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Wal-Mart’s Dominance: Beauty Business Bigger Than L’Or?al

Like everything else it touches, Wal-Mart's impact on mass beauty has been in caricature-like proportions. Here's the latest.

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NEW YORK — Forget about fancy store designs or personal assistance. Selling beauty products can be easy as 1-2-3 even with a warehouse-gray facade and peg hook merchandising, as long as the retail banner reads Wal-Mart.

Like everything else it touches, Wal-Mart’s impact on mass beauty has been in caricature-like proportions. According to sources, 7 percent of the retailer’s $245 billion business is derived from beauty categories. Sounds reasonable enough until you do the math. That means Wal-Mart’s blue-smocked clerks ring up an unmatched $17.5 billion worth of cosmetics, fragrance, bath and body, and hair and skin care products annually.

That puts Wal-Mart’s beauty revenue in league with the world’s largest beauty company, L’Oréal Inc., which peddles cosmetics, fragrance and hair and skin care products across prestige, mass and professional arenas. Its reported sales in 2002 were $14.3 billion euros, (or $16.5 billion).

As Wal-Mart grows, its dominance in beauty is expected to grow too. The company now operates 1,494 Wal-Mart stores, 1,386 supercenters, 532 Sam’s Clubs and 56 Neighborhood Markets, which are drug and food store combos. Internationally, it runs 1,309 units. U.S. expansion plans call for an additional 50 to 55 Wal-Mart’s, 220 to 230 supercenters, of which 140 will be relocated or expanded units. There are also another 25 to 30 Neighborhood Markets in the works, a smaller format that devotes a considerable amount of space to health and beauty.

No surprise that nearly every major mass beauty vendor — that includes L’Oréal Paris, Cover Girl, Revlon, Coty Beauty and Del Laboratories — cites Wal-Mart as its largest customer. Interviews with a spectrum of industry executives determined that for most beauty companies Wal-Mart now typically represents between 20 and 25 percent of their sales and for some brands it can account for as much as 40 percent.

There are firms like Bari Cosmetics, maker of the Bari budget brand and Bon Bons nail polish, that have essentially devoted their operations to serving the world’s largest retailer. Others such as Coty Beauty maintain informal agreements to sell brands exclusively, like its Rimmel cosmetics in the U.S. The sales are just too good not to.

“Sales have far exceeded our fondest hopes,” commented Rick Goldberg, vice president, cosmetics at Coty Beauty. He declined to give sales figures, but said the brand has continued to grow. Since its introduction in March 2000 space has been expanded for Rimmel in about one-third of Wal-Mart’s doors from 4 feet to 6 feet. And Rimmel has been thriving at a time when total cosmetics sales at other mass retailers have been slumping. At Wal-Mart, Rimmel ranks among the top five color brands in terms of unit sales, noted Goldberg.

Like many other mass retailers, private label and proprietary brands are becoming central to Wal-Mart’s beauty mix. After discontinuing No Boundaries, a private label tween line, Wal-Mart replaced it with Mary-Kate and Ashley cosmetics last March. The line was expanded into fragrance earlier this year and also offers bath and body, spa and hair care.

Michael Pagnotta, a spokesman for Dualstar Entertainment, the teens’ marketing company, said sales of Mary-Kate and Ashley beauty, including fragrance, “are all doing well.”

As Wal-Mart learns businesses, it is becoming more daring with private label. Buyers have begun to travel more to look for new products and watch for trends. Its Simply Basic bath line has recently added soy candles to the mix at $3.50 each. There is also the Simply Basic accessories collection containing makeup brushes and cosmetics sponges, with prices ranging from 97 cents for a single sponge to $9.97 for a travel kit. A recent store visit found Simply Basic bath sets, priced $6.86 each, merchandised next to comparable Calgon sets for $9.86.

