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 to 10.6% in 2009, finds Kline. 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. Additionally, consumers are increasingly 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. Marketing costs, being the most malleable, have been curtailed and claim an average of 48.3% of net sales so far this year, down from 50% in 2009. However, Kline finds that the reduction in marketing expenditure is not exclusively driven by cost-cutting, but rather the ever greater use of more focused, often cost-effective, new-media methods to connect directly with the consumer. Many companies are re-assessing 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’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 is also enhanced and the demand for “greener” and usually simpler packaging could ultimately reduce packaging costs. The high overheads resulting from continually high oil prices have already 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.
Ultimately, despite initial higher costs, sustainability can serve both the market and the industry by insisting upon more natural constituents – be they ingredients or packaging – and enhancing both the image of the consumer and the personal care company, said the report.