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“My dear friends, welcome to Mars.”
So began Jean-Paul Agon, the chief executive officer of L’Oréal, as he stood at the podium in Palm Beach to deliver the opening address of the 2012 WWD Beauty CEO Summit, a small smile on his face belying the seriousness in his eyes.
Standing in a darkened ballroom in front of 275 executives from around the world, an enormous red sphere rising behind him on the screen, Agon outlined the extraordinary changes that have forever changed the dynamics of the beauty industry.
His message was clear: Beauty is at the dawn of a revolutionary new world order. And while aspiration remains the axis around which the industry will always revolve, adapting to the rapidly changing landscape is critical for companies who wish to avoid extinction.
“We operate in a world that has changed very quickly and very profoundly,” said Agon. “And this is only the beginning.”
Indeed, change—and the consumer’s role as key instigator—was the prevailing theme at the summit. “Consumers today are totally diverse, they are perfectly informed, they are hard to capture, they are increasingly demanding,” said Agon. “They are critical and combative, but they are also very creative, involved, even to the point of making suggestions about products or advertising campaigns. The consumer, in fact, has become the best prescriber and the best spokesper- son for our brands.”
“Consumers are calling the shots,” agreed Jose Barra, Target’s senior vice president of health care and beauty. “If the product or brand they are looking for is not offered, they’ll switch to a different one. A company’s ability to anticipate, innovate and break boundaries is increasingly becoming an indicator of its ability to survive, let alone grow.”
John Demsey, group president of the Estée Lauder Cos. Inc., noted that the sociocultural upheaval rocking the world is akin to the seismic shifts of the Seventies, which forever altered the status quo. “There has never been a time in history quite like now,” he said. “Today’s world is exceedingly more fragmented, undeniably fast changing and requires new thinking on our part. Today we are living in a mash-up of cultures…a world where luxury shoppers feel just as comfortable shopping in Target as in Saks…in which subgroups are pulling us into territories and geographies that would not even be considered important in crucial markets 20 years ago.
“No more top down, no more telling and selling,” Demsey declared. “We have to widen our perspective, listen and learn.”
Listen and learn: It was a point amplified over the course of the three-day meeting by each of the 18 speakers, whether they hailed from Melbourne or Minnesota, Manhattan or Mumbai. Together they pointed the way to a bright future. Here, the key takeaways.
“The gradual awakening of the new world, which is now emerging, has completely transformed our industry,” said Agon. “New markets will surpass mature markets in size in three years time. And three of these new markets—China, Brazil and Russia—are already in the top five markets of the world.”
Citing a Goldman Sachs report, Elizabeth Arden ceo E. Scott Beattie quantified the opportunity. “They predicted the emerging markets for household and personal care products will grow 8 percent a year for the next 40 years,” he said. “This is a $2 trillion opportunity in our industry. The premium cosmetics segment of the personal care space is going to be one of the very fastest-growing elements of this. The future, our growth [potential] is phenomenal.”
While many are focused on the BRIC countries—Brazil, Russia, India, China—smaller countries, too, possess great promise. Noting that the current distribution structure in China makes it difficult to turn a profit there, Revlon ceo Alan Ennis said, “There are huge markets in Asia—India being a significant one, but the Philippines, Indonesia, Malaysia—that sometimes get overlooked. China gets all the press. But, excluding India, there’s a billion people in those other Southeast Asian markets. So our strategy has been to find high-quality distributors in those markets and go after them as aggressively as we do in China.”
It’s not just new markets, however. Graciela Eleta, a senior vice president of Univision, noted that the U.S. Latino market is currently 50 million strong and is expected to double by 2050 to 132 million, or 30 percent of the total population. “We have an emerging nation within a nation right here in our backyard,” she said. “And this is a consumer who is beauty-obsessed. When Global Insights looks at the next five years, they predict that 35 percent of the growth in beauty and personal care in the U.S. will come from Latinas.”
DIGITAL CHANGES EVERYTHING
The ongoing digital revolution has transferred power from corporations to consumers and fundamentally changed the relationship between brands, retailers and the end user. First some numbers: As Agon noted, 78 percent of all beauty sales are directly influenced by the Internet. There are more than five billion cell phones in use today globally, while in China alone, the number of online buyers of beauty is expected to reach 80 million by 2015.
“There has been a seismic shift in the flattening of the playing field driven by technology,” said Beattie. “The Internet and social media together have redefined the concept of point of sale and dramatically impacted every single one of us.”
Teen Vogue’s Eva Chen reported that 91 percent of her readers use their mobile devices while they’re shopping and 80 percent sleep with their cell phones. “Our readers are living online,” she said, “and if you’re not on it, you are missing out on the conversation.”
