1、North America Equity Research04 June 2019 Beauty Industry PrimerLuxury Beauty Still Gaining Share;Color Cosmetics Decelerating in US;Skin Care and China Still Strong Beverage,Household&Personal Care ProductsAndrea Teixeira,CFA AC(1-212)622-Bloomberg JPMA TEIXEIRA J.P.Morgan Securities LLCChristina B
2、rathwaite,CFA(1-212)622-J.P.Morgan Securities LLCPeter K Grom(1-212)622-J.P.Morgan Securities LLCRetailing/Broadlines&HardlinesChristopher Horvers,CFA(1-212)622-J.P.Morgan Securities LLCTami Zakaria,CFA(1-212)622-J.P.Morgan Securities LLCEuropean Consumer Goods and BeveragesCeline Pannuti,CFA(44-20)
3、7134-J.P.Morgan Securities plcSee page 19 for analyst certification and important disclosures,including non-US analyst disclosures.J.P.Morgan does and seeks to do business with companies covered in its research reports.As a result,investors should be aware that the firm may have a conflict of intere
4、st that could affect the objectivity of this report.Investors should consider this report as only a single factor in making their investment In this second edition of our Beauty primer,we provide an outlook on the expected industry trends in the US,China and globally and update investors on the shar
5、e of wallet shift from color cosmetics into skin care,particularly in the US.We also layered the most recent management commentary from key players Estee Lauder(OW-rated),LOreal(covered by Celine Pannuti),Coty(N-rated),LVMH(covered by Melanie Flouquet)and e.l.f(N-rated).The outlook continues to look
6、positive in China,although we are embedding a deceleration given tougher comparisons,while the US has decelerated(negative LSD for prestige make-up).Our key conclusion for our coverage universe is that EL can still meet or even exceed our estimates and consensus because 2/3 of the companys growth is
7、 actually accelerating,the other 1/3(US and UK)became negative but did not offset the stronger growth,still leading to HSD organic growth in the near future and at the high end of its long-term sales algorithm.We remain cautious on Coty(N-rated)and ELF(N-rated)due to the still sluggish mass beauty t
8、rends.Yet,it has been a tale of two cities:Cotys sales trends deteriorated in the last tracked data in the US,while ELFs trends have improved,as we explain in our recent Nielsen Beauty report(link).Deceleration in US Color Cosmetics Comes from Tough Comparisons and Calendar.Most recently(starting in
9、 4Q calendar 2018),we have seen several brand manufacturers including LOral,LVMH,and Estee Lauder comment on a deceleration in prestige beauty in the US.The slowdown seems to be mostly concentrated in color cosmetics in the US,and particularly in the department store channel(45%of US sales for EL).E
10、Ls CEO Fabrizio Freda mentioned that the US prestige color category is now declining-3%to-4%across all channels,but is particularly pressured by mid-tier brick and mortar department stores.The category seems to still be growing in other channels(online and specialty),according to management commenta
11、ry from both EL and Ulta(covered by Chris Horvers).There are several factors that may have impacted the US in the first quarter more than other markets,including(1)the government shutdown in the beginning of the year;(2)lower tax rebates vs.last year;and(3)the Easter calendar shift that impacted tra
12、ffic to stores.Note that the beauty industry in the US is more dependent on the department store channel(in particular premium cosmetics)than any other country or region,so calendar and traffic are very relevant and impact sales conversion.Net of those impacts,EL estimates that the prestige beauty c
13、ategory was flat to slightly up in the 1Q calendar 2019(including all channels and skin care,which performed better than color cosmetics).While the company is not promising an inflection soon,EL is expecting a sequential recovery;see more details herein and from our recent meetings in London(link,li
