ADOCUMENTARY REPORT

ON

“PESTEL & FIVE FORCE ANALYSIS OF COSMETIC INDUSTRY”

PRESENTED TO

INDUKAKA IPCOWALA INSTITUTE OF MANAGEMENT (I2IM)CONSITUENT OF CHAROTAR UNIVSRSITY OF SCINCE AND

TECHNOLOGY (CHARUSAT)

SEMESTER- III

MBA PROGRAMME (2009-11)

SUBMITTED TOMR.JIGNESH DARJI

PRESENTED BYRASHESH K PATEL

(09MBA33)

1

PESTEL ANALYSIS

All external environment factors consider in PESTEL analysis the factors are

Political, Economical, Socio Cultural, Technological, Legal.

Each factor is more or less affected to Cosmetic industry.

Every industry has to consider these factors because these factors create

opportunity or threat at period of time.

(1) POLITICAL FACTORS

Tax policy:

• Cosmetics may become marginally cheaper for consumers following the 2%

reduction in excise duty.

• However, a large part of FMCG product manufacturing is based in excise-

free zones like Uttaranchal and Himachal Pradesh. The final impact of the excise

duty reduction on product prices will depend on the ratio of manufacturing in

excise-free zones to that in non-excise free zones.

• Companies like Hindustan Unilever (HUL), Procter & Gamble (P&G),

Godrej Consumer Products (GCPL), Colgate, Dabur and Marico have production

facilities at excise-free zones.

• Due to reduction in exice and tax cost will be low, which leads to low

price and thereby increase in demand.

• There could be some savings on excise paid on raw materials, which

would result in overall cost efficiencies and savings for many companies.

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• The categories on which excise duty has come down from 10% to 8%

include soaps, skin-care, shampoos, hair oils, hair colours and cosmetics among

others.

• Prices of certain products were recently dropped by market leader HUL,

which witnessed a volume growth decline in soaps and detergents in the

December quarter.

• The excise cut could also lead to better margins if the benefit is not passed

down to consumers in the form of price reduction.

• While the market seems impressive, there are hurdles that impede growth.

The Indian duty structure on imported products can pose a major deterrent to

multinational vendors.

• Despite the new value added taxation regime, where the duty has been

reduced to 12.5%, the overall duty on the product still comes to about 40%. This

in turn reflects in the pricing of the products.

• Most vendors add the duty to the product pricing to generate the right

revenue. However, there is no organized cosmetic industry body that can take up

the issue with the government.

• In fact this leads to the biggest threat —the unorganized or grey channel.

There are small retailers in the market who directly import from markets such as

Dubai, where pricing can vary from 30–70% from Indian product pricing. Thus

today the grey channel makes up about 60% of the Indian cosmetics market.

Foreign trade regulation:

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• Imported cosmetics have to be registered.

• Regulation in India prevented L’Oreal from entering solo And company

formed a joint venture with MJ group top launch the ULTRA DOUX range of

hair care product.

(2) ECONOMIC FACTOR

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Disposable income

• India has the world’s second largest population behind China, and is poised to

see strong growth in disposable incomes over the next five years.

• The Indian economy is on a high growth drive, which means that purchasing

power and willingness to spend are on the rise.

• It also means big changes are coming to retail there. According to a recent

Merrill Lynch and Capgemini’s Asia-Pacific Wealth Report, there are more

millionaires coming from the emerging markets than from the developed

nations.

• The country’s population of high-net-worth individuals (HNI) is increasing,

and the report shows an increase of nearly 20% in 2005 over the previous

year. India reportedly has the youngest HNI population in the Asia-Pacific

region.

• In fact, more Indian women in age group 25 to 45 are also in the HNI

category.

(3) SOCIAL FACTOR

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Income distribution

• Today increasing numbers of women, especially from the middle-class

population, have more disposable income leading to a change in cosmetic and

skin care product consumption.

• This actually has fueled a growth in certain product categories in the market that

hardly were experiencing it earlier.

• Two such categories are color cosmetics and sun care products that have shown

growth rates of 46% and 13% respectively over the past two years, according to

Euromonitor International.

