EUROPEAN BEAUTY EXECS ANTICIPATE GAINS FOR 2001
Byline: Jennifer Weil / with contributions from Brid Costello, Paris / Melissa Drier, Germany / James Fallon, London / Poul Funder Larson, Copenhagen
PARIS — “It seems reasonable that there will be a certain continuity [for 2001] with last year’s rhythm of internal growth,” said Lindsay Owen-Jones, chairman and chief executive officer of French beauty giant L’Oreal, at the company’s most recent annual meeting.
“It is true that we have always well withstood financial cycles — that’s one of the reasons why I am even confident beyond this current year,” he added.
Owen-Jones was summing up the feelings of many European beauty executives, who estimate high-single to double-digit gains for 2001, despite looming economic uncertainties, particularly in the U.S.
However, to some, luxury goods are beginning to look a bit less luxurious. Goldman Sachs last week lowered its recommendation for LVMH Moet Hennessy Louis Vuitton’s stock to “market performer” from “recommended list,” and cut its earnings-per-share forecast by 9 percent for both this year and next — because, as it said in its Luxury Goods & Cosmetics Flash dated July 6, Goldman “expects further short-term weakness in the share price; [that the] yen weakness has been significant recently, and the market might still underestimate LVMH’s leverage to the yen, particularly given its high fixed-cost retail operations.
“We have cut our 12-month price target to [$42 from $51, at current exchange rates],” it continued. “A recovery in sentiment could occur later in the year, possibly after third-quarter sales are reported in mid-October. We see little attraction unless the shares trade down to a reasonable discount in the sector.” Nonetheless, Merrill Lynch is more optimistic on luxury as a whole. It upgraded its sectoral stance to “overweight” from “neutral” in June.
But despite being more upbeat, the investment bank recognizes the good times are over. “In our view, first-half 2000’s bull run was the result of several exceptional factors occurring simultaneously (a global boom, a strong dollar and a strong yen, an overhyping of the sector’s e-commerce prospects….),” it continued.
Industry executives admit there are grounds for concern, but maintain their business will continue growing. “Clearly, the market this year is going to be a bit more difficult [than in 2000],” said Patrick Choel, president of LVMH’s fragrance and beauty division. “This is mainly due to the U.S. The American department store market is bad. The Japanese market is not great either. [But we] are still on track for double-digit growth.” Innovation remains a key industry driver, he added.
“We will be led by successful, new products in an otherwise fairly tough, defensive game,” agreed Hans-Kristian Hoejsgaard, president of the Lancaster Group. “For Lancaster, we expect modest to high single-digit growth for the next 12 months. From January, we expect [the economy] to bounce back; we [project] higher growth for the first half of 2002 [than for the next six months].”
For its part, Beiersdorf expects a 10 to 12 percent sales rise for the year, according to Uwe Wolfer, the member of the company’s board responsible for the Cosmed division. Last year, Beiersdorf reported its best year ever for beauty sales, with a growth rate of 15.5 percent to reach $2.39 billion, at current exchange rates.
Escada Beaute is expecting to end 2001 with “a double-digit increase,” according to Juliette Rapinat-Freudiger, managing director at the firm. She adds that the company plans to double its sales volume within the next three years.
Beaute Prestige International (BPI), a unit of Shiseido, had sales up 16 percent in the first half, without any launches, price increases or changes in distribution, according to Richard Beardsley, vice president international at the firm. “I think we are going to have a jolly strong year. In Europe, [the Issey Miyake and Jean Paul Gaultier franchise] is number 11 in leading prestige beauty retailers. In the U.S., according to NPD, the Issey Miyake master brand is number 13.”
Looking ahead for the second half of this year, “I expect growth for the [Juvena] group to remain the same. That means a plus of 10 percent for La Prairie and 7 percent to 8 percent for the group,” said Harald Stolzenberg, president of Juvena/La Prairie.
And retailers remain positive, too. “Our sales at the end of May were up by 12 percent at constant conditions,” said Philippe Charoing, managing director at Parfumeries Marionnaud, France’s largest perfumery chain. “We can cross our fingers, but I have good reason to believe the trend will continue for the second half of 2001, with continued growth at constant conditions of between 10 and 12 percent.”
“Looking forward, health and beauty sales will move ahead and margin improvement will continue,” said Steve Russel, chief executive at Boots, Britain’s largest beauty retailer. “We are confident of the outcome for the year, and expect that the pattern of profit improvement will favor the second half.”
“The first half of the current year [to September] is likely to see a lower profit than the same period last year, due to the nonrecurrence of a number of one-off items and the seasonal effect of a larger number of company-owned stores,” said Patrick Gournay, ceo of The Body Shop, which is suffering from its attempt to change its product line and store design too rapidly over the past 18 months. “However, we are expecting a reasonable improvement in profits for the full year as the benefits of our actions begin to feed through to our results.”
For the long term, executives here remain sanguine. They cite substantial growth in the over-50s and men’s segments, plus strong possibilities in Eastern Europe, among other regions.
