PARSIPPANY, N.J. — As rising costs eat into margins, personal care marketers are reducing marketing expenditures, integrating their supply chain and consolidating distribution for improved efficiency, according to findings of recent research from Kline & Co.
According to the research firm’s “Personal Care: U.S. Competitor Cost Structures 2011” report, costs of goods sold — which includes raw materials, packaging, processing and overhead — have increased on average to claim 11.1% of the net sales total in 2011, compared with 10.6% in 2009.
Commonly used ingredients, such as UV agents, SPF ingredients, synthetic ingredients, chemical ingredients, fatty acids and essential oils, have all increased by as much as 8% from 2009 to June 2011. In addition, consumers increasingly are seeking out natural personal care products, which tend to be more expensive to produce and source than synthetic alternatives. Packaging costs have seen similar increases as the consequence of volatile oil and commodity prices, as well as a consumer-driven interest in companies employing sustainable practices.
These demands are impinging upon profit margins and requiring the reallocation of fiscal priorities and a reassessment of cost structures, Kline stated. Marketing costs have been curtailed and claim an average of 48.3% of net sales so far this year, down from 50% in 2009. However, Kline indicated that the reduction in marketing expenditure is not exclusively driven by cost cutting, but rather the greater use of more focused, often cost-effective, new media methods to connect directly with the consumer. Many companies are reassessing their expenditures on traditional media advertising and increasing social media and Web-based advertising in their marketing mix.
Greater consumer expectations of both environmental responsibility and sustainability are cited as new challenges and opportunities that are impacting personal care cost structures. The establishment and sourcing of sustainable, natural and/or organic ingredients are ostensibly challenges to costs of goods and ultimately profitability, but going green also helps create an opportunity for higher price points, increased sales and future cost savings, Kline stated.
Kline’s related research on natural personal care indicates that, despite leaner times, some consumers are willing to pay a premium for natural products, and the popularity of these products has seen them experiencing double-digit sales growth. Moreover, a brand’s appeal also is enhanced, and the demand for “greener,” and usually simpler, packaging ultimately could reduce packaging costs. The high overheads resulting from continually high oil prices already have seen leading personal care marketers adopt lighter packaging to reduce freight costs and a minimization of plastic components, with added benefit of implied environmental awareness, Kline noted.
Ultimately, despite initial higher costs, sustainability can serve both the market and the industry, according to Kline, by insisting upon more natural constituents — be the ingredients or packaging — and enhancing both the image of the consumer and the personal care company.