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France is ranked 16th in the Global Competitive Report up two places from last year and demonstrating a number of competitive strengths, such as an infrastructure that is ranked second in the world, a healthy workforce, a high quality of education, a sophisticated business culture and leadership in the area of technological innovation. On the other hand, as indicated in the Global Competitive Report, France suffers from high non wage labour costs and strict rules on hiring and firing and poor labour employer relations. There is also a govern
GDP Per Capita, (US$), 2007……………………..$41,511.2
GDP: (US$ billions), 2007………………………………2,560.3
GDP (PPP) as share (%) of world total, 2007â€¦…….3.17
Total Population: (millions), 2007………………………60.9
Median Age: 39
Land Area: Largest land area of all EU members
Unemployment: 7% 2008
Current President – Nicolas Sarkozy
ment budget deficit which is above the EU threshold of 60% and national savings rates are low. (Global Competitive Report, 2008/09 p.19) Although France is currently in a good position – in 16th place, the global economy is changing and new competitors are closing in. This paper will examine the challenges that France and their beauty industry are facing.
France key facts:
source: The Global Competitive Report 2008-09 Exhibit A
Economic PerformanceFrance’s Gross Domestic Product (GDP) has aligned with the European average somewhat, although, as the graph below illustrates, France has fared better than the EU within the last year.
This chart created on the Eurostat website, compares France’s Real GDP with the European Union (EU) average. Real gross domestic product (GDP) is a macroeconomic measure of the size of an economy adjusted for price changes (that is, adjusted for changes in the value of money: inflation or deflation.) source: “Real gross domestic product.” Web. ttp://en.wikipedia.org/wiki/Real_gross_domestic_product>. Legend:Blue = FranceGreen = EU (27 countries)source:http//epp.eurostat.ec.europa.eu/tgm/graph.do?tab=graph&init=1&toolbox=type&language=en&pcode=tsieb010&plugin=0http://epp.eurostat.ec.europa.eu/tgm/graph.do
France’s Gross Domestic Product per capita (PPP US$)The Human Development report and the Global Competitive Report demonstrate that France’s purchasing power parity (PPP) has declined since 1993 to 33,000 plus/minus.
Human Development Report 2009 – Exhibit C
Human development index 2007 and its components
GDP per capita (PPP US$)
source: http://hdrstats.undp.org/en/indicators/91.html accessed March 29 2010
source: Global Competitive Report 2008/09Exhibit D
Innovation MeasuresThe Global Competitive Report says “Although less-advanced countries can still improve their productivity by adopting existing technologies or making incremental improvements in other areas, for countries that have reached the innovation stage of development, this is no longer sufficient to increase productivity. Firms in these countries must design and develop cutting-edge products and processes to maintain a competitive edge.” (Global Competitive Report, 2008/2009, page 6)
Exhibit D shows France in blue is ahead in the percentage of GDP for R&D. This hides the fact that Germany one of France’s competitors which we will discuss later in the Cosmetic industry analysis, spends a considerable amount more than France. Although France in blue is ahead in the percentage of GDP they spend on R&D another important aspect of innovation is patents. Exhibit E shows that Germany has double the amount of patents. Gross Domestic Expenditure on R&DExhibit D
France = Blue
EU = Green
Germany has double the amount of patents than France
Analysing the date from the Global Competitiveness Report it is clear that France is suffering in the ranking for innovation and sophisticatio
n as illustrated below.
Exhibit F France is losing behind Germany who is winning currently in 4th place
Exhibit F: Innovation and sophistication factors
According to Porter, a nation’s competitiveness depends on the capacity of its industry to innovate and upgrade. Companies gain advantage against the world’s best competitors because of pressure and challenge. (Porter, On Competition, p.171, 2008) In Exhibit F France is holding steady in 14th position an explanation for their lack of improvement is shown in Exhibit G state of cluster development, where France is low and their rate of patent development is low compared to its competitors, for example, Germany, Japan and the U.S.A.
source: Global Competitiveness Report 2008-2009Exhibit G
France – P E S T Analysis
French political system can be described as semi-presidential form of democratic republic. France has improved considering the rule of law and accountability. France ranks in the 91.3 percentile on voice and accountability as of 2007, which is an improvement from 2002, when it was ranked in the 84.1 percentile. (Datamonitor (2009). France: Country Analysis Report. London: British Library. Page 3)
However, France is still considered as a highly centralized country and the elite group is significantly involved in the state and corporate sectors. Moreover, corruption seems to be one of the main issues in French politics.
