Pestel & Five Force of Cosmetics

A DOCUMENTARY REPORT ON “PESTEL & FIVE FORCE ANALYSIS OF COSMETIC INDUSTRY” PRESENTED TO

INDUKAKA IPCOWALA INSTITUTE OF MANAGEMENT (I2IM) CONSITUENT OF CHAROTAR UNIVSRSITY OF SCINCE AND TECHNOLOGY (CHARUSAT) SEMESTER- III MBA PROGRAMME (2009-11) SUBMITTED TO MR.JIGNESH DARJI PRESENTED BY RASHESH K PATEL (09MBA33)

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PESTEL ANALYSIS

All external environment factors consider in PESTEL analysis the factors are Political, Economical, Socio Cultural, Technological, Legal. Each factor is more or less affected to Cosmetic industry. Every industry has to consider these factors because these factors create opportunity or threat at period of time.

(1) POLITICAL FACTORS Tax policy: •

Cosmetics may become marginally cheaper for consumers following the 2% reduction in excise duty.

•

However, a large part of FMCG product manufacturing is based in excise-

free zones like Uttaranchal and Himachal Pradesh. The final impact of the excise duty reduction on product prices will depend on the ratio of manufacturing in excise-free zones to that in non-excise free zones. •

Companies like Hindustan Unilever (HUL), Procter & Gamble (P&G),

Godrej Consumer Products (GCPL), Colgate, Dabur and Marico have production facilities at excise-free zones. •

Due to reduction in exice and tax cost will be low, which leads to low

price and thereby increase in demand. •

There could be some savings on excise paid on raw materials, which

would result in overall cost efficiencies and savings for many companies.

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•

The categories on which excise duty has come down from 10% to 8%

include soaps, skin-care, shampoos, hair oils, hair colours and cosmetics among others. •

Prices of certain products were recently dropped by market leader HUL,

which witnessed a volume growth decline in soaps and detergents in the December quarter. •

The excise cut could also lead to better margins if the benefit is not passed

down to consumers in the form of price reduction. •

While the market seems impressive, there are hurdles that impede growth.

The Indian duty structure on imported products can pose a major deterrent to multinational vendors. •

Despite the new value added taxation regime, where the duty has been

reduced to 12.5%, the overall duty on the product still comes to about 40%. This in turn reflects in the pricing of the products. •

Most vendors add the duty to the product pricing to generate the right

revenue. However, there is no organized cosmetic industry body that can take up the issue with the government. •

In fact this leads to the biggest threat —the unorganized or grey channel.

There are small retailers in the market who directly import from markets such as Dubai, where pricing can vary from 30–70% from Indian product pricing. Thus today the grey channel makes up about 60% of the Indian cosmetics market.

Foreign trade regulation: 3

•

Imported cosmetics have to be registered.

•

Regulation in India prevented L’Oreal from entering solo And company

formed a joint venture with MJ group top launch the ULTRA DOUX range of hair care product.

(2) ECONOMIC FACTOR 4

Disposable income •

India has the world’s second largest population behind China, and is poised to see strong growth in disposable incomes over the next five years.

•

The Indian economy is on a high growth drive, which means that purchasing power and willingness to spend are on the rise.

•

It also means big changes are coming to retail there. According to a recent Merrill Lynch and Capgemini’s Asia-Pacific Wealth Report, there are more millionaires coming from the emerging markets than from the developed nations.

•

The country’s population of high-net-worth individuals (HNI) is increasing, and the report shows an increase of nearly 20% in 2005 over the previous year. India reportedly has the youngest HNI population in the Asia-Pacific region.

•

In fact, more Indian women in age group 25 to 45 are also in the HNI category.

(3) SOCIAL FACTOR 5

Income distribution •

Today increasing numbers of women, especially from the middle-class population, have more disposable income leading to a change in cosmetic and skin care product consumption.

•

This actually has fueled a growth in certain product categories in the market that hardly were experiencing it earlier.

•

Two such categories are color cosmetics and sun care products that have shown growth rates of 46% and 13% respectively over the past two years, according to Euromonitor International.