Creating content and a dialogue with consumers isn’t a maybe for brands to- day. It’s a must. “The brands that break through the noise are the brands that have the best stories,” said Demsey. “Brands have become the media properties of what magazines used to be or continue to be, only to another level….When I think back on the role of PR, global communications, marketing, to the idea of consumer engagement, CRM, trade marketing, there is a blurring of all these lines right now, whereas everybody is a platform, everybody has content and everybody is selling.”
HEEDING CULTURAL IMPERATIVES
Wherever in the world John Demsey travels, he has a set routine: He has his team assemble the region’s top fashion and celebrity magazines, he tunes in to the local version of MTV and he hits the streets to absorb street culture. “When we plug into the mash-up of what’s going on around us and read between the tweets, we see the opportunities for our industry to get a piece of the global picture,” he said. “I like to refer to it as the granularity of aspiration…It’s important to put yourself in the context of where you are because those are the people who buy our products and they are the ones who aspire to a better life.
“If we pay attention to popular culture, it will tell us what people desire,” he continued. “And when we know what people desire, we will know best how to respond.” For Agon, that concept led to the creation of his doctrine of universalization, in which brands are globalized but products and formulas are localized, adapted to different cultures. “We call it geo-cosmetics,” he said. “That takes into account both the consumer’s physical qualities—her skin, her hair—but also the cultural specificities.”
Desirée Rogers agreed. The ceo of Johnson Publishing was speaking specifically about black consumers in the U.S., but her point was global in scope.“There is a new premium on being who you are,” she said. “In order to stay with the younger consumers, the iconic images have to constantly change to reflect the looks of the day. There’s no right and no wrong. Those companies that choose a cookie-cutter approach without developing a real relationship with consumers will ultimately lose.”
Truly understanding the nuances and needs of a given market is the only way to achieve success. Doing so is easier said than done. Take India, for example, one of the most im- portant emerging countries for most cosmetics giants. “India is about 3.2 million square kilometers, with 35 provinces, 649 districts, 5,000 towns and 640,000 vil- lages. Twenty-three languages are spoken and 1,600 dialects,” said Vivek Bali, vice president and business head of cosmetics and fragrances in the lifestyle division of Reliance Retail Ltd.
The result is an incredibly complex consumer base, each of whom wants specific products. “Brands need to understand the ladies’ beauty needs like no one else does,” said Bali. “We need to design shades for the Indian complexion. Indians are fair, brown, wheatish, olive and dark, and the most popular makeup colors are maroons, mauves, pinks and browns. And red is very festive.”
Whether it’s knowing the preferred form of shampoo (sachets) or personal care (talc has been replaced by deodorant, which is quickly being overtaken by body spray), the ramifications are clear. India, where 65 percent of the country is below the age of 35 and the middle class population has tripled since 1996, represents the future.
Equally as important, though, is recognizing consumer diversity in one’s own backyard. Iman delivered an impassioned message to the mass retailers in attendance. “I can honestly tell you that people are desperately looking for brands that they can believe in right here at home,” she said, noting that she’s never understood why retailers set apart products for women of color into an ethnic beauty aisle and carry such brands only in select stores. “I think personally if a black woman or black family or Latina family is shopping in your pharmacy, she would probably buy the cosmetics line if it was there.”
IT’S AN OMNICHANNEL WORLD
“We are big believers in omnichannel,” declared Muriel Gonzalez, Macy’s Inc.’s executive vice president and general merchandise manager for cosmetics, fragrances and shoes. “If a customer shops in store and online, the data is that she spends more than if she is a shopper in just a single channel.” To that end, Macy’s has implemented a new search-and-send program and opened eight fulfillment stores, a number Gonzalez said would increase to 250 within the year. “The old barriers between who got credit for the sale and where it came from or how much it cost to ship it, that’s really all gone,” said Gonzalez, “because she is just a better consumer and spends more and is more satisfied with us if we make it easier for her.”
Joe Magnacca, president of daily living products and solutions at Walgreens, agreed. “We want to serve everyone across all channels. And we really don’t care if she walks into a store, if she orders online and picks up in store or just orders online,” he said. “We just care that she is satisfied with her order, because it really is her world, not ours.” He cited figures showing that a customer who shops in store and via mobile is 3.5 times more valuable than in-store alone, and someone who shops in store, online and on mobile is six times more valuable. “That’s why we play in all of those areas across our business. We want to create that accessibility,” he said. “And that’s probably why Amazon wants to play with bricks and mortar, too.”
While Macy’s and Walgreens may have successfully integrated once-disparate worlds, many observed that it was time to do the same with the traditional demarcations between mass and prestige retailing in the U.S. “The beauty industry has been slow to embrace and accept the consumer’s new reality,” said Barra. “We are still branding our products for a channel rather than for the consumer. But the equity of a brand is not defined by this channel as it may have been in the past. So clearly there is a tremendous opportunity for all of us today to reimagine our current approach.”