14、nk).We also note that prestige color cosmetics grew at a double-digit CAGR from 2014-2017.If US color cosmetics turn out to be flat in 2019,the prestige market should still grow MSD(albeit atthe low end of the range).2North America Equity Research04 June 2019Andrea Teixeira,CFA(1-212)622- China Dema
15、nd Remains Strong and,Despite Fear of Slowdown in Travel Retail,Trends Remain Supportive and Resilient.We believe the growth in China beauty consumption(especially prestige beauty)is mainly fueled by demand coming from higher labor participation,urbanization,distribution to additional cities because
16、 of e-commerce,and premiumization.To illustrate the demand,EL has recently launched Tom Ford in TMall,which became the largest e-commerce launch for EL ever in China(bigger than M.A.C.).3North America Equity Research04 June 2019Andrea Teixeira,CFA(1-212)622- Table of ContentsHealthy Global Beauty In
17、dustry Growth.4Premium Continues to Outshine Mass.5China Remains the Key Growth Driver Ahead.7Prestige Beauty Decelerated in the US Most Recently.8Specialty Beauty Retailers Decelerating in US?.10Choppier Growth in Mass Beauty.11Developed Market Growth Likely Remains Sluggish.12Accelerating Trends i
18、n Emerging Markets Likely Ahead.144North America Equity Research04 June 2019Andrea Teixeira,CFA(1-212)622- Healthy Global Beauty Industry GrowthBased on Euromonitor data,we estimate the mass and premium beauty category,which includes color cosmetics,fragrances,hair care,and skin care,grew at a 5.9%c
19、onstant currency rate to generate$302B of retail sales in 2018.The total global market is skewed towards skin care,which accounts for 34%of the market,while hair care accounts for 26%,color cosmetics 23%and fragrances 17%.The growth rate of the global beauty market accelerated 100bps from its 2013-2
20、018 CAGR of+4.9%,primarily driven by an acceleration in skin care as well as better trends in hair care.By region,beauty has enjoyed broad-based growth globally,but the key driver of outsized revenue growth has been seen in China,which grew at a+LDD rate in both 2017 and 2018,primarily driven by the
21、 premium segment(discussed in more detail later).That said,the remaining top 4 countries,which account for 36%of the market,grew at a healthy+LSD-MSD rate during 2018.Euromonitor estimates that the China Beauty market will surpass the US in size by 2023,even assuming a deceleration,as we elaborate m
22、ore on below.In premium beauty,the US and China are likely similar sizes when factoring in travel retail as Chinese consumers purchase in tourist locations abroad.Figure 2:Total Global Beauty Market Expanded 6%in 20182018 Global Beauty Sales&Growth by CategorySource:Euromonitor&J.P.Morgan Estimates.
23、Figure 3:Broad-Based Regional Growth,but China Key Accelerator Top 5 Global Beauty Countries by 2018 SalesSource:Euromonitor&J.P.Morgan Estimates.Interestingly,over the last five years the composition of sales in terms of product category mix has remained roughly the same for the total beauty indust
24、ry despite the change in regional mix,with China(historically a dominant skin care market)expanding to 14%of the global market in 2018 from 12%in 2013.Looking ahead,Euromonitor forecasts the total global beauty market expands at a 6%CAGR over the next five years with similar growth by product catego
25、ry.By top countries,total beauty growth in China is expected to moderate to+HSDs from+LDDs growth,and Brazil is expected to accelerate to+HSDs from+MSDs,while the remaining countries remain roughly in line with 2018 growth rates.In prestige/luxury beauty,the growth in China is expected to moderate f
26、rom 50%in 2018 to 20%CAGR in 2018-2023,while Euromonitor estimates premium beauty will maintain its HSD growth pace in the next five years.Share of Wallet Shifting to Skin Care vs.Color Cosmetics?As the historical data suggests(per graph below),the beauty sub-categories do not always move in tandem.
