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Mar, 07 2014

Cosmetics biz make-up

With a growth rate of 15-20% every year, India's retail beauty and cosmetics industry stands at $950 million and is likely to almost to reach $2.68 billion by 2020. The growth curve of the Indian cosmetics sector is rising high. Read on to know more about

Brands like M.A.C., Maybelline, Revlon, L'Oreal Paris, Estee Lauder etc. are already doing huge business with presence in metros and tier-I cities. With the growth of e-retail portals such as Flipkart, Jabong, Myntra, Nykaa, Homeshop18, brands like L'Oreal, Lakme, Maybelline, Revlon, Victoria's Secret etc. have found another way to reach masses specifically in tier II and III cities where consumption base is low and it is difficult for a cosmetic store operator to carry large stocks.  Few brands like M.A.C. have created a niche with minimal presence at the most premium locations in metros and tier I cities.

Advantages of Choosing Cosmetic Industry as an investment option:

High margin business: A lipstick of M.A.C. costs somewhere between Rs 800-900 whereas average price of Maybelline lipstick is INR 400 offering substantially high margin to the investor justifying the sky high rentals at a location such as ground floor of  Select City Walk, Saket, Delhi.

Tremendous potential with women dominant market: Currently all Indian markets are structured to allure women shoppers and which is a global trend. In countries like Malaysia, Thailand there are shopping malls meant only for female shoppers and the same trend is getting replicated in India with majority of stores in markets like Lajpat Nagar and Greater Kailash in Delhi offering women apparel, women accessories, cosmetics etc.

Untapped market with huge potential: Not many brands are present with stand-alone formats which add an element of 'experience'. For different skin type and textures, the product type and attribute varies, which becomes difficult for the end consumer to identify. There is a high need of advocacy and trials before choosing any product which can only be achieved in stand-alone format located at a place such as high-end malls or a popular high street with decent footfall of elite customers.

Risk associated with the business:

Piracy of products: To combat piracy in cosmetics, brands such as M.A.C. and The Body Shop have adopted the restricted distribution strategy making the product available only at the stand-alone outlets. The products are neither available for extensive distribution at multi-brand retail outlets nor on the website portals.

High rentals creating a dent in operating margins: High rentals pull down the business to a larger extent making it unviable for the retail business to survive. Cosmetics doesn't come under the daily needs and is a part of discretionary spending by the customer whereas premium products come under planned purchase and the mid-segment products of low ticket size are counted among the impulse purchase. Ultimately it is the high footfall which can ensure good revenues to offset the effect of rentals, which depends on numerous factors like location, brand value, consumer perception in the given geography, product variety etc.

High manpower cost: Cosmetic business needs a specialised workforce like beauticians, hair stylist with substantial experience so that they can advise the end customer making the purchasing decision in favour of a particular brand. Nowadays, customers have varied options which range from Forest Essentials, Lush, Kaya, The Body Shop, L'occitane to L'Oreal, Lakme, Revlon, M.A.C. Customer need persuasive advocacy to know about the advantages and usage of the product which can only be provided by an experienced beautician.

Overall, Indian Cosmetic Industry has a long way to go with a great demand coming not only from metros and tier I cities but also from tier II and tier III cities. Higher margins and a reputed well-known brand is a best combination to achieve a successful business with long-term sustenance.

Shashwat Prakash is a Senior Consultant (Strategy) at Francorp, India.

 

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