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Wall Street Eyes Pro Lines as Prime for Retail

Being one thing to all has too many risks; creating something for everyone is what’s next.

Being one thing to all has too many risks; creating something for everyone is what’s next.

That’s the consensus among Wall Street and industry beauty experts as they discuss how a firm’s beauty portfolio should aim to bring it virtually everywhere to virtually everyone.

“I think what the CPGs [consumer packaged goods companies] are in the throes of doing is dismantling Neil Fiske’s trade-up strategy. They all need to create more price tiers,” said Andrew Shore, managing director for Moelis & Co. in Manhattan.

Several beauty firms were mentioned as front-runners in this new enriched portfolio trend. Coty Inc. and Alberto Culver Co. were said to be good at reaching all types of consumers, from a certain demographic to what they’re willing to spend on a product. Coty, said one analyst, is an example of a beauty firm that still is “having more of a difficult time” than other beauty companies, but it “does well in fragrance because they decided to be in men’s, mass, prestige, designer and celebrity. They’re everywhere. To make your bed in prestige female is too limited. They’re trying to figure out how to be everything.”

Alberto Culver, said analyst Connie Maneaty of BMO Capital Markets, brought salon hair care brilliantly into the mass market with Nexxus, a company Culver purchased in May 2005 and then repositioned for the mass market in February 2008.

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“They created for themselves an upper tier, to marry well with its existing TRESemmé and VO5 ranges, which target the mid- and value tiers,” respectively, said Maneaty.

The industry is standing at attention as to how Procter & Gamble Co. will respond to this trend, a firm that has expertly tiered its Olay franchise and would greatly benefit from creating a salon tier in mass hair care, analysts said. P&G would have to look no further than its professional arsenal of beauty brands, with the spotlight shining brightest on Frédéric Fekkai, already sold in select Target stores, in addition to its more upscale distribution base that includes Saks Fifth Avenue, Sephora and Nordstrom.

Maneaty said, “P&G may very well sense an opportunity that they could also fill that upper tier [in the mass market]. I think everyone is evaluating what the opportunity is.”

The move is one that P&G should strongly consider, said Kathy Steirly, founder of Kathy Steirly & Associates LLC, a consulting and management firm, as it would bring some dazzle to the drugstore hair care aisle and give P&G a solid, premium salon presence in hair care.

“I think it would be a brilliant move,” said Steirly, comparing the shift as one that could emulate Nexxus.

“Nexxus did very well. It was a beautiful launch with regular prices and nice margins and they did a fantastic job of promoting the brand without giving it away….It’s something the drugstore channel is in such a golden position to” take on.

A look at P&G’s salon hair care opportunities brings one to automatically consider what rival L’Oréal’s options might be, as it is the largest salon company in the country and world.

One analyst said while the firm has remained steadfast in keeping its retail and professional businesses church and state, “There has been a change in mind-set over there” and the firm might be willing to part with one of its more mass tangible brands, such as Biolage or Matrix, the latter of which generates as much as $60 million in gray market sales in the channel already.

Steirly said a move into salon hair care for the mass market would be a huge opportunity for L’Oréal.

“They have very firm convictions [of not moving a salon brand into mass], but I would hope they would rethink it because other people are going to move down into the aisle and they don’t want to be left out,” she said.

Pat Parenti, president of U.S. brands for L’Oréal Professional Products Division said of the speculation, “I didn’t think we have the intention to do that.”

Another analyst pointed to Unilever and its purchase earlier this year of Tigi and how the opportunity is ripe for them to bring Tigi into mass.

“Unilever does not have the professional distribution, so there was much more clarity [with what may ultimately happen with that brand,]” said one analyst. In the past, Unilever said it has no interest in converting Tigi into a mass brand.

Steirly said the timing is right to expand on the salon tier.

“You see how well it is working in skin care,” she said. “Everyone has taken the buyer up several notches. Look at Pro-X. Who would have thought, especially in this climate, that it would do so well? Yes, they are spending a fortune to make it well known, but it is working.”

Maneaty said P&G has a well-tiered skin brand in Olay, if not by price, then by need. There’s the entry-level Total Effects, then Regenerist and Definity, and now there’s Olay Pro-X, Maneaty said.

“Pro-X is very much competing with specialty and department store brands,” she said. “Procter has created a portfolio that is rich enough so that consumers are confident in buying what they see in the mass market. They might be trading down from department stores but in general, what you can buy in mass is very high-end. Women who shop in Saks also go to Walgreens. The ads from mass market brands are as aspirational as department store brands. If you look at an Olay ad, it doesn’t scream ‘Duane Reade.’ It screams, ‘What’s the difference between this and what’s on the next page?’”

Perhaps, then, an opportunity lies in taking Olay to where it does not play, like the younger market?

Erin Ashley Smith of Argus Research said after attending a Coca-Cola meeting earlier in the month, it seems teens are again becoming a focus for product makers and that an Olay range for a younger consumer would make sense.

But introducing something new to the mass market, no matter how innovative, will be met with scrutiny.

“The mass market does not need a new competitor. The retailers don’t need it unless it is so missing from the current portfolio. Retailers want more efficiency,” said Maneaty.

Drugstores have been on a tear to rid their departments of superfluous stockkeeping units and offer streamlined assortments, sticking with big-name brands with big market share.

The strategy of streamlining, she said, has so far yielded positive results.

“In mass color cosmetics, the three biggest companies, Procter, L’Oréal and Revlon, have over the last year gained share. Like in lipstick, collectively, they’ve gone from 70 to 72 percent dollar share year-over-year. These are the premium price point products in mass. That’s interesting. It could be we are starting to see how what [retailers] carry is catering to what consumers are buying because each has a significant market share already. Brands that have a smaller share are really in a difficult position to prove why they should be there at all.”

Maneaty estimated that those with a 3 to 5 percent dollar market share are probably safe, but brands with less than that aren’t.

“Previously, there were no barriers to entry. But shoppers are saying when the assortment is cleaner they have a better choice,” Maneaty said.

As for whether P&G is in acquiring mode, Maneaty said, “In this difficult economy, companies will shed what is not strategic and that will offer others the opportunity to pick them up.”

P&G, she said, has shed more than what they are buying. “They have gotten out of food, they sold Noxzema to Alberto Culver, they got out of the pharmaceutical business. Will they buy in areas they think are growth avenues? Yes. Men’s has always had untapped promise. That’s an area that can be grown over time. There are people who ask what does Gillette do for them, but with that as a platform, they have distribution they haven’t had before. With careful study they will grow it.”