Fall Outlook: A Downpour of Fragrances

NEW YORK — It’s time to launch or die.<br><br>At least that’s the message being sent out by fragrance marketers this fall. Beleaguered executives in both the prestige and mass sectors of the U.S. beauty industry are looking to shore...

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NEW YORK — It’s time to launch or die.

This story first appeared in the July 26, 2002 issue of WWD.  Subscribe Today.

At least that’s the message being sent out by fragrance marketers this fall. Beleaguered executives in both the prestige and mass sectors of the U.S. beauty industry are looking to shore up weak sales by unleashing a flood of new products —?particularly fragrances — enticing cautious consumers back to cosmetic counters.

Executives are betting that strategy will work, noting that newness traditionally sells even in the worst economic times — but others warn that the planned tidal wave of launches could actually wash out the category. “It’s a problem,” said Joseph Horowitz, president of Clarins USA, of the numerous fragrance launches set for this fall. “Some fragrances manage to make it. We have been associated with great winners and great failures. All we can do is go out with our guns blazing and see who’s left standing.”

It’s going to be a crowded field, added Neil Katz, president of Liz Claiborne Cosmetics. “When you’ve got this much going on in a nongrowth area [such as fragrance], you have to be conservative in your expectations,” he said. “We basically planned on the category being flat at the beginning of year [and] our plans remain the same as they were.”

Arie Kopelman, president and chief operating officer of Chanel Inc., said: “It really is watch your back time. Everyone is going to have to do their jobs at a higher level of performance than ever before. But while new has always been an important part of the equation, no one is going to do well with only new. And I don’t remember there ever being so many negative elements in the market at once — between the stock market, the tourism dry-up, consumer confidence dropping and post 9/11 fears, people are a lot more conservative in how they’re approaching things these days.”

Put all these together, Kopelman said, and you have a climate that is not only soft, “there’s little daylight as to when it will turn around. It’s not like it’s six months before happy days are here again. So you start off with what will have the immediate impact on the workplace, which is the new —?more and more promotions, more and more new products. That is not, I believe over the long term, a recipe for success or for profitable brand franchises; you also have to be balanced about doing your existing business well.”

Still, the oft-repeated phrase “cautious optimism” was flung around by a number of top executives.

“As a company, we have good global and geographical presence and we look at business from a global perspective,” said Fred Langhammer, president and chief executive officer of The Estée Lauder Cos. “I feel good about the global business. There’s a lot of opportunity in Europe to continue to grow, especially in Southern Europe and the United Kingdom. Germany is tough. Asia is an opportunity for us. And the travel retail business is starting to come back. But the U.S. market is going to continue to be challenging. Those are the realities and what we have to work with.”

In the current climate, Langhammer said, “I think color and treatment will do well. The fragrance business is a little more difficult. If you have the right product, you go for it. The only thing you can do is to get together with your retail partners, try to generate traffic and focus the organization.” Key launches from the company’s divisions, he noted, include Estée Lauder’s So Ingenious, Resilience Lift Overnight Cream and Pleasures Intense, Donna Karan’s Black Cashmere, Origins’ Make A Difference Skin Rejuvenator, Clinique’s Advanced Stop Signs and Dewy Smooth Anti Aging Makeup, Tommy Hilfiger Toiletries’ T Girl, Aveda’s Curessence Damage Relief Shampoo and Sap Moss Styling Spray and MAC’s Sleek Chic collection.

“The second half, in terms of growth, should be better than the first half,” said Jean-Paul Agon, president and chief executive officer of L’Oréal USA. He noted that the comparisons will be more favorable, considering last fall’s bleak mood.

Agon also asserted that L’Oréal’s various divisions are planning innovative product launches for fall. He reiterated an earlier statement that L’Oréal could finish the half with an overall sales gain in the high-single digits. The goal, Agon said, is “for each brand to bring the right innovation and gain market share.” He indicated that those objectives are being achieved.

