masnaa [the Lebanon-Syria crossing] and at Dera’a [Syria to Jordan], which holds up convoys for three to five days."
Within Syria, demand for cosmetics and toiletries has plunged. "Demand is half of what it used to be as purchasing power is down, and it is only products of first necessity which are selling, although shampoo still is," said Joanne Chehab, general manager of Lebanese cosmetics firm Ch. Sarraf & Co., part of the Malia Group, which has its own line of cosmetics, Cosmaline, and distributes for Shiseido and Wella: "We are also facing export and distribution difficulties, and there is a lot of money in the market we are unable to collect. Very few companies are active today compared to before."
The conflict has also hit the economy in neighbouring Lebanon, as well contributing to a drop in tourists, which has hit sales at Lebanese cosmetics outlets, with some closing down. In marketing terms, Lebanon is considered the "window dressing" of the Middle East due to its cosmopolitanism, with new products launched in the Lebanese market during the summer season when, up until this year, tourists from the region, particularly affluent Gulf citizens, visited the country. "Lebanon is a test market for elsewhere in the region," said Chehab.
However, while sales of more luxurious items have been affected by the economic downturn, the Lebanon mass market remains buoyant and highly competitive between MNCs and local producers. Retail outlets are diverse: around 60% of cosmetics and toiletries are sold at supermarkets followed by mini-markets. And while "pharmacies do not account for much volume [they] are important for a brand’s image, so we do special sales and promotions," said Chehab. "Recently we did a sample that had ‘what the pharmacist offers you’ written on it, and this worked better than conventional free samples as pharmacists often just leave them in the drawer whereas this way they were more likely to hand out the samples." Hair salons are an equally important outlet in Lebanon (and throughout the region) for promoting professional lines, which will then hit the mass market in around three years’ time.
In Lebanon, the personal care market is increasingly sophisticated and mirrors trends in Europe. Chehab said that for hair care products, brands have recently started to heavily market hair syrups in addition to shampoos and conditioners. "Hair syrups have been in the market for decades, but only as of last year are all brands simultaneously marketing them," she said.
Cosmaline has its own line of shampoos and conditioners, Softwave, and is exported to Europe, the Gulf, and North Africa. It changes its packaging every three years to stand out in an increasingly saturated but fast growing segment. "In shampoo there is no loyalty at all. When people see adverts they switch, or because of the smell, packaging or the perfume," said Chehab. "Before people had just one conditioner, now they have seven. But because of the lack of loyalty we can compete with the multinationals, and it is why they are still spending on marketing."
Region-wide, shampoos are primarily marketed towards women, with men typically only selecting shower gels and body washes. Hair lines for men are still small by volume in the region, although that is changing, as is demand for shampoos for children. "Ten years ago we started Softwave for men, but it didn’t do very well. Every two or three years we re-study the market, and now there is a market for men but volumes are not very big, although the Shiseido range for men is growing year-on-year," said Chehab.
In terms of packaging, designs are the same for the whole region, but languages differ. In the Levant, product descriptions are in French, English and Arabic, while in Algeria it is mandatory to have descriptions in French. Elsewhere in the region descriptions are in Arabic and English, with the main product language and the brand name in English. Shampoo product sizes also differ, with the 400 ml bottle more popular in Lebanon, Syria and the Gulf than the typical European size of 250 ml, while Egyptians are big consumers of shampoo sachets, at 5 ml and 12 ml. Larger sizes are also popular for family use, at 700 ml and 4 kg.
In other segments, deodorant sales are growing, with sprays particularly popular in the region – especially in emerging markets Iraq, Syria and Libya – and used not just to combat body odour but also for spraying on the body. In Lebanon however mass sales are mainly made of roll-ons, a segment dominated by the MNCs. Meanwhile, "skincare is a growing segment [in Lebanon] and we saw the possibility of competing with Nivea as it is not a very crowded market," said Chehab. The company has used its distribution agreement with a mineral water producer to market skin creams by giving away a free 500 ml bottle of water and tap into growing health consciousness in Lebanon as well as much of the rest of the region. There has also been a notable trend across the region in brands releasing rival products swiftly once a company launches a new line, whereas previously there was a gap of two to three years. "If say Lancôme launches a new face cream product, another brand responds almost immediately," said Chehab.
While Sarraf’s revenues have been affected by the drop in sales in the Syrian market, and the downturn in Lebanon, with 70% of its products exported, the company will ride out the current storm, expecting to grow by 10% this year, above growth in 2011. Chehab predicts that sales volumes will grow in coming years, and Lebanon will ultimately only account for 5% of overall business.
