L’OREAL-MAYBELLINE COMBO WILL GIVE P&G A RUN FOR ITS MONEY
Byline: Faye Brookman — with contributions from Sidney Rutberg, Cara Kagan and Sarah Raper
NEW YORK — Maybelline has a new French accent — which should give it a much stronger voice both in America and overseas.
In the wake of L’Oreal’s announcement last weekend that it would acquire the Memphis, Tenn.-based Maybelline for $508 million, analysts and mass market retailers are saying the new ownership just might provide the jolt Maybelline needs to restore its luster.
Wall Street sees the purchase as a good fit at a fair price. The combined companies will become a major player in the mass market, giving Procter & Gamble a run for the top spot in terms of market share.
Brenda Lee Landry, cosmetics analyst at Morgan Stanley, said the deal “makes good sense” and that Maybelline makes “an excellent fit with L’Oreal.”
“L’Oreal is very strong internationally,” Landry continued. “Maybelline is very strong in the mass market in the United States but has a lot of room for growth offshore.”
Maybelline lost some momentum in the fall of 1994 when it launched its Revitalizing line, targeted to women 35 years old and up. Many buyers said that by putting its efforts into Revitalizing, the company lost focus on its core businesses.
“Maybelline has certainly been struggling since Revitalizing,” noted Gerald Heller, president and chief executive officer of May’s Drug Stores Inc., based in Tulsa, Okla. Revitalizing itself suffered, buyers said, as Revlon aggressively promoted Age Defying, its competing brand.
Many retailers also said they had given too much space to Revitalizing, which hurt its productivity per square foot.
“I see problems with both lines,” said Marcia Springer, cosmetics and fragrance buyer for Taylor Drug Stores in Louisville, Ky., referring to basic Maybelline and Revitalizing. “The Cover Girl customer appears to be true blue; the Maybelline customer isn’t.”
Springer also said she fears many former Maybelline users are being lured away by department store brands. “A fragrance like CK One pulled the Maybelline customer into department stores and once there, she was enticed to try department store lines with free makeovers,” she noted.
The numbers, however, don’t show Maybelline slipping in market share. According to statistics from Information Resources Inc., a tracking firm in Chicago, for the 52 weeks ended August 27, Maybelline had sales of $390 million through drug, discount and food stores, representing a market share of 16.9 percent.
That was up from the 52 weeks ended April 30 — the last time period for which IRI released figures — when Maybelline garnered a 13.7 percent share. Still, retailers think Maybelline’s sales will show a declining trend over the next few months as the data filters in. Retailers hope L’Oreal — whose U.S. subsidiary, Cosmair, is overseeing the acquisition — can help remedy the situation.
“They certainly give financial strength,” said James Harrison 3rd, president of sales and marketing for Harco Drug Inc., based in Tuscaloosa, Ala. “I think there will be many positive synergies between the two companies.”
Lorraine Coyle, category manager for Eckerd Drug Corp. of Clearwater, Fla., said the companies will complement each other. “Maybelline is good at understanding the customer, right down to the shelf level,” she said. “L’Oreal has the marketing expertise.”
Added Heller of May’s, “L’Oreal has always been a pleasure to work with, and we think Maybelline will get a leg up with L’Oreal.”
The combined company will be a financial powerhouse. With a total volume in the lip, eye, face and nail categories of $648 million for the 52 weeks ended August 27, it will be the second largest mass beauty company, ranking below Procter & Gamble, which had sales of $678 million. In addition, L’Oreal’s Plenitude skin care brand will do an estimated $80 million this year.
For L’Oreal, the purchase of Maybelline will yield entry into more doors, especially the food-and-drug combination stores where Maybelline is strong. Maybelline is sold via 100,000 discount, drug and food stores, while L’Oreal is in less than half that total. The deal is also expected to provide access to the growing ethnic population. Maybelline has Shades of You, a pioneer brand in the mass ethnic market. With sales of $16 million, it is the second largest ethnic line, behind Procter & Gamble’s Cover Girl, which has a number of darker shades to cater to an ethnic audience.
L’Oreal met with less success in 1993 when it tried to integrate darker shades into its existing product lineup to court black women.
Maybelline, meanwhile, could benefit from L’Oreal’s consistent product introductions.
