FRANKFURT -- The German prestige beauty market -- a $1.19 billion arena and second in Europe only to France's $1.4 billion -- is in the midst of fundamental change.
Just as retailers are in the throes of consolidation and widespread experimentation, price wars have erupted in a country long used to uniform pricing.
In many ways, the country's predicament is similar to that of its neighbors -- but with a Germanic twist. The recession that has swept all of Europe is intensified here because of the costs of integrating the former East Germany, with its 16 million people.
As the largest mass and prestige cosmetics market in Europe, with sales of $8 billion, Germany could prove pivotal in shaping the future of how cosmetics and fragrances are marketed on the Continent.
The years of double-digit growth in prestige cosmetics ended in 1992, when growth fell to 5.4 percent, according to the German cosmetics industry federation, Industrieverband Koerperpflegeund Waschmittel. When the final figures are tallied, growth for 1993 is expected to be even lower.
The future doesn't look much brighter. The market research organization, Gesellschaft fuer Konsumforschung (GFK), or Society for Consumer Research, projects average growth in the German fragrance market of no more than 3 percent annually for the three years through 1996. "The market is not in good shape," said Walter Farnsteiner, president of Eurocos Cosmetic GmbH, a prestige market subsidiary of Procter & Gamble, which manufactures the Laura Biagiotti, Hugo Boss and Otto Kern fragrances. He said the marginal gains of 1993 came chiefly through price increases and introductions.
At Parfumerie Douglas, Germany's leading fragrance and cosmetics retailer, the outlook is more sanguine. Michael Brixner, a managing director of Parfumerie Douglas, noted that the entire chain's comparative-store growth for 1993 was only 0.5 percent, and for this year he expects sales to be flat.
Brixner pointed out that from 1989 through 1992, Douglas was chalking up comparable-store sales gains of 10 percent. The outlook may be flat, but even at zero growth this year, volume will be at a much higher point than in the mid-Eighties.
"We mourn at a high level," he said. "When the recession ends, we will take off like a shooting star."The immediate outlook may appear dim, but the response of the German industry has been refreshingly innovative as manufacturers and retailers from Stuttgart to Berlin devise strategies to fit market trends and beat the slump.
Downsizing. When shoppers balked at the prices of 50- and 100-ml. designer fragrances, German manufacturers offered lower opening price points with 20-ml., 25-ml. and 30-ml. sizes. Last year, 17 percent of women's fragrances sold in the former West Germany were 30-ml. versions, according to GFK.
Integrating mass market items into the retail product assortment in department stores and perfumeries as an answer to consumer price sensitivity and increased competition. Bars of Palmolive soap for $1.72 (1 DM) are one example. Nearly every Douglas perfumery has baskets of supermarket toiletries in the entrance, and the shelves nearest the door are devoted to mass market goods.
Stepping up promotion in a country that has outlawed gift-with-purchase giveaways, a favored weapon in other countries. Manufacturers have increased ad spending and shifted the emphasis from print media to TV while retailers are relying on promotional catalogs ranging from less costly newspaper circulars to four-color theme books for Christmas, such as the lavish catalog that the Hertie group produces for giant Berlin flagship KaDeWe.
Discounting. After years of fairly uniform prices, price slashing -- sometimes as high as 70 percent -- arrived in Germany last year. Under competitive pressure, some traditional retailers warn that they too may have to start discounting this year.
Creating perfumeries within department stores. To boost sales-per-square-meter, capitalize on the superior traffic found in department stores and cut personnel costs, the big store groups -- including Hertie, Karstadt and Kaufhof -- have replaced the individual vendor counters at some smaller outlets with in-store perfumeries that have separate street entrances.
There has been an awakening of consumer interest in the last year in men's skin care. Although embryonic, the market consists of lines like Aramis and Biotherm, according to Walter Thumm, managing director of Intercos GmbH, a major perfumery cooperative based in Stuttgart.
Thumm described the impetus as coming mostly from "women buying for their husbands." A faster-growing segment has been men's grooming.
Concentrating distribution. In France and Italy, the overwhelming majority of retailers are independent. But in Germany, more than 70 percent of the perfumeries belong to powerful chains and cooperatives.
Douglas is the biggest with 24 percent of the cosmetics and fragrance market, according to GFK and Nielsen. The chain has 355 perfumeries, mostly in Germany, but the company has spread its wings and ventured beyond its home borders. Douglas has opened stores in France, Holland, Switzerland, Italy, Belgium, Austria and the U.S. and is looking for locations in Spain and Portugal.
Without giving a timetable, Brixner estimated that Douglas could possibly double its European perfumery total, adding that Douglas had been cautious about expanding into the former East Germany in the early days of the 1989 reunification. But now he sees no problem going into the prime eastern markets -- Berlin, Dresden and Leipzig -- with a potential of opening as many as 50 or 60 perfumeries.
Meanwhile, the department stores generate 11 percent of prestige sales and, once again, consolidation is a key theme with the Karstadt store group's 1.5 billion DM buyout of the Hertie group in November, something that is expected to give them a commanding share of the department store cosmetics business.
On the manufacturers' side, the Lancaster Group -- with Joop, Jil Sander, Davidoff, Bogner and Lancaster brands -- claims the biggest slice of the German prestige market with a 22 percent share, according to a study commissioned by Intercos. The L'Oreal brands are next with a combined 18 percent share.
