This story first appeared in the October 24, 2008 issue of WWD. Subscribe Today.
The European beauty industry is waiting to exhale.
As stock exchanges all over the continent continue to seesaw, beauty executives are striving to get a clear picture of the impact the worldwide economic malaise will have on spending on beauty products, particularly in the run-up to the crucial holiday period.
Even before the weakening of the global financial system, beauty unit volume sales in the bellwether French market were down for the eight months through the end of August. Executives in Italy say their market is too volatile to forecast. Experts in Spain detect a definite cooling there.
“The buzzword for the coming months and the next couple of years is ‘unpredictability,’” said Remy Gomez, president of Beauté Prestige International, a division of Shiseido.
“We don’t know what the future holds and everything that once felt safe isn’t,” added Michelle Feeney, chief executive officer of tanning brand St. Tropez. “I lived in New York during Sept. 11 and in some ways it feels like that.”
“The economy is so unpredictable at the moment who can [say] what’s going to happen over the next few days, never mind the next few months?” said Tim Nancholas, strategic insight director at market research firm TNS Worldpanel. “Things are happening in the economy that we’ve never seen before. You’d have to be crazy to make any firm forecasts.”
“Everyone is just holding their breath,” said Nancy Flavin, a Paris-based consultant.
As well as wildly fluctuating stock indices, blanket media coverage of the collapse of banking stalwarts and looming recession are weighing on consumers’ minds, making it difficult to judge how their spending habits will evolve.
While executives asserted the beauty industry is somewhat buffered from a downturn in consumer spending given that fragrances and cosmetics are a relatively inexpensive treat for shoppers who are cutting back on bigger ticket items, others believe all consumer goods will be impacted to varying degrees by a reduction in disposable income.
“We cannot escape the downward trend in consumer spending habits,” said Gérard Delcour, president of Groupe Clarins’ international division. “We cannot escape being in the economy.”
“I’m not that positive about prospects for the beauty sector,” said Eva Quiroga, an analyst at UBS in London. “We have to wait and see if consumers’ weakening purchasing power is going to take its toll. At the moment it’s a volume issue, people are still using products that they already have at home. When it comes time to buy new stuff we’ll see if value is an issue and if they’re willing to pay higher prices. Christmas is going to be very, very tough.”
Italian consumers are also expected to shop prudently in the lead-up to Christmas. Lorella Coppa, general director of Selectiva, said the holiday season will be “a very difficult one for Italian beauty retailers. Before, customers would spend 50 euros [$64.50 at current exchange] on a gift in a perfumery; this year it will be small gifts worth 10 euros [$12.90] — that’s a big jump.”
Coppa said bleak holiday sales will likely continue to worsen into 2009. “It will be a very painful blow [to Italian beauty retailers]. Already many of them are in enormous difficulty, some larger chains will close down many of their doors, while I expect some smaller chains to close down entirely,” she said. “For next year I am discounting 20 percent of clients from our current order sheets — they just don’t have the money to buy.”
France’s prestige beauty channels were already feeling the pinch by the end of August, with sales in unit volume terms down 2.3 percent year-on-year, according to figures published by The NPD Group. Sales in value terms, which were buoyed by an average price increase of 3.9 percent in the eight-month period, slowed to a 1.5 percent increase at the end of August compared with a 2.5 percent uptick at the end of April.
In Italy, 2008 started out well with beauty exports, which had been down at the end of 2007, picking up by 1 percent in the first half to hit 1.2 billion euros, or $1.6 billion at current exchange, according to Fabio Franchina, president of Unipro, the Italian association of cosmetics companies.
“But now it is difficult to forecast how the rest of the year will go,” he said. “The scenario has radically changed in the past 30 days.”
Oscar Mateo, market analyst at the Spanish Cosmetics, Toiletry and Perfumery Association, STANPA, believes the current climate is contributing to a “general cooling down of the sector and a much more moderate growth rate” there.
“For 2008, it will be no higher than 2 percent,” he said. “But that’s not just because of the crisis, it’s many factors. The Spanish market is immature with overstocked mass-market sales points and an underdeveloped network of distribution.”
For now, dealing with fallout from the credit crunch is among top priorities for all involved in the industry. “The beauty industry is quite exposed as the cost of living is increasing, thanks to the rising cost of commodities like gas and electricity,” said Oru Mohiuddin, cosmetics and toiletries company analyst at tracking firm Euromonitor. “That in turn is narrowing consumer spending margins.”
