Summary

Within a short span of the last five-six years, the use of cosmetics by Indian consumers has increased significantly with more and more women and men taking greater interest in personal grooming, increasing disposable incomes, changing life styles, influence of satellite television and greater product choice and availability. With the demand for cosmetics on the rise and the opening up of the market to foreign companies, many of the worlds popular cosmetics brands entered the Indian market in the early and midnineties and some more have set their sights on India. This cosmetics and personal care industry has been growing at an average rate of 20 per cent for the last few years. The growing Indian cosmetics market offers promising prospects for international brands. The growth rate in the cosmetics market reflects an increasing demand for beauty care products in India. Perfumes and fragrances, skin care, and hair care products are some of the major segments with promising prospects for U.S. companies. Penetration of most cosmetic and toiletries is very low in India. Current consumption of many products is well below that of many countries in Asia. The low market penetration of many cosmetics and personal care products offers room for growth. The Indian toiletries market is well developed and dominated by major multinational companies and a few large Indian players. The urban population with increasing purchasing power is the major force driving demand for cosmetics and toiletries. India is a very price-sensitive market and mass-market products constitute the major part of the cosmetics and toiletries market. Indias import of cosmetics and toiletries and intermediate raw materials is around US$ 120 million, of which the U.S. has a share of approximately 10 percent. Market Overview The current size of the Indian cosmetic market is approximately US$ 600 million. Of this, the fastest growing segment is color cosmetics, accounting for around US$ 60 million of the market. Industry sources estimate a rapid growth rate of 20 percent per annum across different segments of the cosmetics industry reflecting an increasing demand for all kinds of beauty and personal care product. Growth has come mainly from the low and medium-priced categories that account for 90 percent of the cosmetics market in terms of volume. Even with a 20 percent average growth rate, the per capita consumption of cosmetics is very low in India. Current per capita expenditure on cosmetics is approximately US$ 0.68 cents as compared to US$ 36.65 in other Asian countries. However, with changing lifestyles, higher disposable incomes, increasing advertising, penetration of satellite television, awareness of the western world and growing importance of beauty pageants, there have been significant changes and use of cosmetics is on the rise. Also, with the boom in the Indian fashion world and the growth in the television industry, there has been a rise in demand for professional beauty care products. Cosmetic companies in India are placing increasing emphasis on market research and targeting new market segments such as teenagers, men and young women. Fragrances and color cosmetics constitute the high growth segments. Nail enamels and lipsticks account for around 65 percent of total color cosmetic sales in India. Lakme, a brand originally introduced by the Tata group of India, now bought over by Hindustan Lever (HLL) of the Unilever group, Tips & Toes, another domestic player, and Revlon dominate the US$ 60 million color cosmetics market. Multinationals, Revlon of the U.S. and L'Oreal's Maybelline has a dominant share of the small premium lipsticks and nail enamels market. Mass-market products account for a major share, while the premium segment accounts only for a mere 9 per cent in lipsticks and 5 per cent in nail enamels. Lipsticks account for nearly a third of the market at US$ 21 million, while the market for nail enamels is estimated at around US$ 23 million. The color cosmetics segment is very competitive and has a high penetration level of 80 percent. Most other cosmetic products are estimated to be used by less than 40 percent of the consumers. The prestige fragrance market, which has seen a steady influx of foreign brands, is currently estimated at US$ 20 million and is mainly bought by the affluent sections. An average annual growth rate of 15 percent