Then comes Unilever's prestige brands with 13.3 percent and Estee Lauder with 11 percent. Eurocos has 6 percent. Two upcoming fragrance introductions by German firms have caught the attention of retailers. The Lancaster Group, a division of Joh. Benckiser GmbH and the market leader, piqued curiosity when it notified retailers to expect a new introduction in the fall. Lancaster executives would say only that it will be a women's scent by a new designer who does men's and women's innerwear.
In mid-March, Eurocos will launch Laura Biagiotti's second men's scent, Roma Uomo.
Roma Uomo's launch strategy features a 5-ml. miniature, retailing for $8 (14.50 DM). Traditionally, miniatures were provided to retailers free as giveaways to consumers.Even more popular are the 20-ml., 25-ml. and 30-ml. promotional sizes.
"I've never seen so many 30-ml. sizes as during last year's Christmas business," said Thumm at Intercos, which represents a combined total of 160 perfumery doors.
Lancaster Group AG of Wiesbaden near Frankfurt attempts to protect its regular-size business by selling its small sizes to the perfumeries during only two of its six ordering periods each year.
Jochen Pink, president of prestige leader Lancaster, maintains that the interest in smaller sizes is directly related not only to changing consumer ideas about value but also to the recession.
"With less money, the first reaction by the consumer is, 'How can I keep using the product but spend less money?' One way is the 30-ml. eau de toilette," said Pink, who noted that Lancaster first used small sizes in 1992.
Reiner Kunath, purchasing director for the 80-door Hertie department store group in Frankfurt, agrees that the recession has boosted sales of small sizes but argues that the economy doesn't explain everything.
"It's not related to the recession. Rather, it's a typical German mentality," he said. "Germans prefer to try something small before they commit."
Brixner of Douglas agrees.
"People don't like to spend more than 50 marks ($29)," he said, describing a 30-ml. as a "starter size."
"If it's a new scent, they don't have to buy a big bottle. Then they can come back and buy one or two gallons," he said with a laugh.
Meanwhile, Lancaster is shifting its marketing strategy in other ways.
"Before, the market was dominated by push-oriented marketing strategies," said Detlef Braun, marketing director at Lancaster Group AG.
Then the high-flying growth of the Eighties decelerated rapidly in 1991, and companies began to rely less on in-store promotion and invest more in advertising to pull consumers into stores.
Braun called 1991 "the turning point to a 'pull strategy,' in which the whole industry increased budgets significantly."
Lancaster executives declined to disclose the specific evolution of spending but indicated their growing reliance on TV advertising.While TV represented only 6 percent of the budget in 1992, last year the company devoted some 30 percent to TV campaigns. Last September, Lancaster put TV spots behind its Joop Femme and Joop Homme, Jil Sander Woman No. 4 and Background fragrances.
Several companies said that advertising products in movie theaters -- attended by 70 percent of targeted Germans youth under the age of 29 -- is becoming increasingly important.
One worrisome issue is the encroachment of diverted merchandise. Executives claim diverted merchandise originates in Europe and the U.S., and that currency fluctuations within the European Community -- particularly with the weak Italian lira -- has opened a back door into more prosperous countries.
"Until now, prices were uniform throughout the distribution," said Thumm at Intercos, whipping out a newspaper insert from Der Duftflacon, a Stuttgart retailer. "They buy off the gray market. For a fragrance priced at 54 DM ($31), their price is 19.99 DM ($11.62)," he said.
The diverted goods end up in the shops of upstart competitors, like the discount perfumery chain called Import, which now has three stores in Munich.
Although some retailers downplay the competitive threat of discounters, Thumm noted, "I don't think we will be able to hold prices. Pricing will become the marketing instrument in Germany. The only question is when. We may see it this year."
As the recession makes consumers more price-wary, it becomes more difficult to compete with an attractive discount. Thumm noted, "You cannot say to a customer, 'I offer you better service and better consultation."'
Farnsteiner at Eurocos estimates that 10 percent of his volume is lost to competition from diverted fragrances sold at discount.
Consumers' price sensitivity and increased store competition have been growing problems as the recession continues. One answer has been for prestige retailers to add lower-priced personal care products to their previously high-priced assortments.
Brixner said Douglas began broadening its prestige assortment with the addition of lower-priced toiletries and mass market cosmetics and fragrances two years ago as a way of meeting increased retail competition and luring more shoppers.
"Our idea was to bring customers into the store," he said. "We try to get a good mix of all price lines."Douglas also is experimenting with open-sell techniques by installing shelving units for shopping ease in a broad cross-section of its stores.
"A Linique customer may know what she wants and can get it and go out," Brixner said, referring to Clinique's German brand name. "Sometimes she doesn't want to be disturbed by a salesperson. But sometimes she changes her mind rapidly, and our sales staff is trained to sense when she wants help."
The sales help then steps in to make an extra impulse sale.
For the larger retailers, one of the cleverest ways of increasing profits in the face of stiff competition has been the development of in-store perfumeries.
The new system increases sales per square meter and reduces personnel costs since the perfumery clerks -- unlike beauty consultants dedicated to individual vendors -- sell all brands.
"We like this very much from a cost standpoint," said Farnsteiner at Eurocos.
Karstadt was the first to introduce the concept and others, including Hertie, have followed its lead.
Hertie has held onto its traditional counter setup at its largest outlets, but in 14 smaller stores has incorporated a multi-brand perfumery, Parfumerie Orly, staffed by store personnel.
"Our motivation was to offer more brands to consumers in order to boost turnover," Hertie's Kunath explained. "But both systems can be profitable, depending on store traffic."
The traditional department with counters has 4,500 square feet, while Orly has between 1,170 and 2,250 square feet.
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