Political stability can be considered one of France’s strengths. Elections are fair and transparent. Although initially the socialist parties were more popular and therefore winning the elections, lately the majority of the society has voted for pro-reform parties. Before the elections president Sarkozy made following promises: a reduction of unemployment, flexible labour laws, pension reform and tax changes.
France’s approach to preventing terrorism is considered to be one of the most effective in Europe. However, it did not come free and the price was limiting civil liberties. (Datamonitor (2009). France: Country Analysis Report. London: British Library. P. 14)
Although the current French government is definitely pro-reform, the rest of French society seems to be opposed to the changes. For example, the government wants to simplify public administration and bureaucracy, promote the competition in the market as well as make minimum wages flexible. (www.lemonde.fr)(EWA – I sort of know what you mean but can you include a couple of the changes that the government want to bring in. I understand that the citizens would be unwilling to accept any change that would lower wages but does the French government want to lower wages that would also go against what Porter says is the point of being competitive. The population is unwilling to adopt any measures that cause a decrease in wages. One of the reasons would be the decline in purchasing power of the French population. As already mentioned in exhibit B above France is already showing a decline in GDP (PPP US$) per capita. Improving the pension system and modernizing the labour market has been delayed because of the unwillingness of French citizen to accept change. In general, the reforms are being delayed. Moreover, the liberalization process is also not as dynamic as hoped for, in effect, president Sarkozy is losing his popularity. In regional elections on 21st March the Socialist Party gained 54 % while UMP 35 % only. (Web.
Improving French foreign policy has been one of president Sarkozy’s main goals. So far he has been successful. France has returned to NATO’s military command. It has helped US in isolating Iran because of its nuclear power. In general, France has been lately very active in international relationships. With no doubt improved foreign relations will help the economic relations with these countries.
French National Assembly composition – Source: Datamonitor (2009). France: Country Analysis Report. London: British Library. P. 39.
President Sarkozy’s administration has also finally improved French bureaucracy which now should be more transparent and efficient.
In France, the government has continued to play a prominent role in business
compared to many other EU countries. (Datamonitor (2009). France: Country
Analysis Report. London: British Library. Page 16)
A concentration of elite citizens in power helps corruption practices and also help to influence government policies which in effect can block development. (Political Science: An Introduction, Michael G. Roskin, June 2005, P. 79) Moreover, since the government becomes more unpopular while trying to implement the reforms (can we get a list of the reforms then I can weave that into this paragraph – pension system reform, health care system reform, public administration reform, reform of work conditions regulations – ‘un contrat unique’, reform of public finances, tax system reform, corporation tax reform) there is a risk that it will become populist to gain power back. There have been a number of protests against reform measures.
The International Monetary Fund (IMF) has stated that France faced a 3 % fall in growth in 2009. The decrease of income and wages combined with rising unemployment will affect domestic consumption. Because of the opposition implementing Sarkozy’s reforms is not going smoothly. France’s credit rating might be affected. That will increase the cost of funding for future governments and business enterprises.(Datamonitor (2009). France: Country Analysis Report. London: British Library. P. 14)
President Sarkozy’s pro-reform approach affected in general review of public policy. This caused the improvement in public services and therefore reducing the public costs.