For brands, that means even more competition for the few remaining euros in consumers’ purses. “The name of the game is getting market share,” said Gomez. “Clearly there is an economic slowdown, however, there are the same number of consumers out there, but many of them are reassigning their priorities and brand choices based on their individual value perception,” said Hartwig Langer, president of Global Prestige Products, at Procter & Gamble Co. “In these more difficult [economic] times, we need to work even harder to understand the customer, delight them, give them ‘wow’ experiences with our products.
“Quality and consumer-relevant innovation will continue selling well, ‘me-too’ will lose,” he continued.
Many industry players share Langer’s theory. “At the end of the day, it all boils down to value for money in Europe,” said Mohiuddin. “The consensus for shoppers is no matter what amount they’re spending, they want to feel like they’re getting what they expect.”
“Yes they continue to use cosmetics, but they are being very careful about what they purchase,” agreed Franchina. “The situation is forcing consumers to squeeze the last drop of toothpaste out of the tube. They are more intelligent about how they spend their money and the price-quality ratio.”
As customers are being choosier about purchases, Delcour believes manufacturers will have to up their game to stay competitive. “Your product has to be even more desirable than it was yesterday,” he said. “You have to offer even more explanation on how to use it and great presentation. When the situation is difficult you have to take care of brand loyalty and have the right offer.”
The same is true for retailers, who are ever more vigilant as to the appeal of their product portfolios and keeping an even tighter reign on stock. “Of course we have noticed a drop in sales related to the economy, the whole market is down so it’s not possible to say there hasn’t been a drop,” said Roberto Forcherio, general director of Sephora Italy, adding the chain’s own-brand products are doing “very well.”
“We have rationalized our costs on every level of the supply chain, which includes staff and shop expenses,” he added. “For example, if it took an hour to unload a shipment of product in-store before, now it takes half an hour. We’ve also adjusted the work hours of the sales assistants in order to better meet the day’s flow of customers, cutting back at quieter times.”
Tighter control of inventory also seems to be a sign of the times, with some retailers preferring to be out of stock for longer before replenishing orders, according to Maria Hatzistefanis, founder of London-based treatment brand Rodial.
“It’s very important to buy considering the sell-out and focusing on our customers’ purchasing power,” said Alessandra Pol, beauty buyer at Italian department store chain UPIM. “We aren’t suffering too much thanks to the particular attention given to the choice of our offer.”
“[We are trying] to identify and separate brands that are free-riders, more than we have in the past,” said Michael Naujock, head of buying, international marketing and procurement at Rossmann, Germany’s third-largest drugstore chain, adding the chain’s beauty categories are “quite strong.”
Verónica Fisas, ceo of Barcelona-based Natura Bissé Group, said that retailers are putting in repeat orders but for smaller quantities of stock.
“Purchases are geared to what the stores know they can sell,” she said. “Stock is finance and finance is cost,” added Delcour.
On top of that, many retailers are taking a more cautious approach when introducing new brands. “We are being more attentive with our buying,” said Paolo Valerio, director of beauty at Coin, adding while the Italian department store chain’s sales of clothing and homewares have dipped, its perfumeries are trending up 10 percent on last year. “We are not taking risks with new brands unless it is something truly special.”
On the flip side, some retailers are opting to take chances to gain an edge on competition. “If you want to surprise your customers, you have to take risks,” said Ulrike Möslinger, marketing manager and member of the executive board of Galeries Lafayette Berlin.“If you don’t do it, you will stay mediocre.”
“New brands are what keep the beauty and cosmetics industry and retail alive,” said a spokesman for Douglas Perfumeries, stressing that the German chain is “cautiously optimistic” about the Christmas selling season. “We always have been the place to find new and attractive brands and will be in the future, too.”
David Walker-Smith, men’s and beauty director at Selfridges, has a similar take on the situation. From November, he’ll devote 269 square feet of Selfridges’ flagship Oxford Street store to Illamasqua, a nascent makeup brand, and with it stage the door’s biggest beauty launch since it introduced MAC Cosmetics. Unlike after Sept. 11, when a trend for “cocooning” and well-being kicked in, Walker-Smith believes a bolder approach is required to respond to the current upheaval in the financial markets.