“A new, important market that is growing very fast is Russia,” said LVMH’s Choel. “Sisley still has strong potential for [sales] increase and is gaining new markets,” explained Philippe d’Ornano, executive vice president at the firm. “We have opened subsidiaries this year in Japan and Scandinavia, and we took back a new subsidiary in Singapore and Hong Kong.”
“I think Spain is a pleasant surprise,” said BPI’s Beardsley. “The country is emerging as a major player.”
The onset of the common European currency, the euro, launching in January 2002, could cause short-term confusion, executives say, but otherwise there will be improved transparency in pan-European business.
“I do fear [a lack of] consumer confidence [next] January, February and March, which can affect 15 percent to 20 percent of business,” said Hoejsgaard.
But Claude Saujet, president of Parfums Hanae Mori, believes the real panic will set in March 2002, “since during January and February all products will be double-tagged” with pricing in euros and local currencies. He said people will still be obliged to purchase staples, but might — for a brief time — feel “uncomfortable” in dealing with a new currency for luxury goods.
Also, European industry has recently been teeming with mergers and acquisitions. As reported, Gucci Group, through its beauty arm YSL Beaute, for instance, recently inked licensing deals to create a fragrance for fashion label Zegna and beauty products for designer Alexander McQueen. Retailers have also been on a spending spree. Marionnaud, one of the only European retailers to expand outside its home country’s borders, is rapidly branching out in Italy, among other international markets. It acquired the Riviera perfumery business there, for instance, in May.
Executives say retailer consolidation keeps beauty brands on their toes. “We have to keep our footwork really nimble, with the changing retail patterns in Europe,” said BPI’s Beardsley. “We have got to think about one market — Europe is one market [now].”
Industry executives unanimously agree that the consolidation phenomenon is here to stay, and it will change the retailer landscape indefinitely. Some even foresee that “once these companies get really big, they are going to segment into different categories, such as Sephora black and white stores,” said Escada’s Rapinat-Freudiger. “We will also see the development of concept stores.”
Even in the current, more testing times, many insist that European beauty remains an exciting story. Sales of cosmetics and toiletries throughout the Continent and U.K. are predicted to increase by 20 percent in constant value terms between 2000 and 2005, according to U.K. tracking firm Euromonitor.
Among the five largest countries, Germany’s sales are expected to rise some 14.7 percent, France’s by 15.2 percent, the U.K.’s by 8.2 percent, Italy’s by 17.9 percent and Spain’s 26.5 percent, in the period.
By product category (also between 2000 and 2005), Euromonitor forecasts men’s grooming products will lead the sales pack, with an increase of 21.8 percent. There’s been a boom in men’s fragrance launches. For this fall alone, some of the names include: Parfums Christian Dior’s Higher, Lancome’s Miracle Homme, Parfums Thierry Mugler’s Cologne, Paco Rabanne’s Ultra Violet Pour Homme, Tommy Hilfiger’s T for Him and Michael Kors’s Michael Kors for Men, just to name a few.
Sun care sales will follow with 21 percent, color cosmetics with 20.8 percent, skin care with 20.5 percent and hair care with 16.1 percent.
European beauty retailers are also beginning to target the 50-plus set. In color cosmetics, Yves Rocher will launch a 78-stockkeeping-unit line, called Yria. Other companies, such as Parfums Chanel, will launch skin care for that demographic as part of its Precision line. Others to focus on the baby boomers include Lancome, with its Absolue moisturizer; Decleor, with the three-unit Vitaroma Lift Total collection; Parfums Yves Saint Laurent, with its first antiwrinkle cream, called Lisse Expert, and Oenobiol, with Oeniobiol Feminite beauty pills.
As for the Internet, beauty executives here are still wary, but view it as an inevitability. “It is obvious everything is cooling down [on the Internet],” said LVMH’s Choel. “But the Internet is here to stay.”
“Expectations concerning e-business were much too high, especially in fragrance,” said a spokesman from Cosmopolitan Cosmetics. “E-sales are a very small part of our business.”
But that is not to say beauty companies are not still investing in the ‘Net.
L’Oreal is promoting Easy Make Up on its Internet site. It is what the company claims as the first interactive, personalized makeup tool that allows users to apply makeup directly to their own photograph or that of a model, and to test almost all of the products in the L’Oreal Paris line. Also, Sisley is set to launch an informational site in September. Despite the June 2000 lifting of a European Commission ruling that disallowed electronic commerce, cyber trade has barely taken off here, with only a handful of prestige beauty brands or retailers selling goods online. But some think it is a risk worth taking. French department store chain Galeries Lafayette, for instance, will start selling beauty goods online by yearend, according to Catherine Deburge, perfumery buyer there.
At Sweden’s Oriflame, the Nordic region’s largest homegrown beauty firm, the ‘Net has helped change the way the firm conducts its business with a large army of distributors. Oriflame has been processing orders from intermediaries over the Internet for less than a year, but, in Sweden, it already handles some 60 to 65 percent of all orders in this manner.
Oriflame has created an internal online system and is now aiming to launch an extranet solution, through which distributors will be offered a templated package for an Internet shop that they can then customize to suit their own needs. The system will roll out in the second half of 2001.