The last quarter century has been awild ride for the cosmetics industry, with profound changes in marketing and distribution. Here Pete Born, who joined WWD in 1977, gives some perspective.NEW YORK — In 1977, Anwar Sadat made his historic journey to Jerusalem, Diane Keaton starred in "Annie Hall," and "Laverne & Shirley" was at the top of the TV rankings. It was also the year that Charles of the Ritz launched Yves Saint Laurent’s controversial new fragrance, Opium.While it may seem a bit preposterous to mention fragrance marketing in the same breath as the quest for Mid Eastern peace, the advent of Opium proved to be a watershed in the esoteric world of global perfumery. As Camille McDonald, president and chief executive officer of Parfums Givenchy, American Designer Fragrances and Guerlain, noted: "Opium was the beginning of the designer domination and the beginning of the megabrands." Opium, combined with the launch of Oscar de la Renta’s first signature scent, gave fashion designers a deed to fragrance marketing that still holds. Jack Wiswall, president of the Designer Fragrance Division of L’Oréal USA, added that the outrageousness of naming a perfume after a narcotic, considering that its parent company was the pharmaceutical firm Squibb, set the stage for over-the-top fragrance marketing in the Eighties. First came Giorgio in 1982 — with a scent so pungent it was banned in some restaurants — then Calvin Klein launched the controversial Obsession in 1985 and Christian Dior countered with Poison.The Opium launch also came two years after the death of Charles Revson in 1975 and the modern era of the cosmetics industry was already taking shape. It has blossomed into what has been estimated as a $79 billion global business today.Revlon, long accustomed to being the top dog, began losing its grasp in the late Seventies and gave way as Estée Lauder loomed. A brash 35-year-old L’Oréal executive named Lindsay Owen-Jones arrived in New York in 1981 with the mission of turning Cosmair into a power player. He later returned to Paris to turn parent L’Oréal into a global powerhouse. The Eighties served as a backdrop, in part, to global warfare between Estée Lauder and L’Oréal. The decade also was the breeding ground for two major fragrance brands: Giorgio Beverly Hills and Calvin Klein.In the Nineties, Shiseido entered the international fragrance business, led by Chantal Roos, who earlier had launched Opium and then spearheaded Beauté Prestige International. She and Vera Strubi at Clarins helped define a new fragrance category, the new European designer scents. Meanwhile, Bernard Arnault fashioned beauty’s luxury supergroup by teaming up three of Europe’s grande dames — Christian Dior, Guerlain and Givenchy — under the LVMH Moët Hennessy Louis Vuitton banner.The biggest development in retailing in the last 10 years was the rise of cosmetics and fragrance specialty chains. First the Body Shop hit, then Bath & Body Works, Victoria’s Secret Beauty and Ulta launched. During this time, Sephora arrived from France with great fanfare, then rolled out across the U.S. The Nineties also marked the ascent of the makeup artist brands —?notably, MAC Cosmetics, Bobbi Brown Essentials, Stila, BeneFit and Trish McEvoy — and a raft of trendy new indie entries, typified by Bliss, Kiehl’s, Hard Candy, Urban Decay, Demeter and Tony & Tina, also hit counters. They didn’t stay independent for long: Lauder and LVMH began snapping up indie brands, with L’Oréal joining the party by acquiring Kiehl’s and a stake in Shu Uemura. Shiseido followed with Nars and Zirh, as well as Decleor. Wella and Puig are the latest to be on the acquisition march.Today’s news in the industry centers on dermacosmetics — mostly skin care brands launched by dermatologists, but encompassing brands that embrace all aspects of the possible marriage between health and beauty. Meanwhile, in the mass market, Avon product righted itself in the Nineties; Procter & Gamble took over, then restored, Cover Girl and Max Factor, and Coty transformed itself, hooking onto the emerging well-being category. Revlon first turned its back on department stores, then lit up the cosmetics market with Color Stay lipstick and Age Defying foundation before sliding into economic turbulence.The last 25 years have marked a period of intense transformation, explosions of growth, painful consolidation and occasional stumbles, such as the fragrance industry’s dead-end infatuation with celebrity scents in the late Eighties. With the exception of Elizabeth Taylor, queen of the personal appearance, few of the dozens of showbiz types who attached their names to fragrances can still be found among the counters.Arie Kopelman, president and chief operating officer of Chanel Inc., sees the proliferation of brands as the most significant change since 1977. "We have gone from divide and conquer to consolidate and conquer," he said, referring to Lauder’s acquisition of a squad of indie brands. It’s a tactic taken out of the old Procter & Gamble playbook, he continued, in which a brand has become a collection of precisely positioned niche brands. That has led to a more professional school of branding, which has coincided with a diversification of distribution into freestanding and chain