A NEW WORLD ORDER
Byline: Jim Ostroff
WASHINGTON — The cosmetics export juggernaut keeps on rolling along.
American firms last year sold a record $2.8 billion worth of fragrances, lip, eye and facial care products and toiletries worldwide, up about 10 percent from 1995, the previous pacesetting year.
But statistics hardly tell the whole story; U.S. cosmetics firms sold far more products overseas than the numbers indicate, owing to the fact that an unknown millions of dollars of these goods were made by American firms in Europe, Latin America and Asia for sale to consumers there.
As far as the Commerce Department is concerned, these were not U.S. exports and, therefore, do not count when it comes to collecting its data.
Perhaps more importantly, for many cosmetics firms, increasing exports are not a goal within themselves, but the byproduct of corporate strategies aimed at rationalizing production by making the manufacturing process more efficient and profitable.
But in increasing exports, these firms are also recognizing changing economic and trade situations.
“We look to produce and deliver cosmetics to foreign countries in the most efficient and effective way possible,” said George Fellows, president and chief executive officer of Revlon Inc. “This often means we will manufacture product in the U.S. due to proprietary technology, size and efficiency of our plants here.”
Many U.S. manufacturers of consumer products have expressed concern to the U.S. Trade Representative that several developing nations virtually sanction what amounts to industrial theft.
There are other practical considerations for exporting, said Robert Ruttenberg, president and ceo of Gryphon Development Inc., a New York-based manufacturer of cosmetics, fragrance, bath and body products.
“Within the past five years, the U.S. market has become saturated and is growing very little, which means to grow you have to take share from your competitors, which is far from easy,” said Ruttenberg, whose firm recently opened five Bath & Body Works stores in Britain and operates 250 domestically.
Gryphon is owned by Intimate Brands, which is 83 percent owned by The Limited.
In addition to the U.S. market saturation factor, “within recent years American cosmetics firms, as part of their overseas expansion and production rationalization, have developed a globalization of brands, that is, trying to portray a worldwide image for their products,” said Michael Plansky, a partner with KPMG Peat Marwick, the New York-based accounting and consulting firm.
Certainly, selected overseas markets are attractive to U.S. cosmetics makers by dint of sales there and the prospects for monumental growth. For example, U.S. exports of fragrances and toiletries to Panama jumped 40.4 percent to $25.7 million during the first three quarters of 1996, compared with the same period the year before.
Exports of these toiletries to Mexico, which had cut back on most imports during its peso devaluation crisis, rose almost 22 percent to $26.6 million in the first three quarters of 1996.
On the same basis, exports of U.S. eye makeup to Taiwan jumped 45.1 percent in the same period to $1.5 million and by 112 percent to $2.2 million to Japan.
Meanwhile, shipments of powder makeup to Taiwan stood at $2.4 million for the first three quarters of 1996, up an astounding 515.1 percent. Exports to Korea of skin care products soared 217 percent to $61.5 million in the first three quarters of 1996.
All data were compiled by McKenna & Cuneo, a Washington law firm, from Commerce Department trade figures.
But this does not mean that selling cosmetics in any of these markets is a cakewalk.
In each foreign market, consumers may have specific requirements and governments often have unique regulatory programs and can throw up import barriers on a whim. In addition, vast consumer markets can look tantalizing at first blush, but then dim once consumers’ disposable incomes and the poor infrastructure of a country are considered. China is a good case in point. This nation not only has one-fourth of all of the world’s people, with a population of 1.2 billion, but its economy is booming as its government continues to move away from socialist planning.
On paper at least, China appears to be a bonanza for U.S. cosmetics firms, said Ira Kalish, a senior economist with Management Horizons, Los Angeles.
“Because [expenses] in China such as rent and medicine are subsidized, your typical consumer in affluent cities such as Shanghai might have several thousand dollars a year to spend in disposable [income], which explains why in 1994, 86 percent of the households there had color televisions and 62 percent had refrigerators,” said Kalish, whose firm is the retail consulting division of Price Waterhouse.
“Cosmetics would be a natural to be sold in department stores in China, except that there are very few, in part due to the fact that distribution systems there are very primitive,” he said. “Most goods are sold by mom-and-pop stores, the transportation and information technology infrastructures are very far behind the West and 90 percent of products, such as beer, are distributed by bicycle.”