27、Make-up demand is moderating worldwide,particularly in developed markets,following the strong recruitment phase led by increased social media/selfie adoption from 2012 and 2013 onwards.Millennials,along with most other generations,were consuming more make-up from 2012-2016,and that growth has modera
28、ted(in particular in mass color cosmetics)since 2017.$104,072$77,259$69,561$50,962 7.6%4.5%5.2%5.5%0.0%1.0%2.0%3.0%4.0%5.0%6.0%7.0%8.0%$0$20,000$40,000$60,000$80,000$100,000$120,000Skin CareHair CareColor CosmeticsFragrances2018 Sales2018 Growth$51,626$43,605$28,943$16,590$12,639 4.6%12.9%2.5%5.2%3.
29、8%0.0%2.0%4.0%6.0%8.0%10.0%12.0%14.0%$0$10,000$20,000$30,000$40,000$50,000$60,000USAChinaJapanBrazilGermany2018 Sales2018 GrowthFigure 1:Mass Accounts for the Majority of Global Beauty 2018 Global Beauty Sales MixSource:Euromonitor&J.P.Morgan Estimates.37%63%PremiumMass5North America Equity Research
30、04 June 2019Andrea Teixeira,CFA(1-212)622- Figure 4:Skin Care Now Growing Faster than Make-Up Globally,as Selfie Generation“Graduates”%Growth Y/YSource:Euromonitor&J.P.Morgan Estimates.Key Players in Skin Care Remain the Multinationals Despite Indie BrandsDespite the concerns about new local brands
31、taking more share due to the e-commerces infinite shelf,the largest segment within beauty(skin care)remains concentrated in the large cap multinationals.While the brand fragmentation in this segment is high,the participation of brands below top 5 only grew 100bps in the last 5 years to 68%,according
32、 to Euromonitor.Skin care requires more R&D than the other sub-categories and therefore tends to drive stronger brand loyalty than color cosmetics,fragrances or hair care given the higher ticket,which makes consumers more reluctant to switch.In particular,in prestige skin care,consumers tend to stic
33、k to their brands,as switching costs are greater given the higher ticket.Figure 5:Skin Care(Mass+Prestige)Is Still Highly Fragmented Worldwide%Retail Value Share(Data Label Values are Shares in 2018)Source:Euromonitor&J.P.Morgan Estimates.Premium Continues to Outshine MassWhile the total market is s
34、kewed towards the mass market,which represented about 63%of the total market in 2018,growth in the premium market outpaced the mass market for the fourth consecutive year in 2018,according to Euromonitor data.0.0%1.0%2.0%3.0%4.0%5.0%6.0%7.0%8.0%2005200620072008200920102011201220132014201520162017201
35、82019E2020EColor CosmeticsFragrancesHair CareSkin CareTotal10.0%4.9%4.6%4.3%4.1%3.7%3.1%2.4%2.2%1.9%1.5%1.5%1.5%1.2%1.1%0.0%2.0%4.0%6.0%8.0%10.0%12.0%2013201720186North America Equity Research04 June 2019Andrea Teixeira,CFA(1-212)622- Premium beauty growth accelerated during 2018 to+7.4%,vs.a CAGR o
36、f+6.1%from 2013-2018.Accelerating trends were seen in skin care,hair care,and fragrances,which were partially offset by a deceleration in growth in color cosmetics.Table 1:Prestige Growth Accelerated from MSD to HSD.Mix Has Shifted from Color Cosmetics to Skin-Care%Growth Y/Y in Global USD Sales2011
37、20122013201420152016201720182019E2020E2022E2023EColor Cosmetics4.5%4.6%5.5%7.0%9.2%9.2%9.2%7.4%7.5%7.7%7.8%7.8%Fragrances4.9%4.4%3.4%4.0%4.1%3.8%3.9%4.8%5.6%5.6%5.6%5.8%Hair Care4.1%3.4%2.2%3.2%5.0%4.2%5.0%7.1%6.1%6.8%6.8%7.0%Skin Care4.9%5.1%4.5%4.1%5.6%4.8%8.3%9.5%7.9%7.4%6.4%6.2%Total4.8%4.6%4.2%
38、4.6%5.9%5.5%6.9%7.4%7.0%6.9%6.6%6.6%Source:Euromonitor and J.P.Morgan Estimates.Figure 6:Skin Care Is Main Category in Prestige and Should Continue to Gain More Relevance%of Global Prestige Beauty SalesSource:Euromonitor and J.P.Morgan Estimates.The premium beauty market is geographically concentrat
