Taxing times for Middle Eastern beauty

Consumers do not like sales taxes – and they are particularly sensitive to tax-based price increases.

So, it is no surprise that personal care product sales in the Middle East have been dampened by the introduction of value added tax (VAT) in Saudi Arabia and the United Arab Emirates (UAE) in January 2018, which have inflated beauty product prices.

This follows the imposition of an expatriate dependent tax in Saudi Arabia last July, as well as new excise taxes (on non-beauty lines) in Saudi Arabia (June), the UAE (October) and Bahrain (December).
Oman will also implement an excise tax from June 2018, and Qatar and Kuwait are expected to follow suit soon.

The result is that Gulf consumers have – for the time being at least – become cautious spenders, especially towards non-essential goods and services.

Political and economic barriers
"The year 2017 witnessed many beauty and personal care brands facing a decline or slowdown in sales compared with the last two years due to political and economic developments in the Gulf Cooperation Council (GCC) region, as this has translated into reduced footfall in stores, less frequent buying or downgrading," says Amna Abbas, Senior Analyst, Beauty & Fashion at Euromonitor International.

It is possible that this slowdown may not last, as consumers get used to the new taxes. According to India-based TechSci Research, the GCC beauty product market, which includes skin care, hair care, fragrances and cosmetics, is forecast to reach US$12.81bn by 2022, from $6.9bn in 2016, driven by an estimated compound annual growth rate of 11.13%.

But for now, the sailing is far from plain in the GCC personal care product market. One problem is the blockade imposed by Bahrain, Saudi Arabia, the UAE and Egypt on Qatar since June 2017 over diplomatic disagreements, which has forced many companies to adjust their operations in the region.

"Adaptability to change has been key for personal care retail businesses who operate in multiple GCC countries and deal with Qatar.
Supplies had to be rerouted to their end destination, which meant logistically and financially adjusting as well. This is causing a slowdown in the region's beauty and personal care market," Abbas explains.

A survey by Middle Eastern comparison site yallacompare, whose results were released in January, found that almost half of UAE residents were worried that they will not be able to afford the increased cost of living brought about by the country's implementation of VAT, considering it as an unaffordable additional expense in the short term.

Opportunities abound
However, shrinking purchasing power could lead consumers to consider alternative brands, suggests Mehrbano Sethi, founder of US vegan make-up brand Luscious Cosmetics, which is available in the UAE through e-commerce.

"One of the biggest trends in the GCC is the acceptance of independent boutique brands that were hitherto overshadowed by the pursuit of the largest, most famous luxury brands only.

Consumers are now opening up to new brand discovery and curious to try new products at varying price points. A rising blogosphere and beauty influencer community is key in bringing about this trend," Sethi says.

She adds that great opportunities exist for smaller brands in the region to break through in the market with a more level playing field: "Consumers typically cut back on high end purchases in times of change or uncertainty; they are receptive to options."

While the majority of the skin care market in the GCC region is still dominated by mass brands, there is a small but fast-growing consumer segment that looks for more natural alternatives, Aly Rahimtoola, founder of Dubai-based beauty brand Herbal Essentials, says.

"I believe that sustainability will gain much more importance within the cosmetics industry... but a lot depends on two critical factors – making the products easily available by widening the distribution while managing retail margins, which tend to be very high, plus educating consumers on the merits of using less synthetic products," he explains.

Retail price hike
Meanwhile, high retail rental prices across the region are posing a challenge to beauty specialist retailers. According to Euromonitor, most retailers find rental fees higher in Saudi Arabia than in their European home countries.

Similarly, beauty brands in the UAE are becoming more selective in their retail locations as they try to reduce the cost of their visibility in these tough economic times, Shahzad Haider, Chairman of Beauty Foundation Arabia and Fragrance Foundation Arabia, says.

Indeed, higher vacancy levels in Dubai's larger shopping malls during the third quarter of 2017 pushed down rents by 3-5%, according to Dubai-based property consultancy JLL MENA.

Consumers are also becoming more promiscuous with brand loyalty and companies have to work harder to maintain their appeal, says Salim Kalsekar, Managing Director of Rasasi Perfumes, a UAE-based family-owned business with 165 stores across the region.

With more international fragrance houses eyeing the GCC region for investment and expansion, local brands are facing greater competition in an already saturated market, he notes.

Nevertheless, 2017 was a good year for Rasasi, having recorded an overall 6% sales increase in the UAE last year, aided by its state-of-art manufacturing facility in the Jebel Ali Free Zone, in Dubai; its focus on R&D; and an international brand partnership with renowned fragrance development houses.

Still attracting investment
Despite the challenging market conditions, international companies continue to foray into the region.

Saudi Arabia especially has become a target destination for global brands as the government liberalises the economy – opening its parallel market to non-resident foreign investors from January 2018, issuing tourist visas from April and allowing women to drive from June.

Saudi Arabia is now set to host its first edition of Beautyworld Middle East from 14-16 October 2018 in Jeddah, where more than 100 exhibitors are expected to participate.

The kingdom's ambitious reforms have also pulled in South Korea's supermarket operator e-mart, which is opening its Scentence cosmetics stores in Saudi Arabia through local retailer Fawaz Alhokair.

The first two stores opened in Riyadh and Jeddah in spring 2018, and a total of six stores are planned for this year.