Heidi Manheimer, president for the U.S at Shiseido Cosmetics (America) Ltd., pointed out that “it’s a very tough market and a very uncertain time.” But Shiseido has been trending with a 10 percent sales increase this year and the company will continue to invest “our rate of sale.” However, Manheimer noted that the company will continue to watch the market closely “to be responsible to all this.”

The category in the most trouble, of course, is fragrance.

“The fragrance business has slowed considerably since Mother’s Day and we don’t see it returning to its former strength [of growth] in the second half of the year,” said Katz. “We think it’s [going to be] a battle for market share in a category that’s basically flat or down. The exception might be [comparing the business with] how poor last year was due to 9/11. [But] it won’t be where it was two years ago.”

Still, “we’re hoping for a turnaround,” and the strategy is “to grow our business,” said Katz, who noted that growth in Claiborne’s retail sales during the first half of this year exceeded the same period last year by 16.5 percent. “We’re hoping to continue that trend,” he said, despite his own expectations that Claiborne’s outlets — department stores — won’t have a stellar year. “I think they’re going to be flat for the year.”

Katz believes two Claiborne fragrances — Bora Bora, which bows next month, as well as Mambo, which launched last year — can combine to carry the company to double-digit growth in the second half. “We realize [growth is] going to come at the expense of competition and not with new growth in the category,” he said. “The space is not growing in stores, so there’s a lot of pressure for brands that are not new to get the attention of retailers.”

Timra Carlson, vice president of NPD BeautyTrends, noted that over the first half of the year, men’s prestige fragrances were up 1 percent, while women’s were down 5 percent. However, she expects the bleak picture to brighten just slightly in the second half, predicting that men’s in the second half should be moderately up, ending the year up about 3 to 4 percent. On the other hand, while she expects sales of prestige women’s scents to rise slightly in the second half, sales in the category are expected to be down 2 percent for the full year, she said.

“Typically, we notice Father’s Day sales foreshadow what to expect for the December holiday season,” said Carlson. “Since 1997, there has been a constant pattern correlating Father’s Day sales and December-Christmas sales within the men’s category. Men’s fragrances grew 6 percent for the month of June, and if this pattern holds true, Christmas sales for 2002 will be higher than last year. Father’s Day grew mainly because of new launches —Truth For Men, Givenchy Pour Homme, Intuition For Men, and Miracle Homme. The addition of mega-new launches set for this fall, such as Polo Blue by Ralph Lauren and Calvin Klein’s Crave, will also help grow the category.”

For women’s, Carlson said: “Although first-half 2002 fell behind that of 2001, fragrances could do slightly better when compared with 2002’s gloomy sales. Mother’s Day was down 1 percent for May 2002 as consumers opted for nonfragrance items. Last year, the women’s category was driven by new launches. The flood of new launches and expectations for a better holiday season could help sustain the category. There are many new women’s launches expecting to do well — Chanel’s Chance, Elizabeth Arden’s Ardenbeauty, Forever Elizabeth from Elizabeth Taylor, Dior Addict from Christian Dior, and Donna Karan’s Black Cashmere. Jennifer Lopez’s Glow may also surprise us.”

Hilary Dart, president of Calvin Klein Cosmetics, has pursued a strategy of newness this year, including the Crave men’s fragrance launch for fall. “I had the clear view that the customer is looking for newness and looking for excitement.”

The aggressive launch schedule, combined with a new ad campaign for Eternity, was designed to “whet their appetite” and it seems to be working, at least from the standpoint of gaining sales and ranking. For the second half, she said, “we would be aiming for a significant increase.”

Dart, however, admits that “we are cautious of the challenges the market is facing in the second half of the year.”

For instance, Dart is very mindful of the heavy traffic in what promises to be an extremely hectic fall launch season for fragrance. As one small example of how she expects to put Crave’s message across, Dart has mapped out a guerrilla marketing campaign, calling for advertising and sampling in nightclubs.

Kopelman is especially optimistic about Chanel’s key fragrance launch for fall, Chance. Still, “I don’t see any significant [beauty] category growth in the short term,” said Kopelman. “At the best, we’ll have stable categories, and that makes it all the more tougher because you get into a market share war. The industry and the retailers may have hurt themselves by overdoing the new side of the equation.” To combat these issues, Chanel has a “very aggressive” fourth quarter planned, said Kopelman. “We’re not backing down in the face of all this,” he said. “But the market is going to be more competitive as a result.”

