By  on December 8, 2006

GENEVA — Equipped with a gilded portfolio of designer names, Procter & Gamble Prestige Products Inc. is determined to amass as much clout in luxury beauty as it now enjoys in the mass market. The latest thrust in that campaign is the decision to launch a Dolce & Gabbana color cosmetics collection to broaden the fragrance brand into a full beauty house.

P&G's commitment to adding color to Dolce & Gabbana's fragrance-based business is a bold strategic move for the Cincinnati-based consumer products giant. News of the decision was confirmed by Hartwig Langer, global president of P&G Prestige Products.

Over the past two years, P&G Prestige Products has been cleaning house: restructuring the division, bolstering its management team, editing its brand portfolio and digesting recently acquired companies into its overall structure.

Now the company is steadfastly focused on becoming a leading player and expects to grow its more than $2 billion prestige business at a double-digit pace next year. With its special project in the works, the Dolce & Gabbana color cosmetics range, P&G is set to become an even more formidable competitor to archrival L'Oréal.

Last year, P&G Prestige Products won a fiercely competitive battle with L'Oréal and the Estée Lauder Cos. for the Dolce & Gabbana beauty license, which it took control of in July. In May, it inked a beauty deal with fellow luxury stalwart Gucci. These two stars round out P&G Prestige Products' already formidable stable of brands, which includes Valentino, Escada, Hugo Boss, Rochas and Jean Patou.

In an interview here, Langer said the company had geared up for significant expansion in the next five years.

"Over the last 10 to 13 years, we have clearly outpaced market growth. And I think we have the right to believe there are significant growth opportunities for us over the next five years, based on the portfolio that we have and the way we go to market," he said.

When pressed about how he planned to accelerate expansion, Langer said growth would come from a combination of existing brands, new launches and new business gained from acquisitions.

P&G is known for engineering a string of strategic acquisitions in the past, and industry insiders said that adding new brands to the fold would likely be a priority for the firm next year.A.G. Edwards & Sons analyst Jason M. Gere noted that P&G tends to make an acquisition every two years, citing Gillette (2005), Wella (2003) and Clairol (2001). Based on that time line, P&G may announce another acquisition this January, which Gere expects will be a beauty firm.

An analyst who asked not to be named said P&G may opt for a small, niche acquisition, but that a large-scale buy (a company over $1 billion) would turn off investors, given that the firm is still integrating its $57 billion acquisition of Gillette. Several analysts speculated that Clarins, which generates $1.3 billion in wholesale revenue, might be an attractive fit for P&G several years down the road.

Acquiring a smaller beauty company next year could be a strategic segue, a way for the firm to enter beauty categories that remain largely untapped by P&G, such as luxury cosmetics and premium skin care.

Antonia Branston, an analyst with global market research company Euromonitor International, said Elizabeth Arden could be a possible acquisition, and would automatically equip P&G with a luxury skin care and color cosmetics line on which it could expand with other brands.

"I suspect skin care is a better area for them to get into because they have the tools to develop high-functionality products, while prestige color cosmetics rely on image, and image is an area P&G is less confident in," said Branston.

Euromonitor International is predicting that skin care will be a growth driver in the beauty industry in the next five years, and premium skin care, which grew 11.2 percent from 2001 to 2005, is expected to be a top-performing subdivision of that category.

In addition to disclosing plans to launch a Dolce & Gabbana cosmetics line, thereby expanding the brand into makeup, Langer also underscored P&G's commitment to fragrance, which forms the basis and bulk of the D&G franchise. "I see us focusing on fragrance for the next three to five years," Langer said. "I think there is huge, untapped potential in the brands that we have in some of the territories and I think we can drive it bigger and better."Though he wouldn't divulge any launch details for the color line, Langer said it would be "when we feel it is the right time and have the right products." In a separate interview, when asked if there were plans for a Dolce & Gabbana skin care line, P&G Prestige Products general manager Markus Strobel said he "would never rule out anything at this stage, but not at the moment."

Speculation about a Dolce & Gabbana color line surfaced more than eight years ago when Italian beauty firm Euroitalia held the license.

Industry executives say P&G will probably follow up the launch with cosmetics lines for its other Italian fashion brands, Valentino and Gucci. In an interview with WWD last month, Valentino chairman Matteo Marzotto said skin creams and cosmetics were definitely part of the development plan for the beauty license, which has grown sixfold since it was acquired by P&G Prestige Products in 2003.

Retailers and industry analysts had mixed reactions to whether P&G could successfully diversify into other premium beauty categories. One retailer, who wished to remain anonymous, questioned P&G's expertise in developing premium skin care and cosmetics products.

Another European retailer said the company might have better luck developing fashion-branded color cosmetics rather than fashion-branded skin care, which has garnered a mixed reaction at retail.

But others have faith. "They are strong enough to take on the premium beauty industry in terms of products," said Branston of Euromonitor. "They are enormous; they have the resources for cutting-edge research and the refined marketing techniques. The question is whether they can succeed in bringing their image up to the same level — and away from the mass consumer brands where they made their name: Cover Girl, Olay, Tide and the rest."

P&G Prestige Products has already dipped its toe in the premium skin care market after the 2005 launch of Boss Skin in selected northern European markets. Though not counted as part of the P&G Prestige Products portfolio, P&G's premium skin care brand SK-II is a retail heavyweight for the company, ringing in $700 million in retail sales this year.

Some analysts said the Hugo Boss skin care line was a good litmus test for the company, and could direct future plans for men's products launched by P&G Prestige Products.The company is confident it has the right skills in-house to create successful cosmetics and skin care products. Carolyn Tastad, vice president of global prestige products, market development organization, at P&G Prestige, said, "Where it makes sense for the brand to extend into other categories, we will do that. We have done that with Boss Skin on the Hugo Boss franchise and we will be doing that on Dolce & Gabbana. We will certainly take advantage that we are in the business from the P&G side and learn from our expertise on that."

With contributions from Molly Prior, New York, and Amanda Kaiser, Milan

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