Making a difference - Middle East

Cosmetics majors must market to very distinct Israeli and Arab markets if they are really to make their mark in the Middle East. Paul Cochrane reports from Beirut

?The cosmetics and personal care sector in the Middle East is one of the fastest growing in the industry worldwide, registering 12% annual growth in the three years to 2008, and valued at $2.1bn, according to trade expert Epoc Messe Frankfurt (EMF). But with the Middle East divided into two Arab markets – the Gulf countries and the Levant – marketing campaigns have to cater to differences in demographics, purchasing power and cultural sensitivities. Then there is the Israeli market, which has to be handled completely independently of multinationals’ Middle East and North Africa operations (and not included in the above statistic) due to only two Arab countries, Jordan and Egypt, having formal relations with Israel. As a result, marketing is either managed out of Israel itself or from Europe, such as Unilever Israel Ltd, L’Oréal Israel and Procter & Gamble Israel MOD Ltd.

“Israel is a separate market, not even discussed in marketing plans for the region, or even talk of cross border trade or infiltration,” commented a marketing manager with a leading multinational who asked to remain anonymous due to company policy and the sensitivities of the Arab-Israeli conflict. “The only time Israel is mentioned is whether anyone knows the campaign there, because our phones don’t even connect, we can’t talk.” He said of one well-known personal care multinational:

“I know when they discuss a campaign in Israel they refer to the country as ‘Little Italy’. And they are different consumers, one reads Hebrew, the other Arabic, so you couldn’t come up with a campaign for both consumers,” he added.

Indeed, according to Israeli law, product labelling must be in Hebrew, although other languages can be used if the fonts are not larger than the Hebrew. Curiously, given the animosity between the Israelis and the Palestinians, a survey published in the Israeli dailyHaaretzreported that Arabs prefer to buy products with packaging in both Hebrew and Arabic.

“In the past, big companies tried to sell overstocked or inferior quality products to the Arab sector with packaging in Arabic only,” says Professor Avi Dagani of the Geocartography Institute in the report. “Ever since, Arab consumers prefer packaging with Hebrew as well, so they can be sure the products aren’t intended for Arabs only.”

The Palestinian market however is considered part of the Levant by multinationals and Arab in terms of marketing and language. “A lot of companies based in Amman, Jordan operate in Palestine; you can get in and out of the West Bank and call Palestinian phones,” said the marketing manager source.

For multinational companies, the two separate markets affect logistics and distribution, with products manufactured in the region’s major industrial and re-export centres, Saudi Arabia and the United Arab Emirates (UAE), not able to export to Israel and vice versa.

This has led to rival development in Israel and Jordan of cosmetics from the Dead Sea, such as salts, black mud and other rich minerals. Israel however has the lion’s share of the Dead Sea cosmetics market, especially in terms of exports outside of the Middle East, reported at some $165m a year, according to the Israel Export & International Cooperation Institute (IEICI).

Meanwhile, sales of cosmetics and perfumes in Israel were projected to have grown 4% in 2008 and valued in Shekels at NIS3.6bn ($871.9m) in 2007, according to Euromonitor. Total revenues of cosmetics exports in 2007 were $290m, a 40% increase compared to the previous year, according to the IEICI. A highly competitive market, the sector is highly fragmented between multinational players and Israeli manufacturers, with the exception of toothpaste, with 44% of the market share in the hands of Israeli firm S Schestowitz, and in shampoos, with Procter & Gamble Israel having a 44% share, according to Euromonitor.

Sourcing for product materials – with the exception of Dead Sea cosmetics – is not different for Israel and the rest of the region. “In general we use the same material for the entire region, as after all there are many commonalities,” says a spokesperson for P&G. “However, there are also differences based on market development and also local regulatory laws which we then need to cater to.”

When it comes to marketing in the Arab world, differences are heightened by the higher purchasing power of the Gulf countries, world leaders in terms of per capita spending on perfume and cosmetics at $334 per year, according to EMF in 2008.

“In 2006, the Gulf Cooperation Council countries (GCC) luxury/high-end beauty market was estimated at $800-$1bn, of which the UAE holds a 28% or $224m market share, second to the 45% of Saudi Arabia, one of the biggest consumers of beauty products in the Middle East,” says David Vercruysse, general manager beauty retail of the Chalhoub Group, a luxury cosmetics retailer based in the UAE.

In Saudi Arabia, cosmetics and toiletries sales were valued at $1.3bn in 2006, and $1.32bn in 2007, according to Economist Intelligence Unit estimates in 2008. Fragrance sales were valued at $209m in 2006 and $238 million in 2007.

“There has been a yearly growth of 10-15% across the Middle East since then, so currently the size of the UAE beauty retail market is estimated at $300-$350m. With the current crisis, there is limited visibility on growth for the year, although we are looking at 5%-10% growth for 2009,” says Vercruysse.

