The price of healthy returns

The medicines and beauty market is thriving, but price-cutting and tougher competition from own-labels is forcing manufacturers to increase the number of premium launches in order to stave off margin erosion

A wet and cool summer 2007 precipitated a growth in cold and flu remedy sales while hayfever formulations nosedived, and sales of nicotine replacement products increased sharply as the introduction of the smoking ban across the UK took its toll.

But figures from market information company IRI show such fluctuations belie solid and steady growth behind healthcare and toiletries purchasing. Sales of over-the-counter (OTC) medicines have grown 58% over the past decade, from £1.47bn to £2.27bn, while the toiletries market has increased in value by a third, from £3.4bn to £4.78bn, driven by deregulation, new products and promotions.

The IRI research covers products bought by consumers, without the need for prescriptions, in supermarkets and chemists. Figures show the sales increase in 2007, which represents the biggest volume growth this century, was driven by a number of factors. The short summer period in the UK last year led to massive increases in cold and flu remedy sales while lowering those of hayfever products.

The massive sales boost for OTC products is due to underlying factors such as changes in weather patterns and retailers making medications more accessible. If consumers can easily acquire OTC goods, they are more likely to medicate themselves rather than go to their GP, therefore increasing sales of those products.

Deregulation in 2001 further increased the availability of products and the confidence of consumers; and the data also revealed an increased development of premium products which, as they often include improved formulations and ingredients, can command higher prices.

At the same time, as well as products becoming more available, medicines are becoming cheaper. More money is being spent but the pack price is becoming cheaper.

In addition, the imposed smoking ban has increased sales of products aimed at helping people quit. Legislation to ban smoking in public places contributed to unit sales of smoking cessation products, which, according to IRI’s research, grew 17% from 8 million packs in 2006 to 9.4 million last year. The sector’s value has surged from £61m in 2001 to £95m last year, but by just 4%, or £3m, more than in 2006. Value growth has been slowed by own-label products and price cutting.

The toiletries sector has enjoyed similarly high growth, with the market size increasing a third in value. Because of continuing new product activity in the toiletries sector, the price of products is falling month after month. In order to maintain value of business, manufacturers are launching new products so that they can be sold for higher prices than products already on the shelves.

The study looked not only at unit sales, volumes and promotions but also at brands. It identified a pattern of diminishing sales of own-label products due to popular toiletry brands reducing their prices. For instance, a five-year grocery basket comparison of the same products show prices have dropped, saving the consumer £8.45 on that same basket, from £70.42 to £61.97.

However, although the same products cost less today than five years ago, consumers are buying different products and as a result don’t benefit as much as they could from falling prices. The analysis suggests UK consumers are more attracted to brand names but that choice is influenced by which products are on promotion.

To counter dropping retail prices in established products, manufacturers are launching new and higher priced products.

Underneath these individual trends is a definite growth in the market – both in value and volume terms. People are buying more things, and emerging sectors – such as gradual tanning, anti-ageing and men’s skincare products – have been driving this growth over the past ten years.

Some product sectors have lost out while others gained – sales of products specifically for the bath have gone down over time as products for use in the shower have increased, although the overall sector for washing hasn’t changed dramatically. Likewise, liquid soap has grown at the expense of bars.

There are also high levels of trade promotion activity, and in-store price related promotions – in 2007, for the first time, more than half of all products bought were on promotion. In 1999, 42% of the total volume sales of the category were on products sold through promotions, above the average for the grocery industry. That grew to 52% in 2007, and there are no signs of the trend slowing; it seems people are still attracted by the idea of getting a good deal.

The practice has helped new brands and brand extensions become established, because people are less brand-loyal than ever before. Overall, new brand contribution over the ten-year period has been between 2.4% and 4.7%. In most years this has been driven by one major introduction, such as Gillette Fusion in 2006, when new brands and brand extensions accounted for 4.3% of total toiletries value sales – or £140m in UK sales.

New brands and brand extensions launched in 2007 accounted for 3.1% of total toiletries value sales, with a further 8.5% contributed by products launched the previous year.

A manufacturer’s strategy focused mainly on new product launches seems critical to the stability of a market that is dominated by tough competition, the downgrading of prices and retailers playing a powerful role.

IRI client solutions director MArtin Wood and industry insight director Tim Eales contributed to this week’s Trends Insight

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