has been estimated for this segment for the next few years. The body spray category is the fastest growing segment within the fragrance category. The body spray market is estimated at approximately 20 million cans per annum and it is estimated to increase to 100 million cans by 2007. The skin care market in India is estimated at US$ 180 million. Within the last decade, this segment has seen many consumers slowly shift from the mass to the premium end of the market. The penetration rate is high in the skin-care segment as compared to color cosmetics. In the skin-care segment, price and volume played an equal role in value growth. From a very basic level of most consumers using only face cream and moisturizers, the market for more specialized skin care products such as sun screens, toners, cleansers, astringents, dark circle removing creams, anti-wrinkle creams and day and night creams seems to have grown steadily in recent years. Moisturizing lotions, fairness creams and face cleansers are the popular categories in the skin-care segment and account for approximately 60 percent of the skincare segment. The major players in this segments are Lakme, Ponds, Fair & Lovely of the HLL group with a 50 percent market share, followed by players such as J.L. Morison that markets the Nivea range of products in India, Godrej and Revlon. The size of the hair care market in India is estimated at more than US$ 200 million, 50 percent of which interestingly comes from sales of shampoo. International companies like Unilever through its subsidiary, Hindustan Lever (Sunsilk, Organics, Clinic, and Lux); and Procter & Gamble (with brands such as Pantene, Head & Shoulders) dominate the shampoo market in India with approximately 58 and 20 percent market share respectively. The hair coloring and styling/gel market segment is at a nascent stage in India. There are not many local brands available in this segment but in recent months, many foreign brands such as L'Oreal and Wella have started making inroads into this segment by positioning hair colors as a fashion accessory. Penetration of these products is very low and limited to certain sections of the urban market. The market for hair creams, mainly used for hair grooming by men is also very small. Hair oiling, an age old tradition of Indians and mainly used as a pre-wash nourishment is a major segment in this sector and has giants like HLL and local Dabur and Marico Industries fighting for market share in the hair oil segment. The Shahnaz and the Biotique brands dominate the premium herbal cosmetics segment in India, estimated at USD 100 million. While other parts of the world are taking to the traditional Indian herbal way of beauty, Indian consumers are increasingly looking to international brands as life style enhancement products. More and more shelves in shops and boutiques are stocked with cosmetics from around the world. Since liberalization, many international brands like Avon, Burberrys, Calvin Klein, Cartier, Christian Dior, Estee Lauder, Elizabeth Arden, Lancome, Chambor, Coty, L'Oreal, Oriflame, Revlon, L'Oreal, Yardley, Wella, Schwarzkopf, Escada, Nina Ricci, Rochas, Yves St. Laurent and Japanese cosmetics company, Shiseido have entered the Indian market. The prices of most foreign brands have been fairly high, which has deterred average Indian consumers. International brands cater to a segment that can broadly be classified as the urban higher income group. Penetration levels of international cosmetics brands in India are still low. Foreign brands currently constitute only 20 percent of the market. A major reason for low penetration of international brands can be attributed to high pricing. These companies initially gained sales on their international brand image, however, repeat purchases were not forthcoming and to retain their sales growth, several foreign companies reformulated price strategies to tap the large Indian middle class. Urban women in the middle and upper income groups in the age range of 23-50 is the target group for international brands, as this group looks for better products and is willing to pay a premium for international quality products. Industry estimates suggest that there are close to 10 million such women in India. The toiletries market in India is well developed and dominated by multinational companies and a few large Indian companies. A few major players, high entry barriers, fairly high rate of new product launches, and high advertisement spendings characterize this segment. Major players in this market are HLL, Procter & Gamble (P&G), Colgate Palmolive, Reckitt Benckiser, Godrej Consumer Products and Nirma. HLL is the market leader in majority of the toiletries and personal care segment such as soaps/personal wash, oral care, fabric wash and talcum powder. In oral care, Colgate Palmolive is a household name and until a few years back was almost a generic name for toothpaste in India.

Bath and shower products account for the largest share of the market. The market size of soaps alone is more than US $ 350 million. Use of liquid soaps is also gaining popularity in India. Oral, and hair care products tailored specially for Indians such as hair oils also have a major share. The toiletries segment is clearly divided into two categories - the less price sensitive and highly brand conscious premium segment catering to the urban higher middle class and the general segment that caters to the middle and lower middle class. In terms of volume, the Indian toilet soaps market has been estimated to be growing at approximately 5 percent and currently stand at over 5,50,000 tones.

Market Trends Cosmetics and toiletries are not just the domain of women any longer and Indian men too are increasingly taking to the use of more and more body sprays, perfumes and other cosmetics and toiletries. With rising demand from men, the Indian market is getting enlarged and many players are coming out with cosmetic products especially skin care products for men. The market size of men's personal care segment is estimated at approximately US$ 165million, with Gillette having the largest market share. Other major players in this segment include Godrej, J.L. Morison and HLL. The growing demand for men's cosmetics have made many direct selling companies such as Modicare and Amway to launch new products for men. In the last five/six years, there has been a renewed craze for herbal cosmetic and personal care products, especially in the skin care segment with the growing belief that chemical-based cosmetics are harmful. Shehnaz Hussain, Biotique, and Lotus Herbals are the major players in this segment. Many companies also expanded their range to include herbal variants. The growing popularity for natural products also attracted many primarily health-care companies such as Himalaya Drugs (with its Ayurvedic Concepts range), and Dabur to launch natural-based cosmetic products. The urban population in the major cities with increasing purchasing power is the main force that drives demand for various cosmetic products in India. The advent of satellite television and awareness of the western beauty and fashion world, advertisements and promotions, increasing number of women joining the work force is changing preferences, customs and cultures in India. The success of contestants from India at various well known international beauty pageants in the last few years have also contributed towards making the Indian women more conscious about looks, beauty, grooming and aware of western cosmetic products/brands. All this changed the needs and consumption pattern of the Indian women, thus leading to increased growth in the cosmetic sector.More Indian consumers started using cosmetics and a small segment are also seen willing to pay a little more to look good. Increasing disposable income and purchasing power have led to a constant up-gradation from mass to premium products even though mass-market products still constitute the major portion of the India cosmetics and toiletries market. Import Market Costs for importing products are much higher than producing it in the country. India allows entry of imported cosmetics without any restrictions but the average import tariff on cosmetics products is currently very high at 39.2 percent. This makes imported products very expensive for most consumers. Most foreign cosmetics companies selling premium brands have had a difficult time developing the low volume premium market in India. Many had to re-work price strategies towards the mass segment. Price is not the only reason responsible for their problems. Poor assessment of the size of the upper middle and high-income groups, and price sensitivity even within these groups, had added to their problems. According to estimates of industry experts and trade publications, India's annual imports of cosmetics and toiletries and intermediate raw materials is approximately US$ 120 million. Countries like US, Europe, mainly France, Germany, Italy, Netherlands, and Spain account for the major share; and Australia, China, and Japan account for rest of the share.

