Beiersdorf Ag And The Cosmetics Industry
Published: Last Edited:
Disclaimer: This essay has been submitted by a student. This is not an example of the work written by our professional essay writers. You can view samples of our professional work here.
Any opinions, findings, conclusions or recommendations expressed in this material are those of the authors and do not necessarily reflect the views of UK Essays.
Beiersdorf AG (BDF), together with its subsidiaries, engages in the manufacture and distribution of branded consumer goods primarily in Europe, the Americas, Africa, Asia, and Australia. The company operates in two segments, Consumer and Tesa. The Consumer segment offers skin and beauty care products under the Labello, NIVEA, 8x4, la prairie, JUVENA, atrix, Eucerin, FUTURO, Hansaplast/Elastoplast, and Florena brand names. The consumer division represents over 80% of the company's total value sales. The Tesa segment engages in the development, production, and marketing of self-adhesive system and product solutions for industrial customers and consumers.
Beiersdorf Aktiengesellschaft was founded in 1882 and is based in Hamburg, Germany. The group has around 17,300 employees and over 150 affiliates worldwide. Since 2003, the company has been part of the Tchibo Group.
The group recorded revenues of 5,120 million during the fiscal year ended December 2006, an increase of 7.2% over 2005. The operating profit of the group was 477 million during fiscal year 2006, a decline of 15.8% over 2005. The net profit was 664 million in fiscal year 2006, an increase of 99.4% over 2005.
This report analyses the economic aspects of the business of cosmetics and the consumer segment of Beiersdorf AG.
In 2006, the cosmetics and toiletries industry posted $163 billion, a growth rate of more than 5% over 2005 $155 billion. Euromonitor International forecasts average annual growth of 3% to reach global sales of more than $313 billion by 2011. (GCI, 2007).
The industry continues to benefit from a combination of strong macroeconomic trends (including a worldwide rise in consumer spending power); key demographic factors such as aging populations and higher life expectancies; an increased interest in appearance and personal care as a means of preventive healthcare; and lifestyle and climatic changes that are creating opportunities for new product niches. Legislative restrictions are having a positive impact by improving consumer confidence and facilitating international trade, and technological advances are improving product efficacy and providing manufacturers with new marketing tools and advertising opportunities.
3. Competition and Markets
Microeconomics: Porter's 5 Forces
Based on Porter's five forces model which determines the intensity of the industry competition and profitability (Porter 1980, p3), Beiersdorf has an advantage in the cosmetics industry; their heritage and unmatched leadership in skin care through NIVEA has created an immediate stronghold over its competitors in the industry as well as differentiation. However the threat of substitute products and services could affect Beiersdorf's popularity.
Threat of New Entrants - Medium
A large number of firms differentiate their products and maintain a certain degree of control over their pricing. This monopolistic competition has relatively low barriers to entry and exit. Government regulation, mostly related to safety issues, and distribution channels appear to be the most significant barriers to entry in the cosmetics industry. Beiersdorf has the advantage of economies of scale, an established supply and distribution channels and high product differentiation, to compete and have an incumbent advantage. The capital requirements of entry, customer and supplier loyalty, legislation, and retaliation are moderate, which indicate that a new entrant is hindered to enter the market and compete. To stay competitive, Beiersdorf needs to continually innovate.
Threat of Substitutes - High
The risk of product-for-product substitution is high as equivalent product benefits are available both in generic and branded form. Beiersdorf has contended with this risk by continuous innovation and introducing unique formulations across global markets. Beiersdorf has worked to expand its presence in the global personal care market by promoting its flagship brand NIVEA, which launched a global marketing campaign last summer that intends to cover 64 countries by mid-2008. To increase sales by presenting consumers with innovative new products, Beiersdorf's expenditure on R&D rose 7.6 per cent to 127m in 2007 and this investment is expected to help the company launch successful new products in the years ahead (Cosmetics Design, 2007).
Bargaining Power of Buyers - Medium
Buyer (customer) concentration is moderate as product differentiation and distributed markets ensure relative price differences that ensure profitability. This indicates reduced bargaining power of the buyers. Loyalty to Beiersdorf's products is relatively high and the cost of switching buyers is medium. The risk of supplier acquired by the buyer is less as the products are proprietary formulations. Beiersdorf also differentiates through choice and first to market innovation. As such, they should be unwilling to accept compromises on quality. This will also be true for emerging economies, where, as they develop and innovation becomes a competitive differentiator, buyers will be less willing to compromise on quality.
Bargaining Power of Suppliers - Medium
Ingredients are individually sourced from suppliers and blending them into unique proprietary products has traditionally been Beiersdorf's primary strength. Suppliers concentration is high with the added risk of buyer being acquired by the supplier. However, the cost of switching suppliers is moderate and overall, suppliers increasing costs is less impactful on the profitability.
