Daily Research News Online no. 2232 - Health and Beauty Retailing in Europe

Health and Beauty Retailing in Europe

March 14 2003

Latest research from Mintel studying health & beauty retailing across the UK, France, Spain, Germany, Italy, Netherlands and the Republic of Ireland highlights Boots as the largest health and beauty specialist in Europe by a large margin. However, it has so far been largely unsuccessful in exporting this beyond its home market.

In recent years the health & beauty sector has marginally underperformed all retail sales in the UK. Market share of specialist retailers is declining as more and more sales are taken by other channels, especially the grocers.

Mintel estimates that retail sales of health and beauty specialists in the UK reached £12.8bn in 2002 and grew by 13.7% between 1997 and 2001, while total consumer spending on health and beauty products showed a growth of almost 20% on the review period. The specialist health and beauty sector grew at a considerably slower rate in the UK than in most other European countries, namely Ireland (141%), the Netherlands (50%), Spain (37.3%), Germany (26.1%), and France (24.7%), although Italy was slower at 7.8%.

Excluding NHS receipts from the equation, Mintel estimates that specialist outlets account for a little under two-thirds of all spending on health & beauty products. Grocers are the next largest channel of distribution and capture around 30% of the market. Some way behind are department and variety stores, non-food discount stores and direct sellers.

Unlike in many other European countries, health & beauty retailers in the UK have seen their share of all retail sales declining in the recent years. 'This loss of share is largely because retail sales through community chemists have been under pressure from grocers and Boots and Superdrug, and at the same time chemists themselves have cut back intentionally in this area in order to concentrate on prescription and other healthcare services' comments Richard Perks, Senior Retail
Analyst.

Demand for OTC medicines in the UK has grown by 18% between 1997 and 2001 to £2bn, while sales of beauty, toiletries and personal care items have climbed by 15%. In countries where deregulation of OTC distribution has taken place, non-pharmacy outlets are accounting for a growing share of such retail sales. For example, in Germany, 18% of OTC medicine sales are now captured through unlicensed outlets, up from 13% in 1998. The comparable figures for the UK are 44% up from 30%. However in France, due to restrictions in other channels, pharmacies account for over 95% of retail sales of pharmaceutical, medical and orthopaedic products.

Moreover, the number of pharmacies in the UK has been in decline in recent times, while the number of other specialists (beauty and medical outlets) have both been rising rapidly. Not only has the market seen the expansion of beauty retailers like The Perfume Shop, and new niche players such as Lush, but there has been a marked increase in the number of specialist medical and orthopaedic shops. Mintel believes this reflects two trends - first of all the ageing population, but secondly the public's increased interest in wellbeing and a move to take more responsibility for one's own health.

Mintel expects this trend to continue for the foreseeable future. Community chemists are turning increasingly to prescription and other healthcare services, which Mintel thinks will lead to below average rates of growth compared to some retail sectors. Drugstores are greatly challenged by grocery stores and non-food discounters, while specialist beauty outlets have department & variety stores and direct sellers to contend with.

Boots is still the largest health and beauty specialist in Europe by a large margin, although its geographic coverage extends to just two countries. It is one of the few chains to successfully combine all three functions of pharmacy, drugstore, perfumery and cosmetics. It has been, however, conspicuously unsuccessful in exporting this beyond its home market, while many of its health and beauty rivals are sweeping across Europe into several new markets, all of which is helping to drive their growth.

Coming from a lower base than most, France-based perfumery Marionnaud records the highest growth rate over the five year period to 2001 (+489%), fuelled by numerous acquisitions. The British retailers' performances are pedestrian by comparison. Only The Body Shop has a truly international profile. Superdrug is now part of an international group. In 2001, it was eventually acquired by Kruidvat, the market leader in The Netherlands, which in turn was purchased by AS Watson of Hong Kong the following year. Kingfisher's decision to sell Superdrug to Kruidvat created a powerful third force in European drugstores, behind Boots and Germany-based Schlecker. Superdrug's pharmacy and own brand expertise should be a useful addition to the Kruidvat business. While Kruidvat's buying power should enhance the Superdrug's competitive position against the UK market leader, Boots.

