Indian Cosmetic Sector 2007-08

1. Introduction

India's cosmetics and toiletries industry is tipped to grow 27 percent over 2006-2011,
according to Euromonitor, due to the country's strong economic performance and
youthful demographic structure.

Like all emerging markets, the trends of India's cosmetics industry are expected to
follow those of the more advanced countries, for example an expected growth in natural
and organic cosmetics. However significant differences in the market drivers suggest
that this sector may not follow the expected patterns.

Local players are dominating the natural cosmetics sector providing cheaper natural
alternatives to standard beauty products and foreign brands, according to the market
research company.

In addition Ayurveda is experiencing something of a renaissance in India and many

companies are cashing in on the trend by releasing Ayurvedic inspired beauty products.

Furthermore, natural ingredients present an economic advantage for local players as

natural and Ayurvedic ingredients are often cheaper than their chemical alternatives.

Consequently, the main drivers of India's natural products trend are the country's low-
income majority, rather than the consumer elite who are willing to pay the premium as
is the case in Western markets, and other emerging markets.

2. Regulatory Aspects

The major source for pharmaceutical regulation is the Drugs and Cosmetics Act 1940
(DCA), and the Drugs and Cosmetics Rules (DCR) made there under. This legislation
applies to all pharmaceutical products, whether imported or made in India. The
legislation is enforced by the Central Government in New Delhi, which is responsible for
overall supervision. The office of the Drug Controller of India (DCI) has primary
responsibility. Matters of product approval and standards, clinical trials, introduction of
new drugs, and import licenses for new drugs are handled by the DCI. At the field level,
enforcement is generally done by individual State governments through their Food and
Drug Administrations. This includes getting approvals for setting up manufacturing
facilities and obtaining licenses to sell and stock drugs in distribution centers and retail
outlets.

3. Products

The cosmetics market can be segregated into talcum powder, colour cosmetics (lip, eye,
face, and nail care products), deodorants, and perfumes. The cosmetics market has
been growing at the rate of 15-20% for the last few years. The sector has witnessed
growth mainly from medium and low priced category that accounts for majority revenue
share of the cosmetic market.
The market consists of eye and facial makeup products, talcum powders, lipsticks and
nail enamels.
The facial makeup market in India is valued at Rs 97 crore and is expected to reach
Rs 200 crore by 2012.
The lipstick market in the country is valued at Rs 200 crore.
The talcum powder market is valued at Rs 236 crore and is expected to reach Rs 495
crore by 2012.

Herbal cosmetic products in the form of creams, Lotions and gels also form a formidable
component of the Cosmetic market but they shall be discussed separately.

3.1 Colour Cosmetics

These are the fastest growing segment, valued at $60 million. The major products in
colour cosmetics market are foundation, compacts, eye make-up, lipsticks, nail enamels,
blush-on, etc. Lipsticks and Nail Enamel account for 65% of the Color cosmetic segment.
The nail polish segment is valued at Rs. 1.25 billions followed by the lipstick market at
Rs 7 millions. All the categories in this segment are growing at around 25-30%.

Gone are the days when cosmetics were viewed as expensive and self-indulgent items.
Greater access to television, increased advertisement, growing awareness of western
world, and greater product choice and availability have resulted in growing demand for
cosmetic products in India.

However, the penetration level of cosmetics and toiletries product is still very low in
India. The per capita expenditure on cosmetic products in India is approximately $0.68
cents compared to $36.65 in other Asian countries. The penetration level of
international cosmetics brand in India is also low. International brands account for only
20% of the cosmetics market. This low level of market penetration can be perceived as
an opportunity for major players in FMCG sector.

3.2 Toiletries

The toiletries market is quiet developed and it is dominated by large Indian companies
and MNCs. High advertising expenditures, high entry barriers, and a high rate of new
product launches characterize this segment. Shower and Bath products have the major
share in the toiletries market. The toiletries market can be segregated in the following
two aspects:

. The premium niche i.e. High brand conscious. It caters to the urban higher class.
. The less price sensitive niche it caters to the middle and lower middle class.

