Growth Amid Turmoil: Middle East Cosmetics Market

The cosmetics market in the Middle East continues to defy the region’s instability with manufacturers taking advantage of the opportunities provided by Africa, reports Paul Cochrane

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The Middle East cosmetics market is weathering the region’s current political and economic instability. While the markets in the Levant are experiencing tough times, Gulf sales continue to grow. Retailers and manufacturers are also offsetting the losses incurred in depressed and unstable countries by exporting to burgeoning African markets.
Beauty and personal care product sales in the Middle East and Africa (MEA) were  US$24bn in 2013, according to market analysts Euromonitor International, with Middle Eastern growth driven by strong sales in the United Arab Emirates (UAE) and the other Gulf Cooperation Council (GCC) countries of Qatar, Bahrain, Kuwait, Oman and Saudi Arabia. Topping beauty and personal care sales in the MEA region in 2013 were fragrances, accounting for 19% ($4.6bn) of the total, followed by hair care items with a 17% share ($4.1bn) in sales. Colour cosmetics and skin care each accounted for 13% of sales, at $3.1bn respectively, according to Euromonitor.

A TALE OF THREE REGIONS

“The entire GCC is doing really well in terms of sales. Some markets are better than others, such as the UAE and Qatar, and while Bahrain was affected [by the 2011 protests], sales have now returned. Kuwait is a slightly slower market but there’s some progress,” says Abdulla Ajmal, General Manager of Ajmal Perfumes, based in the UAE’s Dubai, which produces and exports its own line of fragrances.

However, demand in the region’s largest market, Saudi Arabia, has slowed – particularly for perfumes – because of the kingdom’s recent nationalisation policy, which gives preference to local instead of expatriate workers. This has led to the expulsion of thousands of expatriate workers, including thousands of Yemenis that had worked as perfume sellers.
Furthermore, the holy city of Mecca, which attracts millions of Muslim pilgrims every year, is currently undergoing major urban re-development. “There has been a big lull in Saudi Arabia as the Yemenis dominated trading but had to close shop, and in Mecca there are not as many pilgrims because of the construction, so the buying numbers are down, which has had an impact on business. Ramadan [the month-long Muslim fast that ended in late July] sales have been pretty decent and made up for it, and I hope that this momentum continues,” says Ajmal.
The North African market, he adds, is “almost at a standstill”, due to ongoing instability in Egypt, Libya and Tunisia, while only low-cost cosmetics in general are still selling well. The Iraqi market has also experienced a downturn in 2014 due to political instability and the rise of the extremist group Islamic State (IS), while the conflict in Syria has negatively affected the Lebanese and Jordanian cosmetics markets, both domestically and in terms of exports.
Syria had been a growing cosmetics market, but since its uprising began in 2011 manufacturing has dwindled due to a lack of raw materials, attacks on facilities and the difficulties of distribution. Some Syrian manufacturers have outsourced production to neighbouring Lebanon, while Turkish cosmetics exports to Syria have increased to offset the drop in domestic production – growing from $4m in 2012 to $9m last year, according to the Istanbul Chemicals and Chemical Products Exporters’ Association (IKMIB). Exports from Turkey to Iraq have also increased, going from $150m in 2011 to $180m in 2013, said  the IKMIB.
While distribution, storage and collecting payments are challenges in the Syrian and Iraqi markets, Lebanese cosmetics brands such as Cosmaline are also still being exported there to retain a brand presence, looking to calmer times in future.
“We either have to ship to Iraq or go [by land] through Syria and Jordan to Iraq, so we can’t always access the market. We have teams working on an hourly basis to find ways to transport products, as shampoos are bulky items to fly. If you reach that point, margins are compromised,” says Joanne Chehab, General Manager of Ch. Sarraf & Co, part of the Malia Group, which makes Cosmaline, and distributes for Japan’s Shiseido Co Ltd and German hair care brand Wella.
“Recently, for instance, we had the green light for 12 trucks to go to Iraq with Cosmaline products and we have a team monitoring the trucks via GPS as insurance companies won’t insure you in the case of theft. The kind of challenges we are experiencing today affect turnover, but we don’t want to stop exports; it is about being creative,” says Chehab.