39、ed,with the US and mainland China combined accounting for 37%of global prestige beauty.If we add travel retail,which represents about 18%of sales for EL,for example,and about half of that comes from Chinese travelling and purchasing abroad,their contribution is close to 22-25%,which leads us to beli
40、eve that the US and China are similar in size,and together,these consumers represent about half of all the prestige market in the World.Chinas outsized double-digit growth over the last few years means the country has become an increasingly important proportion of the global mix,increasing from 8%of
41、 the premium market in 2014 to 13%by 2018(ex-travel retail+purchases abroad).This statistics is in line with Estee Lauders sales mix,as the company disclosed that about 13%of its sales(all prestige)comes from its second home country,China(9%of ELs global sales),which added to travel retail in the bo
42、rder of China(4%)represents c13%as well.The US represents about 24%of the premium market(still largest)globally and also coincides with the 25%of EL sales that comes from its home country.Skin Care38%Fragrances27%Color Cosmetics25%Hair Care10%7North America Equity Research04 June 2019Andrea Teixeira
43、,CFA(1-212)622- Figure 7:Top 5 Countries Account for 60%of Premium Beauty2018 Premium Beauty Sales by CountrySource:Euromonitor&J.P.Morgan Estimates.Figure 8:Outsized Growth in China Expected to Moderate but Remain+DDsConstant Currency Historical&Forecasted Premium Beauty GrowthSource:Euromonitor&J.
44、P.Morgan Estimates.We believe Euromonitor estimates for US prestige color cosmetics may prove too optimistic given the data in the first three months of the year.Yet,if we assume flat for the year,the US prestige beauty market would still grow at MSDs(albeit at the bottom of the range or 4%in 2019 a
45、gainst the 6%estimated above.Figure 9:Premium Skin Care Global Players Have Been StableValue Share%Worldwide Source:Euromonitor Figure 10:Premium Color Cosmetics Continues to Consolidate Value Share%Worldwide Source:EuromonitorChina Remains the Key Growth Driver AheadWhile Chinas beauty sales growth
46、 is prudently expected to moderate from the 30%growth seen during 2018,demand is expected to remain strong,with Euromonitor forecasting a mid-teens CAGR through 2023.We believe the key drivers for outsized sales growth in China going forward will be:(1)continued growth in the emerging middle class;(
47、2)increasing female spending power for women,driven by higher labor force participation(already one of the highest in the world);(3)increased access to premium products through T-Mall to many more cities vs.bricks and mortar retailers;and(4)previous one child policy that led to higher purchasing pow
48、er to the Millennials and Gen-Z sole daughters and granddaughters who now benefit from undivided attention(and income)from as many as six adultsincome(parents and grandparents on both sides).Travel Retail&Purchases Abroad Doubles Chinese Spend(1/4 of Global)Travel retail sales are not allocated by n
49、ationality,so actual Chinese consumption is likely higher.EL management has estimated that for every dollar a Chinese national buys at home of the companys product,another dollar is spent abroad,so the Chinese consumption likely represents roughly 26%of total Prestige market globally.The company has
50、 also mentioned that about half of its total travel retail sales(about 18%of total sales globally)are to Chinese travelers,so that would represent 13%plus 9%,or about 22%.We assume a range between 21-27%of total USA24%China13%Japan12%United Kingdom5%France4%Other42%7%17%3%5%0%6%6%30%3%3%0%7%6%15%4%5