These products are not limited to women as their usage is now extended to men also.
Men also use body sprays, colognes and other toiletries products. The men's personal
care market is valued at $165 millions. Gillette is the largest player in this segment.
Other major players in this segment are HLL, Godrej, and J.L. Morison and HLL.
3.3 Talcum Powder

This is one of the most popular cosmetic products in India. Its market is valued at Rs
3.5 billions and is growing at the rate of 12% per annum. Its penetration level is 45.4%
and 25.2% in urban and rural areas respectively. Pond’s dominates talcum powder
market with a market share of 70%, followed by Johnson & Johnson with a market
share of 15%.

4. Herbal Cosmoceutical Products

The demand of ayurvedic, herbal and cosmetic products are high soaring in the world
today. India has always been a rich producer of ayurvedic and herbal products. The
natural resources in the country are in abundance and have been a major source for the
booming industry of ayurvedic, herbal and cosmetic products.

There is a huge demand in the Western countries of organic natural products such as
Aloevera, Amla, Shikakai and extracts of Neem, sandalwood and other such herbs and
trees.

With an increasing demand for anti-aging creams and lotions with an added emphasis
on organic products the market for these products is expanding immensely.

To stress on the matter an US-based company Nutraceuticals International has

formed a joint venture with India's Amruta Herbals to develop and market
Indian plant extracts for use in the cosmetics and nutraceuticals market.

The Herbal Personal care products market is valued at US$ 100 million presently.

5. Expenditure on Advertisements-An Indicator of Market

Potential

Top 10 Advertisers contributed for 83% share of overall Skin Care ad pie on TV. The
table below mentions the same.

Top Advertiser % Share

Ponds India 19%
L' Oreal India Pvt Ltd 17%
Hindustan Unilever Ltd 15%
Paras Pharmaceuticals Ltd 9%
Reckitt Benckiser (India) Ltd 7%
Ganapati Herbal Care Pvt Ltd 6%
J L Morrison India Ltd 4%
Emami Limited 2%
Lakme Lever Ltd 2%
Procter & Gamble 2%
Amongst these, Fairness creams have the maximum share of the Skin Care advertising.

The following brands were launched in the Q1'08. 2 brands each of 'Ponds
India' and 'PharmaclinixLtd' were among the following Top 10 list.

Rank New Brands

1 Ponds Flawless White
2 NiveaLip Care
3 EveryuthDermacareLight & Clear Face Wash
4 Dr Lips Bloom
5 Vaseline Intensive Rescue
6 Pharmaclinix Lightenex
7 Collegian Cream
8 Pharmaclinix Scar Repairex
9 C Care Body Lotion
10 Mary Kay Cosmetics

6. Growth in India

Cosmetics and toiletries saw strengthening value growth in 2007 over the previous year.
Growth was partly due to high levels of inflation but volume sales also saw dynamic
growth. Rising income levels resulted in lower-income groups being able to afford more
cosmetics and toiletries and also saw many trading up from unpackaged to packaged
products. Meanwhile, mid- and high-income consumers in urban areas began to seek
out value-added mass brands and premium products.

Increasing urbanisation and a growth in the number of office workers in India resulted in
a strong focus on grooming. Grooming is increasingly associated with professional and
social success and taking care of one’s appearance regarded as a virtue rather than
vanity. This boosted sales for many areas of cosmetics and toiletries. Colour cosmetics
saw the strongest growth in cosmetics and toiletries as a result of women increasingly
focusing on their appearance, while deodorants, fragrances, depilatories, styling agents
and many other product areas also benefited from this trend.

Hindustan Unilever offers the widest product range and has the strongest distribution
network within cosmetics and toiletries and thus continued to be the leading player in
2007. The company also focused on building rural sales towards the end of the review
period, as did second-ranked multinational Colgate-Palmolive. Godrej Consumer
Products and Dabur are meanwhile the leading domestic players, with both also
benefiting from a strong distribution network in both urban and rural areas.