Sophisticated products such as fragrances, non-transfer long-stay lipsticks, liquid lip color, eye make-ups, anti ageing/anti wrinkle creams, professional hair-care products, preparations for shaving creams, are some of the major items of import. Competition The Indian cosmetic market, which has been traditionally a stronghold of a few major Indian players like Lakme, and Ponds has seen a lot of foreign entrants to the market within the last decade. India is a very price sensitive market and the cosmetics and personal care product companies, especially the new entrants have had to work out new innovative strategies to suit Indian preferences and budgets to establish a hold on the market and establish a niche market for themselves. Given the price-sensitivity of the Indian consumer who do not normally prefer to fork out a large sum at one time, many cosmetic and toiletries companies launched their products in smaller pack sizes to make them more affordable. HLL and Revlon were the first to introduce small pack sizes. Revlon introduced its small-range of 8 ml nail polishes and lipsticks, and was soon followed it its strategy by major Indian companies as well. Small pack sizes have proved to be very popular in the Indian market as it offers a consumer lower purchase cost and the opportunity to try new products. Stiff competition in the cosmetics and toiletries market also saw an increase in the range of new products being introduced for newer application concepts in the last few years. In the skin-care segment, from just creams and moisturizers, there has been a upgrade to value-added products such as under-eye wrinkle removing creams, dark circle removing creams toners, sunscreen lotions, fairness creams, and many more. The color cosmetics market saw new products such as smudge-proof lipsticks and mascaras, liquid lip color, and long-stay lipsticks being introduced. These specialized applications led to growth in volumes and also enabled companies to price the products at a premium, driving up value growth. Service marketing strategies, such as point-of-sale advice and beauty counseling have shown to boosts sales of cosmetics and personal care products and driven growth in the Indian market. Beauty counselors or advisors at retails outlets have been very successful in gaining attention, creating product awareness and overcoming consumers lack of familiarity with, and fears about many cosmetics and personal care products such as home hair permanents and color cosmetics. Some companies such as Lakme have even set up exclusive Lakme beauty parlors at major cities in India through the franchisee route. Major herbal cosmetics brands such as Shahnaz Hussain and Biotique also operates chains of salons through franchisees and offer specialized training courses to customers. Companies continue to innovate on selling methods. Popular Indian brand, Ponds established consumer advisory cells and through touch screen counters and telephone help-lines offers advice on skin care. Another company, Baccarose, owners of the Chambor brand organizes tea party make-up sessions at major Indian cities. L'Oreal markets its range of specialized hair care products exclusively through salons and beauty parlors. L'Oreal currently is the only company in the market that has a hair color range tailored exclusively for parlors. The company was also the first to introduce modern hair color and shampoos for colored hair in the Indian market. A strong brand promotional campaign, good distribution network, constant product innovation and quality improvement, and the ability to provide a variety of quality products are some of the major reasons for the success of most companies. HLL, is currently India's largest cosmetics and personal care products producer and its brands has the dominant share (more than 50 percent) in segments such as personal wash, skin care, shampoos, lipsticks and nail polish. End Users

Since liberalization in 1991 along with the crowning of many Indian women at international beauty pageants, the cosmetic industry has come into the limelight. Consequently there has been a change in the cosmetic consumption and this trend is fueling growth in the cosmetic sector. Indians by and large are price-sensitive. Indian consumers want the best but many are not always willing to pay for it. Understanding the attitudes, preferences and aspirations of the different segments of India's consuming class is very crucial to achieving success in the Indian market. Experiences of many multinational companies across a range of consumer industry sectors have shown that the size of the Indian middle and upper middle class customer base and willingness of Indian consumers to pay premium prices for brand image has been greatly over estimated.