There are a few bright spots in fragrance. Laura Lee Miller, president of Unilever Prestige, noted that the brand’s key first-half scent launch, Vera Wang, continues to have a “phenomenal year” and will be boosted with line extensions, a sampling campaign and a limited additional rollout in the second half of 2002, with the fragrance slated to be in about 450 domestic doors by yearend. “We had a very successful first half with Vera, and that has given us a strong platform to go into fall. For instance, we achieved a number-one scent position in Saks Fifth Avenue and held onto it through June, and we have doubled our retail estimate with Saks this year.” Consumers have responded to the product.”

Although the fragrance category continues to be an industrywide challenge, “we have not changed our strategy,” said Miller. “We’ve worked harder on penetrating key doors that we’ve chosen to partner with. The tight distribution will be maintained, and we have maintained all of our ad commitments, including print and scent strips. We are proud to say that we are overachieving in retail projections and in net shipping projections.”

While fragrance continues to be a concern, prospects for color cosmetics and skin care seem brighter. Carlson noted that these two categories each grew 4 percent in sales in the first half of 2002. “We predict approximately 5 percent annual growth in prestige makeup for total year 2002. The number of new product launches in the first half of 2002 was slightly higher than the same time period last year — 5 percent in 2002 versus 4.5 percent in 2001 —?with many of the new launches for the second half of the year concentrated around the fast-growing eye and lip categories.

“Lip gloss, eye shadow and mascara will most likely remain the hottest subsegments of the year,” she said. “In lip gloss, Bobbi Brown’s Shimmer Gloss stick should do well, and the mascara wars will continue with four new launches from major companies: Chanel, Lancôme, Shiseido and Christian Dior. This is in addition to the January Clinique Mascara launch and Estée Lauder’s March launch.”

In skin care, Carlson sees the growth coming from face products, hair and gift sets, while sun and aromatherapy are expected to decline. “Age specialists, eye products, masks and body moisturizers will be the hottest subsegments for the year with significant volumes stemming from new launches,” she said. “Franchise line extensions from the major players will fuel growth in this category. Although there were fewer new introductions in 2002, new launch dollar contribution was up from last year’s in the January-June 2002 period. New products represented 8 percent of total skin care sales, double from a year ago. Top sellers included in these numbers are: Estée Lauder’s Advanced Night Repair Eye Recovery Complex, Clinique Extra Moisture Surge Gel, Lancôme Primordial Advanced Night Crème and Lancôme Renergie Intense Lift anti-wrinkle crème and Absolue Night Crème.”

“I can tell you that none of us are having any fun,” said Clarins’ Horowitz. “It’s been a while since we had some fun. What’s comforting is that this is a business and there are going to be business cycles — there eventually will be an upswing. Exactly when that will happen, I don’t know.”

“We need department stores to succeed,” added Horowitz, especially for skin care. “Essentially, I have confidence that they are going to breathe new life [into department stores].” Part of the responsibility, he noted, lies with the company itself. “We have to, one, bring excitement to the consumer through newness and innovation. And two, to refine and improve our at-counter experience — we have to make it a pleasurable experience characterized by information and attentive care.”

When it comes to top-line versus bottom-line growth, opinions vary. Said Langhammer: “I am in favor of growth, but it must be responsible. I’m not in favor of artificially propping up the market without long-term perspective. Spending without a specific plan for longevity is not a smart idea —?you have to be financially responsible, and gaining market share at any price is not a good business strategy.”

In terms of top-line versus bottom-line growth, Miller believes they go hand in hand. “We continue to be focused on top-line growth with a new product such as Vera Wang, but we are in no way going to alter our pattern of support. The bottom line maintains a great deal of importance, but our focus is on top-line and appropriate support for the growth.”