Social mobility •

Higher paying jobs and increasing awareness of the Western world and beauty trends there have served to change the tastes and customs of the middle class and higher strata of the society, with the result that a woman from such social strata now is more conscious of her appearance and is willing to spend extra cash on enhancing it further

Lifestyle change •

The increasing market size is the direct result of the changing socio-economic status of the Indian consumers, especially women

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( 4 ) TECHNOLOGICAL FACTOR •

Nanotechnology has been dominating the news lately, but what exactly is it and how can it benefit us humans.

•

Well, nanotechnology (nanotech for short) refers to the exploitation of microscopic materials for various uses such as dental bonding agents, in toothpaste and for cosmetic and medical uses as well as in manufacturing; it is the joining of different fields of science, biology, physics, chemistry and engineering.

•

A nanometer-sized particle is approximately one billionth of a meter and can only be seen by a very powerful microscope.

Nanotechnology and Cosmetics •

Today nanotechnology is being used in computer science, medicine and cosmetic manufacturing.

•

In the cosmetic arena it is believed that the smaller particles are more readily absorbed into the skin and as such repair damage easier and more efficiently. It is believed that as new products are developed nanotechnology may be used to prevent graying hair and combat hair loss in some cases

•

. Nanotechnology is elevating the development of skin care products and cosmetics to another level, making them high-tech so as to deliver increased benefits to users.

•

In addition to improving the efficacy of cosmetics and skin care products, nanotechnology is making it possible for other ingredients to be used in the manufacturing of beauty products.

•

Nanotechnology in the beauty industry involves making products with nanoparticles that can go deeper below the skin’s surface to give better results. 7

Sunscreens and some anti-aging products are the main cosmetic products on the market currently being made using nanotechnology. •

Some large cosmetic players are leading the charge in the field of nanotechnology in the beauty industry.

•

Chief among these companies are L’Oreal who has employed the technology in products such as Revitalift anti-wrinkle cream. According to L’Oreal Revivalist’s results are immediate because the product contains “nanosiomes of Pro-Retinol A”. Estee Lauder also has a number of nanocosmetics on the market, as does Proctor & Gamble, Shiseido and Duprey Cosmetics.

•

However, because of the relative newness of the technology in terms of cosmetics manufacturing there is still concern as to how safe nanotech cosmetics are and their long-term effect.

•

Agencies such as the Federal Drug Administration (US) and The Royal Society (UK) have issued statements calling for continued testing and transparency governing research on the use of nanotechnology in cosmetics.

•

Some nanoparticles have received FDA approval, such as zinc oxide and titanium dioxide which have been included in sunscreen; in 1996 the FDA is reported to have concluded that “… smaller, micronized particles

(5) ENVIRONMENTAL FACTOR

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•

Environmental protection is one of the most important issue now a day.

•

Especially in chemical, pharmaceutical industry.

•

Cosmetic production is also related to chemicals.

•

Though those chemical are less harmful for skin.

•

But waste disposal is most important issue.

•

Environmental protection must consider by all companies involved in it.

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( 6 ) Legal factors At present the following Acts and Rules made there under that govern the manufacture, sale, import, export and clinical research of drugs and cosmetics in India. •

The Drugs and Cosmetics Act, 1940

•

The Pharmacy Act, 1948

•

The Drugs and Magic Remedies (Objectionable Advertisement) Act, 1954

•

The Narcotic Drugs and Psychotropic Substances Act, 1985

•

The Medicinal and Toilet Preparations (Excise Duties) Act, 1956

The Drugs (Prices Control) Order 1995 (under the Essential Commodities Act)

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FIVE FORCE ANALYSIS

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Threat of new entry: High If the industry has low entry barriers, threats for new entrants will high and if entry barriers is to enter in the industry, threats for new entrant will be low. Potential new entrants include various aspects like – economics of scale, capital requirement, government policy, and cost advantage. All these are influencing to Indian cosmetic industry. In the Indian cosmetic industry threats of new entrants is very high because entry barriers are low.

Elements Economies of scale Brand identity Switching cost Capital requirements Excess to distribution Absolute cost advantage

High Medium Low * * * * * *

 Excess to necessary inputs Government policy(in terms of complexity) Expected retaliation



* *

Economies of scale

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Positive factor for cosmetic industry is economies of scale which mean more you produce less is the cost of product. Cosmetic products are produced in bulk and so the fixed cost is less and thus the per unit manufacturing cost. Further adoptions of latest technical knowhow (which is a costly affair) can certainly provide impetus for the growth of these industries.



