Australian cosmetics company expansion into the German market

International Marketing

We are a cosmetics company based in Australia that operates a differentiated strategy. The German market is one of our main targets for potential expansion. As the third-largest market for cosmetics in the world, Germany has significant potential, but the market growth is slow and the demographic trends unfavourable. Furthermore, competition is intense, meaning that it may be difficult to gain significant market share.

We have some strengths that we can leverage, however, in order to enter the German market. Our product is of high quality and our company may have appeal as an exotic player in a market dominated by European firms. However, because our brand is unknown we must take steps to build the brand, requiring an extensive promotional program. We also have a lack of local knowledge and will therefore need partners in distribution, retailing and advertising in order to support our launch.

We will enter the market with a national retailer on board, premium product and pricing, and strong promotional support. It is important that we are able to have a national presence immediately because the differentiated strategy demands not only premium positioning but a broad target market, which characterizes our business. Promotion will be extensive, and focused strongly on fashion and lifestyle magazines.

The initial promotion budget for one national retail account will be in the range of €10 million. If we are able to capture our first year target market share of 0.1%, we will earn revenues in Germany of €12.6 million. After three years, we hope to have a 3% share and multiple national accounts, with corresponding increases in promotional budget. We strongly believe that despite the challenges, we can be profitable in Germany even in our first year, and certainly in subsequent years.

1.0 Introduction

The product chosen is a line of cosmetics. The line is positioned at the high end of the mainstream, with a correspondingly high margin for the company. The company is a relatively small firm, but has been growing rapidly. International expansion has been restricted to the New Zealand and Singapore markets to this point, and the management feels that greater potential exists in the European market than in other Asia-Pacific markets.

As international marketing manager, my task has been identified by senior management as developing market information on selected major European markets in order to assess their suitability for market entry. This report concerns the potential our company has with its flagship cosmetics line in the German market. The German market has been chosen as the first in our study by virtue of its position as the largest by population in the European Union. Germany is also one of the EU's wealthiest nations and therefore one of the largest consumers of cosmetic products in the Union. The market, however, is also quite diverse, encompassing the former East, the dense rural population of Bavaria and a multitude of modern industrial and post-industrial cities.

The objective of this report, therefore, will be twofold. The report will be the framework by which international market information is gathered and analyzed. The information gathered in the production of this report will allow us to better understand the nature of the German market. The second component of the objective will be to use the information gathered to make an assessment of our firm's ability to compete in the German market. Potential entry strategies will be discussed and analyzed in the context of the basic market information that has been gathered. The ultimately goal will not be to make a decision with respect to the German market, but to provide senior management with insight into the nature of the market and an analysis into the best means for the company to enter this market and what potential the market might hold if we decided to enter.

2.0 Situation Analysis

The PESTLE analysis is a fundamental tool used to help firms analyze the macroenvironment in which they operate. The six components are political, economic, social, technological, legal and environmental. The analysis in this case is to be focused on the German market, as opposed to the home market. The company needs to fully understand the ways in which these different components of the German market environment can potentially impact the business, even if these impacts are minimal (Gillespie, 2007).

The political environment in Germany is relatively benign for cosmetics companies. The company would be subject to the same regulations as domestic firms, so would not be at a competitive disadvantage due to political considerations. Germany does not rank within the top ten trade partners of Australia and indeed the UK is the only member of the EU to do so. Germany is, however, the third-largest trade partner within the EU, with merchandise exports in 2008-09 estimated at a$2.184. This represents growth over the previous year of 50.6%, one of the highest growth rates in the world (Department of Foreign Affairs and Trade, 2009).