stores. Lauder chairman Leonard Lauder agrees that the single most descriptive word of the last 25 years has been "consolidation," in light of the sea of change that took place. On the manufacturing side alone, dominant old names like Charles of the Ritz, Helena Rubinstein, Germaine Monteil and Princess Marcella Borghese either faded into the background or were replaced outright by a new breed of what Lauder described as "new independent cosmetics companies that brought a vibrance to the industry that has not been equaled in memory." He was referring, of course, to not only Estée Lauder and its sister brand, Clinique, but also Lancôme, Clarins and designer fragrance brands like Calvin Klein and Ralph Lauren. Lauder, whose singular vision has had much to do with the shaping of the modern prestige business on a global scale, sees the last quarter century as a time of fundamental change, particularly at retail. In the past, Lauder noted, there was a major specialty store, usually family owned, in the downtown of every market. They were a springboard for fledgling brands like Lauder, which didn’t have the capital to survive in department stores. "If it were not for the small specialty stores," he recalled, "we could not have gotten our roots down deep enough so that we could survive. They gave us our lifeline."But regional malls started opening outside of town with the rise of the suburbs, and brought with them aggressively expanding department stores chock full of national brands. America began turning its back on the downtown and a mortal blow was struck at specialty stores. The passing of generations of management and inheritance taxes finished the job. Lauder, who seemed to delight at the ironies involved, noted as The Limited and Gap spread across America, the newly born small, independent cosmetics brands had no place to sell, other than large specialty stores like Nordstrom that were big enough to survive. The need for distribution outlets for the growing number of indie brands paved the way for a new generation of cosmetics specialty stores, led by Sephora but crowned by the jewels of the trade — Fred Segal, Space NK, Pure Beauty and Mecca. So much so that this new generation of specialty stores needs a constant flow of new upstart brands. "In the last 25 years, we have gone from us needing specialty stores to specialty stores needing us," Lauder concluded.He touched on one factor — the invention of consumer credit — which also was a major turning point in the mind of Dan Brestle, a group president at Estée Lauder who oversees a number of the company’s young brands like Stila, Aveda, Bobbi Brown Essentials and Bumble and bumble. In fact, Brestle sees the creation of Visa and Mastercard as the first of two body blows that sent American department stores reeling onto their present course. The creation of "plastic" empowered the consumer and "broke the stores’ stranglehold on credit," Brestle said, recalling, "everyone got their Amana dishwasher on the two-year plan." Those most affected were the big-box retailers, Sears Roebuck & Co., J.C. Penney, R.H. Macy and Dillard’s, he speculated. Moreover, by empowering consumers to apply credit to wherever they chose, it set the stage for the birth of the discount and specialty store chains, first fashion specialty stores, but then beauty chains. The second turning point came in the form of Robert Campeau, a swashbuckling real estate mogul from Canada who came south to carve out a retail empire, snapping up Allied Stores in 1986 and then Federated Department Stores in 1988. Industry sources theorize that Campeau’s game plan was to become such a dominant force that vendors could be persuaded to give him two extra points of margin, which presumably would have paid for the acquisitions. The plan backfired into bankruptcy.It was a period of frenzied deal making on Wall Street, starting as early as the Seventies. Dayton Hudson acquired Mervyn’s in 1978 and Marshall Field’s in 1990. May Department Stores Co. bought Associated Dry Goods in 1986, giving it Lord & Taylor in New York and Robinson’s in Los Angeles, and Harcourt General picked up Bergdorf Goodman and Neiman Marcus in 1987. Macy’s bought Bullock’s and I. Magnin in 1988. Investcorp acquired Saks fifth Avenue in 1990, then later sold it to Proffitt’s. Federated acquired Macy’s in 1995 — after both companies emerged from Chapter 11 —?and took over Broadway Stores in 1995. Meanwhile, Dillard’s gobbled up a daisy chain of department store rivals, culminating in the acquisition of Mercantile. Campeau’s grand design ended in Chapter 11. Brestle was just one executive who noted that the leveraged takeover of Federated was like stepping onto a banana peel. To secure the debt, the company cut costs — and service. "That was the downfall of department stores," Brestle observed, joining other executives who decried changes wrought by prolonged belt tightening. Fiscal expedience was blamed for squeezing the juice out of retailing.The meltdown of the late-Eighties coincided with computer technology that allowed headquarters to maintain branch stores hundreds of miles away, which proved to be a double-edged sword. It paved the way for the creation of huge retail conglomerates, like May Co. and Dillard’s, but it