INNOVATION, DISCIPLINE INTEGRAL TO REVLON’S COMEBACK STRATEGY
Byline: Evan Clark / With contributions from Faye Brookman
NEW YORK — Revlon unveiled a master turnaround plan Monday, along with heavy fourth-quarter losses that signal it’s not a moment too soon.
In its first large-scale meeting with analysts in two years, the firm’s executives tried to assure Wall Street that the company can recover in a year.
The assurances stood in stark contrast to fourth-quarter losses of $48.4 million, or 94 cents a share — more than three times the 27-cent loss Wall Street was expecting. Sales for the period dropped 22.5 percent, to $321.1 million, but were down only marginally for continuing operations. U.S. sales for continuing operations were $179.9 million, an 8.4 percent improvement over a year ago.
First reactions Monday were positive as the company’s shares were up 12.5 percent, or 57 cents, to close at $5.15 on the New York Stock Exchange.
Jeffrey Nugent, president and chief executive officer, said the company’s turnaround strategy is “based on launching innovative products, supporting those products with new advertising and marketing initiatives and getting our cost structure in order.”
Any good plan, a turnaround effort especially, starts with an assessment of key challenges and the strengths which can be utilized to overcome them. Revlon’s review found a lumbering cosmetics firm, which virtually shut off the new products pipeline when the company went on the block in 1999.
Additionally, the firm saw its in-store merchandising as weak and backed by dated and ineffective advertising.
There was also an excess in manufacturing capacity, as well as a bloated overhead structure and a fiscal irresponsibility in which concern over market share outweighed focus on cash flow.
Already the company has tackled some of its weaknesses.
Its ability to regain control of its destiny rests with its strengths, paramount among which is global brand equity. The leader in the domestic mass color cosmetics category, Revlon also sells its products in more than 100 countries worldwide.
Working in Revlon’s favor, the cosmetics category is stable and profitable as a whole. In addition to consistent historical growth, Revlon told analysts, “women wear cosmetics irrespective of economic conditions.”
William Steele, a consumer products analyst with Banc of America Securities, agreed: “Once a woman’s found a foundation, she’s locked into that brand.”
In many cases, retail customers, especially drugstores, depend on Revlon for this key profit-driving category and are aching for the company to get back on its feet. As the company noted in a slide presentation, there isn’t really anywhere else to turn: “New entrants, including private label entries, and existing competitors have not grown the category.”
Steele also agreed that a healthy Revlon is good for the category.
Though it’s cutting back on manufacturing capacity, the firm said it has been able to manage its costs in the area effectively and has been able to excel in the quality of its customer service.
Allan Mottus, an industry consultant, said that Nugent has “stripped the company down to its fighting central self,” noting that the firm no longer has the luxury of a superstructure. Its options have been reduced in favor of leanness, he said.
“Basically, the new products and advertisements have to reignite the Revlon trademark to a broader and more contemporary customer,” noted the consultant. “Their margin for error obviously become smaller because they don’t have the resources they had previously.”
He also pointed out that, with dependence on the color cosmetics category, “They have to hit it right on the button with the makeup, but they have the personnel to do it.”
Mottus said, “new products make you look like a genius in this business” and expressed his belief that the company became engrossed nearly to the point of catastrophe with one of its greatest successes, ColorStay. Revlon sold it for “too long and it filled up the pipeline, and it’s taken them a year and a half to get out of the mess they got themselves into.”
To put together the pieces once again, the firm’s short-term goals include rejuvenating the Revlon brand, creating profitable trade partnerships and reducing costs.
First and foremost, the firm said it needs to bring its flagship Revlon brand, which accounts for 73 percent of its total color cosmetics sales, back up to speed. It will do this through new products, new ads and better promotions.
“We expect our new product pipeline will be our strongest since 1994, the year we introduced the ColorStay line, and will be filled with innovative products that will provide new benefits for our consumers,” said Nugent.
Revlon has altered its new product process, creating a “funnel” by having a continual stream of new products ready to be launched rather than a “tunnel,” where new products need to be launched immediately upon development. A key to this is a consumer evaluation process that connects quantitative and qualitative research directly from a group of roughly 300 consumers. The evaluation produces results in a week instead of the previous three months. Now, the company said, it’s in the desirable position of having more new ideas than it needs.