French infrastructure is one of the best in Europe. There are over 10,000 km of well-maintained highways in France. That is better result than in Germany or UK. French railway network is also very well established. France is seen as global air transport hub with 27 airports. “The world-class infrastructure network enables France to offer international investors excellent conditions for doing business and also drive the overall economic engine of the nation.” ((Datamonitor (2009). France: Country Analysis Report. London: British Library. P. 18)
French external debt is above the EU limit of 60% and most probably will stay this way. Moreover, the share in exports in the Eurozone has fallen by 16% during 1999-2007. (Datamonitor (2009). France: Country Analysis Report. London: British Library. P. 18)
As the reasons for this situation can be named low level of industry specialization and poor price competitiveness of French industries. Moreover, France’s effective corporate tax burden is higher than EU average.
The privatization of telecommunications, electricity, gas, postal services, rail freights as well as the services sector has been in place for a while. The government has also introduced stimulus plan. The hope is that increased investment spending will stimulate domestic consumption.
The financial system in France is still significantly being regulated and administrated. What has helped French economy now to recover from global crisis, might create a problem in the future. Structural reforms in public enterprises, pensions and the constitution need to be completed now; otherwise France will lose the competition with countries with more liberalized systems like UK or Germany.
While social structure considered an aging population and relatively high unemployment rate seem to be main issues. As well as deficient educational system; (Global competitive report, Porter and Schwab, p.19) describes the education system as a whole is high/strength but the flexibility of the labour force is the problem as well as poor labour relations) this partly can be blamed for high unemployment rate. Unemployment rate was 10 % in January 2010. Web.
Monthly unemployment rates August 2008 – January 2010:
Taking into consideration social parameters in general France has been rather successful. For example, life expectancy at birth is in France 80 years; in terms of gender equality there is a positive social climate for women.
France has one of the highest birth rate in Europe. Unlike in many other European countries although the rate is decreasing, France is still doing well. “France’s birth rate of about 1.8 children per woman in 2006 makes it the only European country with the possibility of maintaining its current population. (Datamonitor (2009). France: Country Analysis Report. London: British Library. p. 22)
An aging population and early retirement are serious issues on French social landscape. These issues have not been given enough attention by policy makers which now may cause big problem of additional government expenditure. Low labour participation is another issue as well as the fact that French workers work relatively low hours yearly.
Source: Web. < http://www.oecdobserver.org> Accessed: March 15 2010
Another challenge is educational system which has not kept with changing industrial order.
New scheme ‘Active Solidarity Revenue’ (RSA) has been introduced by French government. The aim is to prevent unemployment and poverty. The programme will persuade people to look for a job rather than living off social benefits.
France’s wage hikes have not seen an equal increase in productivity or increase in output. Thus, wage increases have become unrealistic.
(Datamonitor (2009). France: Country Analysis Report. London: British Library. P. 22) By continuing this policy while the wages are increased but the productivity is not increasing is a serious threat for economic growth. Moreover, France is losing competition on global market where products from emerging Asian countries are present.
French government has passed new rules regarding immigrants who want to live in the country or acquiring French nationality. On one side it will help to stop illegal immigrants, however on the other side it will also put off well educated foreigners to work in France.
R&D situation in France is satisfying, although far from perfect. The level of public investment in R&D is around 2 % of GDP while EU’s aim is 3 %. Moreover, private sector funding is still not pleasing. Public involvement is declining and private sector funding still not increasing. This situation might cause problems in future. To improve this condition the Agency for Industrial Innovation has been established. Its main task is to support innovation in large companies. Web.
What can be considered as main strength is relatively large number of patents received by France. France ranks fourth in the world in terms of number of patents granted for its innovation. (Datamonitor (2009). France: Country Analysis Report. London: British Library. P. 24)
This situation is caused by the approach of successive French government to R&D. Research and higher education are priorities of the current government. Large amount from yearly budget is dedicated to support these domains. Political commitment to R&D is therefore high in France.
Although R&D is considered as an important issue by politicians France’s expenditure is at 2 % of GDP only. For comparison it is 2.68% in US and 3.18 % of GDP in Japan.
Moreover, the spending on R&D as a percentage of GDP by French government is declining. In addition, the input from private sector is still not rewarding. This situation will without any doubts influence future technological development of the country.
