Cosmetic, Toiletry and Fragrance

industry in the Brazilian market

FINAL PAPER 2010-2011

Laura Garde
 1. Market opportunities in the chosen country for the product

a. The market
Figures supplied by the IBGE (Brazilian Institute of Geography and Statistics) and the
Brazilian Association of Toiletries, Perfumes & Cosmetics Industries (Abihpec) show that
while the country GDP and that of industries in general grew respectively 5.1% and 4.3% in
2008, that of cosmetics industries grew 7.1%, even when the industry suffered from a sales
decline this year.
In 2009, the market resets and grows by a very healthy 11%, outpacing performance in the
United States and Europe.
In the last 14 years, the Cosmetic, Toiletry and Fragrance (CT&F) industry recorded a
deflated growth rate of 10,5%.
According to data from Euromonitor for 2009, Brazil ranks third in the world CT&F market.
More specifically, it ranks 1st deodorant, 2nd in kids’ products, men’s products, oral care, in
bath care, in sun protection and fragrances, 3 rd in color cosmetics (makeup and nail care) and
hair care, 6th in skin care and 8th in depilatories.

Moreover, the country being world’s 27th most consuming country, it shows that the sector is
not yet glutted. French products benefit from a high quality image, which make Brazil a
promising market for French companies.

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The factors that can explain such a growth of the CT&F sector in a few years are seen in a
variety of ways:

Also according to the Abihpec, some factors may explain the good result for the sector. They
are: greater female participation in the labor market, constant releases of products and use of
state-of-the-art technology by personal hygiene, perfumery and cosmetics industries, which
causes greater production and consequently sale of products at more competitive prices.
On the other hand, increased product segmentation played a key role, with manufacturers
increasingly targeting products at specific age profiles – particularly teenagers and more
matured women, different genders and ethnic groups, such as Brazil's large black and dark
population. This strategy, in turn, enabled manufacturers to tailor their marketing and
advertising campaigns more accurately, achieving more effective results.

b. The products
Contrary to trends in other markets, hand and body products and lotions play a major role in
Brazil, accounting for just over 40% of total take-home sales. As consumers become more
sophisticated, other product types such as anti-aging specialty treatments and lip/eye products
will grow in importance.
But the hair care segment is making up 26% of total cosmetics and toiletries value sales. The
consumption of hair care products was stimulated by changing in female habits and by greater
choice of products.

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Within the sector, one line is gaining strength: that of raw materials for natural and organic
products. A forecast by the Organic Monitor shows that consumption of these products is
currently 4%, but in 2012 it may reach 10%.

c. The competition
The market is dominated by local brands, with Natura controlling the leading spot in 2009.
But Natura lost some of its shine and was unable to maintain the huge growth rates it enjoyed
over the last few years, with sales up only 9.5% in the domestic market.
“The movement was led by companies such as Avon, which managed to increase sales by
more than 26% after years of poor results in Brazil due to fierce competition with Natura,”
the managing director of a personal care products selling company.
Other global players such as L’Oréal, Beiersdorf and Unilever have also dialed up the
competition with innovative products and heavy media investment.
In the Latin American market overall, the luxury class posted the highest growth in this
category, up by 23.6%, followed by salons at 17.4% and specialty stores at 16.5%.

d. Distribution channels
CT&F products are distributed through three basic channels:
 Traditional distribution – including wholesale and retail stores
 Direct selling – development of the home shopping concept
 Franchises – specialty and personalized stores
9% 1%

Traditional
Direct Sales
90% Franchises

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 2. Economic and political situation in Brazil and how it is
going to impact this industry

a. Economy
The Brazilian economy is the 10th largest economy in the world. During the period 2004-08,
the economy grew at the rate of 4-5%on average. Many would consider this growth rate to be
less impressive than rates seen in China and India, but Brazil nevertheless continues to be an
investment hotspot. Brazil is one of the few countries in the world that is self-sufficient in oil,
which plays a very crucial role in global economy. Brazil is also a leader in alternative energy
sources; it produces more ethanol than the combined production of Asia and Europe. Brazil is
also the second largest producer of iron ore in the world.
With this abundance of natural resources, Brazilians are manufacturing everything from
aircrafts to hair pins. The decades of hyper-inflation and unstable domestic currency seem to
be over. There is a long list of positive points that make Brazil a promising candidate for
spectacular growth.

Brazil has recorded overall low growth rates in the last couple of years. The table below
compares the performance of the Gross Domestic Product with that of the overall
manufacturing sector and with the rates for the industry of CT&F products, showing that the
CT&F sector presented much more vigorous growth over the last couple of years than the
other manufacturing sectors (average growth of 10.5% for CT&F versus 2,9 for total GDP
and 2.3% for the overall manufacturing industry).