Social mobility

• Higher paying jobs and increasing awareness of the Western world and beauty

trends there have served to change the tastes and customs of the middle class

and higher strata of the society, with the result that a woman from such social

strata now is more conscious of her appearance and is willing to spend extra

cash on enhancing it further

Lifestyle change

• The increasing market size is the direct result of the changing socio-economic

status of the Indian consumers, especially women

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( 4 ) TECHNOLOGICAL FACTOR

• Nanotechnology has been dominating the news lately, but what exactly is it

and how can it benefit us humans.

• Well, nanotechnology (nanotech for short) refers to the exploitation of

microscopic materials for various uses such as dental bonding agents, in

toothpaste and for cosmetic and medical uses as well as in manufacturing; it is

the joining of different fields of science, biology, physics, chemistry and

engineering.

• A nanometer-sized particle is approximately one billionth of a meter and can

only be seen by a very powerful microscope.

Nanotechnology and Cosmetics

• Today nanotechnology is being used in computer science, medicine and cosmetic

manufacturing.

• In the cosmetic arena it is believed that the smaller particles are more readily

absorbed into the skin and as such repair damage easier and more efficiently. It is

believed that as new products are developed nanotechnology may be used to

prevent graying hair and combat hair loss in some cases

• . Nanotechnology is elevating the development of skin care products and

cosmetics to another level, making them high-tech so as to deliver increased

benefits to users.

• In addition to improving the efficacy of cosmetics and skin care products,

nanotechnology is making it possible for other ingredients to be used in the

manufacturing of beauty products.

• Nanotechnology in the beauty industry involves making products with

nanoparticles that can go deeper below the skin’s surface to give better results.

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Sunscreens and some anti-aging products are the main cosmetic products on the

market currently being made using nanotechnology.

• Some large cosmetic players are leading the charge in the field of nanotechnology

in the beauty industry.

• Chief among these companies are L’Oreal who has employed the technology in

products such as Revitalift anti-wrinkle cream. According to L’Oreal Revivalist’s

results are immediate because the product contains “nanosiomes of Pro-Retinol

A”. Estee Lauder also has a number of nanocosmetics on the market, as does

Proctor & Gamble, Shiseido and Duprey Cosmetics.

• However, because of the relative newness of the technology in terms of

cosmetics manufacturing there is still concern as to how safe nanotech cosmetics

are and their long-term effect.

• Agencies such as the Federal Drug Administration (US) and The Royal Society

(UK) have issued statements calling for continued testing and transparency

governing research on the use of nanotechnology in cosmetics.

• Some nanoparticles have received FDA approval, such as zinc oxide and titanium

dioxide which have been included in sunscreen; in 1996 the FDA is reported to

have concluded that “… smaller, micronized particles

(5) ENVIRONMENTAL FACTOR

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• Environmental protection is one of the most important issue now a day.

• Especially in chemical, pharmaceutical industry.

• Cosmetic production is also related to chemicals.

• Though those chemical are less harmful for skin.

• But waste disposal is most important issue.

• Environmental protection must consider by all companies involved in it.

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( 6 ) Legal factors

At present the following Acts and Rules made there under that govern the manufacture,

sale, import, export and clinical research of drugs and cosmetics in India.

• The Drugs and Cosmetics Act, 1940

• The Pharmacy Act, 1948

• The Drugs and Magic Remedies (Objectionable Advertisement) Act, 1954

• The Narcotic Drugs and Psychotropic Substances Act, 1985

• The Medicinal and Toilet Preparations (Excise Duties) Act, 1956

The Drugs (Prices Control) Order 1995 (under the Essential Commodities Act)

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FIVE FORCE ANALYSIS

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Threat of new entry: High

If the industry has low entry barriers, threats for new entrants will high and if

entry barriers is to enter in the industry, threats for new entrant will be low.

Potential new entrants include various aspects like – economics of scale, capital

requirement, government policy, and cost advantage. All these are influencing to

Indian cosmetic industry.

In the Indian cosmetic industry threats of new entrants is very high because entry

barriers are low.

Economies of scale

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Elements High Medium LowEconomies of scale *Brand identity *Switching cost *Capital requirements *Excess to distribution *Absolute cost advantage

Excess to necessary inputs*

Government policy(in terms of complexity) *Expected retaliation *

Positive factor for cosmetic industry is economies of scale which mean more you

produce less is the cost of product.

Cosmetic products are produced in bulk and so the fixed cost is less and thus the

per unit manufacturing cost.

Further adoptions of latest technical knowhow (which is a costly affair) can

certainly provide impetus for the growth of these industries.