Competitive Rivalry - High
Despite an unfavourable environment in Beiersdorf's key region of Western Europe, the company has managed to consistently outperform global sales of cosmetics and toiletries over the review period and by one percentage point in 2006. Beiersdorf's global sales growth (6%) is above that of its direct competitors Procter & Gamble and Unilever, although L'Or al outperformed by one percentage point. However, like L'Oreal and other major global players, much of this growth is derived from emerging markets.
This performance tends to demonstrate that Beiersdorf's growth strategy is successful. However, the degree by which Beiersdorf outstripped overall sales has lessened. It is essential for Beiersdorf to continually invest in R&D to maintain their competitive differentiation and profitability.
The recent revision of Beiersdorf's growth strategy indicates that the company identified the right targets for growth, both at product category level, such as with a focus on men's grooming products, and at a geographical level. The slight departure from the previous focus on North America seems wise, as sales in this region are forecast to remain sluggish over the period 2006-2011. On the other hand, increased efforts to launch Beiersdorf's brands in high-growth countries such as China and Russia should prove very beneficial.
4. Market demand and understanding the consumer
The law of diminishing marginal utility holds for the cosmetics sector. A shift in the demand curve will be seen as a result of changes in demand due to factors other than price, such as increases in consumer income, changes in taxes on the product, changes in price or availability of competing products, and changes in expectations of future prices (Wilkinson 2005, p.82).
Various elasticity concepts, including own price elasticity, income, advertising and cross-price elasticises of demand as well as consumer indifference curves are very important to the company as they influence the pricing and advertising strategies (Jones 2004, p.98).
The demand curve for Beiersdorf's portfolio can be expressed as D1, displayed in Figure 3. P1Q1 represents the market equilibrium point for quantity and demand for the pricing strategy.
Beiersdorf expansion of its market share in 2007 by focusing on product innovation and emerging markets with a special focus on the Chinese market was supported by high sales of Nivea Visage and Nivea for Men, and sales in China increased 45.1 per cent in 2007 contributing to a 7.6 per cent rise in the company's turnover to 5.5bn, indicated by an outward shift in the demand curve from D1 to D2. At this price point, quantity sold was higher (P2Q2). Sales were up 12.8 per cent and the jump in profits was also due to the company's logistics and production revamp, which has centred on its hair and skin care operation in Europe during the past two years. Thus, the demand curve may well have sloped more sharply upwards than it appears in Figure 3. This raises the equilibrium quantity from Q1 to the higher Q2.
These curves demonstrate that Beiersdorf's overall revenue has grown considerably from 2006. In its financial results for 2007 the company reported sales of 5.5bn for the fiscal year, which adjusting for currency translated into a 9.1 per cent increase on 2006.
Also, Beiersdorf's growth is driven by advertising and promotion, alongside heavy research and development investments. Faced with growing maturity in its key market Western Europe, Beiersdorf has not limited its growth strategy to product innovation. In addition, the company is focusing on alternative retail channels.
5. Market supply and understanding the company's costs
Market supply is the aggregate of individual firm supply, determined by factors affecting firm supply. The market supply function for a product is a statement of the relation between the quantity supplied and all factors affecting that quantity (Hirschey 2005, p.110).
With the dual aim of halving working capital requirements and saving costs, the Company embarked on a restructuring of its supply chain in 2005. Originally managed locally, all major supply chain processes, including planning, sourcing, production, delivery and returns are now moving towards more central management. Processes are being optimised, in order to reduce the time-to-market for new products, and products and processes are being standardised as much as possible to achieve economies of scale.
In Europe, Beiersdorf has already adapted its production sites and logistics centres to reflect actual demand and has reduced overcapacity. For example, early 2007, the company sold its production and logistics facilities in France, as well as its Hamburg-based logistics centre and its Heitersheim-based soap factory both in Germany. In Asia, Beiersdorf conducted an in-depth analysis of its product and supply chain during 2006. It is expected to roll out its Asia restructuring plan in 2008. Meanwhile, on the back of beneficial business tax reform net profit leapt to 132m from 74m in 2006.
Although Beiersdorf began to focus a large part of its efforts into strengthening its position in high-growth regions such as Eastern Europe, Latin America and Asia-Pacific, the company is behind many other international manufacturers. Many players identified the same areas as key targets over the last few years. Without first-mover advantage, Beiersdorf will have to match its competitors in terms of distribution, price and product support in order to reach new customers.
