Dec. 11 (Bloomberg) -- Natura Cosmeticos SA is counting on increasing sales from its Latin American units to drive growth as stagnant revenue from its core Brazilian market makes it the world’s worst performing cosmetics company.
Sales in countries such as Argentina and Mexico are poised to generate more profits as recent investments kick in, brand recognition grows and costs fall, Chief Executive Officer Alessandro Carlucci said. Meanwhile, Brazilian consumers, burdened with debt after the economy contracted 0.5 percent in the third quarter, are cutting spending.
“Operations are profitable and we are seeing significant growth rates in both the top line and the bottom line” in Latin America outside of Brazil, Carlucci said in an interview in Rio de Janeiro Dec. 9. “We are very enthusiastic and there are good signals of recognition of preference of brand.”
Hair products and deodorant are driving demand at the Itapecerica da Serra, Brazil-based company, which promotes itself as eco-friendly and all-natural, and will help the beauty industries in both its home market and Latin America grow about 9 percent each in nominal terms next year. That would be the same as in 2013, or as much as 4 percent in real terms, Carlucci said.
Natura saw sales in Brazil grow 5.5 percent in the third quarter versus 40 percent for the rest of Latin America as it faces competition from companies like Avon Products Inc. Natura’s sales grew at quarterly rates of 15 percent to 27 percent in 2009 and 2010, according to data compiled by Bloomberg. Natura sells its products directly through representatives to people’s homes.
Natura fell 0.1 percent to 41.45 reais at the close in Sao Paulo, leaving the shares down 29 percent this year after 2012’s 62 percent gain. Avon rose 24 percent this year through yesterday. Natura is trading at 20 times estimated 2013 earnings, compared to 18 times for Avon. In August of last year, 47 percent of analysts rated the company buy, compared with only 16 percent today, according to data compiled by Bloomberg.
Consumer spending in Brazil, which the government has been stimulating through tax cuts on home appliances and cars to prop up the economy, slowed to 0.4 percent on average in the first three quarters of 2013 from 1 percent in the first three quarters of 2012, according to data compiled by Bloomberg.
People have less money to spend on discretionary items as inflation widened 5.8 percent in November, corroding family incomes. The outlook for 2014 isn’t much better even with the World Cup and elections -- which should pump new money into the economy -- on the schedule, Carlucci said.
In addition to a weakened economy, Natura has been facing competition from local and international companies including New York-based Avon, which saw constant dollar revenue in Brazil rise by 13 percent in the third quarter, driven by innovation and more-expensive products. Latin America represented 52 percent of revenue in the third quarter, according to data compiled by Bloomberg. Avon didn’t respond to a request for comment.
Natura’s strategy to beat its competitors is to get customers to buy more frequently, Carlucci said. The company is counting on innovative products -- such as its Ekos line of products that contain raw materials gathered, in a sustainable way, from Brazilian biodiversity -- at varying prices, faster delivery and offering customers myriad payment options, including the use of credit cards, which was first introduced about three weeks ago.
Latin American sales outside of Brazil represented 15 percent of 1.8 billion reais ($780 million) in revenue in the third quarter. Even countries like Argentina, where inflation widened to an official rate of 11 percent in October, are a boon for Natura.
“The region is doing very well,” Carlucci said. He cited economies like Peru’s, which is estimated to grow 5.1 percent in 2013, and Colombia’s, which is estimated to grow 4 percent, according to data compiled by Bloomberg. Brazil’s economy is estimated to grow 2.5 percent.
An increase in the number of international sales representatives and productivity of Brazilian consultants are the two main growth drivers for the company, a team of Votorantim Corretora analysts lead by Luiz Cesta wrote in a Nov. 6 report.
“We believe that some top-line growth may be reached in the short term, 2014, but we believe that the complete maturation of the line and deeper results will only be seen in a couple of years,” the Votorantim analysts wrote.
Growth could instead come in the form of acquisitions, which the company is eyeing for 2014, Carlucci said. In February, Natura acquired a 65 percent stake in the Australian company Aesop for A$68 million ($62 million).
“M&A hasn’t stopped there - if it fits into our plans, we’ll make more acquisitions,” Carlucci said. “More than geography, we look for brands that are competent and have an identity that aligns with Natura’s.”
To contact the editor responsible for this story: Ed Dufner at email@example.com