“People are thinking about the bottom line for this year,” said Chanel’s Kopelman. “If you’re a public company, you have no choice or your stock will tank. All companies are looking at both the topline and the bottom line; it would be stupid to ignore either. You may emphasize one at one time, but you can’t ignore them. In the short term, I am more top-line oriented, but I am very concerned about both. This will be some ride in the fourth quarter. It will be the most interesting fourth quarter the industry has ever seen.”

“Growth of the bottom line is the most important thing for a public corporation,” said Katz. “But we believe that growth on the bottom line has to come from growth on the top line, not from cutting expenses. If you just cut expenses, you’re just going to create a lot of problems for yourself in the future.”

Prospects seem slightly brighter on the mass side. Marc Pritchard, vice president of global cosmetics and personal care at Procter & Gamble, said he expects second-half cosmetics sales to continue to climb, as they did during the first half of the year. He said the market could likely end the year with growth in the high-single digits.

Cover Girl, he said, has achieved eight successive quarters of share growth and he anticipates the brand will continue to gain share. Emphasis will be on the face and lip categories, as Cover Girl strengthens its core foundation business with AquaSmooth, which launched earlier this year to become the top-selling compact makeup. Later this year, the brand will unveil Fresh Complexion Pocket Powder. Cover Girl will continue to support its popular Outlast long-wearing lip color.

Max Factor has been building its market share as well, with four consecutive quarters of growth. “We’ve had high-single-digit growth and double-digit growth among our top customers,” noted Pritchard. In total, Max Factor’s sales are up 30 percent over last year. New items for Max Factor this year include Facefinity and Lashfinity, both extensions of the Lipfinity franchise. Pritchard said for both brands, the emphasis this year is on face and eyes.

“The good news is that the market has been growing as well,” said Pritchard. “A lot of that is driven by the fact that many mass brands have really been putting efforts in their power segments.”

Bill McMenemy, executive vice president of marketing for Del Laboratories, believes the second half of the year will present as many opportunities for the maker of Sally Hansen as the first half. He cited Del’s second-quarter success, in which sales grew 16 percent and earnings grew 38 percent, as an indicator of good things to come.

The company is on the heels of launching two new nail products, Nail Prisms and Maximum Growth Nourishing Nail Color, both of which will be aggressively supported in the second half of the year. In fact, Del’s ad budget companywide will increase 20 percent in the second half.

McMenemy said Del “will continue to focus on growing both the top and bottom line in the last half as is the company’s philosophy. What grows profits is growth in sales.” Despite a strong belief that the strength of the company’s products and brands is what helps drive sales, McMenemy attributed “the softness in competitive brands…as a unique opportunity to get more space next year and more support from retailers.” Del has already received commitments from retailers that as much as five additional feet of retail space is coming its way in 2003.

Gary Schofield, president of Caboodles Cosmetics, is very enthusiastic about the rest of the year and early 2003.

“We feel retailers are finally starting to understand the importance of reaching teens, and the recent Marketplace meeting helped with that. We aren’t pulling back on products, if anything we have more [products] than ever and retailers keep asking us for more. We’re really excited about some new items, which have molds in shapes and fold up into cases.”

Meanwhile, Alberto-Culver Co. reported Thursday that its net earnings for the third quarter ended June 30 jumped 25.2 percent on a sales increase of 12.6 percent. Howard Bernick, president and ceo of Alberto- Culver, reported that the company’s North American consumer products businesses and its Sally Beauty businesses had produced excellent sales and “exceptionally strong” double-digit profit growth for the quarter and the nine months.

“Consumers looking for quality and value are driving the economy overall at this point in time and are finding that our famous branded consumer products and our Sally stores deliver on both of these principles,” Bernick said in a statement. “To extend the trends we are seeing, we have continued adding new Sally and Beauty Systems Group stores and continued investing heavily behind Alberto VO5, TRESemme, St. Ives and our Pro-Line International ethnic hair care products to sustain our strong performance at retailers’ shelves.”

Bernick is confident that the company’s aggressive business stance will produce a record sales and earnings year in fiscal 2002, which would make it the company’s 11th consecutive growth year.

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