6. Market analysis, failure and responses
Market failure is the situation where the market mechanism fails to allocate resources efficiently (Wilkinson 2005, p.473). There are a number of reasons why market failure might occur: inefficiencies, imperfect competition due to oligopoly in the cosmetics market, external economies and diseconomies of production, pure private and pure public goods; and government intervention in the form of taxation and subsidies to try and restore social equity while exercising other options such as legal measures and persuasion.
Annual sales growth in the cosmetics and toiletries market has fallen gradually from 21.2 per cent in 2002 to 11.3 per cent last year to $20.9bn. Overall growth figures are slowing as the market matures although breaking down the figures suggests high double-digit growth is still achievable in the market for more sophisticated products. Picking out two categories for comparison, premium cosmetics sales increased 15 per cent last year whereas deodorant sales grew by only 8.2 per cent (Cosmetics Design, 2008).
Beiersdorf should achieve growth figures in Central and Eastern Europe with targeted growing niches and expanded market share. In addition, Beiersdorf paid 269.45m in October for an 85 per cent stake in China-based C-Bons Hair Care, which owns the Slek and Maestro brands (Cosmetics Design, 2007). This will significantly strengthen Beiersdorf's market share in China.
7. Market structures and company strategies
Economists classify market structures into four main types: perfect competition, monopoly, monopolistic competition and oligopoly (Wilkinson 2005, p.313). The cosmetics business is an oligopoly. With competitors such as Unilever, L'Oreal, Proctor and Gamble, Avon, Est e Lauder Cosmetics, and other large corporations, Beiersdorf attempts to maintain a technological superiority through path-breaking innovations and their highly successful soft-sell techniques. The constant research and development of cosmetics, combined with the universal human desire to look the best they can, suggests that the industry has great potential. The strategies used by Beiersdorf are an attempt to differentiate itself from other competitors in the industry.
Despite an unfavourable environment Beiersdorf's global sales growth (6%) is above that of its direct competitors Procter & Gamble and Unilever, although L'Oreal outperformed by one percentage point. This performance tends to demonstrate that Beiersdorf's growth strategy is successful. The recent revision of Beiersdorf's growth strategy indicates that the company identified the right targets for growth, both at product category level, such as with a focus on men's grooming products, and at a geographical level. The slight departure from the previous focus on North America seems wise, as sales in this region are forecast to remain sluggish over the period 2006-2011. On the other hand, increased efforts to launch Beiersdorf's brands in high-growth countries such as China and Russia should prove very beneficial.
8. Economic output and national wealth
Economic output is measured with actual growth and potential growth. Actual growth may be defined as the actual annual increase in national product or real GDP per annum, normally expressed as a percentage or on a per capita basis. In contrast, potential growth is the annual increase in a country's productive capability. Actual growth may fall short of potential growth if the economy is working at less than full capacity, which is if it works within its production possibility frontier. Economic growth is perceived to be desirable since higher growth benefits the population of the country. However, high shorter term economic growth using non-renewable resources, causes slow long term growth.
Cosmetics industry contributes positively to the GDP due to its manufacturing activity. Beiersdorf's products are manufactured across the world and in all its major markets it has manufacturing facilities or agreements with affiliates. Beiersdorf also supports beauty salons and massage parlours with its professional products and thus indirectly supports local economies.
9. Economic growth and business cycles
The global economy recorded sound growth in the early part of 2007. However, in late summer the ongoing slowdown on the U.S. real estate market triggered fears regarding the creditworthiness of financial market products and institutions in the U.S.A. and Europe. U.S. monetary policymakers moved to counter rising cyclical risks by cutting interest rates.
Nevertheless, the drop in real estate prices, rising default rates for mortgage loans, and the jump in jobless rates at the end of the year led to a market slowdown in the growth of U.S. consumer spending and hence in the economy as a whole. Against this background, the U.S. dollar came under strong pressure in the second half of 2007. In addition, the euro appreciated significantly against the yen, impacting the international competitiveness of European companies.
Continental European economies were dominated by robust growth in exports and investments and further improvements on the job market, but were impacted by an increase in inflation risks, fuelled by rocketing prices for oil, energy, and food.
Figure 7: Inflation in 2007
Source: Beiersdorf Annual Report, 2007
The ongoing rapid expansions of the Chinese market, where growth rates are at about 12%, continue to offer sales opportunities for European producers. At the same time, China's growing demand for raw materials led to price rises on the global commodities markets. Although Continental Asian countries saw dynamic development, Japanese growth is below expectations. In Latin America, growth remained stable at around 5% in 2007, while in Eastern Europe it was 6%.
Business cycle's effect on Beiersdorf, as a factor of investment and consumer spend on goods and services, is limited as its products cater to virtually every age-group among consumers and its flagship brand NIVEA and its extensions as an umbrella brand have gained immense value and loyalty.