French national research and innovation policy aims to promote innovation, increase the participation of private sector, and improve the cooperation between public and private sector. The goal is to increase the spending on R&D to 3 % of GDP and one third of this amount should come from private sector.
France lacks the coordination and one clear policy regarding R&D sector. There are many research and knowledge institutes which objectives are overlapping each other. One united strategy is needed. Furthermore, there is lack of efficient communication between research institutes and private companies, therefore resources are not being used fully.
Moreover, the lack of the connection between the producers and consumers of the technology can be observed. Public R&D centres very often do help in application of new technology in industry. In effect, efforts and costs will be duplicated.
Beauty products in France – cluster analysis
1/ Description of the cluster, cluster size and performance
The cosmetics and toiletries (C&T) industry in France is estimated at 8 billion EUR in sales and can be divided into the following categories:
* Skincare, colour cosmetics: 37%
* Hair products : 23 %
* Perfumes : 20 %
* Toiletries: 19 %
* Other : 1 %
Although in total export value, the C&T industry in France shows growth of 6.5% between 1999 and 2005, in terms of global market share, France has declined from 31,6% to 28,5% during the same period.
Despite this, France is still a dominant market leader with its export value sales double the amount of the second and third largest exporters Germany and USA with export value of just below 4 billion EUR respectively.Rossi, Prlic, Hoffman; November 2007, Global Insight Report, p.14
France’s beauty care industry has two specialised regional sub-clusters – the PASS cluster (Parfum, Arômes, Senteurs et Saveurs – perfume, aromas, scents and flavours) in the Provence-Alpes-Côtes d’Azur region, and the Cosmetic Valley cluster (Sciences de la Beauté et du bien être – Science of beauty and well-being) based in the Centre and Normandy region.ClickPress, July 2008 [http://www.clickpress.com/releases/Detailed/82987005cp.shtml]
The beauty products cluster consists of just few large corporations and over 400 Small medium enterprises (SMEs) with 25 – 250 employees. There has been an estimation of 855 companies in the C&T industry with less than 10 employees. Rossi, Prlic, Hoffman; November 2007, Global Insight Report, p.4
Major companies include L’Oreal which is the global market leader with annual sales of US $ 17.7 billion, followed by Japanese owned Shiseido (US $ 5.4 billion), LVMH (US $ 2.7 billion) and Yves Rocher (US $ 1.8 billion). Smaller companies include Chanel, Clarins, Pierre Fabre Dermo Cosmetique and Yves Saint Laurent. Beauty packaging, October/November 2005 [http://www.beautypackaging.com/articles/2005/10/top-20-global-beauty-companies.php]
International groups in the cosmetics sector – such Beiersdorf, Henkel, Coty Inc, Puig Group and Pacific Europe – have a strong presence in France and benefit from a vibrant business environment that also serves as a test market.
France also offers expertise in associated industries, such as bottle manufacturing and the production of aromas and scents. Invest in France agency press release at ClickPress [http://www.clickpress.com/releases/Detailed/82987005cp.shtml]
Institutions for collaboration
The Cosmetic Valley and PASS regional sub-clusters support active cooperation between companies, research organisations, training institutions, laboratories, universities and suppliers. International investment into the industry is promoted and facilitated by the Invest in France Agency (IFA). ClickPress, July 2008 [http://www.clickpress.com/releases/Detailed/82987005cp.shtml]
The reason behind the perception of France as the cradle of beauty and luxury goes back to the 16th century when it became the center of cosmetic industry starting with the manufacturing of parfumes.
Although historically the first European parfume makers originated in Venice, the trade with parfumes developed strongly during the 17th century in France which is today recognised as the dominant parfume manufacturer. This is the result of the attention and support given to the industry by the King Louis XIV whose policies stimulated luxury trade. The use of parfumes spread among the aristocrats and the trade flourished with first parfume guild being established in 1729 in the Provence region.
By the 18th century, the original parfume makers started selling other beauty products such as hair dyes, powders, rouges, soaps and white face paints.