Because Germany is a member of the European Union, the company would be subject to political factors arising from the EU environment. The European Union and Australia have, in general, a strong trade relationship. According to the European Union (2008), Australia exports €17.4 billion (approximately a$29.75 billion) worth of goods and services to the EU. Key exports are agricultural products (notably wine), minerals and energy commodities. There are no considerable trade barriers between Australia and the European Union with respect to cosmetic products. Europe is the second-largest destination for Australian foreign direct investment, so the potential exists for the company to offshore production to a European partner if that route is chosen. This partner could exist anywhere within the EU to serve the German market. More comprehensive specifics regarding the laws governing the sale of cosmetics in Germany can be found at the IKW website, http://www.ikw.org/pages/prodgr_details.php?info_id=115&navi_id=km&page_title=Personal%20Care%20Products.

The economic environment for our product is relatively favourable in Germany. Hit by recession in late 2008 and early 2009, tallying four quarters of economic contraction in the process, the German economy grew last quarter and despite predictions of an overall contraction for 2009, is showing signs of recovery (Dougherty, 2009). If the rebound takes hold, it could reasonably be expected to trickle through to consumer products, which as in many countries have seen a dropoff in demand over the past year. Optimism aside, the German economy has not weathered the economic downturn as well as the Australian economy, a consequence of a tighter credit crunch than we have seen in the domestic market.

The social environment in Germany is favourable for cosmetics, although growth has been hampered by the country's sluggish economy. A compendium of industry reports from trade magazines suggests that the country is most favourable for anti-ageing lines and for men's fragrances, both of which have demonstrated strong performance in recent years. The men's fragrance category has one of the highest penetrations in Europe, for example and in 2008 the market for men's cosmetics was expected to double in the next year (Stone, 2008). Demographically, Germany is ageing rapidly and this has resulted in a surge of demand for anti-ageing cosmetics (Pitman, 2006). Furthermore, organic cosmetics have an approximate market share of 4% (Organic Monitor, 2006), a high figure that indicates a minor social trend towards fully organic lifestyles. Private label cosmetics are the most rapidly growing price category for cosmetics in Germany, where private label goods run at about 25% market share in many consumer categories (Pitman, 2006).

The technological environment in Germany is of little consequence to our company. Firms currently operating in Germany have roughly the same degree of technological capability as we do, and in any case our industry is only marginally driven by technological advances.

The legal environment is relatively favourable. There is little indication that our firm would have any legal difficulty selling our product in Germany. Litigation risk is similar to what we face in Australia.

The environmental environment is slightly more robust in Germany, which is a world leader in both recycling and adoption of organic consumer products. Environmental laws in the European Union in general are stricter than ours in Australia, and may differ between jurisdictions. It is, however, not expected that we would be unable to meet any more stringent requirements because production would either be here in Australia or if offshored to Germany the local partner would already be compliant with the environmental code, which for this industry includes environmental assessments of production facilities by the industry group IKW (IKW, 2009). There are also strict rules regarding animal testing that any entrant into the German market must adhere to. We would need to reconcile our current practices with respect to animal testing with these regulations prior to market entry.

In addition to the PESTLE analysis, there are several other types of analyses that can help us understand the environment we can expect to face in Germany. One is the market analysis. The Germany cosmetics market is the 3rd largest in the world, behind the U.S. And Japan, with a value estimated by the German Cosmetic, Toiletry, Perfumery and Detergent Association (IKW) to be €16.5 billion (a$28.2 billion) in 2008 (IKW, 2009). The Germans have a long history in the business, with "eau de Cologne" being invented in Koln 210 years ago (IKW, 2009). The German market is continuing to grow slowly, despite economic challenges, recording 10.5% growth since 2004 (Ibid.).

There are approximately 525 firms in the industry in Germany, ranging from large international enterprises to small boutique cosmetic and fragrance houses. The industry is centered in Frankfurt. These companies are among the world's leading exporters of cosmetics. The industry association coordinates efforts with respect to both marketing and research and development functions at German firms.

The German cosmetics market is relatively saturated with competitors. Most major international brands have a presence in the market, as do scores of boutique brands. A multitude of channels are used, with indications being that mainstream mass retailers are the preferred channel for Germans in general. These tend to be department stores, of which there are a wide range of chains. Although the size of the market alleviates competitive pressure to some degree, the multitude of competitors makes the German market a difficult one in which to operate. In addition to a wide range of name brands, private labels have a strong market share in the neighbourhood of 25%, and compete based on price.

