Beauty business set to boom.

Beauty consciousness has dawned on rising affluence. With an increase in the number of households upgrading to a higher consumption lifestyle, there is an explosion of growth in the Indian beauty space. Consider the Living Standard Measurement (LSM) classification, which is the new socio-economic classification to gauge consumption patterns : between LSM 1-4 , which is the lowest level, and LSM 8-plus (top end), there has been an 80-fold jump in growth in the consumption of beauty products and services. 

That explains why a Hindustan Unilever (HUL) is speeding up to open a Lakme salon a week. Or how a Jawed Habib Hair & Beauty (JHHB), which has grown from 37 salons in 2006 to around 225 at the end of November 2010, is eyeing a similar growth. Or why foreign chains like the contemporary French beauty salon, Jean-Claude Biguine, with annual revenues of 150 million euros, are setting up salons to groom the Indian consumer.Clearly, the predominantly unorganized locally run beauty salon market is at an inflection point. The mushrooming of branded chains like Lakme is expected to change the landscape completely a few years down the line, ushering in a new era of trained salon personnel, offering services based on global insights and professional products strutting the latest international technologies.”Step back and look at the way consumption has changed in India. Growing affluence has resulted in increased experimentation. This has accelerated the growth of beauty categories. You see this explosive growth in beauty services as well. Salons are at the centre of that growth. So it’s a big opportunity . A couple of years ago, we really decided to pick beauty as a theme. We have dramatically stepped up investment, innovation and go to market capabilities behind our entire beauty portfolio. And the Lakme brand is core to beauty. We see the Lakme business building scale within beauty,” said Gopal Vittal, executive director – home and personal care (HPC), HUL.

With close to 150 salons at present, HUL is scaling up rapidly , setting up one Lakme salon per week. The ambition is audacious. If one does the math, there would be about 200 Lakme salons a year down the line. But HUL would rather scale up this ambition to open 2 salons per week, if it has its way. Is there really room for so many? “We believe that there is room to keep adding salons for now. But what is crucial is to be true to the business model – the right return on capital, the right cost structure and the right people,” said Vittal.

“Currently, Indian hair and beauty industry is seeing a per capita annual spend of only $1.2, which is far lower than world standards. We are expecting this number to grow to $5 by 2015. So, in terms of market potential , there is no problem, however, only those companies which can have strong manpower and can overcome the hurdles of the industry can sustain this growth,” said Rohit Arora, executive director, JHHB. The Rs 23-crore firm has proposed to tap the capital market with an initial public offering of Rs 60 crore.

The roughly Rs 7,000 crore organized and unorganized hair and beauty industry is growing at the CAGR of 35%. At this rate, it has the potential to become a Rs-30 ,000 crore business by 2015.

Professionalization of salons 

About 18 months ago, when HUL took a closer look at its salons business under Lakme, it realized that the traditional methods of running an FMCG company would not apply here. The company set up a 100% subsidiary where Lakme was housed and looked after by a dedicated team having a separate CEO. The business got the attention it needed at a time when beauty was developing wings to take off in India. “The purpose of setting up a separate subsidiary that is still nested within the HPC business was to ensure focus and the right culture. And what is important is to build capabilities that are structural and sustainable ,” said Vittal.

In addition, HUL realized it required high-quality trained staff to have an edge. It has now launched a beauty academy with the objective to provide in house training to stylists. For this, HUL has forged an alliance with Pivot Point, a leading beauty training company in the US.

Providing financial metrics was another important task because a salon business operates on a return on capital employed kind of business and not the gross margin kind. “It took us six months to perfect the model. Now we have got a reasonably good grip on how we need to go about it. We’ve understood the levers and we are ready to scale up. So in the last few months we are adding a salon a week. But even as we do that, we have to keep our eye on same salon growth. And we are pleased with the 20% odd growths that we are seeing there,” said Vittal.

As a next step, HUL wants to closely inter-link the product business and the salon business . It has created a Lakme brand council which will advise on product innovation. HUL has already launched Unilever’s global professional product brand TIGI and hopes to build the salon brand in a major way. It has also tied up with global partners—Toly (based in Malta) for packaging structures and applicators, Fiabila in France for Nail Enamel, Schwann Stabilo in Germany for all pencils and pencil applicators and Intercos in Italy for lipsticks, eye shadow and face make up.

With national players expanding their base, will the unorganized market eventually be devoured? “It will take time before anyone or few large branded players take a larger share of this market. However, we are expecting the consolidation to happen at the organized level in the coming years. Local players will continue to exist, considering that there are low barriers to entry in this sector,” said Arora. While no organized player can hold a substantial share of this market, Arora said “the pipeline is big enough for many players” .

Perhaps, till the government sets up a regulatory system , it’s going to be a beauty rush for all.

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Big bazaars score over kiranas

EARLYthis year, when escalating prices were crunching household budgets, modern retailers were more responsive in cutting or holding prices of day-to-day products than traditional retailers, thanks to their ability to check operational costs bargain hard with suppliers and launch private labels.