In addition, Louis Santucci, the Cosmetics, Toiletry and Fragrance Association’s international vice president, noted, “There is a tension between the federal and provincial governments, and so it’s sometimes difficult to determine which rule should be followed.”
Estee Lauder has established a beachhead in China, servicing the country out of Hong Kong and “doing very well in seven cities, where Lauder and Clinique are the number one and number two selling” cosmetics [brands], said Jeanette Wagner, president of Lauder’s international division.
The firm will expand its retail sales to “three or four other cities just as soon as the infrastructure comes in” making this feasible, Wagner said.
Yet, for a company like direct-seller Amway, the very lack of retail stores in China is viewed as a positive, said David Brenner, senior vice president for market development with the Ada, Mich.-based firm, which is about to launch its business in six coastal provinces, including Shanghai.
“Consumers in this region are very capable of buying our products, and while retail distribution might be a challenge for some companies, the lack of infrastructure should not make it more difficult for us,” since Amway sells its products via personal representatives, Brenner said.
That point was driven home earlier by Avon Products Inc., which entered China in 1990 and quickly established a direct-selling base. Avon’s sales in China last year were estimated at $60 million to $65 million, and executives are aiming for a target of $250 million by 2000. Avon lists China as its top global growth prospect.
Revlon, meanwhile, which just began selling its lines in China late last year, can live with door-to-door cosmetics vendors.
“Of course they’re competition, but they are developing the cosmetics markets” in countries such as China, Fellows said. “As the retail infrastructure develops, business will gravitate to retail, and there will be clear opportunities for us,” he added.
The situation in South Korea is at the other extreme, but challenges still abound for U.S. firms.
On the upside, Revlon’s Fellows noted, “Korea’s economy is very strong. There is very good infrastructure, and its consumers have a very high use of cosmetics.”
He ascribed the sharp increases in U.S. cosmetics exports there in recent years to a substantial reduction of Korea’s import duties.
CTFA’s Santucci concurred, asserting, “There’s no reason now why Korea shouldn’t be one of the top markets [for cosmetics exporters].”
But, he is quick to add things could be better there, explaining that Korea “has batch and annual testing requirements that we feel are costly and unnecessary.
“It doesn’t allow [foreign] firms to be members of its cosmetics trade association, which is allowed to review sensitive commercial information about our products,” he continued. “They can give you a lot of negative reaction to your entry to the market if they don’t like your price — exerting subtle pressure for you to adjust your prices if they decide these are too high.”
On the horizon, some industry executives worry about the growth of trading blocs, such as the European Union, which eliminate trade barriers among member nations, giving firms that make cosmetics within the bloc an advantage.
Besides the EU, several trade blocs have been formed in Latin America, and one is forming among Asia-Pacific nations, though this will include the U.S.
Santucci does not foresee this trade polarization as a significant problem to American firms, noting there are serious discussions now among leading trade powers about eliminating cosmetics import duties entirely by 2000.
Lauder’s Wagner even views the development of trade blocs as beneficial, noting this should reduce the hodgepodge of regulations and certifications that can stifle imports. Yet, even while companies pursue global brand strategies, trying, as they say, to present “one face” to consumers worldwide, the fact is this face often looks different to consumers from one region to the next.
It has to, said Lynn Emmolo, Avon’s group vice president of global product marketing. “There are significant olfactory differences and requirements in Latin America, where we have strong fragrance franchises,” and Avon will be launching a new fragrance line soon to meet this need, Emmolo said.
Similarly, she said Avon skin care products emphasize skin whitening attributes in Asian markets, since this is a vital consideration for many consumers there.
To some extent, Avon’s country strategies are set by a global product council, composed of representatives from 22 nations, which Emmolo said “meet twice a year to review product strategies.” She said, “They discuss whether an approach is appropriate or not, and often we’ll [change] products since they do know better than [Avon executives] in New York.”
However, Emmolo said Avon, which operates in 125 nations, “does set some parameters” in order to decide how much of its business should be handled on a “global, regional and local” basis.