“Now is about being out there, facing the world head on, putting on a brave face and surviving,” said Walker-Smith.
Putting on a happy face, with the aid of makeup, also seems to be a consumer mantra. Color cosmetics, and lipstick in particular, traditionally among the more resilient segments during times of economic instability, are proving popular across Europe.
“Color will continue to grow as always seems to happen in a downturn,” said Daniela Rinaldi, head of perfumery and concessions at Harvey Nichols. “We call this the lipstick index. Post 9/11, sales of red lipsticks grew double digits in [the U.K.] market and the U.S.”
Sephora’s Forcherio said makeup is selling “extremely well” and Mónica Ruiz Utrilla, beauty and cosmetics marketing director at Spanish department store chain El Corte Inglés, said lipstick is currently a bestseller.
“Lipstick is always a great pick-me-up,” said Nica Lewis, head consultant at Mintel Beauty and Personal Care, and the uberpolished Forties-inspired makeup look favored by Dita Von Teese is a hot trend. “The Forties were the height of ‘austerity chic,’ when people made do with what they had. People will keep up certain appearances and economize on things that are less visible.”
Some industry watchers are also upbeat about fragrance. “History tells us that in tough times people still spend on life’s little luxuries and fragrance certainly falls into this category,” Langer said. “Jean Patou created Joy for his couture clients in the Great Depression. You may not necessarily be buying higher-priced luxury items, eating out as often and going on exotic vacations, but you can still pamper yourself with a splendid fragrance.”
“I think fragrance will be among the more buoyant markets [in the U.K.] this Christmas,” said Nancholas. “People will more likely look for their favorite fragrance but at a cheaper price on the High Street and on the Internet.”
On the other end of the budget spectrum, Walker-Smith said Tom Ford’s fragrances, which retail in the U.K. at 100 pounds, or $175 at current exchange, per 100-ml. bottle and 250 pounds, or $438, for 250 mls. are “on fire.”
“Sales continue to thrive where brands offer quality or are niche,” said Rinaldi, who also pointed to Ford’s scents as strong fragrance performers alongside Marc Jacobs Daisy. She said Harvey Nichols customers gravitate towards lesser-known brands, such as Molecule, Creed and Bond No. 9. “We currently have waiting lists for brands not yet on sale, such as Ageless Fantasy [the antiaging fragrance] and the delicious range from By Kilian, beautiful, well-conceived fragrances as the top end of the luxury spectrum.”
Nancholas said for the 52 weeks up to the end of August, fragrance represented 52 percent of British beauty turnover. (Overall beauty sales in that period totaled 1.5 billion pounds, or $2.63 billion, an increase of 8 percent, year on year.) Sales of fine fragrance and makeup each increased by 10 percent, while skin care sales were flat. Nancholas said part of treatment’s lackluster performance could be explained by successful launches of masstige brands, including Boots’ No. 7 private-label line, which picked up market share from brands with higher-price tags.
Earlier this month, for example, British supermarket chain Tesco said its Q10 Derma Intensive+ Anti-Wrinkle Day Cream, which retails at 1.79 pounds, or $3.11, outsold branded competitors — including Nivea, Olay and Garnier — to become the best-selling facial moisturizer at the chain.
Executives are quick to point out, however, that habitués of luxury treatment products are unlikely to migrate to bargain beauty brands en masse just yet.
“People who have a lot of money are still spending on beauty — that’s not where they’ll cut first,” said Flavin. “It’s a luxury they want to allow themselves no matter how hard things get.”
“People are willing to pay more for what’s really important to them — everywhere else there’s room for a deal,” said Lewis.
Indeed, a survey undertaken by British beauty e-tailer Feelunique.com found that a third of women in the U.K. would prefer to eat less than cut their beauty spend.
With discretionary spending reined in, however, tried and trusted brand names are likely to have the edge over more experimental purchases, according to executives.
“[Consumers] are turning to brands with heritage that they are confident will deliver,” said Alex Pike, marketing director at mass-market treatment brand Simple.
“There’s no doubt that stronger brands are better buffered against uncertainty,” said Rune Gustafson, chief executive of brand consultancy Interbrand U.K. “When the markets aren’t confident brands give confidence. Brands that stay relevant and close to consumers’ needs will resist better.”