There were marked changes in the distribution of cosmetics and toiletries during the
review period. Supermarkets/hypermarkets notably gained value share during the
review period, with these outlets opening in smaller towns and cities and attracting
consumers by offering a wide range of products and frequent promotions. On a smaller
scale, convenience stores also expanded in the major cities. Department stores were
another dynamic channel, with a number of up market department stores opening in the
metro cities and offering a large cosmetics and toiletries department or branded shop-
in-shops. Direct selling meanwhile also gained share thanks to the expansion of Oriflame
and Avon.

Growth in Rural India

A study undertaken by the government-run Associated Chambers of Commerce

and Industry (Assocham) indicates that there is significant growth potential
for marketers of personal care products in rural and semi-rural India.
The FMCG (Fast Moving Consumer Goods) category, of which a significant percentage is
made up of soaps, shampoos, toothpaste and other every day toiletries and personal
care goods, is likely to jump by 10 per cent in rural India by 2010 and by 6 per cent in
semi-urban areas as an increasingly young population adopts western personal care
habits.

The total FMCG category in India is currently valued at $15bn (€10.9bn), of which
$2.85bn is attributed to rural areas and $4.2bn is accounted for semi-urban areas.
Currently the organisation estimates that the percentage of this total spend on personal
care products is approximately 8 per cent, a figure that is expected to grow markedly in
coming years.

But as spending patterns and demographics shift, it is expected to be in rural areas

where consumer patterns will be most affected.

As an example of this, the total market share of FMCG in India within rural populations
is currently estimated at 52 per cent, a figure that is estimated to reach 57 per cent by
2010. Likewise, the market share for the semi-urban population is expected to increase
from 19 per cent to 21 per cent in the same time-frame.

The growth in market share in these areas is expected to impact the urban India market,
where the size is expected to fall from 29 per cent to 22 per cent, representing a fall of
25 per cent up to 2010.

The government association claims that this fall will be accounted by the fact that
consumers in urban areas are expected to reject excessive FMCG consumption and start
to move towards the use of more sophisticated products, including naturals and organics.
The study also highlights that growth in rural and semi-rural areas will focus on the fast-
growing younger population, who are also, statistically speaking, more likely to spend
greater amounts on personal care products as their grooming and personal care habits
are changing the fastest in India.

The population of those aged below 20 is currently estimated at 180 million and
continues to rise in line with the Indian birth rate. On the back of a fertility rate of 2.81
children for each woman the total population exceeded 1 billion in 2000 and is
continuing to rise.

The reason why the profitability of FMCG companies operating in India has risen by 20
per cent in the period 2006 - 2007 is mainly due to market growth within the semi-rural
and rural and rural areas, further emphasizing the belief that the market is already
undergoing significant realignment.

The data suggests significant opportunities for international personal care players, and
the biggest players have all made considerable efforts to increase their footprints on the
market in recent years.

Most recently the world's largest FMCG players, Procter & Gamble, has increased its
presence in the skin care market in India with the launch of four new Oil Of Olay
products in the country. The launch aims to tap in to current annual market
growth within the skin care sector of 16 per cent.

7. Global Scenario

The Japanese cosmetics market is in a stable condition but with continuous realignment
of distribution channels, all cosmetics producers need to enhance and restructure the
management of their sales channels. Specialty stores are the leading channel due to
consumer convenience and low prices while sales through department stores is slowing
down. Shiseido, Kao (and Kanebo), Kose, and Pola dominate the cosmetics market in
Japan.

China’s cosmetics market, the second largest in Asia Pacific after Japan, is witnessing
increased demand due to improving lifestyles and rising disposable income of the
Chinese population. However, the level of development of the market is still very low.
This suggests a huge growth potential for foreign cosmetic producers. Although several
domestic firms are present, foreign companies dominate the market. L’Oreal has the
largest market share in China.

