BEAUTY FIRMS FEAR A MEXICAN MIASMA
Byline: JIM OSTROFF
WASHINGTON — What a difference a month makes. In early December, American beauty companies were singing the praises of the Mexican market, buoyed by a free trade agreement that had sales soaring in 1994 — even doubling the figures of the previous year.
But come New Year’s Day, the tune had become more like a dirge, as Mexico’s 60 percent peso devaluation and the ensuing economic panic sent sales into a tailspin, NAFTA or no NAFTA.
“No doubt, 1995 will be a tough year for us, and we’re not expecting any miracles,” said Patrick Carroll, international vice president for Calvin Klein Cosmetics.
Calvin Klein had looked for this year to be a banner one in Mexico — perhaps topping its 16 percent sales growth in 1994 — because of the launch of the CK One fragrance, which took the U.S. and Canadian markets by storm.
“But pricing now is a tough subject, with our Mexican distributor paying in U.S. dollars and selling in pesos,” Carroll said. “So all we can do is give a bit on our margins, as will he, and we’ll all hope for the best.”
Mexico’s economic turmoil is also roiling the prospects in Canada, he noted, as its monetary support for Mexico — mandatory under the North American Free Trade Agreement — raises the specter of higher inflation in Canada.
If there is any silver lining in this bleak situation, it is that companies manufacturing cosmetics in Mexico, such as Avon, pay for their raw materials and manufacturing costs in pesos. This could give them a competitive advantage in Mexico and the rest of Latin America over firms with U.S.-based manufacturing facilities.
This all is a far cry from the opportunities that greeted cosmetics companies in Mexico for most of last year. U.S. cosmetics exports, based on the manufacturers’ prices, soared 40 percent to $173 million in the first 10 months of 1994.
“But with October through December being the big holiday season, there was no telling just how high our sales would have gone for all of 1994” if the economic crisis had not arrived, said Louis Santucci, international vice president at the CTFA.
No doubt, NAFTA fueled this hot growth. On Jan. 1 last year, Mexican import duties on 23 categories of cosmetics were eliminated totally. For another nine categories, duties were cut by one-fifth and will end totally in 1999. A 10-year phaseout of import tariffs on fragrances also began.
“These changes had their main impact on [Mexican] purchases of high-end cosmetics, but what really drove consumer purchases was advertising, which created competition” and fueled price reductions, Santucci said.
“Everyone looked at Mexico as a gold mine,” Klein’s Carroll said. “It has a large population of young people, a growing middle class and good potential for upscale, prestige products in department stores.”
But with the resolution of Mexico’s economic morass uncertain, sales forecasts are premature, he said, even with the slated second-half launch of CK One. According to Norman Auslander, chairman and chief executive officer of Lander Co., a private label skin care manufacturer based in Englewood, N.J., “1994 was a banner year for us, and our Mexican sales doubled from the previous year.”
The outlook was rosier still given the expansion plans of Wal-Mart and its joint venture partner Cifra S.A. de C.V., whose department stores, along with other mass merchandisers, are Lander’s primary Mexican outlets.
Then, in January, Wal-Mart put all expansion plans on hold. “Really, there’s nothing we can do now” to boost Lander’s sales in Mexico, Auslander said. “We have many existing orders, but they were put on hold by the Mexican account until they know what’s happening with the peso.”
At Estée Lauder International, cosmetics sales in Mexico, measured in units, rose 22 percent in the first half of 1994 and were up 15 percent between July and December from the same period in 1993.
The company expects 1995 unit growth in Mexico to be 15 percent above 1994 levels, said Jeannette Wagner, president of Lauder International. Yet, Wagner said that with the peso devaluation, “we need to run a leaner ship.”
She added that Lauder raised its prices to be close to parity with the U.S. and raised the wages of its staff in Mexico to compensate for the devaluation.
“We will hold our leadership for Estée Lauder and Clinique as number one and number two and are widening the gap between us and our competitors,” Wagner claimed.
Industry sources report that all non-Mexican cosmetics firms are now facing an uphill struggle there. But for a company such as Avon, whose representatives have been going door-to-door in Mexico since the 1950s and which manufactures there, the economic doldrums may have a positive side.
With 75,000 salespeople there, Avon posted a 7 percent sales gain in 1994, making Mexico “about a $400 million market,” said Brian Martin, the company’s New York-based vice president of corporate communications. The reps’ order rates “are among the highest in the world for any Avon country, at 90 percent,” he said.
Although Avon is not making sales forecasts for Mexico in 1995, Martin noted, “We’re very much a fourth-quarter business, and so we’re formulating strategies now to mitigate any impact of the [peso] devaluation.”
Nonetheless, he said, “devaluation may give us a competitive advantage over companies that import product into Mexico.”
Martin added that with the devaluation, Avon “might view Mexico as a potentially large export platform to the rest of Latin America, because the devaluation would make these [Mexican-made Avon] products more attractive.”
Over the long haul, though, trade analysts such as Eugene Milosh maintain the outlook is positive for cosmetics sales in Mexico. “While consumers are cutting back on purchases now, there are certain areas, such as cosmetics and soft drinks, that will bounce back rather quickly,” said Milosh, president of the U.S. Association of Exporters and Importers in New York. He said he was basing his assertion on historic precedent.
Susan Cohen, consumer group manager with Kline & Co., a Fairfield, N.J.-based market research firm, said U.S.-based companies account for about half of the retail cosmetics sales in Mexico.
The CTFA’s Santucci added that “while our companies are not happy with what’s happening there, currency devaluations happen all around the world from time to time and companies learn to make adjustments.” He added, “But when you look at the essentials of the Mexican market, over the long term the feeling is that it is a good market.”
In the short term, though, Mexico’s economic crisis is having a ripple effect on the Canadian economy, too, which could hurt cosmetics sales there, according to Calvin Klein’s Carroll. Noting that “we’re linked to Mexico through NAFTA and have to support their currency,” he said, “We had to give them about a $1.5 billion line of credit, which didn’t inspire investor confidence in the Canadian dollar, and the government had to prop up our dollar.”
As a result, Carroll said Canadian interest and mortgage rates will rise in the short term, which could dampen consumer spending. Since Klein Cosmetics supplies the Canadian market from the U.S., the weaker Canadian dollar increases the costs of these imports.
In 1994, Klein’s Canadian sales soared 29 percent over 1993 levels — while all-Canada cosmetics sales rose about 7 percent — due largely to explosive sales of CK One, launched there last fall.
Santucci said that in the first 10 months of 1994, the manufacturers’ value of U.S. cosmetics exports to Canada was $435 million, up 18 percent from a year earlier.
Aside from causing some economic problems in Canada, NAFTA has had no real effect on its cosmetics market. But the 1989 free trade pact with the U.S. has been beneficial, Carroll said, noting all import duties have been phasing down and will end in 1997, “which has helped us since we now have pretty close to cosmetics price parity on either side of the border.”
Still, concluded Carroll of Calvin Klein, “This is a year to catch our breath and maximize what we have. This year will be one of maintenance for us.”
— Fairchild News Service