Wal-Mart has added its own SimplyMe Spa collection, featuring items such as avocado hand cream and body mud and scrubs, with items priced at $3.44 or $4.83 each. A single use facial mask is 94 cents. While private label shampoo and nail polish remover have long been standard items for drugstores and discounters, Wal-Mart also offers styling gel to compete with the L.A. Looks brand and a styling mousse that compares to Pantene.

Sources say that Wal-Mart is working on another beauty collection with Elizabeth Arden. At press time neither Elizabeth Arden nor Wal-Mart responded to requests for comment.

It is said that you are either a Wal-Mart vendor or you are not. If you are, you know to be prepared for your meetings bearing your lowest price possible (after you’ve squeezed your own operation) and ready to become intimately involved with volumes of Wal-Mart data through Retail Link. (Wal-Mart’s scan data has been exclusively available through Retail Link since it stopped supplying data to ACNielsen and Information Resources Inc.) Vendors source their own data through Wal-Mart’s system and then must analyze and package it in a weekly report that is sent back to Wal-Mart.

Said one vendor, “We call it drinking the Wal-Mart Kool-Aid.” Like coffee it is an acquired taste, but then you can’t give it up. “You have to realign your thinking, because doing business with them is a whole different mind-set — it is a lot more demanding and a lot more analytical.”

Still, almost unanimously, vendors requested anonymity when speaking about Wal-Mart. Said one senior marketing executive, “Wal-Mart people are sharp, easy to work with, but they also put the fear of God in suppliers.”

What keeps manufacturers sipping from the Bentonville cooler is not just the angst of being left out of the biggest game in town, they say once you understand the rules there is a dignity in the partnership. Nearly everyone interviewed said that Wal-Mart is fair. Smaller players like Wal-Mart because they are not subjected to painful slotting fees.

But Wal-Mart is keen on getting the most out of its partners. Like many retailers it appoints category captains to help it develop planograms in specific categories, usually it is the top-selling brand. The vendor representatives who act in the capacity are allowed to view Retail Link data of its competitors brands to help Wal-Mart make smart decisions, but are contractually forbidden to share that data with members of their own firm.

The retailer’s mantra as widely promulgated is to squeeze every penny out of its system and yours, yet it is Wal-Mart that loses in the final profit margin, with the intent of making it up in volume. The average cosmetics markup is 40 percent, whereas Wal-Mart tends to hold it at 30 percent, say sources.

“Wal-Mart is the only person who makes less money. They buy at the same price as CVS or Eckerd,” said John Devine, of BeautyWorks and formerly of Procter & Gamble Beauty. Although vendors do have added costs in other areas.

One of the most significant differences with Wal-Mart’s beauty department compared to other retailers is that it warehouses very few stockkeeping units. Most of what comes in is cross-docked, meaning it is shipped from the manufacturer to a central distribution center and moves out usually the same day to a Wal-Mart store. It is Wal-Mart’s emphasis on efficiency that has pushed most cosmetics manufacturers to begin shipping products in basic units of two, rather than three that had been the industry standard. The move insures cleaner sell through and helps prevent overstock situations.

The cost burden of that change, however, fell on manufacturers that had to amend manufacturing and packaging systems. To ship fewer pieces at a time, is “absolutely more expensive for us,” said one cosmetics vendor.

Still that doesn’t explain why shoppers are buying up more cosmetics in Wal-Mart than anywhere else. Price plays a factor of course, but industry consensus is that it is the sheer number of shoppers that pass through its doors, as compared to the lighter foot traffic of drugstores.

Vendors also credit Wal-Mart because of its willingness to try something new. Revlon chief executive Jack Stahl said that Wal-Mart helped it test and fine-tune Revlon’s latest store fixture.

“Wal-Mart has brought previously unavailable fragrance products to smaller markets across the nation,” said Robert Crames, chief executive officer of Northern Group. “Northern Group manufactures, markets, and distributes designer and mass fragrances in the mass market, and we value the developmental role Wal-Mart plays in the retail arena.”

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