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The bonanza of globalization has its price.
This story first appeared in the May 11, 2012 issue of WWD. Subscribe Today.
That is what Dan Brestle, the retired vice chairman and president of the Estée Lauder Cos., North America, had in mind as he was leaving some parting thoughts behind during his speech in February as the outgoing chairman of the Personal Care Products Council. He was talking about the downside to selling to a whole new tribe of customers suddenly thundering out of the emerging world. “Consumers are travelling more than ever before, and your ability to control product pricing around the world will be challenged,” he said. “When a consumer can buy a product in one country at full retail and take it home at full retail and sell it for a profit in her home country, it creates a whole new definition of diversion.”
At first glance, this may look like a topic for accountants and nerds, but the issue is a live nerve that runs through the soul of a brand. Says another executive, “It is more than global pricing; it is global positioning.”
Brestle seems to have sounded an alarm just when others in the industry are beginning to look into the situation on their own. But while discussing it among themselves, beauty executives seem reluctant to talk about the issue publicly, apparently out of fear of being accused of committing resale price maintenance by some government lawyer. So the term is “suggested retail price.”
This is a key issue because price is one of the core elements that determines brand identity and how consumers view a brand’s intrinsic value. Once the selling margin is hammered out with a retailer in a certain market, the resultant retail price tells the consumer where the brand sits on the price/value pecking order. Or, as one executive says, “Who we are as a brand and what it says about the brand.”
In a recent follow-up interview, Brestle made it clear that the problem is not in losing control of pricing per se but what it leads to. When someone comes home to a former third world country from Hong Kong with a suitcase full of MAC lipsticks—one of the coins of the realm—and goes home and displays them on a shelf next to chewing gum, the brand loses its lustre. “The big problem is the image of the place where the selling is being done,” he says, adding that the danger is “losing control of your brand positioning because you don’t control the outlets where your products are sold. That is the issue.”
In the past, there have always been cases of products winding up where they weren’t supposed to be. But it could be controlled. Consumers didn’t move around from market to market in large clusters. Companies serviced the globe by targeting distinct geographic markets, like Japan or Korea or Russia or Brazil. As Brestle points out, the industry could be casual about their pricing attitudes in individual markets because each of the geographic entities could be seen as mutually exclusive. No more. This is the new era of the Chinese consumer, “one of the biggest spenders around the world,” in the words of one marketer.
Without elaborating, Philip Shearer, chief executive officer at Groupe Clarins in Paris, notes that mismatches in global price positioning is a very old issue, but it has been brought roaring back to life with the dramatic emergence of these clusters of consumers moving around the globe and completely uprooting the old order of international marketing.
An executive at another company said that 73 million Chinese traveled outside of the mainland last year. Of those, 63 million went to Hong Kong, while the rest headed for Macao and Taiwan, and hit travel retail shops across Asia, Dubai and finally Europe, principally Paris. Prices in Hong Kong are roughly 30 to 40 percent lower than in mainland China, with its steep import duties. On the surface, Hong Kong pricing is on a par with Europe, except that once the traveller has reclaimed his VAT tax, places like France could be considered cheaper. Then there is the U.S., which is definitely less expensive with its lack of import duties, anemic dollar and highly competitive market. U.S. prices are also lower than those in Canada. New York has been well documented as a magnet for Brazilians, who are escaping the high import duties at home. A lipstick can cost $40 in a shop in São Paulo, $15 in a duty free store in the Rio de Janeiro airport and $16.50 in Miami. More than one executive jokes that a traveller with a big enough suitcase can pay for her plane tickets by moving around the globe buying and selling beauty products.
Brestle and other executives view the problem globally. “If I were a company, I wouldn’t take pricing as casually as it has been,” he says. “They should look at the world as a whole and not in segments.” He adds the problem will worsen as even more Chinese begin travelling. Another executive alluded to the influx of Japanese travellers 20 years ago and described the Chinese onslaught as “Japan times five.” High product prices in Japan helped fuel the phenomenal growth of the global travel retail channel, which now dwarfs the entire prestige market in the U.S.
There are a number of reasons for price variation, some structural like high import duties, as in Brazil and China, and value added taxes, as in Europe. Also, manufacturers negotiate different margins with their retail partners.
In terms of transparency, nothing levels the competitive pricing field like the Internet, with its low prices free of duties and taxes. “What the Internet can do is extraordinary,” says an executive, who notes that vendors pay for retail space only to be undercut by a Web site. The same complaint is made about duty free shops getting a free ride from local-market advertising.
As one observer says, consumers’ new global awareness is forcing companies to be more consistent in their brand messaging from market to market. It is no longer efficient to radically tailor strategy in a particular market, as when Lancôme was sold door-to-door in Korea in the late Eighties due to a lack of department stores. If the prices of familiar products gyrate between markets, the equity of the brand suffers. The consumer’s perception of value is undermined. One observer’s advice: “Focus on the consumer and forget all the intermediaries.”