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Not a Pretty Picture: After Tough Year, Beauty Faces Grim ’03

NEW YORK — Tighten your seat belt.<br><br>Top executives in the cosmetics and fragrance industry seem relieved that an extremely arduous 2002 is shuddering to a close. But the prospects for the first half of 2003 don’t seem any more...

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NEW YORK — Tighten your seat belt.

Top executives in the cosmetics and fragrance industry seem relieved that an extremely arduous 2002 is shuddering to a close. But the prospects for the first half of 2003 don’t seem any more inviting or smell any sweeter.

Seemingly endless new product introductions, vanishing retailer inventories and shrinking margins — worsened by ever-diminishing foot traffic and penurious consumers spending grudgingly in the wake of layoffs and fears of them — have many executives seeing how far they can cut back.

Their fears seem to be borne out by dismal department store sales. And most executives aren’t optimistic about a turnaround.

William Lauder, who was recently named chief operating officer of Estée Lauder Cos., noted, “We don’t see much reason to give us hope for a great change from the current trend.” He said the strategy for spring will largely involve maintenance of market share as well as self preservation, or as he put it, “a matter of focused spending.”

“I don’t see any evidence that things are going to get better,” said Camille McDonald, president and chief executive officer of Parfums Givenchy, American Designer Fragrances and Guerlain. “Hopefully it’s not going to get worse. Everyone had tough numbers this year and is being extra conservative.”

How’s Christmas? According to McDonald, “very disappointing. They’re all buying cashmere sweaters for $9.99 right now,” she said. However, Shalimar is “experiencing 30 and 40 percent gains and Guerlain is having the best Christmas in its history.”

Like many manufacturers polled, in the wake of a difficult economy, McDonald is focusing on core brands — particularly the classics. “We’re developing what we have in as conservative a way as we can,” she said. “We’re scaling back on launches, and a good part of our spring is going to be devoted to developing and solidifying existing brands. We’ve got a new program coming out with Amarige, and I think there are a lot of legs left in Marc Jacobs. We’re focusing on driving home strength for our Kenneth Cole men’s business, and we’re also planning to refocus on Givenchy pour Homme. We’re being careful to be conservative on one hand, but on the other hand, we don’t want to risk-manage ourselves into oblivion — which is a risk for everyone.”

“Barring another terrorist attack in the U.S.,” noted Leonard Lauder, chairman of Estée Lauder Cos., “The Sept. 11 jitters are calming down.” Moreover, “there is an upturn, which was confirmed by the near-landslide outcome of the November elections. Third, I am seeing signs of retail strength that I haven’t seen since Sept. 11, which coupled with the end of destocking, is going to give us all a boost. I’m not ready to make this a firm projection as part of our sales and earnings plan, but I’m sleeping better at night.”

He admitted that the fragrance category is “the murkiest business.” But he seemed heartened by the strength in the treatment business and selected parts of makeup and color cosmetics. Lipstick and lip gloss remain strong, indicating that “people are still feeling good enough about themselves to look good.” He cautioned, however, that “we depend very much on the fashion business done by department stores. Unless the department stores can find fashion vendors who can give them replenishment and new products at a rapid-fire rate at prices consumers can afford, they will lose ground to Zara and H&M. Usually I like to say that we are masters of our own fate,” Lauder said, apparently referring to the prospect of building foot traffic in the stores. “But I think the department stores have to take more responsibility on their shoulders.”

“It’s such a mixed bag,” said Fred Langhammer, president and chief executive officer of Estée Lauder Cos. He noted that there’s no consistent picture of retailing across the country, with stores shifting their promotional attack from region to region and allocating their resources in no particular pattern.

The weakness of the economic environment has been complicated by calendar shifts, with a late Thanksgiving and early Hanukkah. It is hard to predict how this selling season will end, simply because the crucial importance of the last 10 days before Christmas. Langhammer noted that he’s never seen such disparities. The only consistency he can find, Langhammer noted, is that “the fragrance business is pretty soft.”

As for next year, Langhammer said that Lauder is “gearing up for a pretty aggressive new product program” and planning on investing in what will touch the consumer. The objective is to build traffic.