Indeed, despite the international financial crisis, the Dubai department of economic development issued 135 licences to perfume and cosmetics businesses in December 2008. German cosmetics giant Beiersdorf has also recently opened a Nivea Haus store to target shoppers and tourists, its first outside of Germany. Retail space meanwhile has risen 30% in Dubai over the past three years on the back of a rising population and tourism, reflected at local retailer the Dubai Duty Free, with sales of perfume from July 2008 showing a 34% growth over the year to AED275.5m ($75m), while cosmetics sales increased by 39%.

“The UAE has seen accelerated development of the beauty retail market compared to the rest of the GCC region. At the same time, the segmentation of the beauty retail market is becoming clearer and better defined,” says Vercruysse. “But consumer behaviour and interest towards beauty products is very dependent on origin, and on being a tourist or resident. We witness this very clearly in the UAE, where our consumer base is 25%-30% local Arab women of Dubai, 25%-30% the expatriate community and 15%-20% are tourists, which include Russians, Asians and Arabs from other GCC countries.”

In terms of growth, skin care is the fastest growing segment in Dubai at some 15% a year. “But we are still behind the rest of the world (Europe, America, South East Asia) when it comes to skin care, due to the educational needs of consumers, who need the right advice they can trust,” adds Vercruysse. When it comes to marketing cosmetics and perfumes in the 14 countries the Chalhoub Group operates, Vercruysse says that while there are similarities, multinationals and regional players cannot adopt a one size fits all approach.

“Our advertising and store campaigns are flexible and tailored to the specific needs of each country. In Saudi Arabia strong restrictions on marketing apply – no religious symbols, no sensuality – while in the UAE constraints on visuals and store actions are moderate. Dubai is much more open to new products and the consumer is more sophisticated, as opposed to Saudi Arabia which is an extremely conservative market,” says Vercruysse.

“Keeping high creativity levels while respecting the sensitivity and religious guidelines applicable per country increases our campaigns’ impact compared to one size fits all campaigns that are mainly using pack shots. In Kuwait, for example, although outdoor advertising campaigns would only feature pack shots, as legally authorised, print ads of the same campaign can allow the use of creative visuals and even include models,” he adds.

Other multinationals have to operate along the same lines, although in terms of more mass market products, global advertising campaigns or those used in Europe and North America are often used on television and in magazines, dubbing the advert into Arabic.

But while the Gulf markets are the major focus areas for cosmetics retailers and manufacturers, the much smaller Mediterranean market of Lebanon is used as a location to initially market products. “Lebanon has huge aspiration value, as people that live in Saudi Arabia, Jordan or the Emirates look to Beirut as a fashionable, trendy, avant-garde place that forms fashions,” says the multinational source. “So companies try to market in Lebanon, not as an investment, but for the whole region, such as visitors and expatriates seeing a new brand and people using it in Lebanon.”

However, Vercruysse says the marketing of products does depend on the brand: “A fragrance launch from an internationally known brand would more likely have a regional launch than a specialised skin care product from a niche brand that has relatively low awareness in this region. For example, for a skin care launch our strategy might be to launch in the UAE market first as a test, fine tune locally and then roll it out to the balance of the GCC.”

SUSTAINING THE MIDDLE EAST BOOM IN PERSONAL CARE

?Euromonitor International

Accounting for only 4.3% of world sales, the Middle East and Africa C&T market is still modest on a global scale, but the level of growth is encouraging, with booming oil economies and rising disposable incomes holding plenty of promise for the future.

The UAE topped per capita spend in the region at $152 in 2007, putting it among the highest in the world, while other oil-rich countries, including Saudi Arabia ($76), Kuwait ($69) and Qatar ($68), all spend considerably more per person than in Iran, which stands at $28.

The landscape of the Middle East market is changing. While the major multinationals have always had a dominant presence, historically, homegrown brands also took a big share of the market. In 2001 Iran’s Paxan was second in the market behind Unilever, and two other local brands, Pakrokh and Kaf, were in the top 10. In 2007 Procter & Gamble, Unilever and L’Oréal Groupe led sales, while Paxan is the only local company still in the top 10, and this had fallen to eighth position. This continued, though reduced, presence is due mainly to the company’s high sales in its home country, where advertising foreign goods is banned and the multinationals have been largely kept at bay. With the exception of Iran, multinationals have made much headway in the Middle East, and largely at the expense of homegrown brands.

The region, and the UAE in particular, has seen rapid development towards a modern sales format, helping drive the presence of foreign players. In the past 20 years Dubai has branded itself a shopping mecca, even hosting annual shopping festivals. The cosmetics and toiletries market in the country has been transformed by the shift from independent stores and pharmacies to the modern shopping mall experience of today. Here the multinationals dominate as with their marketing might they are ideally placed to exploit this ultra modern, brand conscious society.

Although less dramatic, distribution modernisation is taking place across the region. In Saudi Arabia the emergence of department stores has played a major role in boosting sales of fragrance, colour cosmetics, hair care and men’s grooming in particular, despite perfumeries remaining the country’s top selling point. In Iran a trend for distributing in supermarkets and hypermarkets began in 2005 and took firm root in 2007. This modernisation can only serve to further open up the market for the multinationals.

In terms of value sales across the Middle East, premium cosmetics, hair care and fragrance lead the way. But it is premium cosmetics and fragrance that have shown the most dynamism. Hair care, despite continuing steady sales, appears to be reaching maturation.