LEBANESE DEMAND

Sales in Lebanon have flagged because of the economic downturn and the loss of tourists because of the nearby Syrian war, evident in the lead up to the summer season. “Spring was good for sales, beyond the budgeted target – but since May, the market has slowed as some retailers have reduced their stocks,” says Chehab. “The absence of tourists hurts a lot, as the purchasing power of foreigners is very important; while a Lebanese client buys two or three items, a Saudi or Kuwaiti buys ten to 15 pieces, so their basket is much bigger,” she adds.
However, the domestic Lebanese penchant for beauty products has kept sales buoyant, with manufacturers increasingly focusing on domestic customers to make up for tighter margins. “Sales haven’t changed a lot. Even though the Lebanese are more financially squeezed, people still want to look good. This is the difference between Lebanon and other markets,” says Fadi Sawaya, CEO of the Beirut based Sawaya Group, which distributes cosmetics brands throughout the Middle East.
Nonetheless, manufacturers are having to work hard to retain sales and increase footfall at retail outlets. Key to bolstering sales in Lebanon are hairdressers and salons. “Fashion is at the heart of cosmetics here and the main influence comes from hairdressers who are involved in fashion shows – when it comes to the newest brands, they are beacons for the latest trends that the retail market will follow,” says Georges Ghosn, Business Manager at Ch. Sarraf & Co. “We create activities for hairdressers – such as taking them to London – and provide a lot of giveaways.” Manufacturers are also advertising more and increasing their social marketing activity, he says.
Other tactics are being used. Sarraf (operating under the Cosmaline brand), for instance, in collaboration with US-based Procter & Gamble (P&G), have launched an online portal that provides advice via a consultant on hair treatment, styling products and tutorials to the Arab speaking world. “It is not about selling products online, but interesting the consumer [into buying products offline],” says Chehab. Lebanon is an ideal hub for such an online platform, as the Lebanese are considered trendsetters in the region. Sawaya, however, believes that the country does not get the attention it deserves from international brands, which have become more focused on the Gulf markets. “I think more international retailers will come to Lebanon and I hope that more brand decision makers understand the reality of Lebanon; that it is more than just a market of four million people. Despite all the problems we have, Lebanon is a fashion and beauty dealership for the region,” says Sawaya.

EYES ON AFRICA

With the downturn in the Levant, North Africa and Iraq, Middle East manufacturers and distributors are turning to new markets to bolster sales. “We used to focus on the Middle East, but are now increasingly open to new markets in east and west Africa, where there are a lot of Lebanese traders. It is a natural transition, as many African buyers go to Dubai, which is a platform for cosmetics. Beirut is also a platform, so if you have both, you can cover the Middle East, Africa as well as central Asia,” says Sawaya. “North Africa is going to be a big market, but not yet because of the problems there.”
Manufacturers in Jordan are similarly focusing on export markets due to sluggish domestic sales. “It is going to be a tough year ahead as the market is being increasingly squeezed due to the loss of the Iraqi and Syrian markets. What is selling is basic cosmetics, not branded items,” says Ifani Igboanugo, owner of Ransel  Industries in Jordan, which primarily exports to Nigeria.