According to a study by The Nielsen Company, modern retail dropped prices by more, or increased them by less, for more product categories than traditional retailers, or kiranas, between the last quarter of 2009 (Oct-Dec) and the first quarter of 2010 (Jan-Mar).

“The power of modern retail lies in the scale and efficiencies which we have built over the years,” says Kishore Biyani, CEO of Future Group that operates retail formats such as Food Bazaar, Big Bazaar, Pantaloon and KB’s Fairprice stores.

The Nielsen Shop Census study compared prices of 47 commonly used items including toothpastes, washing powder and confectionery. Modern retail dropped prices by more, or increased them by less, than traditional retailers for 29 product categories while traditional retailers did better in 18 categories.

It collected data from 16,000 stores (11,000 urban and 5,000 rural, in both modern and traditional retail) in 462 towns and 1,427 villages.

During this period, the rate of inflation, as measured by the Wholesale Price index, was hovering around 10% and food inflation was more than 12%.
In the past two years, modern retail has been able to significantly cut operational costs related to real estate rentals, energy costs and increase persquare-feet productivity of employees leading to savings in people costs.
They also launched private labels to get a better grip on selling prices and profit margins, and some savings were passed onto customers.

Higher collaboration with small and medium suppliers as well as distributors of large FMCG companies helped them cut costs in transportation and logistics.

Efficiencies of scale helps one source the goods closer to the manufacturer says Mr Biyani. In 2009, Big Bazaar sourced 26,000 tonnes of rice, 4 crore pieces of clothing, 20 lakh suitcases, 36 lakh mixer-grinders, 45,000 manufactured beds, 20 lakh bedsheets and 19,000 LCD TVs. Each of these figures will be higher by a minimum of 30% for the year 2010, he says. “Such large sourcing allows us to get better prices directly from manufacturers and producers.”

Big Bazaar is the largest player in the segment contributing over 33% of modern retail sales. Other top retail formats competing with traditional kirana for essential purchases include Reliance Retail, Aditya Birla Retail’s More and Spencer’s Retail.

Kumar Rajagopalan, CEO, Retail Association of India, says strong sourcing power helps modern formats offer better prices. “They have done away with the extra level of intermediaries,” he says.

Meanwhile, grocers too are working on protecting their turf by leveraging on their strengths such as customer relationships, home delivery, credit facilities and expanding their product portfolio.

Top FMCG companies such as Hindustan Unilever, Procter & Gamble Marico and Godrej have begun adopting kiranas, teaching them category management and effective merchandising to counter big retailers and their private labels.

Bharatiya Udyog Vyapar Mandal (BUVM), the biggest national-level association of mom-and-pop stores, has formed city-centric associations that negotiate directly with manufacturers such as Unilever and P&G and do away with any middlemen.

This helped kiranas offer 5-20% discounts on MRP of branded products like detergents, shampoos soaps, oil and atta.

“When prices rose due to inflation some kirana stores offered customers the option of paying in instalments apart from extending them credit for a month,” says Vijay Prakash Jain, secretary general of BUVM that comprises 17,000 state and district-level associations across 27 states.

Interestingly, kiranas managed the prices of items such as detergent bars toilet soaps, shampoo, packaged tea and iodised salt better than modern retail, according to the Nielsen study.

Currently, traditional retail, both grocers & chemists, constitute over 95% of total sales in the country.

Modern trade at just 3-5% of the total national industry sales, had grown aggressively at over 35-40% contributing to over 15-25% sales for most consumer goods companies last year.

Wadhawan to revamp supply chains

Wadhawan Food Retail (WFRPL), a closely-held unlisted company promoted by the Wadhawan group, is planning to revamp supply chain operations in its outfits in order to lower costs and achieve better margins and delivery schedules.

The group owns the Spinach convenience store chain. Fresh from its recent acquisitions, WFRPL currently manages 100 stores of Sangam Direct, a direct-to-home online grocery format it bought from Hindustan Unilever; Sab Ka Bazaar, a 42-store food and grocery chain based in the National Capital Region; S Mart, a 14-store strong Bangalore-based grocery retailer and a management contract to run Maratha Co-operative based in Maharashtra.

As part of the integration, the company will set up a uniform vendor management and combined distribution centres, which will supply products to all stores and take care of Sangam’s front end needs. Sangam has four regional distribution centre (DCs), Spinach has two DCs in Mumbai and Sab Ka Bazaar has a couple of DCs in Delhi.

WFRL has also lined up expansion plans for all the companies it has acquired. The company is planning to build the Sangam network in cities where WFRL’s outfits have a presence and later enter new territories. When Sangam was under HUL, it was restricted to Mumbai.

The company is planning to offer more FMCG products and services under the Sangam platform. It is also planning to set up a desk for institutions so that they can order products online.

Wadhawan said the company was planning to invest Rs 1,500 crore to open nearly 1,400 stores in the next 4 years. Spinach has stores under Local, Super and Express formats. He said the company was looking at various options such as specialty stores, cash-and-carry outlets and so on. The company was planning to set up 30 hypermarkets in a couple of years and the first one would be up by mid-2008.

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