Revlon said the new consumer evaluation process will allow for the early finalization of its calendar, a nine- to 12-month lead time for retailers and “more innovative, consumer-driven new products.”
Upcoming Revlon launches include the Absolutely Fabulous LipCream line, Mattifying Foundation and the Sleek Cheeks Blush, while products already out for the year include Skinlights Face Illuminators and Vitamin C Absolutes.
The changes come none too soon for many of Revlon’s customers. An executive with a top drug chain said, “Things have gotten very bad in stores because of the lack of new products during 2000 — the worst I’ve seen.”
There was an upside, though, with many of Revlon’s customers noting the strength of Skinlights.
In the domestic mass market, Revlon’s market share fell in 2000 to 17.2 percent due to its lack of new products. Its nearest competitors, Maybelline and Cover Girl, carried 18.9 percent and 18.3 percent, respectively. While not expecting its market share to skyrocket in the coming year, Revlon did lead the category for the preceding four years, and wants to regain that position.
“The Revlon trademark is still gold — they have to shine it up,” observed Mottus.
To drive the new products, brand and market share, Revlon, as reported, installed Kirshenbaum Bond & Partners as its new advertising agency. The move replaced Tarlow Advertising, the in-house agency which guided the brand for the last 15 years, but allowed it to go stale through lack of attention.
As a trial run, Kirshenbaum did the firm’s ad campaign for Skinlights Face Illuminators and departed from the Revlon norm by using a relatively unknown model.
Also, Cindy Crawford’s contract as the face of Revlon wasn’t renewed. While possible candidates and the nature of the new face of Revlon is shrouded in secrecy, the firm is expected to hire a top-name model.
Valerie Cheyney, buyer for Happy Harry’s, was tentative. “I’m not sure the decision to not use Cindy was good, but I’m anxious to hear about new advertising plans.”
Revlon said its advertising costs will be kept down by improving the cost efficiency of traditional media and by moving beyond TV and print to include alternative communications such as the Internet, public relations or sampling events.
In her presentation on the Revlon brand to analysts, executive vice president Cheryl Vitali said: “Media spending will focus on launching and supporting new products. The core should benefit from the halo effect of new media as well as more customized and more effective retailer events.”
Steele, the Banc of America analyst, said the solidification of Revlon’s financial position should be the firm’s number one priority.
“First and foremost, the company has to have its balance sheet and working capital pointing north,” he said.
Steele noted, “In general, when companies turn around operations, the last thing to fall into place is the income statement.”
The balance sheet, he said, with receivables and inventories each down about 34 percent, is more positive. “Generally, it appears that the company is fixing the internal operations first, and while that has a negative effect on the income sheet, that’s on a short-term basis.”
He stressed the importance of running a tight ship for Revlon, since it’s up against much larger companies in L’Oreal and Proctor & Gamble.
Indeed, the spending cuts at Revlon are for real. The firm, which said it spent about $150 million on promotions in 1999, plans to spend closer to $60 million in 2001 with new products accounting for half of that budget.
Revlon’s new trade terms offer a bonus program that includes incentives to retailers who succeed at lowering their returns, a problem that has plagued the cosmetics giant for some time now. The returns issue has sometimes resulted in retail customers, faced with volume shortfalls, turning more of a profit on returned products than they were selling them to customers.
The new terms lay greater responsibility on the retailer, but should help avoid the bloated inventory of the recent past.
If actual returns from a retailer fall below targets, the retailer receives a 50 percent cost saving from Revlon.
However, some retailers felt the term revisions wouldn’t simplify their dealings with Revlon and that, because they weren’t over-Revloned, they weren’t cutting its floor space.
Most retailers, though, seem to be satisfied with the new terms. A small New Jersey-based retailer said: “We thought [they] would be challenging, but it actually is helping with our inventory. They still have a long way to go, though.”
Nugent said: “We expect that decreased returns resulting from the new trade terms will enable us to significantly reduce related costs there by improving our operating margins.”
Mottus added, “Historically, it requires a healthy Revlon to keep the mass beauty market flowing,” he said.
Referring to the evolution of the drugstore channel, the growth of mass merchants and the uncertainty of the future of the industry, he concluded, “All the ground rules are changing. The Earth is swaying right now.”