Magnacca’s goals were equally bold. “We are trying to take a leadership position in prestige beauty,” he said, noting that whereas once Duane Reade, now owned by Walgreens, was so synonymous with poor service there was an entire Web site devoted to complaining about it, now the retailer sells fresh sushi in select flagships. (“It’s actually excellent,” Magnacca insisted.)
On a global level, the omnichannel world takes on even more significance. Speaking of countries that don’t yet have a well-developed retail infrastructure, such as Brazil, India and certain areas in the Middle East, Beattie asked, “If you’ve never experienced retail infrastructure like malls or a high street, why is there necessarily going to be the preference to buy product there? Why not just go immediately to a mobile platform and buy products that way?”
EXPERIENCE THE DIFFERENCE
In a world dominated by digital, traditional retailers are in the fight of their lives. At the summit, retailers were unanimous that survival depends on providing consumers with unparalleled, knock-your-socks-off experiences. “A transactional model doesn’t work anymore,” said Wendy Liebmann, ceo of WSL Strategic Retail, during a panel moderated by Mecca Cosmetica’s Jo Horgan and also featuring Nars ceo Louis Desazars. “We have to build a different level of engagement.”
Horgan noted that in an Australian beauty market that is shrinking by 5 percent per annum, Mecca posted 10 percent same-store comps last year, attributing that success to programs that captivated the customer. For example, Mecca staged a makeup artistry event based on the Nars book, Make Up Your Mind, in which acetate overlays provided clear before/after and how-to guidance. “As a result, we did over 2,000 applications that month and the average basket was $280,” said Horgan, who noted that 20 percent of Mecca’s business comes from events.
Marigay McKee, Harrods’ chief merchant, revealed the formula that she and her team created to adapt to the digital challenge. “In the Eighties, department stores were like schools. The sales associates were the teachers, and the customers were the pupils. In the Nineties, department stores became more like hospitals and the sales associates became doctors to the customer’s patient,” she said. “Today, stores have become like homes and hotels, where the associates are hosts and the customers are our guests, who we invite in to experience our hospitality.”
At Harrods, which derives half of its traffic from the tourist trade, that hospitality is very alluring indeed: cocktail parties, fashion shows, extended opening hours—even 75 China Union pay terminals to make the transaction seamless for those customers. Harrods invites really high rollers to special events like a couture show in Paris or a gallery exhibition in Milan.
While that’s the exception rather than the rule, exclusives have become a crucial point of differentiation. “When I first got to Harrods, I asked the beauty office, ‘How many exclusives do we have this year?’” McKee recalled, incredulous when she heard the answer of four or five. “I was like, ‘There’s 52 weeks and 365 days in a year!’”
Today, Harrods has on average 250 to 300 product exclusives every year.
Horgan pointed out that shoppers respond not just to newness in the product realm, but in the retail arena, too. “We try to change the store completely every month—from the windows to the visual merchandising to what the staff wear,” she said. “There’s only so much newness that brands can bring,” she continued. “As a retailer, we have to take responsibility for creating that sense of newness ourselves.”
LEADING THE CHARGE
Leadership that meets the changing mores of today was a recurrent theme woven throughout the presentations. John Paul DeJoria, the cofounder and ceo of John Paul Mitchell Systems, delivered a call to action to the attendees: Build your industry and you’ll build your company. DeJoria, who also created Patrón Tequila, told of an ad that a rival tequila brand created bashing Patrón. Rather than retaliate with another negative campaign, Patrón ran a series of public service ads outlining the benefits the company brought to the community where the liquor is made and its philanthropic efforts around the world.
“Not one company was knocked,” said DeJoria. “It talked about the tequila industry unlike anyone’s ever seen it. Did this help out the tequila industry? Heck, yes. Sales grew last year,” he said.
“Did it help out Patrón?” he continued. “Last year, Patrón became the number- one by dollar volume tequila company in the world.”
Changing times call not only for a reassessment of how you do business externally, but internally as well. Agon and Beattie both spoke of the need to create decentralized, flat organizations with a strong central vision. “It needs to be agile,” said Beattie. “It needs to be opportunistic.”
“The way we manage our companies and the way we manage the people who work for our companies is changing,” declared Chuck Rubin, ceo of Ulta. Eschewing both democratic and dictatorial models, Rubin said that creating a meritocracy, rewarding only those who truly step up, create ideas and execute against them, is the way to ensure success today. “We need employees who don’t feel entitled, but instead feel motivated to contribute and then be rewarded,” he said. “As leaders, our role is to distinguish those people who strive.”
Zhuo (Joe) Wang, executive vice president of Shanghai Jahwa, agreed, as he spoke of his company’s attempts to turn its Herborist brand into a global player, noting that insistence helped build the brand. “It’s about staying the course,” he said, “and avoiding self-inflicted setbacks.”