In recent years, sales have been bolstered by rising demand in Iraq, North Africa, Oman and Saudi Arabia, whose relatively wealthy 28 million people is currently the largest Middle East market in terms of cosmetics and toiletries consumption, followed by the United Arab Emirates (UAE) and Iran, according to market researchers Euromonitor. "A very important market for us is Saudi Arabia as there is the scale there that smaller countries like Lebanon don’t have," said Chehab.
The oil-rich Gulf countries, with the exception of Saudi Arabia, have a smaller population than the rest of the MENA region, but their significantly higher income levels make the Gulf a core market for cosmetics, toiletries and perfumes companies. According to Euromonitor statistics, the average annual spend on cosmetics and fragrances in the Gulf is USD334 per person, and its hair care market was estimated to be worth USD584.3 million in 2010, and projected to grow 16% to USD679.4 million by 2014. Such growth is reflected in a rebound in sales over the past two years following a dip in the wake of the financial crisis that hit the Gulf countries in 2008.
"There was a slowdown in terms of year on year growth during 2010; the average ticket size had decreased as customers were weighing each purchase decision with added scrutiny. Currently I would say we are on the road to recovery, where we find that footfall is down but average ticket size has increased," said Abdulla Ajmal, general manager of Ajmal Perfumes, a leading Oriental perfume brand based in Dubai, UAE. Ajmal expects its growth to be 10% this year on last year’s turnover of USD220 million.
In fragrances, demand is high in the region due to the social emphasis put on smelling good, men and women alike, and re-applying a fragrance, or another fragrance, throughout the day. "Perfumes are bought largely for regular use in the Gulf unlike our western counterparts who link perfumes to occasions. For us, every day is an occasion to wear your favorite perfume," said Ajmal. Indeed, the Gulf perfume market is estimated to be worth USD3 billion, according to Euromonitor, while the market size for premium women’s fragrances in Saudi Arabia is estimated at USD121 million and for men at USD101 million. "The sector has performed fairly reasonably for us, the prime reason would be that fragrances are largely classified under the need rather than want set within the region," said Ajmal. He added that fragrance consumption is five times more in the Gulf than anywhere else in the world.
To keep up with such demand and what Ajmal called a "thirst for new products that never diminishes," the company launches 10 new fragrances a year. So popular is Oriental perfume within the region, and growing globally, that major brands have introduced Oriental type fragrances and are regionalising fragrances by putting an emphasis on darker colours and Arabic motifs. "We see a lot of international brands experimenting with what they classify as Oriental fragrances. It’s a phenomenon that I like to call ‘Oudh mania’ where every fragrance brand of repute is launching fragrances under the Oudh banner. Since the market potential exists, the Gulf is the right area to target where Oriental perfumery is strong and growing year on year," said Ajmal.
In terms of retail, beauty and perfume space has grown by 30% over the past three years in the UAE, according to Euromonitor, and point of sale is increasingly important for consumers as well as brands. "We are seeing a greater emphasis on customer engagement on a one-to-one basis encouraging product trail and equipping the customer with the right knowledge so that they can make an informed decision," said Ajmal.
Another regional trend is the growing demand for Halal personal care products, which are free of gelatine and animal products, certainly pork derivatives. Estimated to be worth USD560 million in the Gulf by Euromonitor, sales grew by 20 percent in 2011 and the UAE is estimated to account for half of the segment’s sales. "What’s really driving demand is the fact that the Muslim population is now dominated by a demographic of young, educated professionals and they know how to balance their Muslim and cultural identity," said Shamalia Mohamed, founder of Amara Halal Cosmetics, a recently founded company in the US that is aiming to enter the Gulf market, the UAE especially. "For young Muslims, halal has to be healthy, socially responsible and appealing. They have no problem to pay a little more premium for organic and natural cosmetics to suite their modern lifestyle." Mohamed forecasts further growth in the sector as awareness increases about Halal-certified products. "I can see big brands jumping into this multi-million dollar market. Initially, anything that is new to the market has an advantage and after a while it becomes a norm or just a regular mainstream item," she said.
The UAE-based Chalhoub Group Retail estimates spending per capita in the Gulf countries on cosmetics, toiletries and perfumes at USD40-USD45, and the fragrance, makeup and skin care market to be worth around USD1 billion among major prestige beauty retailers.
It sells commercial, luxury and Arab-oriented brands throughout the MENA, has also had an uptick in business. "We experienced a rapid growth in 2011, up 25 per cent versus 2010 brought about by the huge government social handouts in our major markets. As of August 2012, sales have not slowed down and we expect to end the year up 20 per cent," said Salah Al Sagha, General Manager-Beauty.
In Saudi Arabia, men were banned from working in cosmetics and lingerie shops in June, being replaced by saleswomen in 7,353 stores. "Another related rule was recently set asking for the separation of men and women inside our beauty shops. These have forced us to do some major adjustments in our number one market," said Al Sagha.