Jean Paul Agon has learned in the year since he became president and chief executive officer of L’Orèal USA that the best defense is a strong offense. While admitting that no one can predict the future of the economy, Agon said, “the most important thing is how you prepare your year. What you bring to the market is more important than the [general] growth of the market,” he said, pointing out that a hot introduction can ignite demand. “We have prepared a very aggressive year.”

Among major projects on L’Orèal’s launch pad are Fructis hair care, Lancôme’s Resolution anti-wrinkle cream, a ground-breaking Couleur Expert hair coloring product, Giorgio Armani’s Sensi women’s fragrance and ambitious plans for Biotherm. Agon said last quarter’s sales showed a close to double-digit increase and his ambition for next year is the reach into the “very high-single digits,” if not the double digits.

Luc Nadeau, president of the Luxury Products Division of L’Orèal USA, said L’Orèal has seen “some interesting sales improvements this month, although not across the board.”

One thing is sure: “Newness will continue to drive retail sales,” Nadeau said, “and we have made sure that we have all the elements in place to make a symphony of excitement. We feel very confident that we have the portfolio to provide the product launches, the innovation and the animation to have a great success next year.”

“We’re very pleased with the way that Christmas is shaping up for us, but the category is soft and it’s coming down to day-to-day with how we’ll end up at the end of the year,” said Arie Kopelman, president and chief operating officer of Chanel Inc. “No one’s jumping up and down with glee at how this Christmas is doing, and there are lots of clouds on the horizon for 2003. It’s my hope that we’ll start to see fairer weather in the second half, but there are no genies coming out of bottles saying ‘I’m going to save your ass.’”

Overall, market conditions are promoting “guerrilla marketing, rather than a long-term view,” said Kopelman. “Consumers are looking for deals on a permanent basis and margins are shrinking. As executives, we’re learning to operate on smaller margins and we’re running our businesses on a defensive basis, which torpedoes the bottom line. It may help earnings for a short-term period, but I don’t think it’s the best way to maintain a brand’s health and profits over the long term. Any fool can give away product, but in the end it’s about the balance sheet. If we paint ourselves into a promotional corner, it’s going to be bad. Balancing the new with the classics is key.”

Kopelman said, “We’re rethinking as a company how we look at launches and flanker products, but I don’t think we’ll have any knee-jerk reactions.” He noted that classic brands like Chanel No. 5, as well as newer scents Coco Mademoiselle and Chance, continue to perform well for Chanel. “We will seat them for the long term to the best we can — we don’t want to muddy the waters by overdoing the launches in 2003,” he said. “[This climate] is going to take a tremendous amount of creativity and energy for everyone to deal with.”

“I think for first half of 2003, we are going to be faced with the same level of challenges that we’ve seen this year,” said Hilary Dart, president of Calvin Klein Cosmetics. “I think they may come in different forms. Consumers today have a lot more choices across a lot more product categories, and the number of launches that the prestige fragrance category has embarked on means winning a customer over is about offering them something new. Still, our strategy is to give them something new, yet offer them the familiarity of our classics. One of our major strategies this year has been to look to the strengths of our portfolio and build upon them.” For instance, she noted, the brand’s newest additions are Eternity Purple Orchid, a limited-edition riff on Eternity; Sheer Obsession, a lighter version of the classic, and graffiti-inspired CK One bottles.

Christmas continues to be “challenging — it’s a little slow,” said Dart. “We are seeing strong performances from Eternity and Obsession.” The brand’s major men’s launch this year, Crave, “was about building awareness on a global scale,” said Dart, who said that it ranked in the top three in most U.S. department store doors at launch and is achieving number-one ranks in the U.K., in travel retail and at Sephora’s Paris flagship.

Timra Carlson, vice president of NPD BeautyTrends, said the emergence this year of flanker products, or fragrances that are lighter or heavier spin-offs of original scents, is a trend that’s expected to continue into 2003. “It is likely that manufacturers will continue to add flanker products in 2003,” said Carlson. “Typically, [they] are associated with summer fragrances, but [toward] the end of 2002, [one] manufacturer introduced [a] winter flanker.”