The UAE, too, continues to attract new names. Another South Korean cosmetics brand, Etude House, made its Middle East debut this year. The company opened its first regional store in Dubai in March 2018, followed by a branch in Kuwait at The Avenues mall.

Also, in January, Italian make-up brand Korff Milano became available in the country in partnership with local BinSina Pharmacies.

Qatar, on the other hand, saw the arrival of Penhaligon's first boutique in the country, last August, which the British perfume house opened at Hamad International Airport.

And in Kuwait, local beauty guru Areej Sultan Al Essa launched her first cosmetics brand in mid-2017, called K7L. The make-up range is formulated with Arab women in mind and the nail polish collection is toxin-free and vegan.

An abundance of unique minerals and resources such as Dead Sea salt, black mud and a diverse range of minerals has given Israel’s beauty and personal care sector an advantage

Levant: Value driven
As usual, sales patterns in the Levant contrast with those on the Gulf, with local challenges coming to the fore in shaping markets.

Lebanon's $414m cosmetics and beauty market (as estimated by Euromonitor), for instance, is experiencing an ongoing downturn.

After two years of stagnant growth, the market dropped by more than 5% year-on-year in 2017, according to Jacques Sarraf Jr, Brand Manager at Cosmaline, which produces its own line of personal care products and is part of the Malia Group.

He attributed the drop to the country's weak economy, with Lebanon impacted by the conflict in Syria (now into its eighth year) and regional instability.

Economic growth was estimated by the International Monetary Fund (IMF) at 2.1% in 2017, with the same projected for this year.

"With the crisis ongoing, purchasing power is still dropping. We are seeing a lot of promotions in the market, and consumers are trading down. What is trending now is value packs in bigger sizes, to get a lot for less," he says.

Manufacturers have increased the volume size of products, with shampoos going from 400ml to 600ml and 800ml sizes – a trend reflected across the Middle East, says Sarraf.

Euromonitor estimates that the Lebanese market has grown from $395m in 2016, with annual growth at 5%, while per capita spend rose from $65.80 in 2016 to $68.20 in 2017, and is predicted to reach $71.80 in 2018.

However, Sarraf says the market by unit is down overall. "In 2015 and 2016, there was parity – [there was] no growth but [it was] stable.

Now we see a drop as a whole. The luxury segment is dropping, and if you look at the value segment, it is increasing," he says.

A manager at L'Oréal Lebanon confirms the drop in the market, saying sales were particularly down at malls and larger retailers, and that new product launches were bolstering sales but not like in previous years.

While there were few new product launches, the natural and organic segment grew. But it remains niche compared with the mass volume market, which is value-orientated, says Sarraf.

Euromonitor estimates growth from 2016 to 2021 at 35.6%, but in the current environment this looks overly optimistic, says Sarraf. "Looking at the economic landscape, if reforms don't happen soon, I don't think next year will pick up. Maybe [it will pick up] in 2020, otherwise it will carry on as a value and promotion market. Manufacturers are taking the biggest hit as they're dramatically reducing margins," he says.

What is marginally bolstering sales is trade with neighbouring Syria. Manufacturing largely stopped due to the conflict, while foreign companies are no longer distributing in Syria.

Instead Syrian traders come to Lebanon to buy primarily large volume sizes. "All Lebanese traders want a foot in the Syrian market for their brands to pick up some activity and consumers indirectly, as once the Syrian market improves, they want to be there," says Sarraf.

Israel: Unique materials
In Israel, however, which has had far less direct exposure to the Syrian crisis, the beauty product market is far steadier.

Indeed, the rise of online make-up artists and bloggers has boosted consumer interest in make-up, a trend that has driven premium product sales, a Euromonitor analyst says.

As a result, overall colour cosmetics sales including facial, eye, lip and nail products (comprising premium and mass products) in Israel were estimated to have grown at a healthy 6% in 2017 to reach $249m from $234.9m in 2016, according to Euromonitor data.

Meanwhile, Israel's beauty and personal care sector as a whole was valued at $1.62bn in 2017.

However, overall beauty and personal care product sales were estimated to have grown at a slower rate than colour cosmetics.

Of course, an abundance of unique minerals and resources such as Dead Sea salt, black mud and a diverse range of minerals has given Israel's beauty and personal care sector an added advantage, according to the Israel Export & International Cooperation Institute.

Israeli company A. Meshi Cosmetic Industries has developed a wide range of cosmetic Dead Sea products under the MonPlatin brand name. Also, Ahava and Biscol Cosmetics have been marketing Dead Sea ingredients products.

Iran: Untapped potential

Finally, Iran and its 80 million population remains an untapped potential bounty of sales, with market access continuing to be restricted by ongoing American sanctions.

Indeed, Euromonitor says there was strong demand for make-up in 2016, but that counterfeit goods grew at the expense of legitimate sales.

Iran's total colour cosmetics sales were worth $626m during 2016, says Euromonitor, but the market researcher would not say what proportion was covered by counterfeits because of the difficulty of gathering data.

But category growth is strong: at 17.3% in 2016 compared with $533.6m colour cosmetics sales in 2015, according to Euromonitor.

Many women consider "wearing make-up a must in a wide range of social situations, as it gives them the opportunity to enhance their appearance under the mandatory Islamic headscarf (hijab)", Euromonitor notes.