The capital requirement :

The cosmetic industry is spread over small and medium scale units. Capital requirement is not a barrier as cosmetics can be manufactured in a small room also.



Access to Distribution network

The distribution network for cosmetic industry is very wide. There many suppliers in the market for supplying raw material. Also there is huge domestic and international market and demand for cosmetic is increasing. One can easily assesses the distribution network.



Experience and expected Retaliation

In cosmetic industry to start new business, the person should have some experience in the industry so that knowledge about industry is there.



Legislation or government Action

The most positive thing about the industry is that government is supporting the industry very well. There is no license require for starting new plant in leather industry. Also government had reduced the excise duties on shoes and footwear components. The government had reduced the export duties on leather items. While the market seems impressive, there are hurdles that impede growth. The Indian duty structure on imported products can pose a major deterrent to 13

multinational vendors. Despite the new value added taxation regime, where the duty has been reduced to 12.5%, the overall duty on the product still comes to about 40%. This in turn reflects in the pricing of the products. Most vendors add the duty to the product pricing to generate the right revenue. However, there is no organized cosmetic industry body that can take up the issue with the government. In fact this leads to the biggest threat--the unorganized or grey channel. There are small retailers in the market who directly import from markets such as Dubai, where pricing can vary from 30-70% from Indian product pricing. Thus today the grey channel makes up about 60% of the Indian cosmetics market.



Differentiation

There is hardly any product differentiation.

Threat of substitute: low

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There are mainly two substitutes of cosmetics. 1. Spas and 2. Home remedial products. Spas Spa industry is currently in introductory stage. Many people even not aware about it. So it’s threat is low. Home Remedial Products Home remedies are also used but in more rural areas. So overall threat of substitute is low. Elements Switching cost Buyer propensity to substitute

High Medium Low * *

The bargaining power of buyer: high Bargaining power of the buyer is high. Buyer do not stick to one product, as with the introduction of new cosmetic in market people will go for that. 15

Along with the domestic company, international companies are also providing the same range of products. As a result buyers have many options for buying the product. Switching cost is also very less. There is hardly any product differentiation and the customers can switch from one supplier to another. However, for some enterprises there is strong customer-supplier relationship and the level of trust and loyalty is very high.

Elements Bargaining leverage Buyer volume Alternative source of supplier Buyer information Switching cost of the buyer Substitute products Price sensitivity Price/total purchases Product differences Brand identity Impact on quality / performance Buyer profit



High Medium Low * * * * * * * * * *

Alternative source of supplier:

There are many supplier of raw material and finished products in the market. The customer has the wide choice of supplier. Also the unorganized market is one of the options for the buyers.



The switching cost of the buyer is low. 16

The cosmetics are the product that has low switching cost, as there is hardly any differentiation and buyers can shift from one supplier to another.



Buyer’s price sensitivity:

Customers are quality and price sensitive. However, for some enterprises there is strong customer-supplier relationship and the level of trust and loyalty is very high. Some customers of the large industries do not want switch over to new supplier on the fear of getting bad quality products and the products that will effect their health.

Bargaining power of Supplier: Low The bargaining power of the suppliers in the industry is low and there is large number of suppliers available in the market. There is hardly any switching cost from one supplier to another and no input differentiation. Forming hard networks for common bulk purchase can further reduce the bargaining power of the suppliers.

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Elements Differentiation of inputs Switching cost of suppliers & firms in the industry Presence of substitute of inputs Supplier concentration Impact of input on cost / differentiation Threat of forward integration

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High Medium Low * * * * * *

Competitive rivalry :- High The cosmetic industry is mostly spread over huge domestic and foreign market. The industry includes the organized and unorganized players.

The rivalry

amongst competitor is moderate because all global players are eyeing on the Indian market . The factor affecting competitive rivalry is as follows: Market growth rate : •

According to “Assocham”

•

Indian Cosmetic market in 2008 is $ 950 million.

•

And will increase $ 1.4 billion during next 2 year.

•

Original Cosmetic market growth is 25% in 2008.

Elements Industry growth Product differences Brand identity Switching costs Information complexity Diversity of competitors Exit barriers

High Medium Low * * * * * * *

Because of all this factors and also due to its growth in future, competitive Rivalry will be high.

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