In skin care, gift set sales are “thriving” and will continue to accelerate in 2003. “Established brands will stay in the game with new and improved formulas of top-selling products and with line extensions [based on] successful franchise names,” said Carlson. In color, lip gloss is expected to be hot in the first half. Lip products with “wet shine” attributes will become a popular alternative to thick textured glosses, according to Carlson. Foundations that purportedly firm, hydrate, minimize pores and provide anti-fatigue and anti-stress properties are “likely to see continued success as we head into 2003,” she said.

“We’re in a depressed market,” said Maggie Ciafardini, executive vice president and general manager of Beauté Prestige International. “There are uniform blips of optimism here and there, but nothing consistent,” she said. Like a number of executives, Ciafardini said it’s time to focus in-store. The next six months will be “very cautious, and it’s a time when you have to bring customers into the store with as many vehicles as possible.”

Overall, Ciafardini said, “We are doing fairly well considering the environment. What is most difficult for us is that retailers are spending very close to the cuff — being very tight in support from a funding point of view — and not projecting out the stock as necessary.”

“We’re planning very cautiously and we’re focusing our attention on the in-store environment,” said Kathy Cullin, president of Puig USA and general manager of Puig Beauty North America. “All of our programs will try to reach the consumer directly at point of sale.” Puig markets prestige fragrances in the U.S., from designers Carolina Herrera, Nina Ricci and Paco Rabanne. Puig also signed Hussein Chalayan in a fragrance marketing deal a year ago but has yet to launch Hussein products.

Though Puig’s established brands are experiencing a sales decline of 10 to 15 percent, according to industry estimates, Puig’s new properties are offsetting the slide, resulting in a business that’s currently up about 5 percent. The biggest impact on prestige fragrance is a consumer that’s “nervous,” said Cullin. “People are being frugal. A $100 gift last year may only be a $50 gift this year.”

Cullin feels the current cycle will take a “few years” to break. “We just need to build our marketing programs and launch plans with expectations for a more conservative time,” she said. Puig’s first-half launch plans aren’t changing, according to Cullin. Neither is its new investment this year in a sales force staffed with ranks of part-time salespeople. That investment will be maintained in 2003. Cullin noted that Puig is looking at where its advertising dollars are going. Puig isn’t looking at any “major cuts,” but money spent on national advertising will likely be redirected to more regional efforts.

Several executives point out that it’s not all gloom and doom, however,

“Overall, we’re very optimistic about business right now,” said Bernd Beetz, chief executive officer of Coty USA. “At present, we’re up 7 percent over a year ago, and we will further strengthen our position by focusing on our blockbusters —?Davidoff, Lancaster and Jennifer Lopez.” In fact, Beetz said he is “ecstatic” at the business that Lancaster’s Jennifer Lopez-inspired scent, Glow by J.Lo, is doing. “We have additional activities planned in many areas, especially with Jennifer Lopez’s brand, and we are also continuing to launch Glow in additional international markets worldwide,” Beetz said.

Still, Beetz isn’t seeing an immediate turnaround likely for the industry as a whole. “The business overall will continue to be challenging, and I don’t think that will change anytime soon,” he said. “The U.S. and European economies aren’t necessarily roaring back and I think the launches will level off.”

The same measures that helped turn a profit for Shiseido Co. Ltd., during the company’s first half, which ended in September, will continue into the first calendar half of 2003 and beyond, according to president Morio Ikeda. The company is projecting a 5.9 percent increase in total net sales to $5.12 billion for the fiscal year that will end March 31, 2003. A net profit of $204.9 million is expected for the same period, compared with net losses of $186.6 million during the last fiscal year. A bright spot for Shiseido has been improved domestic sales. Within the Japanese market, sales increased 4 percent to $1.93 billion during the first fiscal half. “We restructured our system to reduce inventories and to activate the sales point, which brought the good results in the domestic market,” Ikeda said. “We will reduce the number of brands from 100 to about 35 by fiscal 2004 in order to focus our budget and our efforts on important brands.”

