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Unilever’s Foray Into Prestige Skin Care

December 17, 2015: 12:00 AM EST
Is Unilever changing its spots? The company’s emphasis on personal care and specifically prestige skin care suggests it wants to move from its detergents, soaps and foods heritage to become a beauty player
 
Double the Business, with Personal Care leading
Unilever aims to double the size of the business and deliver this partly, and probably largely,through growth in its Personal Care category.
 
It’s been getting steadily more reliant onPersonal Care: the category contributed nearly 37% of total sales in the first half of 2015, up from just over 30% five years ago. And Personal Care is increasing its share of operating profit, from 36% in 2010 to almost 45% today. Moreover, its share of operating profit is larger than its share of sales, underlining its importance to both turnover and margin growth.
Food divestments partly explain this: Unilever has jettisoned certain food brands, but there has also been an explicit strategy to build up the Personal Care business.
Unilever’s CEO, Paul Polman said he would like to see Personal Care contribute half of all company sales, adding that Unilever’s personal care business is now the second largest in the world, after L’Oréal.
 
 
Betting big in Prestige
Even with this context, Unilever surprised many with its announcement, backed by a number of recent acquisitions, that it is making a serious move into prestige skin care.
 
At the Q3 2015 earnings call, Unilever’s new CFO, Graeme Pitkethly, said that the priority for Personal Care is continuing to grow the core while also building premium.
Mass still remains critical for Unilever. Skin care and hair care account for some 70% of its Personal Care sales. It has large individual brands, like TRESemmé, “well on its way” to being a billion euro brand, and other brands that already sell a billion dollars a year: Dove, Rexona deodorants and antiperspirants, Lux soaps and shampoos, Axe male grooming products, and Sunsilk women's hair care products.
But, Unilever is now betting big on prestige/premium, with the launch of premium products from TRESemmé and Dove, and notable skin care acquisitions this year, which now reside in a new prestige business, alongside existing premium brands, like IOMA and Regenerate.
 
Unilever expects this new business to become a major prestige player. Sales are “rapidly approaching” €500 million, but the company is moving cautiously and acquisitions have been paused. Polman wants to take it gradually, with “moderate acquisitions… learning our way into this in a very mindful way.”
 
Hoping to tap emerging market demand
As well as Personal Care, a major strategic driver for the company is the emerging market space and its growing numbers of increasingly affluent middle classes.
Emerging markets already account for well over half of Unilever’s total revenue (58% in the first nine months of 2015), and this share should continue to grow.
Another reason for the move is the rapid growth of the prestige market globally. It is growing faster than the market overall and remains relatively unconsolidated, providing white space opportunities.
 
With an aging and increasingly wealthy global population looking to turn back the clock, Unilever would not be alone in eyeing the opportunity for professional and prestige skin care options. The premium segment now drives much of global skin care market growth.
 
Even when economic growth has waned in developed markets, demand for premium products has grown while mass market demand has struggled.
 
The acquired brands
In 2015 Unilever purchased four prestige skin care brands: REN Skincare, an “iconic” British skincare brand; Kate Somerville Skincare, “one of the most trusted names in the premium US skincare market”; Dermalogica, a professional skin care brand available in salons and spas; and Murad, a “leading clinical skincare brand”.
Taken together they represent about $430 billion in fast-growing sales.
 
 
What has Unilever bought?
Except for Kate Somerville, which is mainly US-focused, but with a small Asian presence, the brands have a fairly broad geographic reach, in both developed and emerging markets.
 
They also offer different types of products and channels, enabling Unilever to fill what one commentator calls “capability gaps”.
For example, REN provides access to the prestige naturals segment, where Unilever is otherwise under-represented, as does Kate Somerville, but with a different geographic perspective.
 
According to Kline, the acquisitions allow “Unilever to make a dent in channels such as prestige, specialty, and professional, which until now were not the firm’s forte.”
Dermalogica and Murad are more focused on the professional business, with skin health expertise.
 
Dermalogica draws on expert endorsement and education, and has a presence in complementary channels.
 
Murad is an expert “Doctor brand” that offers clinical and holistic wellbeing, and has a loyal following. In 2014, it purchased its UK distributor to drive expansion in Europe. It is also expanding in Asia, where China would seem a good fit for the brand.
 
At a minimum, the acquisitions help Unilever build a hedge against soft growth in mass channels, provide sales opportunities in both advanced and emerging markets, and give Unilever access to new channels and segments.
They also bring new, dynamic and innovative talent and expertise required to build smaller “indie” brands that compete with larger, established players in skin care and other categories.
 
Will the strategy work?
A broader question is whether the company can use these assets to become a successful major prestige player.
 
Paul Polman believes Unilever is already at “critical mass” in prestige, enabling it to be a “major player right away,” but buying scale is different from delivering success.
Euromonitor’s Ildiko Szalai believes the brands are relatively narrow geographically, too niche, and the new prestige business too small, and it might struggle to compete with the established, global prestige powerhouses like L’Oréal, Estee Lauder and LVMH.
 
History is littered with companies that overreach, pushing too far beyond their core competency, and the skills required in prestige (high-touch marketing, higher R&D spend, different channels…) are very different from Unilever’s traditional capabilities.
But, perhaps in today’s world of fast and massive disruption, core competency might be an outdated principle. Think Nike’s push into digital, Apple’s iPhone, Netflix’s original content, and Google’s Android program. Closer to personal care, we have Clorox’s acquisition of the Burt’s Bees brand.
 
In 2013, Nike CEO, Mark Parker, told FastCompany that "business models are not meant to be static…In the world we live in today, you have to adapt and change. One of my fears is being this big, slow, constipated, bureaucratic company that's happy with its success. That will wind up being your death in the end."
 
Business360’s take
Success will depend on well Unilever allows its acquisitions to continue to be the indie brands they are, distinct from Unilever’s corporate culture and bureaucracy, at the same time as providing them with the resources and support they need to scale. A tricky balance.
 
Unilever next reports its financial results January 19, 2016 and we may get a better sense then. In the absence of hard data we would look for early warning signs, such as employee churn at the acquired brands and possible competitor response from other prestige players.   
Business360, December 17, 2015
Domains
PERSONAL CARE BUSINESS
Market Segments
Skin Care
Geographies
Worldwide
North America
EMEA
United States of America
Europe
United Kingdom
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