The pioneer in door-to-door cosmetics sales, Avon also tailors its lines to make its products more affordable in countries where “consumers don’t have large disposable incomes,” she said, explaining it will offer its sales reps the same products as sold in affluent nations, but in lower-priced smaller sizes.
Amway, too, tailors its product lines to meet nations’ differing consumer needs, and, like most American firms, must run the gauntlet of varying regulatory requirements in each market.
“Sometimes, these barriers can seem to be harsh, but we look at them as developmental realities that we have to adapt to,” Brenner said.
Frankly, he said, cosmetics firms should expect foreign countries will increase their scrutiny, noting, “as cosmetics become more than generic moisturizers, governments are more concerned about their potential effects on the skin.”
Lauder’s Wagner, meanwhile, emphasized that a country’s potential market size can be deceiving.
“India’s middle class is estimated to number 200 million people. But if you examine the per-capita income being spent there on cosmetics, it is 68 cents, compared with $38 in South Korea,” she said, adding that exporting to India is academic since “its duty rates are over 100 percent.”
Wagner noted she will be traveling to Vietnam in July as “an observatory trip,” adding that Lauder has no timetable for selling cosmetics in that country.
At the other end of the industry spectrum, Key West Aloe Inc. of Key West, Fla., also has it sights set on world export markets, but is taking a different approach from the industry giants.
Recognizing the need to export due to saturation of the U.S. market but without the resources to maintain its own worldwide sales personnel, Key West has teamed with Sony Corp., which maintains a product catalog distributed to its 200,000 employees. “This is a wonderful venue for us, since we can make the contact with consumers without having to shake everyone’s hand in Japan,” said Joseph Liszka, Key West’s president. The firm, which does about $1 million in export sales, mainly to Western European countries, is looking to expand its sales using agents overseas as well as an Internet site.
None of this likely will push Key West’s sales to the billion-dollar level anytime soon, and “that’s exactly the point,” Liszka said.
“We have ‘discovered’ our niche. We are not Avon or Revlon and don’t ship millions of units,” he said, “but we can handle orders for 10,000 or 100,000 and can do this under our brand name, or as a private label for overseas buyers.”
For all of the discussion about foreign markets, almost nothing is mentioned by cosmetics firms about Mexico.
Since Mexico’s economic crisis began in late 1994, forecasts that it would rival Japan as a top U.S. market for cosmetics sales have been tossed aside. But some analysts say Mexico’s slide has halted, and the prospects for these exports improved.
“Our companies’ sales there last year were not where they were a few years back in dollar terms, but by volume, firms that stayed in that market have found conditions have stabilized,” said CTFA’s Santucci.
Emalee Murphy, a cosmetics trade attorney with McKenna & Cuneo, noted, “Mexico still is our number four trading partner, even with its peso devaluation and economic problems, and the fact that trade didn’t slide in 1996 [in comparison with 1995] is good news.”
Murphy noted that total U.S. cosmetics exports to Mexico rose from $162 million in 1993 to $218 million in 1994, the first year of the North American Free Trade Agreement.
But with the drastic reduction of the peso at the end of that year, which produced an economic crisis from which Mexico just now is recovering, these exports tumbled to $155 million in 1995.
Trade data for the first three quarters of 1996 show U.S. cosmetics exports to Mexico totaled $131 million, essentially unchanged from a year earlier.
On the same first-three-quarters basis, Canada was the top U.S. cosmetics export destination, with sales of $623 million, or 23.9 percent of the total $2.6 billion in such exports during the period.
These 1996 shipments were up 16.5 percent.
Japan was in second place, buying $317 million worth of U.S. cosmetics during the first three quarters of 1996, or 12.2 percent of the export total. Japan’s imports rose 23.6 percent from the year-earlier period.
The United Kingdom was ranked number three as an export destination for U.S. cosmetics in the first three quarters of 1996, when it imported $144 million worth of these products, which accounted for 5.5 percent of total U.S. exports of cosmetics. Rounding out the top five, South Korea was right behind Mexico, importing $115 million worth of American cosmetics during the first three quarters of 1996, for a 4.4 percent share of the U.S. export market.
The $115 million figure, however, represented a 93.7 percent increase in the imports in Korea from the U.S., compared with the same period in 1995.