The industry started being commercialised after the French revolution in 1789 as manufacturers seeked ways to avoid the association with aristocracy. The guild system was abolished in 1791 and first cosmetic shops were opened in Paris, exports to neighbouring countries also started during this time.
In the 19th century, French manufacturers developed chemical processes of replacing aromas obtained by natural means with beauty products based on scientific research. This has led to inventions of completely new scents that were not just â€šcopying’ existing natural scents. Separate male and female fragrances were also introduced during this period.
Increased demand led to need for larger production facilities. First parfume factory was built in 1840 in Parisian suburb La Villette by an entrepreneour L.T. Piver.
Distribution channels were developed as prices of cosmetics became more accessible to the common man and manufacturers were by now producing branded products as well as private labels for department stores.
During the late 19th century, an entrepreneur Francois Coty made a major impact on the cosmetic business. His achievements include setting up own salesforce (unheard of in the cosmetics business until than) and using designer bottles for parfumes (until than parfumes were sold in pharmacy-like simple bottles) â€š to attract the eye as much as the nose. His aim was to keep the perception of cosmetic s as a luxury that more people can afford and he succeeded in bringing cosmetics and parfumes to the masses.
By the end of 19th century three quarters of French parfumes and beauty products were sold abroad thanks to the developed infractracture which made it easy to export products to Europe and the US. Typically sales were managed through local import agents. Some bigger manufactuterers such as Coty or Piver later established their own shops in other countries (Pivor in London, Coty in New York).
In 1907 Eugene Schueller started new company Société Française de Teintures Inoffensives pour Cheveux selling hair dyes for hairdressers. The vision of the company was to doâ€šresearch and innovation in the interest of beauty. Later renamed as L’Oreal, the company had by 1950s over 100 researchers. Today L’Oreal is a leader in the beauty products industry. Geoffrey Jones, 2007, Imagining Beauty: The History of the Global Beauty Business, p.16 – 38
3/ Competition and trends
According to the Global Insight Inc, the world cosmetics market grew between 2000 and 2006 in Europe and China but declined slightly in US and Japan (Exhibit 2).
EU15 – United Kingdom, Germany, France, Spain, Portugal, Greece, Luxemburg, Belgium, Austria, Ireland, Netherlands, Denmark, Finland, Sweden, Italy
EU 12 – Czech Republic, Slovak Republic, Poland, Hungary, Latvia, Lithuania, Estonia, Slovenia, Bulgaria, Romania, Malta, Cyprus
EU 27 = sum of the above
The forecasts show expected further growth especially in developing regions
such as China and central & eastern Europe (EU12). (Exhibit 3)
France has kept its dominant position as the leading exporter of beauty products over many years selling double the amount than its closest competitors Germany and US. The growth in value is 6.5% between 1999 and 2005. This however is lower compared to EU average (8.3% growth) as well as compared with the rest of the major beauty exporters in world – USA, China and Japan (8.1% growth). This means that on the global scale, France is losing market shares. (Exhibit 3)
Revealed comparative advantage
Global Insight Inc measured the ‘Revealed comparative advantage’ of nations exporting beauty products and in its findings we see that France is positioned in the upper right quadrant (Cosmetic Industry RCA Analysis, Exhibit 4) – the threatened industries. The graph shows us that France is by far the largest exporter, is well positioned but its position is weakening due to lesser growth compared to other countries. On the other hand, the only countries showing intensive growth are developing nations that started at a much weaker base. The market for French products has matured in the developed regions of western Europe and the US which have been traditionally the largest export countries for French products.
As a conclusion, France will now have to be more aggressive in creating a strong position in the developing markets of BRIC (Brazil, Russia, India, and China) countries + central and eastern Europe to regain its growth.
This assumption is supported by the data from French customs which point to fast growing cosmetics sales to the emerging markets, while the EU plays a less important role in French exports (50% against 64%). Between 1998 and 2008, sales growth in emerging countries was two times faster than it is for all exports of cosmetics.
