Five Forces of Competition

Five Forces in the Beauty Products Industry.

As a $160 billion-a-year global industry, the beauty products industry encompasses makeup, skin and hair care, perfumes, cosmetic surgery, health clubs and diet pills. Incumbents have remarkably long staying power in the industry. L’Oreal of France, today’s industry leader, was founded in 1909. In 1911, both Nivea of Germany and Shiseido of Japan were established. In America, Elizabeth Arden and Max Factor were founded at about the same time. All these brands are still around.

Recently, the industry has been growing at approximately 7% a year, more than twice the rate of the developed world’s GDP. Two groups around the world underpin such strong growth: (1) richer, aging baby-boomers in developed economies and (2) an increasingly more affluent middle class in emerging economies such as Brazil, China, India, Russia and South Korea. Brazil, for example, has a larger army of Avon ladies (900,000 – note Avon ladies sell cosmetics by visiting people’s homes) than its men and women in the army and navy combined.

Three major changes affect this industry. First, a number of new entrants have emerged. Most luxury goods firms, such as Chanel, Dior, Ralph Lauren, and Yves St Laurent, now have beauty products. Two consumer goods giants, Proctor and Gamble (P&G) and Unilever, pose probably the most significant threats. As their traditional products such as diapers and soaps mature, they are increasingly pouring their resources into their beauty divisions. Second, changes in consumer behaviour help no frills retail chains such as Wal-Mart gain bargaining power, at the expense of fashionable department stores, whose selling costs are high and whose sales are declining. Wal-Mart, for example, only wants to deal with a handful of big suppliers, which plays into the strength of L’Oreal and P&G. Small players, such as Estee Lauder and Revlon, which depend more on department stores, are hurting as a result. Finally, incumbents increasingly fight back, by emphasising how unique their products are. L’Oreal, for example, advertised how many patents it had filed. Shiseido claimed that its Body Creator skin gel can melt 1.1 kilograms of body fat a month without any need to diet or exercise.

While the market for traditional beauty products becomes increasingly competitive, the industry’s real growth may come from areas outside the “radar screen” of the main players: cosmetic surgery and well-being products. First, cosmetic surgery is no longer the exclusive territory of actresses and celebrities. In the United States, it used to cost $12,000 to reconstruct a woman’s breasts ten years ago – now it can be done for $600. More than 70% of such customers now earn less than $50,000 a year. The US market for cosmetic surgery, a $20 billion business, has grown 220% since 1997. The second area for growth is well-being products, consisting of spas, salons and clubs linking beauty with natural solutions such as exercise and diet, as opposed to chemicals. The market has been fragmented with numerous entrepreneurs operating a few spas, salons and clubs here and there. It seems that sooner or later, traditional beauty products companies will turn their attention to these new areas.

Group work (up to 6 students)
What are some of the darker sides (in other words, costs) associated with globalization?
How can strategists make sure that the benefits of their various actions outweigh their drawbacks (such as job losses in developed economies and environmental damage in emerging economies)?
Individual work
Compare and contrast the five forces affecting the airline industry, the fast food industry, the beauty products industry, and the pharmaceutical industry (1) on a worldwide basis and (2) in your country. Which industry holds more promise for earning higher returns? Why?

Practical group work
Read the case study “Five Forces in the Beauty Products Industry’’ and consider these questions in preparation for class discussion.

a) Why do incumbents have long staying power in this industry?

b) How do new entrants overcome entry barriers? How do incumbents react to new entries?

c) Should traditional competitors focus on expanding new country markets in emerging economies, or on entering hot new growth product markets in developed countries?