THE GULF GOES GLOBAL

Dubai has become a particularly important  hub for cosmetics and re-exports due to its location and the variety of cosmetics on offer. “Consumption within the GCC is one thing, which is increasing at moderate levels, estimated at 5% a year, but it is the export markets [and related distribution] that are very strong. In a region where there are crises, when one market closes or becomes harder to reach, another one opens and that rotation keeps business alive and [is] why markets haven’t shut down,” says Michael Dehn, Group Exhibitions Director for EPOC Messe Frankfurt, which organises the annual Beautyworld Middle East exhibition in Dubai.
African manufacturers and retailers are also increasingly sourcing from Dubai, as products not available in China or Europe can be found in the UAE.
“There is a strong connection,” adds Dehn. Indicative of this is that Dubai’s foreign trade in perfumes and cosmetics rose 9% in 2013 on the previous year, reaching Emirati dirham AED18bn ($4.90bn), with imports of AED11bn ($2.90bn), exports of AED2bn ($544.50m) and re-exports of AED5bn ($1.30bn), according to Dubai Customs data.
The Gulf has become a particular focus for international and regional cosmetics firms because of the high purchasing power and diverse mix of its consumers, among them tourists and expatriate workers, as well as the popularity of fragrances.
According to Euromonitor, the UAE had the highest per capita spending on beauty and personal care products in the MEA region in 2013. Meanwhile, consumers in Saudi Arabia spent $34.40 per capita on premium fragrances in 2012 (a figure estimated to rise to $49.10 by 2017) and $21.30 in the UAE in 2012 (which  is expected to reach $25.50  in 2017).
Interest in the market was reflected in the rise in exhibitors at Beautyworld Middle East 2014, up 24% on last year, and with trade buyers up 11%, coming from more than 120 countries.
“Even in my wildest dreams, I didn’t expect another tremendous year. Last year, we broke 1,000 exhibitors and this year, 1,354. This confirms that the focus of the cosmetics industry is shifting to the Middle East,” says Dehn.
The biggest growth was in perfumes, with international firms keen to expand in the Gulf region but also there to tap the latest scent trends and products emerging from the Middle East. “This is unusual at exhibitions, as usually it is the other way around, with international companies bringing trends. But especially in perfumes, it is a reverse trend,” says Dehn of the Middle East producers innovating with ingredients and completed perfumes.
“More manufacturing, even the design and conceptualisation of perfumes, is done here now,” he adds.
Oriental perfumes have become increasingly popular globally, especially agarwood- (or oud) and musk-based scents, with international brands such as Tom Ford, Van Cleef & Arpels and Yves Saint Laurent (YSL) releasing their own perfumes.
“On a larger scale, oud has become a lot more prominent, but the downside is the majority of these [international] brands don’t use oud; it is just for marketing purposes,” says Ajmal. “On the positive side, there is more exposure to oud and this is opening a new genre for us. This will not necessary be oud, but more spicy and woody scents.” His company brings out ten to 12 new perfumes every year and 20% of fragrances are now fusions of styles. “It is about giving a little twist; a western perspective on what an oud fragrance should be like,” adds Ajmal.
Indeed, there is a growing focus on exporting oriental perfumes. “The woody flavours are not as popular in Europe due to their very heavy scent, but when you speak to manufacturers outside the Middle East, Russians are a big target group, where there is a strong trend for it and producers are trying to find ways to target the Japanese market in particular, as it is a highly refined one,” says Dehn.

DOMESTIC MANUFACTURE ON THE RISE

Oriental fragrances are also crossing over into personal care products, with shampoos now featuring musk and amber scents, according to Ghosn. Indeed, the trend for sourcing from the Middle East is going beyond perfumes. Beautyworld Middle East is considering bringing companies supplying manufacturing equipment to its exhibition as creams, dermatological products and cosmetics are increasingly being made in the region. “We noticed  that this area is growing for machinery, packaging and raw materials, which is interesting as in many other industries, products are mainly imported – but that  is clearly changing and improving,” says Dehn.
Sawaya has followed this trend by launching his own brand of make-up products, ProVoc, which is distributed around the world and includes innovative, hygienically disposable products for use in salons. “The Middle East was considered a place of consumption, not a place for manufacturing cosmetics that might be competitive with elsewhere,” he says.
However, to appeal to the Middle Eastern market, Sawaya launched his products in western countries such as France and the US, as products are then typically better accepted in the region, while boosting the chances of major pharmacy chains and retailers stocking them. “It is a strategy, to be successful outside and then come back,” says Sawaya.
This is particularly important as sales of cosmetics are increasingly made through larger retailers rather than smaller outlets and the overall market in the Middle East is becoming more structured.
“In skin care, for the big brands, the  majority of sales are in the supermarkets, but not more specialised cosmetics related to skin care and make-up as these require advice [and] so [are] sold at pharmacies  and outlets,” says Sawaya. “There are higher sales in pharmacies for certain products  of the same brand and when there is a beauty advisor, sales are even better,” he says. This extends to fragrances, with  beauty specialist retailers accounting  for 47.7% of sales in the MEA according to Euromonitor.