The capital requirement :

The cosmetic industry is spread over small and medium scale units. Capital

requirement is not a barrier as cosmetics can be manufactured in a small room

also.

Access to Distribution network

The distribution network for cosmetic industry is very wide. There many

suppliers in the market for supplying raw material. Also there is huge domestic

and international market and demand for cosmetic is increasing. One can easily

assesses the distribution network.

Experience and expected Retaliation

In cosmetic industry to start new business, the person should have some

experience in the industry so that knowledge about industry is there.

Legislation or government Action

The most positive thing about the industry is that government is supporting the

industry very well. There is no license require for starting new plant in leather

industry. Also government had reduced the excise duties on shoes and footwear

components. The government had reduced the export duties on leather items.

While the market seems impressive, there are hurdles that impede growth. The

Indian duty structure on imported products can pose a major deterrent to

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multinational vendors. Despite the new value added taxation regime, where the

duty has been reduced to 12.5%, the overall duty on the product still comes to

about 40%. This in turn reflects in the pricing of the products.

Most vendors add the duty to the product pricing to generate the right revenue.

However, there is no organized cosmetic industry body that can take up the issue

with the government. In fact this leads to the biggest threat--the unorganized or

grey channel. There are small retailers in the market who directly import from

markets such as Dubai, where pricing can vary from 30-70% from Indian product

pricing. Thus today the grey channel makes up about 60% of the Indian cosmetics

market.

Differentiation

There is hardly any product differentiation.

Threat of substitute: low

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There are mainly two substitutes of cosmetics.

1. Spas and

2. Home remedial products.

Spas

Spa industry is currently in introductory stage.

Many people even not aware about it.

So it’s threat is low.

Home Remedial Products

Home remedies are also used but in more rural areas.

So overall threat of substitute is low.

The bargaining power of buyer: high

Bargaining power of the buyer is high. Buyer do not stick to one product, as with

the introduction of new cosmetic in market people will go for that.

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Elements High Medium LowSwitching cost *Buyer propensity to substitute *

Along with the domestic company, international companies are also providing the

same range of products. As a result buyers have many options for buying the

product.

Switching cost is also very less. There is hardly any product differentiation and

the customers can switch from one supplier to another.

However, for some enterprises there is strong customer-supplier relationship and

the level of trust and loyalty is very high.

Elements High Medium LowBargaining leverageBuyer volume *Alternative source of supplier *Buyer information *Switching cost of the buyer *Substitute products *Price sensitivityPrice/total purchases *Product differences *Brand identity *Impact on quality / performance *Buyer profit *

Alternative source of supplier:

There are many supplier of raw material and finished products in the market. The

customer has the wide choice of supplier. Also the unorganized market is one of

the options for the buyers.

The switching cost of the buyer is low.

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The cosmetics are the product that has low switching cost, as there is hardly any

differentiation and buyers can shift from one supplier to another.

Buyer’s price sensitivity:

Customers are quality and price sensitive. However, for some enterprises there is

strong customer-supplier relationship and the level of trust and loyalty is very

high. Some customers of the large industries do not want switch over to new

supplier on the fear of getting bad quality products and the products that will

effect their health.

Bargaining power of Supplier: Low

The bargaining power of the suppliers in the industry is low and there is large

number of suppliers available in the market. There is hardly any switching cost

from one supplier to another and no input differentiation.

Forming hard networks for common bulk purchase can further reduce the

bargaining power of the suppliers.

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Elements High Medium LowDifferentiation of inputs *Switching cost of suppliers & firms in the industry *Presence of substitute of inputs *Supplier concentration *Impact of input on cost / differentiation *Threat of forward integration *

Competitive rivalry :- High

The cosmetic industry is mostly spread over huge domestic and foreign market.

The industry includes the organized and unorganized players. The rivalry

amongst competitor is moderate because all global players are eyeing on the

Indian market . The factor affecting competitive rivalry is as follows:

Market growth rate :

• According to “Assocham”

• Indian Cosmetic market in 2008 is $ 950 million.

• And will increase $ 1.4 billion during next 2 year.

• Original Cosmetic market growth is 25% in 2008.

Because of all this factors and also due to its growth in future, competitive Rivalry will

be high.

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Elements High Medium LowIndustry growth *Product differences *Brand identity *Switching costs *Information complexity *Diversity of competitors *Exit barriers *