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Beauty’s New Measure: the Quick and the Dead

NEW YORK -- Once purely an art, cosmetics merchandising is becoming a science.

The advent of scanner and point-of-sale data has armed cosmetics buyers and merchandisers with tools to determine which items in their departments are producing...

NEW YORK — Once purely an art, cosmetics merchandising is becoming a science.

The advent of scanner and point-of-sale data has armed cosmetics buyers and merchandisers with tools to determine which items in their departments are producing optimal turns and a significant return on investment.

In the past, buyers relied on gut instincts, warehouse inventory withdrawal statistics, gross margins and manufacturer-provided information that wasn’t always accurate to determine space allocations on the peg wall.

“Before we looked at margins, and ambience was a buzzword,” said Sheri Ralston, buyer for PayLess Drug in Wilsonville, Ore. “Now we’re strictly looking at turns, gross profit return on investment and space-to-sales analysis. When you change the grading system, cosmetics does not perform well.”

The true profit picture for cosmetics has not been impressive. “Unfortunately, no one is making any money,” lamented one leading manufacturer. “The reason is the abuse of inventory. It costs retailers money to tie up dollars and it costs manufacturers money to make the product, especially in smaller quantities.”

Another obstacle is that many leading cosmetics firms provide free fixturing and other benefits to retailers who must commit to specified footage — making it difficult for retailers to bite the bullet and reduce space. However, once retailers started scrutinizing turns, they found the cosmetics category turns as slowly as 1 to 1.5 times per year instead of the 3 times per annum and more — a rate they’d prefer. Many buyers said top management is putting greater pressure on them to shore up turns and profits or to cut back on space devoted to beauty.

“Increased competition, better data available to management to analyze turns and profitability and cosmetics-vendor reductions in allowances all contribute to increased management focus on the profitability of the cosmetics category,” said Donna McManus, buyer for K&B Inc. in New Orleans.

McManus said K&B is engaged in space management analysis of its stores and each category as it relates to turns and profitability. “Long term, better turns are needed to maintain present space allocations of the cosmetics category,” said McManus.

Keeping the space devoted to cosmetics is critical for preserving the business, according to Larry Aronson, vice president-sales for Procter & Gamble Cosmetic and Fragrance Products, Hunt Valley, Md.

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“We need to build the business without proliferation of the category,” he said. “The goal is to work smarter and fill the distribution properly. Cosmetics is a category where it is important to recognize that productivity decisions need to be made in the context of reducing the inventory, as opposed to sacrificing service, selection and other retail variables.”

Among the retailers taking the most aggressive stand to improve beauty productivity, according to manufacturers, are K&B, Revco D.S., Twinsburg, Ohio; Wal-Mart, Bentonville, Ark.; CVS, Woonsocket, R.I.; May’s Drug, Tulsa, Okla., and Walgreen Co., Deerfield, Ill.

Walgreens, for example, has an overall plan of removing $200 million from its total inventories across the store via its Strategic Inventory Management System.

Smaller chains are also upgrading systems to control inventory. “We’re working very diligently on improving productivity,” said Gerald Heller, president and chief executive officer of May’s Drug.

The chain has been using POS checkout registers in a number of its stores and just completed its first inventory conducted by scanning stockkeeping units.

May’s can get reports showing what was sent to each store in inventory, what sales actually were in the store and, based on turns, what excess is in the store.

From there, the chain can also estimate what results would have been if its inventory had been in balance with the chain’s inventory turn goals.

Using these statistics will help the chain better plan its cosmetics purchases, said Heller.

Ralston at PayLess added that she has made changes in her cosmetics planogram based on actual product movement.

“We are streamlining and really looking at gross profit return on inventory,” Ralston said.

In several cases, space normally devoted to higher-priced lines has been edited to make room for lower-priced entries, according to buyers.

“Some products are turning less than one time a year, whereas Wet ‘n’ Wild turns 3 1/2 to four times on a three-foot set,” said Frank Copolla, executive vice president of sales for Pavion Ltd. of Nyack, N.Y., makers of Wet ‘n’ Wild, a budget brand.

Retailers have made physical changes in their cosmetics departments to improve profitability.

Randall’s Supermarkets in Houston, for example, has shortened its peg hooks to accommodate fewer products, yet still give the appearance of a fully stocked department.

Osco Drug in Chicago has gone from 9-inch to 6-inch pegs to boost turns. “Anyone who hasn’t reduced their pegs is crazy,” said one manufacturer. Perry Drug Stores of Pontiac, Mich., has instituted a program to edit 1,700 slow-moving items throughout the chain and to fill the space with multiple sku’s of faster movers.

Revco D.S., a chain with a reputation for having one of the most sophisticated inventory tracking systems in the mass market, reduced color cosmetics space to expand the nail care assortment, which delivers greater profits.

Aronson at P&G agreed that methods to boost productivity per sku are needed throughout the department. “We need to work with customers to help maximize return on inventory investment. We work with customers to do an analysis to identify places where there is room to make changes in the entire category,” he said.

Revlon is also attempting to deal with productivity, according to PayLess buyer Sheri Ralston. “Who better than Revlon to get involved in that end of the business. They are a major player that will be affected by what is happening,” she said.

Both manufacturers and retailers are turning to third-party resources to increase the efficiency of product launches and promotions. One source is Chicago-based Spectra Marketing Systems Inc.

The firm has worked with several leading manufacturers and chains to understand market dynamics and to eliminate the “dart throwing” approach to merchandising and product introductions.

“From the manufacturer’s side, some of the most obvious ways to use Spectra is when targeting an introduction,” said Monika Torrence, vice president product management for Spectra. “You can target the households most likely to buy a specific product without wasting time and dollars. For retailers, the more they know about their customer base, the better they can market the mix based on the demographics of clusters of stores.”

Spectra’s systems can produce data that allows retailers to identify the clientele of each store and then determine how many items per shelf foot of each product and brand.

To illustrate how Spectra works, Torrence created reports for Women’s Wear Daily. Using a particular Wal-Mart store in Chicago, Torrence ran a comparison of how that store stacked up against the competition within its trading area in terms of attributes such as shopper composition and shopper frequency.

From there, grids were created determining which consumers were heavy users of particular categories and brands — in this case, mascara. Lifestyles and media habits were ranked corresponding to the store’s base of heaviest users. “What you can determine is how much mascara needs to be carried — which brands do I need, which ones do I promote,” explained Torrence.

In the sample store, it was discovered that the most frequent users preferred Maybelline and Cover Girl.

From the information, Spectra can break down age, education, children in households, incomes and marital status. Also, lifestyles can be identified; for example, heavy users of mascara can be cross referenced to see what activities they prefer, such as waterskiing or weight training.

That can help marketers with launch plans that won’t waste marketing dollars. Realizing that a one-size-fits-all approach doesn’t work in retailing anymore, Spectra sections shoppers into different groups such as upscale suburban with kids, mid-downscale and downscale urban 55 plus.

It ranks what percentage of shoppers at a particular store falls into a particular group.

Spectra can perform numerous other marketing studies to assist retailers and manufacturers in better reaching consumers. Despite the emphasis on micro marketing and revamping planograms to reflect the briskest sellers, retailers admit the productivity game can go too far.

Although turns and profits are dictating their buying decisions, they realize the importance of selection when it comes to beauty.

“We are trying to balance selection and profitability,” said McManus.

McManus also has advice for manufacturers: “Introduce fewer products and support them more substantially. Stop making needless UPC changes and create smaller, more exciting prepacks and promotions.”