Over the past five years, the Global Cosmetics Manufacturing industry has experienced steady growth. According to IBISWorld industry analyst Nikoleta Panteva, “The past five years have been no exception, despite declining per capita disposable income in key markets. ” Industry Analysis & Industry Trends: The global cosmetics industry is broken down into six main categories; skincare being the largest one out of them all, accounting for 31 percent of the global market. * Revenue: $243bn; * Annual Growth 08-13: 3, 0 %. However, there are certain factors which affect the entry to the cosmetic industry by firms.
These factors can be briefly analyzed using the Porter Five forces analysis. They include the threat of substitutes, threat of new entry, bargaining power of customers and suppliers as well as intensity of rivalry in the industry. Threat of new entry This factor analyzes the ease with which firms may enter into an industry. The cosmetic industry has a low threat of new entrants. The first is the huge costs of entry. Developing unique cosmetic products requires a lot of resources both in terms of research and development and the actual manufacturing process.
Another factor which discourages entry into this industry is the huge competition present in the industry. In addition to the huge competitors such as Avon, Revlon, Clinique, Estee Lauder, LR, Mac and Unilever, who have a large market share, there are many other small scale competitors who also have a small market share and who reduce the overall profitability of firms in the industry. Bargaining power of customers This factor analyzes the power which suppliers have regarding making price changes for their products.
When consumers have a high bargaining power, the manufacturers and sellers may not adequately predict future demand by the market. The cosmetic has a high bargaining power of customers. This is due to the increase competition and availability of cosmetic products from a variety of manufacturers. Bargaining power of suppliers This factor analyzes the power which suppliers have regarding making price changes for their products. The cosmetic industry has a low bargaining power of suppliers. This is due to the high number of market players and large supply of diverse products to the market.
There are many cosmetic products which are developed by both large and small scale manufacturers. Threat of substitutes The threat of substitutes arises when there are similar products developed by competitors which satisfy the market needs. Consumers are able to purchase competitor’s products if they are not satisfied with product price or quality. In the cosmetic industry, there are many competitors as has been discussed. There is therefore a high threat of substitute products. It is therefore essential for the market players in the cosmetic to be innovative if they are to tackle the challenge of the threat of substitute.
Competitors There are many competitors who reduce the overall profitability of the industry, which makes it a barrier for new companies to entry. Moreover, the many large scale cosmetic firms make it a barrier to entry especially for middle and small scale firms. Complementors: within the industry, outside the industry The high seller concentration in the developed countries leads to high competition and an overall reduction in profitability for cosmetic firms in this industry. The cosmetic industry is valued at $6 billion in France and $12 billion in Germany.
In the US, it is valued at over $20 billion. Demand from emerging economies and aspirational shoppers has also kept the industry growing over the past five years, with revenue increases averaging 3. 2% per year to reach $233. 3 billion by the end of 2012. Merger and acquisition (M&A) deals of interest over the past decade that have served to change the face of the Global Cosmetics Manufacturing landscape include Procter & Gamble’s takeover of Gillette, L’Oreal’s acquisition of The Body Shop and Coty’s acquisition of Unilever’s fragrance division.
Other key drivers underlying the ongoing spate of M&A activity include the expansion of geographic footprints, diversification into new product categories or market segments and the exploitation of new technologies, including greener processes. In the future there will be new players from growing markets, such as India, China, South Korea, Indonesia and Brazil. Aggressive marketing will ensure that firms entering the cosmetic industry have products which are known to the market.
A combination of Internet, electronic and mass media advertising should be used in order to reach all the desired target market segments. So the industry has high competition, high entry barriers, low supplier power, high customer power and a large number of substitutes. In order for a firm to enter and be successful in the cosmetic industry, it has to apply various strategies. These include focus on emerging markets and developing countries, implementing a cost leadership strategy, implementing research and development and applying aggressive marketing campaigns.
These strategies will ensure that they capture a market share, develop customer loyalty and achieve long term profitability over the years. The example of co-opetition: One of Nestle’s most innovative and successful cobranded products includes creating the new brand, Inneov with L’Oreal. In 2002, Nestle and L’Oreal formed a 50– 50 joint venture to begin to develop what they called a “functional food” (Charles 2002). Inneov is a nutritional supplement for cosmetic purposes taken orally, with the purpose of protecting, correcting and stimulating skin, nails and hair cellular processes.
Inneov is one of the first major brand alliances between a food and a cosmetics company. The product benefits from the nutritional research of Nestle and the dermatological research from L’Oreal. Inneov is based in France and launched in pharmacies in November 2006. L’Oreal did the marketing due to its current expertise in promoting cosmetics. This new brand shows that Nestle selected the right product and the right partner to enter an industry that makes food for the skin rather than food for consumption.