It is true that mass-market cosmetics are not essential for life, however, the relative low-cost of the products, and the heavy reliance on image enhancement, especially in women, prompt that cosmetics would not be the first items to be forsaken in time of economic hardship. This makes the industry more resistant to recessions and other economic downturns.
10. Capital accumulation and technological progress
In addition to Beiersdorf's acquisitions, the investments in operating activities amounted to 106 million relating to intangible assets and property, plant, and equipment in 2007.
Innovative product development is a strategic factor at Beiersdorf for ensuring competitive strength and group growth, based on over 80 years of research and development. In 2007, the company spent 127 million on research and development (2.3% of sales). On a global level, 870 members of staff - without C-BONS Hair Care - are employed in research and development.
11. Labour markets and unemployment
Though unemployment is creeping, unbridled inflation has played havoc with commodity prices and interest rate turbulence. This can lead to loss of jobs as companies may trim their expenses in an effort to counter inflation.
Beiersdorf enjoys a healthy growth rate of over 6% against the industry growth of 4% average. There is no threat of unemployment and labour market issues for Beiersdorf due to its unassailable market share and brand loyalty across the world. The resilience of the economy could be impacted by unemployment, but is unlikely to directly impact demand for Beiersdorf's products, due to its strong heritage and the NIVEA brand pull.
12. Role of government and fiscal policy
Government expenditure and taxation is the basis for fiscal policy. Cosmetics are regularly taxed and such taxes have a notional effect on demand of Beiersdorf's products.
However, customs and import duties on raw materials and finished goods have an impact and the company appears to counter such effects with local manufacture and continued product innovations.
13. Role of government and monetary policy
Since inflation and money supply determine the monetary policy, inflation is countered with a change in interest rates to affect a control on money supply.
Beiersdorf indicates that currency, interest rate, and liquidity risks are subject to active treasury management. In most cases they are managed and hedged centrally. Derivative financial instruments serve solely to hedge operational activities and financial transactions essential to the business. The Company limits potential default risks relating to the investment of the Group's liquid funds by only making short-term investments with prime-rated counterparties.
Consumer impact of monetary policy may affect spending on cosmetics. However, brand loyalty and preference for personal grooming offset any adverse impact.
14. Foundations of international trade
The law of absolute advantage and the law of comparative advantage are the basis for international trade. Countries specialise in goods and services which they have the greatest aptitude for producing due to natural resource endowments, or because of the acquired skills of their workforce. These factors of production are largely immobile between countries so trade takes place in the goods which they produce.
The terms of trade of a country might change as the result of a change in the composition of its exports or imports, or a change in the price of its exports or imports. For the former, businesses selling higher priced products such as software as opposed to low level manufactures would be one cause of an improvement in the terms of trade. This leads to the issue of free trade against protectionism, such as import tariffs, quotas, exchange controls, export subsidies and administrative barriers.
Beiersdorf with 150 affiliates worldwide is a major player in international trade. It leverages inherent strength of each country it operates in and extends these advantages across its global markets.
Beiersdorf projects that the consumer segment of its business will continue to enjoy growth of approximately 8 per cent due to its increased China focus, which is double the cosmetics market as a whole. China does not however carry the burden of delivering sales growth for the company alone and Russia, Brazil and India have been identified as fellow drivers for growth. This is more confident than the outlook of competitor L'Oreal which, on the back of recent results affected by the weak US dollar, pulled down its expectations for the full year to just under 6 per cent growth (Cosmetic Design, 2008).
The cosmetics industry, business and market analysis, based on the 12 strands of the Grenoble syllabus, identify several important issues. Central to the planning and development of strategies within the business environment is based on an understanding and interpretation of micro- and macro-economic factors. Applying the above twelve economic factors to Beiersdorf performance, it is clear that market, governmental and global forces act upon the company, affecting strategic decisions. The business is consumer-oriented and market driven. Sustaining market share and ensuring growth in this free and highly competitive market requires continuous application of information analysis, strategic decision-making and rapid execution.
Constant innovation, vast potential in emerging markets, maturing markets in Western Europe and US, varied preferences of consumers across global markets who also seek consistent quality and product standards, may result in dramatic shifts along the demand curve.
An oligopoly, the cosmetics business thrives on capital accumulation and technological progress, ensured by economic growth, business cycles and international trade. Fiscal and monetary measures by the governments and labour issues influence the business to a limited extent.
Beiersdorf is a successful global company in this sector and its growth and expansion over the decades indicates a healthy and competitive advantage.
Cite This Essay
To export a reference to this article please select a referencing stye below: