Formulators Outsource to Make Up Lost Margins

THE PERSONAL CARE market is growing at only 1%–2%/year, and formulators are willing to give themselves a makeover to help boost sagging earnings. Personal care companies are increasingly outsourcing their chemical manufacturing as well as many of their R&D needs to specialty chemical companies.

That effect is helping specialty companies grow their personal care businesses faster than the marker overall–as much as 2%–3%/year, consultants say. Also, raw materials used in personal care products are still true specialty chemicals: They are primarily sold based on performance, not price, resulting in respectable margins, says Kline & Co. (Little Falls, NJ). However, pricing in some mature sectors is under pressure.

Personal care makers are increasingly asking specialty companies for help in new product development to offset the price declines. “Innovation is more important for makers of personal care products than ever,” says Jane Toogood, global v.p./health and personal care at Uniqema. “Consumers want unique sensory characteristics in their products,” she says.

Toogood says personal care companies are relying more and more on suppliers for help with product development. “We partner with customers from the very earliest phases of their product development effort,” she says.

Suppliers say personal care firms do not always have the required know-how in-house. “It is difficult for a personal care company to offer all technologies,” says Antonio Trius, executive v.p./care at Cognis. “From the chemical suppliers’ point of view, cooperation is beneficial because it is important to know the needs of consumers,” says Trius.

Kline says the stronger links are similar to the model adopted by specialty chemical companies and pharmaceutical drug companies, which is mostly focused on discovery, chemical process development, and marketing. Specialty chemical companies have taken over the scale-up of drug manufacturing, as well as the supply of basic chemicals, intermediates, bulk actives, and producing the final dosage form. Henkel adopted that model when it spun off its specialty chemical business as Cognis and focused only on personal care and household product development.

The new business model should also lead to development agreements for finished good formulations between specialty chemical firms and personal care companies, says Eric Vogelsburg, a consultant at Kline. Chemical companies will increasingly be involved in the discovery of new raw materials, the blending and packaging of finished goods, and toxicity testing, says Vogelsburg.

Personal care companies are keen to get more new products to offset slow growth rates and earnings shortfalls in mature brands. Revlon and Procter & Gamble (P&G) have shed several of their product lines to make up for earnings shortfalls. Revlon’s third-quarter earnings were $2.8 million, on sales down 22%, to $351.9 million, compared to a loss of $27.7 million in third-quarter 1999. Revlon says it has been crushed by the reduction of U.S. customer inventories, reduced demand for its cosmetics, and increased competitive activity in certain markets.

Revlon sold its worldwide professional product business to The Colomer Group (Barcelona) for $315 million in March. The deal includes professional salon products, ethnic beauty products, and natural honey-based skin products. Revlon sold an Argentine subsidiary that makes shampoo and conditioner to a Dial subsidiary for $46.5 million earlier this year.

P&G issued several profit warnings this year forcing its chairman, president, and CEO Durk Jager to step down in June. Earnings for its beauty care business for its fiscal year, ended June 30, dropped 3%, to $894 million, on sales flat, at $7.39 billion. P&G sold its Clearasil brand acne skin care line to Boots Healthcare (Nottingham, U.K.) for $340 million in October. It is closing its beauty care products plant at Wakefield, U.K. P&G announced in June that it is considering divesting its Coast-brand personal care products.

“We must make rough choices on where to focus our resources,” says Susan Arnold, president of P&G’s global personal beauty care business. “We chose to focus on growing our core mega brands, such as Olay,” she says. P&G has also put its Wash & Go hair care brand on the block. The company says it will retain the brand if it does not get its asking price.

L’Oreal’s first-half earnings, meanwhile, were up 19%, to [epsilon]377.6 million ($328.5 million), on sales up 14%, to [epsilon]6.14 billion. The results were helped by acquisitions; L’Oreal is among the leaders in personal care M&A this year. It acquired Bristol-Myers Squibb’s $340-million Matrix Essentials division, and bought the Responbrand shampoo from Colgate-Palmolive in November. L’Oreal purchased cosmetics maker Kiehl in April; and Carson (Savannah, GA), an ethnic beauty firm. Henkel and hair care producer Wella are reportedly interested in purchasing Clairol from Bristol-Myers Squibb.

There have been fewer deals among specialty chemical suppliers to the personal care industry. The only significant acquisition this year was Arch Chemical’s $37-million purchase of Brooks International’s (South Plainfield, NJ) personal care intermediates business. The deal expands Arch’s position in the hair care business and launched it into skin care; Arch already serves the hair care market through its flagship antidandruff biocide line. Brooks’ sales were $20 million in 1999; 80% of sales are from the skin care industry and 20% from hair care. The company’s product lines include biopolymers, proteins, botanicals, liposomes, lanolin and derivatives, emulsifiers, and proteins.

Market watchers say suppliers to the U.S. and European personal care industry need to consolidate further. No single supplier holds a market share greater than 15%, says Vogelsburg. The market comprises mostly mid-size companies–ranging from $150 million-$500 million/year in sales–unlike the rest of the specialty chemical industry, which is dominated by large, multibillion-dollar companies and small niche players.

However, Henkel has had little luck trying to sell a stake in its [epsilon]2.9 – billion Cognis unit. Henkel recently announced that it will divest Cognis either in a piecemeal sale or as a whole (CW Nov. 22/29, p. 9). Analysts estimate the sale price at about [epsilon]1.6 billion and believe that the divestment will be completed within the next nine months.

Some specialty firms and analysts warn that profit margins in the personal care sector will come under increased pressure. “One very important development is the growing importance of ‘no-name’ products such as supermarket brands,” says Wolfgang Rupilius, v.p./surfactants at Goldschmidt.

Price declines in some personal care lines have been perpetuated by a general lack of product differentation in recent years, industry sources say. “There haven’t been any radical changes in the personal care market this year,” says Trius. This means that companies must launch more differentiated products that can command a premium price, he says.

One key target is the aging population of “baby boomers” in North America and Europe. “The rising age of the population means that anti-aging products are becoming more and more important. I believe that products such as ceramides that impart elasticity and flexibility to the skin will grow in significance,” says Rupilius. Also influential is the desire for products that are natural, mild, and biodegradable. Uniqema this year highlighted a product range derived from natural sources, including coconut and palm oils, that mimic natural, organic processes, as well as an olive oil derived product used as a spreading and moisturizing emollient.

Demand is also increasing for botanical and herbal extracts. “The trend toward natural ingredients is more pronounced in Europe than in the U.S.,” says Rupilius. “Americans are more pragmatic about the ingredients used, but Europeans are worried about the inclusion of synthetic ingredients,” he says.