High oil prices during 2007 and much of 2008 drove production and distribution costs for personal care marketers up significantly. Since then, oil prices have decreased, which has helped to expand operating margins somewhat. However, declining consumer demand stemming from the global recession would likely offset any profitability gains from lower oil prices. This, combined with the perpetual need to spend significantly on advertising and promotions in order to drive consumer awareness and demand in highly competitive categories, continues to lead to margin pressures for personal care marketers, Kline & Company revealed in its 2008 report.
This summer, Kline will start working on the 7th edition of its Personal Care: U.S. Competitor Cost Structures 2009 study scheduled for publication in the 4th quarter. It will contain information on the financial performance of ten key leading suppliers of personal care products in the United States for 2008 and the first half of 2009. This study will analyze the overall cost structure of the personal care industry, including cost of goods sold and marketing, administration, and R&D expenses. Each company profile will include an overview of each company’s personal care business, an assessment of domestic personal care sales by product class, and an analysis of their individual costs, expenses, and profitability.
In the previous edition, published in December 2008, Kline revealed that the top marketers in the personal care industry collectively spend about 29% of sales on cost of goods, 53% on marketing, and 7% on other expenses including R&D and administration, leaving an operating margin of about 11%.
The recession has also led to greater levels of discounting and special pricing, which may hurt gross margins. Companies whose product lines are heavily focused on luxury products, such as Estée Lauder, may feel the sting of the recession more than those whose products tend to be priced lower, such as Avon, Johnson & Johnson, and Procter & Gamble. Procter & Gamble, L’Oréal, and Estée Lauder have all announced price reduction strategies in an effort to target cash-strapped beauty consumers.
Overall, the recession affects the ability of personal care marketers to increase retail prices, unless unique product benefits are highlighted.
“Companies that continue to employ effective marketing, efficient operations, sustained R&D expenditures, and steady innovation are the ones that will remain profitable and hold market leadership positions in uncertain times,” says Laura Mahecha, industry manager for Kline Market Research division.
The new report will be crucial for marketers to understand how to structure and run their operations, benchmark and differentiate their business against that of competitors in these difficult times, as well as make strategic decisions toward increasing profitability.