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This shows that the CT&F sector has a lot of success and that it has a huge possibility to grow
more and more within the coming years.

Also, the trade balance for CT&F products in the last ten years, indicating an accumulated
growth of 249.7% in exports between 2000 and 2009, while imports grew 121.0% in the
same period. The CT&F Industry’s trade deficit, which totaled US$ 163.1 million in 1997,
trended downward in the following years, tapering off to US$ 8 million in 2001, but then
bounced above the line in 2002 and onwards. In 2009, the surplus reached U.S. $ 131 million,
down 27.8% over 2008.
We can see that the Brazilian market is a good place to sell CT&F products, but also to create
them, as the exports and imports are really important.
Brazilian exports of CT&F products can be broken down into the following product segments
in 2008:

We can see that there is an important opportunity on the market for selling products but also
to create products and sell them. The hair care products are both the products the most
exported and both the more sold on the local market.

b. Politics
Brazil has one of the most liberal investment climates for outside investors. Non-resident
investors, both individuals and legal entities, can invest in most of the financial
and capitalmarket instruments available to resident investors, without any restrictions.
However, non-resident investors are required to hire local entities to act as custodian and
representative for regulatory and tax related issues. Investors are also required to complete
other formalities like registering with the Brazilian Central Bank, the stock market regulator
CVM and the Federal Revenue Service.

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Brazilian political landscape shows that doing business in Brazil is quite easy as there is a
strong and stable government with numerous commercial policies and treaties. Brazil is a
country, which government is very open to foreign investments and which encourages the
creation of local companies in order to continue exporting products. In the last years, import
tariffs for majority of products were reduced following the Brazilian authorities policy to
open the market to international competition. Beauty and Personal Care imports into Brazil
are subject to average import duty of 14%.
But the major drawback is the corruption that is established at all the levels of the country.
According to Transparency International's Corruption Perceptions Index for 2009, Brazil is
ranked in the 75th place out of 180 countries.

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 3. Costs of doing business in Brazil and its impact on the
specific market for your product industry

We can see that doing business in Brazil is more expansive than in the rest of Latin American
countries and a more expansive than in the OCDE countries.
In fact, the average Brazilian company pays around 69% of its net profits to the government,
according to the World Bank. In the United States, a company pays 46.8% of its profits. The
United Kingdom and Canada pay even less, 37.7 and 29.9% respectively.
For a given invoice in Brazil, the business owner may have to pay ICMS, PIS, COFINS, IPI ,
ISS, CSLL, and income taxes on the total, which can add up to 50%.
There are 62 taxes in Brazil, which make the tax system so complex that even a small
business has to hire the services of an accounting firm to ensure it is current with the
constantly changing tax requirements.
Hiring and Firing people also makes business owners plan carefully. Additional costs for
employees – such as taxes, health insurance, meal stipend, grocery stipend, transport stipend,
vacation pay and “thirteenth salary” (an additional month’s pay every December) add up to
nearly 90 percent more than base pay – a stark contrast to the United States at 29.4% and the
United Kingdom at 18%.
Also, the Beauty and Personal Care imports into Brazil are subject to average import duty of
14%.
But according to an expert accountant working for a big local firm, these taxes are expected
to lower within the next five years in order to compete with the neighboring countries.

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 4. Evaluate the decision of investing in this country with this
industry
Regarding all the information gathered about the CT&F market and the global economy, I
can assure that there is a good opportunity for an investor.
Indeed, the demand for personal care products and cosmetics keeps growing in Brazil, women
are really willing to take care of their appearance since they work more and earn more
money.
We have also seen that the market is not yet saturated and that there are a lot of different
opportunities to take, like the natural products ones and the hair care products ones.
In Brazil, it is not only possible to sell products but also to manufacture them in Brazil and
then re export them. On both sides, the opportunity is great, but I have decided to center my
researches on selling foreign products to the local market.
The economical landscape shows that Brazil is in a good shape and especially the CT&F
market. The government is really willing to bring foreign companies to its country and even
if the taxes are really high, they are expected to lower very soon.
The major drawback is the corruption, which can increase the price of the establishment or
can drown a business if the backhanders are not paid.

To conclude, the enormous opportunity on the market counterbalance the high taxes that
weight on foreign companies. And being present in Brazil is a good way to enter the
neighboring countries as Brazil is a good place to experiment products and see their impact
on the local population.

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References

For the CF&T market :

For global informations :

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