Ikeda believes there’s sentiment that the market will remain “severe” in 2003, but, he declared, “There is no excuse for this industry to stay slow.” Overseas, China remains a long-term focus, as does the U.S. “We will see 40 percent growth every year in China for a while,” said Ikeda. In the U.S., “we have more chances to grow. The skin care business is one of the categories in which we can expand our business [in the U.S.]. The economy in the U.S. is still severe, and [there] is uncertainty, but the U.S. market has basic economic strengths.”

Robin Burns, president and ceo of Intimate Beauty Corp., Victoria’s Secret Beauty and Aura

Science, said that her Victoria’s Secret business is running 11 percent ahead for November and December and following a series of successful fragrance launches, most recently Sexy for Her, the company should be able to continue this performance into next year. “We finally have a portfolio of products that we can market aggressively,” she said.

Laura Lee Miller, president of Unilever Prestige, is thrilled with the legs that her division’s Vera Wang scent has shown since launching this spring. The scent reportedly had a $750,000 week during Thanksgiving week, said industry sources. Also, the scent is reportedly doing especially well in Saks Fifth Avenue and Bloomingdale’s doors. Miller is also seeing “a nice build” in Nautica fragrance sales. “The reduced time between Thanksgiving and Christmas this year has led to more steady shopping at the department stores,” she said.

“Year to date, Shiseido business is up 12 percent,” said Heidi Manheimer, president of U.S. operations at Shiseido. “It’s very encouraging in light of a difficult climate, and combined with the new products that we’re planning, we feel that bodes well for spring.” As reported, the brand will bring its Body Creator — one of the top-selling cellulite creams in the Asian market —?to the U.S. this spring, along with a host of other skin care and color cosmetics initiatives. The brand’s Pureness skin care lineup continues to perform “extremely well,” and Manheimer also sees strong potential from the recently released Future Solution antiaging cream. “Skin care is still about 70 percent of our business, and our premium skin care business is up 36 percent, our treatment business is up 26 percent,” she said. “Overall, we’re confident for spring.”

Ikeda believes there’s sentiment that the market will remain “severe” in 2003, but, he declared, “There is no excuse for this industry to stay slow.” Overseas, China remains a long-term focus, as does the U.S. “We will see 40 percent growth every year in China for a while,” said Ikeda. In the U.S., “we have more chances to grow. The skin care business is one of the categories in which we can expand our business [in the U.S.]. The economy in the U.S. is still severe, and [there] is uncertainty, but the U.S. market has basic economic strengths.”

Robin Burns, president and ceo of Intimate Beauty Corp., Victoria’s Secret Beauty and Aura

Science, said that her Victoria’s Secret business is running 11 percent ahead for November and December and following a series of successful fragrance launches, most recently Sexy for Her, the company should be able to continue this performance into next year. “We finally have a portfolio of products that we can market aggressively,” she said.

Laura Lee Miller, president of Unilever Prestige, is thrilled with the legs that her division’s Vera Wang scent has shown since launching this spring. The scent reportedly had a $750,000 week during Thanksgiving week, said industry sources. Also, the scent is reportedly doing especially well in Saks Fifth Avenue and Bloomingdale’s doors. Miller is also seeing “a nice build” in Nautica fragrance sales. “The reduced time between Thanksgiving and Christmas this year has led to more steady shopping at the department stores,” she said.

“Year to date, Shiseido business is up 12 percent,” said Heidi Manheimer, president of U.S. operations at Shiseido. “It’s very encouraging in light of a difficult climate, and combined with the new products that we’re planning, we feel that bodes well for spring.” As reported, the brand will bring its Body Creator — one of the top-selling cellulite creams in the Asian market —?to the U.S. this spring, along with a host of other skin care and color cosmetics initiatives. The brand’s Pureness skin care lineup continues to perform “extremely well,” and Manheimer also sees strong potential from the recently released Future Solution antiaging cream. “Skin care is still about 70 percent of our business, and our premium skin care business is up 36 percent, our treatment business is up 26 percent,” she said. “Overall, we’re confident for spring.”

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