The specialist cosmetics and perfumery format, largely unknown in the UK, is a focus for expansion and development in the rest of Europe. Douglas from Germany has been a major business for many years, and two France-based businesses are currently being very aggressive, Sephora and Marionnaud. The latter in particular has made a series of acquisitions and is expected to make more. LVMH-owned Sephora's focus has tended to be more on organic development.

In the UK, Boots tops the poll with over 33% share of specialist health and beauty sales, reflecting the fact that with almost 1,300 stores there is a Boots store in most shopping centre locations in the UK. 'Boots' leading position reflects the convenience and accessibility of its nationwide chain of stores in high streets and shopping centres and its wide product range' comments Richard Perks. 'Boots also benefits from having a fairly upmarket customer base with a bias towards younger shoppers and women with children, which means customers have a wider range of reasons to visit the store and also the disposable income to buy products on impulse when they are there'.

Mintel's consumer research shows that almost half of adult consumers go to Boots for their basic toiletries such as soap, toothpaste, shampoo and deodorant, over a third for their cosmetics and skincare purchases and 40% to buy their OTC medicine and healthcare products.

Health and beauty specialists are coming under increasing pressure from non-specialists such as department stores and food retailers. The specialists are responding to this often price-led competition by focusing on expertise in relevant products, value-added services and premium ranges.

The big four grocers (Tesco, Sainsbury, ASDA and Safeway) have all been developing pharmacies as fast as possible. They are potentially highly profitable, but they also generate footfall and they provide a service which customers want when doing their main weekly superstore shop. They therefore welcome the OFT's report recommending the ending of restrictions on granting pharmacy licences and Mintel expects to see all the leaders accelerate pharmacy installation, constrained only by the availability of pharmacists.

On the whole, health and beauty ranges are seen as an area of relatively soft margins, one where the retailers would hope to make up margin given up in the more competitive areas of food. Therefore while there has been some high profile price cutting on OTC medicines, this has been mainly to establish credentials as 'shopper champions' rather than initiating wide ranging price cuts in the area.

Tesco, thanks to its pre-eminent position as the UK's leading supermarket as well as the progress grocery multiples have made in penetrating the market, already operates 210 pharmacies (double the amount of its nearest rival) in its larger stores. The presence of in-store pharmacies gives the supermarkets added credibility in the sale of OTC products and also provides an additional reason for people to visit the store to buy products for their health.

According to Mintel's consumer research, convenience is the major factor in terms of where people buy OTC medicines and healthcare products. 'This reflects the fact that people generally buy these products when they have an immediate need, such as a cold or a headache, rather than stocking up in advance, and indicates that retailers need to have a good location with high footfall to compete effectively in this market' comments Richard Perks. The ability to get advice from a pharmacist is less important, as is a good range of products. Price comes even further down in terms of priority, along with cheaper own label products. Convenient opening hours are also less significant than a convenient location.

However, the growing demand for products with associated 'health' credentials for a population that is becoming increasingly neurotic on health matters means that retailer of premium products is well placed. 'Grocery multiples can attack the market for commodities, but they are not so well placed to attack the premium end - partly because they do not have the right environment, partly because of a lack of service and partly because distribution at the premium end is often tightly controlled by the manufacturers' comments Richard Perks.

Everywhere in Europe other than the UK Mintel's forecasts suggest that the health and beauty sector will outperform against national retail sales. The UK sector is dominated by pharmacy chains and we feel that this will continue to hold back its performance compared to the retail industry as a whole. Increasingly, community chemists like Moss and Lloyds pharmacy are focusing on healthcare issues and services, and sales of OTC goods, medical or otherwise are not expected to keep pace with other areas of retailing. Retail sales of health and beauty retailers in the UK are set to grow by 11.7% between 2002 and 2006 and account for 6% of national retail sales by 2006 while all retail sales grow by 18%.