The share of emerging countries in total sales of cosmetics rose from 14.9% in 1998 to 24.6% in 2008, with particularly strong sales in China and Russia. A trend confirmed by Jean-Paul Agon, the Managing Director of the L’Oreal Group, in an interview to the French newspaper Le Monde, dated November 6: “In the ten coming years, our customers will mostly be Chinese, Indian, Brazilian or Indonesian.” While the group L’Oreal already achieves 60% of its business outside Europe, this proportion is expected to rapidly rise to 90%, according to Jean-Paul Agon “Sooner or later sales catch up on demography”, he claims.
France’s second largest competitor in Europe – Germany – shows a better performance in terms of growth and is slightly gaining market shares from 13% in 1999 to 14% in 2005. Although this might seem only a slight improvement, in terms of growth in absolute numbers, Germany has grown faster than European average and almost twice as fast as France (10.9% growth for Germany versus 6.5% for France). Compared to other three top exporters of cosmetics (France, US and UK), Germany is the only country growing in market shares.
In 2007, German exports rose by 14.4% compared to previous year and summed up to EUR 964 million in the first half of 2007, with highest demand from France, the United Kingdom and Russia. Gentry Earlene, German-Arab Industry of Commerce, December 2008 [http://aegypten.ahk.de/index.php?id=1093&L=15]
The growth of German exports is driven by local SMEs which are strategically managed by IKW – the German Cosmetic, Toiletry, Perfumery and Detergent Association (Industrieverband Körperpflege- und Waschmittel e. V.) whose mission is to help German SMEs to enter and conquer foreign markets. Gentry Earlene, German-Arab Industry of Commerce, December 2008 [http://aegypten.ahk.de/index.php?id=1093&L=15]
As a result of its strategic focus and investment, German SMEs have developed quality cosmetics for almost all segments. Etre Belle Cosmetic Vertrieb GmbH is an interesting illustration of those successful German SMEs. The company is now present in more than 35 countries. The brand has developed complete fragrance and skincare ranges segmented by skin types.
German companies are also world leaders in some specific niches, such as organic and natural cosmetics which shows the most dynamic growth in western Europe and USA. (German-Arab Chamber of Industry and Commerce, [http://aegypten.ahk.de/index.php?id=1093&L=15 ])
Udo Frenzel, director of economic affairs at IKW, the German Cosmetics, Toiletry, Perfumery and Detergent Association, sums up the success behind Germany growth:
“The exports of the German cosmetics, toiletry and perfumery industry in the last ten years are a story of success based on the quality image of “Made in Germany”. There is nearly no country on the entire globe where not at least one German brand is available on the market. At present German exports of our industry are 68% higher than imports to Germany”. Gentry Earlene, German-Arab Industry of Commerce, December 2008 [http://aegypten.ahk.de/index.php?id=1093&L=15]
Research and Development
French companies sustain their comparative advantage by investing heavily into research and development which is a key requirement to stay competitive in the cosmetics industry. As the following table shows, France’s R&D expenditure in 2001 was 2.5x higher than that of the second largest competitor Germany in 2004. (Exhibit 5) Data for other leading countries are unfortunately not available but the assumption is that France is a leading investor into R&D worldwide.
This is also supported by the fact that the French government actively supports research and has introduced a competitive R&D tax-credit system, which reimburses 50% of R&D costs in the first year. This provides incentives to non-French companies to set up research facilities in France. Companies that have done this include Pacific Chemical Corp. (South Korea), Takasago (Japan) or Hutchison Whampoa (Hong Kong).Invest in France agency press release at ClickPress [http://www.clickpress.com/releases/Detailed/82987005cp.shtml
The most significant threat to the ongoing competitiveness of the industry in most EU countries but mostly relevant to France and Germany, is relatively low productivity combined with high unit labour costs which shows a wide gap between EU companies and the U.S. and Japan. Rossi, Prlic, Hoffman; November 2007, Global Insight Report, p.4
Although only average EU15 (refers to the first EU countries before entry of post-communist nations) data for productivity in the beauty products industry are available, given the size of the French market, the weighted average is likely to be similar to the actual data for France. Referring to the source above, the rest is an assumption, therefor
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