changed the nature of department stores, which were local businesses in the early 20th century. The neighborhood store became a far-flung division of a retailer in another market, and then the number crunchers took over.Brestle recalled knowing one department store buyer who knew every fact of life in her 34 doors. Suddenly, she had 106 doors to oversee and "she never got in half the stores and didn’t know the department managers."Worse yet, department stores, whose assortments had been dramatically expanded by Edward S. Finkelstein of Macy’s, began shrinking in definition as management began jettisoning less profitable merchandise categories, like toys, books, electronics and, in some cases, furniture. Restaurants were closed, too.Brestle noted that department stores not only eliminated inventory costs and other overhead, but also drove away the consumers who had shopped the discontinued categories. This fed the growth of specialty stores in the mall, said Brestle, who added, on the other hand, that "the flip side is there has been no successful challenge to department store domination in cosmetics. The question is still out there whether Sephora is the answer to that."One consequence of the fiscal consolidation is that it left the most powerful brands — the so-called Big Three of Clinique, Estée Lauder and Lancôme — in the driver’s seat of department store merchandising. Due to their superior volume, those brands enjoyed the best space and location on a selling floor and could afford the most ample staffing, Brestle pointed out, adding that they also can afford to spend enough on advertising to make their powerful gift-with-purchase promotions work. This leads to more volume and an unassailable position.Luc Nadeau, president of the Luxury Products Division at L’Oréal USA, saw the abandonment of those merchandise categories that "rounded out their overall assortment" as a turning point since "there is a type of customer moved to the specialty outlets." He added, "It was just one less excuse to go to department stores and the competition in the mall became more and more fierce."Nadeau questions whether department stores have retained enough difference in brand identity and he has a few ideas on how they can evolve, such as launching small lifestyle-centered stores in malls. "It is the service, the way a brand is presented and the overall environment," he said. "The level of service and the quality of service — ‘Do we have enough people and are they trained well?’ We have to recapture the magic."One executive who mourns the passing of the old-guard specialty stores is Ben Gilliken, president of Thierry Mugler Inc. who started in the business in 1968 as territory sales manager in North and South Carolina for Elizabeth Arden. "We had a lot of fine retail outlets to put our products in," he said about the differentiation between specialty and department stores that disappeared with the consolidation of the late-Eighties. "The financial people took over and whole departments came out," he said, adding ruefully, "the whole reason for department stores to exist disappeared." With the advent of malls, stores stayed open more hours in the week, more sales help was needed and "service started slipping. Today, we are trying to figure out how to compete with Wal-Mart." Gilliken, who noted that department stores are experimenting with central checkouts, added that the central problem today is "an evolution from luxury products to commodity products.""The department stores got very safe," said Donald Loftus, president and chief executive officer of Cosmopolitan Cosmetics Inc., who began his career in 1979 as a buyer for Halle’s in Cleveland, Ohio. He illustrated the effect of attrition by stating that "there were 43 buying offices that existed in 1977 and don’t exist today." And streamlining hasn’t made life any easier. In 1977, he noted, "a fragrance launch was a big deal. There have been 50 to 60 launches a year for the last three years. We can identify 15 of them as successful and 67 could be considered failures. Each of them represents an investment of $15 million."Looking back 25 years, McDonald at Givenchy said, "Newness was an occasion, not a staple. You fought to be on a launch team, because it was such an event and such a stimulant for a career."Loftus sees a silver lining in the evolution of distribution. "Twenty years ago, the vendors controlled everything in the distribution, then in the Eighties the power shifted to the retailers," he said. "In the Nineties, the power went to the financial people, where it remains today." If anything, he noted, this has strengthened the bond between retailers and vendors. "Our relationships are now real good working partnerships," he said. "We’re both pressured by the bottom line."Agreement on that point came from William P. Lauder, chief operatingofficer of Lauder, who noted: "We are more dependent on each other and linked together for success." He also noted that even though there has been a profusion of brands, more business is being done by fewer of them. Quoting NPD BeautyTrends statistics, Lauder suggested that the sun is setting on designer brands, due to the rise of the demonstrated cosmetics brands in the fragrance category. He also raised the question