South Korean cosmetics market is growing at a faster rate than developed regions.
There is a clear trend of the market heading towards premium cosmetic products. The
younger populace is looking for general skin care and hair care products while the older
generation has more specific needs for their cosmetics products. Another notable trend
is the rising demand of the male consumer segment. Amorepacific and LG H&H, the
leaders in the Korean cosmetics market, have transformed traditional stores into their
self-owned retail channels.

India is being targeted by global cosmetic giants due to its favorable

demographics. The modern, urban Indian women are becoming increasingly conscious
about their style and looks, with great emphasis on lightening of skin tone. Skin care
and color cosmetics have witnessed solid growth for the last few years, with more than
half of the skincare market comprising of skin lightening creams. Lip products form a
majority of the color cosmetics market. In India, small pack sizes are very popular as
they offer a lower cost and the chance to try new products. Hindustan Unilever is
India´s largest cosmetics company, followed by L´Oreal.

Skin care products dominate the Taiwanese market, followed by color cosmetics and
hair care products. In Singapore, sun care products and men’s grooming product has
been the growth engine. In Thailand, skin care products and perfumes lead the market.
In Vietnam and Indonesia, domestic cosmetic producers cater to the middle and low-end
market segment while imported cosmetics dominate the upper strata of the market.

India's per capita consumption of cosmetics and toiletries for well-known

branded products stands at 0.68 dollars as against 40 dollars in Hong Kong, 10
dollars in Malaysia and Taiwan, 12 dollars in Japan and 1.5 dollars of China as
per ASSOCHAM.

The above fact re-emphasises the presence of immense opportunity in India.

8. Times ahead

It is estimated that the Indian beauty market is worth more than US$1.5 billion and is
rising at 25% p.a. - twice as fast as the US & Europe markets, thereby offering
extensive opportunities to domestic and international players. Even with double-digit
growth rates, the market penetration of cosmetics and toiletries products in India is very
low. Current per capita expenditure on cosmetics is approximately US$0.68 cents, as
compared to US$36.65 in other Asian countries. This low market penetration for
cosmetics and personal care products in India can be viewed as an opportunity for more
significant growth down the road in this country of 1.2 billion people.

The fastest growing segment is color cosmetics accountable for around US$60 million of
the total market. Nail enamel and lipstick account for about around 65% of the color
segment. Lipstick sales accounts for nearly a third of the market at US$21 million, nail
enamel US$23 million, skin care market in India is appox. US$180 million, hair care
market in India is about US$200 million. Market penetration levels of international
cosmetic brands in India are low. Foreign brands currently constitute only 20% of the
market.
Men’s personal care segment is about US$165 million. India’s annual import of
cosmetics & toiletries and intermediate raw materials is around US$120 million.

Cosmetics and toiletries are expected to see even stronger growth during the forecast
period in constant value terms. This will be chiefly due to rising income levels and
consumers trading up. In addition, distribution is expected to improve for cosmetics and
toiletries and consumers will have greater access to a wide range of cosmetics and
toiletries, ranging from cheap basic products in small pack sizes through affordable
value-added mass brands to super-premium global brands. Cosmetics and toiletries will
therefore effectively cater for a wide range of Indian consumers, driving sales growth as
a consequence.
The Body Shop entered the Indian market in June 2006 and aims to have 50 stores in
India's largest cities by 2008, suggesting that international firms see India as a potential
market for natural cosmetics.

India's consumer elite continues to buy the more expensive international brands,
offering top of the range high-tech beauty products, and it is this sector of society that
is tipped to drive market growth. A recent report suggests that the Indian market is
becoming increasingly sophisticated, with increasing consumer interest in skin care
products particularly anti-aging and skin whitening formulations.

This is facilitated by the increasing spending power of the higher socioeconomic sectors
of society, particularly women's increased personal spending power.