Our company competes domestically as a name brand, utilizing national distribution channels. We have a strong product and have built a good brand name in our current markets. The brand is unknown in Germany, however, and would need to be established. We would also need to develop distribution networks in order to attain market penetration. We are a strong competitor in every market in which we operate, but none of these markets are as large or as saturated as the German market.

The implications of this situational analysis are simple. The German market has strong potential, more due to its size and characteristics than due to growth. The main growth segments of men's cosmetics and anti-ageing cosmetics do not fit with our current core product line. However, women's cosmetics is the largest component of the German industry, to the point where the IKW breaks the category down into multiple component parts (skin care, decorative cosmetics, bath & shower, etc.). The German market has significant potential for us, but there are many challenges as well. If our production processes meet the environmental and animal testing requirements of the EU and Germany, the marketing department feels that it can develop a strategy to enter this market.

4.0 Objectives

Our company's mission statement is to deliver the highest quality cosmetic products at a fair price to consumers. In order to attain this mission, we follow a differentiated business strategy. Michael Porter described generic industry strategies in his book Competitive Strategy (1980), wherein the differentiated strategy was defined as having a high degree of product uniqueness and industry wide target scope. Our company has built a brand name in the higher end of the cosmetics business through strong marketing and a high quality product. We trade on that name, but we distribute through national channels. In entering the German market, we would adapt this approach to that market, seeking out national channels there and maintaining our differentiated strategy with regards to the high quality of our products and the strength of our brand name.

4.5 Market Strategies

The market selected is Germany, and we intend to enter this market on a national basis. We believe that the best approach is to launch nationally, with a high profile campaign. This method of market entry we believe is the best fit for our company for a couple of key reasons. One is that we have as a model the differentiated strategy, which incorporates a wide target market and national scope. Thus, we want to arrive in the German market with national distribution in department stores and other national outlets. The high profile campaign will support our efforts to establish our brand and built awareness in the German market. We also need to communicate the points of differentiation between our product and those of our competitors.

The recent market trends provide us with insight into consumer behaviour in Germany. The average German spends €134.60 on cosmetic products (IKW, 2009), which combined with 25% market share for private labels indicates that the vast majority of Germans do not purchase high end cosmetic products. The market sees low organic growth, with just 2.2% growth overall reported in 2008 by the IKW. As a consequence, it appears that aside from the growth potential in anti-ageing cosmetics and possibly in the organic sector, the pace of change in the German cosmetic industry is slow. Consumers are brand loyal and not given to spending extravagant amounts.

Our market positioning, however, should be done with an eye to consistency across markets. This is especially important since our target market will be inherently worldly and may have exposure to different markets. Brand differentiation is crucial to the company's business strategy, but this can be scuttled by having different brand images in different markets (Matthiesen, 2004). Consistency is critical, therefore we must position our product at the high end of the mainstream, the same as we do in the domestic market. In the German market, we will also add a secondary positioning as an exotic foreign brand, with the boost in image that this entails.

5.0 Marketing Mix

The marketing mix consists of the following components: product, price, distribution and promotion. If we were to enter the German market, given the aforementioned data and analysis, the following is the recommended marketing mix. We should launch with our complete flagship line. This includes all of our products under that brand, including ancillary non-cosmetic products. The reason for this is that we must build our brand, and one of the best ways to do this is to increase our visibility in stores. Moreover, national chains are accustomed to dealing with major firms that provide the full range of products. We must match that in order to gain a foothold with national distributors and retailers.

The price should reflect our differentiated strategy. It is therefore recommended that we price at the higher end of the mainstream. We are positioning ourselves slightly higher than the mainstream, because we not only have a higher quality product but we also wish to trade on our foreign origins. The price should be between 5-10% higher than the mainstream domestic brands in order to convey the superiority of our product to the consumers.