of how effective makeup artists brands can be, as a group, in selling skin care.L’Oréal’s Wiswall started at Lauder, recalling the early days of Clinique and Aramis, and is now president of the Designer Fragrance Division at L’Oréal USA. Having been on both sides of the great competitive divide, he remembers the early dominance of Lauder’s Clinique and Aramis and the challenge of Ralph Lauren’s Polo, which led the way for a host of other men’s fragrances like Drakkar. What looms large in Wiswall’s encyclopedic recollections of the evolution of the business is the rise of Lancôme, which he described as "the first European brand to put a big footprint on the U.S. market." Another riveting memory is the 1985 launch of Calvin Klein’s Obsession, which rocked the fragrance world. Among other things, it pioneered the master brand concept, which later was repeated throughout the industry, most notably with Ralph Lauren’s Romance in 1998 and the men’s version in 1999. Obsession also revolutionized the method for launching fragrance in department stores, with its liberal use of TV advertising and rocketing sales results.Robin Burns, then the young president of Calvin Klein Cosmetics and now president and ceo of Intimate Beauty Corp. and Victoria’s Secret Beauty, recalled how a lot of her inspiration at that time came from her previous job as a men’s fragrance buyer — and later divisional merchandise manager — at Bloomingdale’s. The idea for TV advertising, which was not done in prestige launches, came from Gloria Vanderbilt. The concept of using scented strips and other mass promotional tricks in a limited distribution came from Giorgio and the "naughtiness and controversy" of the Obsession positioning was a page out of the Opium book, Burns said.Although Burns noted that, in retrospect, "there has not been enough fundamental change to adapt our business to compete in the world today," she made it clear that one of the most significant improvements in the last 25 years has been in the elimination of display cases that kept merchandise under lock and key. One of the great steps forward was assisted-selling merchandising that allows consumers to actually experience the merchandise before buying.Burns sees the evolution of designer beauty marketing as beginning in the late-Seventies with the king of licensing Pierre Cardin, before shifting to Saint Laurent, Halston, Klein and Lauren.Another major factor in Eighties fragrance was Giorgio Beverly Hills, a company that was cofounded by Gale Hayman and her now ex-husband Fred. Now president of Gale Hayman Enterprises, Gale Hayman recalls that 25 years ago, a more natural, neutral color came out of Hollywood and hit the streets in the form of natural tones. The Eighties was the time of the emergence of skin care in America, which led to worries about health in the Nineties in the form of sun protection, which focused on minimizing skin wrinkling and cancer caused by overexposure to the sun. On the fragrance front, the provocative noticeable scents of the Seventies and Eighties gave way to more subtle unisex scents that were more appropriate for office life as more women joined the workforce.Joseph Horowitz, president and ceo of the U.S. division of Clarins, said that not only has the department transformed from a local business to a chain operation in the last 25 years, but the consumer’s relationship with the store has also changed profoundly. A quarter of a century ago, a typical department store customer wouldn’t dream of going into Korvettes discount store. Now Costco is the hot ticket.Just as retailing once was a personal interchange between customer and merchant, stores also thrived on novelty. Now mass and class have been drifting together and what we have is simply fragrance. Horowitz worries that the temptation of open-sell could lead to the commoditization of the category. "I’d rather we find a way to sell fragrance with service," he said.David Horner, an industry consultant who helped build the Giorgio phenomenon 20 years ago, maintains that department store retailing has been too impersonalized. "The consumer has become a nonperson," he said. "The department stores believe they’re better off in the real estate business."Neil Katz, the president of Liz Claiborne Cosmetics who began his career in 1973 with Clairol as director of market planning and research, has built a successful fragrance business at Claiborne by keeping close tabs on consumer tastes. To him, the biggest change in the last 25 years is in consumer attitudes, primarily all the heartland folks living between Manhattan and Malibu. The fashion cachet of Paris and New York no longer can dictate a purchase. "It’s more important how it fits into their lifestyle and fantasies," he said. "Consumers are not loyal to any particular brand."One thing hasn’t changed, Kopelman at Chanel points out, people want product more than ever. "We are living in a youth-oriented culture and people want to grow old gracefully," he said, adding that pinpoint positioning is essential to avoid marketing blur and benefits have to be clearly explained. Moreover, "service has gotten more and more important," Kopelman said, "as the world gets more hectic."

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