Although still relatively small, the Middle East is one of the fastest growing fragrance markets in the world, up from $1.2bn in 2002 to $2bn in 2007, equating to average year-on-year growth of 10.4%, compared to a global average of 8.1%. In countries where religion requires women to cover up, it is not surprising that they have chosen scents as a way of expressing themselves. In particular, the UAE is driving this growth and fragrance accounts for 22% of its cosmetics and toiletries market, in part due to the UAE’s unique position as a tourist shopping destination.

The market in Saudi Arabia is slightly different. Fragrance sales still dominate and are the highest in the Middle East in terms of value sales, standing at $593m while the UAE stood at $158m. But there is speculation that the Saudi Arabia fragrance market is approaching maturity. It is in the fragrance sector that local manufacturers still hold their own, with many consumers still opting for traditional Arabian scents and oils. Arabian Oud tops the Middle East market, with 9% of retail sales in 2007,while Abdul Samed Al Qurashi also features in the top 10 and Hamil Al Musk Oud, Mahmoud Saeed Group and Rasasi lie just outside. With the region-wide buoyancy of the fragrance sector it is likely that both locals and multinationals will continue to invest in this potentially lucrative market, while other leading global fragrance manufacturers such as Natura Cosméticos are likely to expand into the region and further drive sales.

Premium cosmetics sales grew from $2bn in 2002 to $3.1bn in 2007, equating to average year-on-year growth of 9.1%. While value sales in Iran were highest, at $632m, this is largely due to its large population as per capita spend is low at $8.80. It is again the UAE and Saudi Arabia that are driving growth and look encouraging for the future, their per capita spends standing at $41 and $29 respectively, with sales growing by 16.9% and 12% respectively over the review period.

It is perhaps unsurprising that sales of premium cosmetics are strong in these booming Middle East markets with their aspirational consumers. Since both countries are among the top in the world for disposable income and, for locals at least, price is often not an object, this seems the ideal environment for premium products to develop.

For the foreseeable future the Middle East looks likely to be a key value market as rising oil prices continue to drive economies and provide increasing disposable incomes. As well as the continuing oil wealth, many of the countries have a youthful population, brought up with more access to the media and therefore the west. They are less likely to adhere to strict religious codes and be more willing to experiment, while the modernisation of distribution, with the extra space for products which that brings, allows them more and more choice in their experimentation. In addition, the growing numbers of visitors and immigrant workers serves to not only drive sales, but also influence local consumers’ choices. All factors combined, the Middle East, and in particular the powerhouses of Saudi Arabia and the UAE, promise opportunities aplenty for the future.

ISRAELI COMPANIES STAY ON TOP OF DOMESTIC SKIN CARE MARKET

?Izaskun Bengoechea, research analyst, Euromonitor International

Israeli skin care is characterised by a large number of both domestic and international players competing for a slice of the market, which in 2008 grew by 4% in current value terms. Brands such as Dove, L’Oréal Dermo-Expertise and Nivea have continued to attract consumers with a stream of product launches that claim to offer the latest ingredients and innovative technologies. However, domestic brands Careline and Ahava have managed to remain in the first and second positions with a value share of 10.7% and 6.5% respectively in 2008. Other strong local brands are Sano’s Crema (3.6%), Halavin’s Love Line (1.7%) and Premier Dead Sea (1.2%).

One of the secrets behind the success of local manufacturers is their claim to the most beneficial ingredients for skin. Dead Sea minerals, olive oil, honey and almonds are all sourced in the country and natural ingredients are also hugely popular as Israeli consumers consider them less harmful than artificial products. Dead Sea minerals have proven to be a particular goldmine, with many local brands such as Ahava, Halavin and Premier Dead Sea basing their formulations around the ingredients. Domestic companies are also able to match global brands in terms of media exposure and in-store promotions.

Like many local brands, Careline deliberately emphasises the fact that the brand is developed in Israel. The brand’s packaging carries a bold logo stating “Israeli innovation inside”. And brands such as L’Oréal’s Dermo-Expertise lost ground in 2008 as a result of increased innovation from the likes of Careline and Ahava. In 2008 Ahava focused on combining Dead Sea salts with plant extracts to create new formulations.

The Israeli skin care market is expected to grow by almost 11% in constant value terms over 2009-2013 despite the weakening of the economy in the short to medium term. One of the reasons behind the positive performance is the fact that retailers have been slashing the prices of skin care products for the last two years in order to tempt customers away from buying their products duty free. According to some estimates, duty free accounts for as much as 50% of skin care value sales and some consumers take flights specifically to stock up on duty free products. If retail unit prices continue to decrease, pushing up volume sales, local manufacturers will benefit as they have a greater presence in retail than in duty free.

For the foreseeable future, local companies will continue to emphasise their brands’ provenance. Only two factors could pose a threat to Careline and Ahava’s dominance. The first is Dove as it continues to expand its range and run well received advertising campaigns. The second would be if one of the multinationals were to acquire local company Ahava, seeing value not only in its sales in the domestic market but also its success abroad.