Sales Prospects The growing Indian cosmetics market offers promising opportunities for international brands. The growth rate in the cosmetics market reflects an increasing demand for beauty care products in India. The most promising segments for international companies to pursue are perfumes and fragrances, and specialized/professional skin care and hair care products. The fastest growing market is however color cosmetics, which account for US$ 60 million of the total market. The rural market in India for cosmetics and toiletries remains is largely untapped. Major domestic players have also not been able to penetrate this market. The urban market itself for specialized cosmetic products remains to be fully exploited. The Indian skin-care market is not yet fully tapped and offers promising prospects as a growth area. Penetration of color cosmetics is lower than the penetration prospects of the skin-care segment. To promote the growth of their products, a dominant player like Lakme have embarked upon a business plan to establish their exclusive franchised beauty salons across major metros in the country. Imported cosmetics have had a major impact on the Indian market. Foreign products have enhanced growth of the Indian market by attracting aspirational consumers and increasing acceptance of color cosmetics, previously perceived by many as harmful to skin. Indians generally perceive foreign brands as being of superior quality. Other key issues regarding sales prospects are product variety and retailing strategies as well. There is a marked shift among consumers from functional common-fits-all products to more specialized formulations. This is one of the reasons why an increasing number of cosmetic companies are dealing with consumers directly through special exclusive counters in major departmental stores and malls featuring their own beauty consultants. L'Oreal India has established a consumer advisory unit and Ponds, as mentioned earlier offers skin care advise through touch-screen kiosks, and telephone helplines. Beautique - an exclusive one-stop shop for only imported cosmetic brands set up recently in New Delhi has qualified beauty consultants to provide free advice and make overs to consumers. The Indian cosmetics and toiletries market will continue to grow due to the increasing incomes and purchasing power of the growing Indian middle-class and urban consumers. Demand from the rural areas and smaller towns are also fast increasing. Industry sources expect significant growth in both the mass and premium segments of the Indian cosmetics market. The market base however in the premium segment is very small. It is a niche market and the scope for rising volumes is slower. The growth in the premium segment is usually seen to be because of people upgrading from the mass to the premium rather than an increase in consumption as such by itself. Prospects for increasing volumes on the other hand is higher in the mass segment mainly because the market base for this segment is higher, and because of the lower pricing, it is easier to persuade end-users to try out the products. Market Access

Prior to March 31, 1999, India had cosmetics and toiletries on its restricted list of imports and a special import license was required for import of cosmetics and toiletries into the country. This regulation has now been done away with and, India today, permits import of cosmetics and toiletries without any restrictions. This has made the Indian market more attractive to foreign cosmetic companies. Imports have been made easier, but not necessarily cheaper. The total import duty rate on cosmetics and toiletries classified under HS Code 33.03 to 33.07 is 39.20 percent, which even though has been scaled down over the past few years is still very much on the higher side. The high duties cause imports to be price uncompetitive. Certain high - end products just do not sell in India because the final price to bring it into India is too high for consumers to pay. The components of the total import duty include a basic duty of 20 percent (applied on the cost insurance freight (CIF) value of goods), an additional duty (popularly called countervailing duty) of 16 percent, and a special additional customs duty of 4 percent introduced in the 1998-99 Indian budget levied on the aggregate of the basic, countervailing and additional duties. This import tariff component is levied to provide local manufacturers some protection against imports. The special additional customs duty of 4 percent is intended to represent the incidence of sales tax and similar levies applicable on domestic goods. The countervailing duty is equivalent to the local excise tax on similar articles manufactured within the country. Since January, 2001, the Indian government made it mandatory for all pre-packaged goods (intended for direct retail sale) imported into India to bear the following labeling declarations: i) name and address of the importer, ii) generic or common name of the commodity packed, iii) net quantity in terms of standard unit of weights and measures, iv) month and year of packing in which the commodity is manufactured or packed or imported, and v) maximum retail sales price (MRP) at which the commodity in packaged form may be sold to the end consumer. The MRP includes all taxes, freight transport charges, commission payable to dealers, and all charges towards advertising, delivery, packing, forwarding and the like. Compliance of the above-stated requirements has to be ensured before the import consignments are cleared by customs in India. Import of pre-packaged commodities such as raw materials, components, bulk import etc., that need to undergo further processing before they are sold to end consumers are not included under this labeling requirement.