“As far as the consumer is concerned, they will most likely benefit since the quality and innovation of Maybelline products will improve under the guidance of L’Oreal,” said Charles Busta, vice president and general manager of P&G’s mass market cosmetics and fragrance division. “L’Oreal understands the need for innovation and fashion-forward color.
“I think we can also expect to see improvements in Maybelline’s packaging, formulations and shade statements that are much more cutting edge than Maybelline has been before,” he added.
When L’Oreal launches items like its long-wearing lipstick Colour Endure, Springer said, a technologically based benefit is usually part of the package.
L’Oreal’s only weak link has been its inability to follow up the fragrance success of Vanderbilt. Ironically, Maybelline hasn’t been able to crack the fragrance market either. Its launch of a scent called Daydreams in the early Eighties was a disaster; it was pulled off the market within two years. While noting the possible synergies of the merger, retailers are also quick to caution L’Oreal not to dramatically alter Maybelline. “We don’t want to see a ‘L’Orealization’ of Maybelline or a ‘Maybellination’ of L’Oreal,” said Harrison. “We’ve seen that a company can manage different brands. Procter & Gamble has done a good job keeping Max Factor separate from Cover Girl; Revlon has done the same with Almay.”
Guy Peyrelongue, Cosmair’s president and chief executive officer, said he intends to preserve Maybelline as a separate entity reporting to him — with its own manufacturing, marketing and sales force. Buyers were gladdened by Peyrelongue’s plans to maintain separate businesses and to retain Maybelline president Robert Hiatt. Hiatt is perceived in the trade as being “retail friendly” and willing to work with chains on flexible programs such as smaller displays for lower volume stores or exclusive endcap programs. “Customer service [to the trade] will be a question since Maybelline has always gotten high marks for that,” P&G’s Busta noted. “It remains to be seen if the merged organization will be able to keep that up.”
Many sources did say they’ll have to wait and see if all the promises hold true.
“They always say in the beginning that everyone will stay on,” said one buyer. “What will be interesting is to see how [L’Oreal] approaches the low-end of the cosmetics business.”
Several others noted that Maybelline’s former owner, Wasserstein Perella & Co., had been hunting for a successor to Hiatt, who has gone on record as saying he will step down at some point in the near future. Hiatt said his plans are to stay at the helm — although, he added, “I want to find a successor. This may accelerate that process.”
In Europe, many analysts saw L’Oreal’s move as possibly the first of many takeovers.
“This is perhaps the first step in a new strategy to invest more in acquisitions,” said Loic Morvan, an analyst with James Capel in Paris. At Paribas Capital Markets in Paris, analyst Marie-Helene Leopold called the deal an “acknowledgment” by L’Oreal that it would need acquisitions to grow. Several analysts said they expected L’Oreal would look at acquiring companies in Japan, to better attack the Asian market. Of the Maybelline move, Morvan said it would help “offset the seasonal aspect” of Cosmair’s business. He noted that 50 percent of Cosmair’s turnover was in the prestige side of the business, which is highly dependent on second-half Christmas business, while only 30 percent of L’Oreal’s worldwide business is done in that sector.
Paribas’s Leopold said the less expensive Maybelline ranges would also allow L’Oreal to go into developing markets sooner.
The merging of L’Oreal and Maybelline may also open up opportunities for smaller beauty players, suggested industry analyst Allan Mottus. “Retailers don’t like to be beholden to one or two big players and they’ll start doing more business with companies that aren’t as big of a presence in cosmetics, such as Coty,” Mottus said.
While not ruling it out entirely, analysts don’t expect a competitive offer for Maybelline to surface.
“I don’t see much chance of another bidder coming in,” says Douglas Lane, consumer products analyst for Merrill Lynch & Co. “Besides, Maybelline has appeared on everybody’s radar for a long time now as a possible acquisition and there were no takers. There are no other logical buyers that would not face anti-trust problems.”
Another possible inhibition to a competitive offer is a $13.5 million break-up fee provided for in the merger agreement. According to papers filed with the Securities and Exchange Commission, Maybelline has agreed to pay L’Oreal the fee if the acquisition falls through. Also, according to the filing, the agreement can be terminated by either company if it is not consummated by July 8, 1996 — but Lane said that is unlikely. He called the acquisition a “good deal for Maybelline shareholders. The stock is now at an all-time high.” Maybelline stock closed Thursday on the New York Stock Exchange at 36 3/8, up 1/8.