We need national distribution. There are a wide range of department stores and discount outlets in Germany that serve the entire nation. Within these, we would seek distribution and retailing partnerships with higher end outlets. In order to meet this requirement, we will need a distributor that is centrally located, perhaps in the industry's hub of Frankfurt, and that has contacts with the stores we wish to target. We also have the option of self-distribution, which would require setting up our own warehouse and dealing with the importation paperwork.

Promotion for entry into the German market should be fairly intense. The market is highly competitive and the consumers are relatively brand loyal. We have no brand awareness. Furthermore, in order to secure national accounts we will need to bring something to the table that will convince them we are serious about the market entry and a strong promotional campaign will fit the bill. Advertising should be undertaken in German-language fashion magazines in particular, but other media should be explored as well.

6.0 Financial Evaluation

Entry to the German market will be an expensive proposition. The market, however, is huge. It is estimated that we will need to spend between €5-10 million (a$8.55 -- a$17.1 million) in order to support the launch. If we are able to capture a 0.1% share of the total cosmetics business, that would amount to revenues of €12.6 million (a$21.55 million). While the market is fragmented with over 500 firms involved, there are several major competitors with strong market shares. If our company is to compete on a national scale, we need to be able to build our brand over the course of 1-3 years, with market share targets in the range of 2-3% (€378 million or a$646 million) and corresponding increases in market budget to support additional retail channels. The breakeven point, if we spend €10 million to launch, would be a market share of 0.079%. Naturally, these figures are gross, but we have a gross margin on our products in the 70-80% range depending on the specific price point we set, so a breakeven point will come out in the 0.1% market share range. The financial projects should be subject to a sensitivity analysis. In this case, we estimate that the 0.1% market share nationally would come from having only one national account, our initial retail partner. If we do not secure an initial retail partner, we would not enter the market.

7.0 Implementation and Control

The action plan for entering Germany has several steps. The first is to improve our market information. As we have no experience in the German cosmetics market, we have a significant market knowledge gap that must be overcome. A country manager with significant German experience and language skills should be a priority for the firm before we give strong consideration to such a launch.

The second step in the action plan is to seek out local partners in retail, distribution and advertising. These partners will not only facilitate our entry into the market, but will also help us to make up our knowledge gap. We should also contact the IKW in order to determine the specific environmental and animal testing parameters it will expect us to meet. Depending on our findings, we may wish to explore partnering with a local firm for production.

With our distribution and retail partners in place, the third step in the action plan will be to begin the advertising campaign. We will coordinate a launch with our advertising and retail partners, allowing for the product to be on store shelves when the first ads appear. The print ads will launch first, followed by other media as needed. The fourth step in the action plan is to build out our retailer network. By adding retailers we will be able to sell more product. We will support this effort with more intensive marketing activities.

The action plan will be monitored on a week-by-week basis for the first two years. We will have specific monitoring programs not just for sales but for consumer response to our advertising. We will also watch for competitor response to our arrival, for shifts in the competitive marketplace and for trends in the industry. We will monitor our brand awareness as well, since part of the initial marketing objective is to build the brand. Brand perception must also be monitored as well, since we are entering the market with a differentiated strategy. The outcome of our marketing program must be not only sales but brand awareness and perception that is consistent with the image we have cultivated to date in our other markets.

8.0 Conclusion

The German market for cosmetics in the third-largest in the world, and is therefore enticing to our company. The potential, however, must be tempered with the understanding the growth is relatively slow, the competition is intense and the demographics are not in our favour since the population is ageing. If we are to enter this market, we must utilize our differentiated strategy, with the additional element of our foreign appeal. This will justify our premium pricing and allow us to gain a niche in the cosmetic sections of national department store chains.

If we support our entry into the German market with a sufficiently strong promotional campaign and can gain distribution and retail partners with local knowledge, there is significant profit potential. Conversely, if we are unable to lower our knowledge gap with respect to the German marketplace, we may find that we are unable to survive amid the environment of intense competition and slow growth.

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