MAKING INROADS ABROAD
Byline: Jim Ostroff
WASHINGTON — There is little doubt that U.S. cosmetics companies took it on the chin in 1998 and during at least part of last year; they were sent reeling by the Asian economic crisis that dried up many of their most lucrative markets.
But like the champion prizefighter stung by a left hook out of the blue, the industry got up off the mat. America’s beauty and fragrance firms are making inroads in European and Asian markets long dominated by the traditional leaders.
Of course, it’s folly to proclaim that the industry will retain these gains in perpetuity — or even through next year. William C. Egan, Johnson & Johnson’s executive vice president for global skin care, asserts, “In truth, the one thing that is certain is that the rules of the game will change.” Egan is also chairman of the Cosmetics, Toiletry and Fragrance Association.
“How they will change, why and when — now those are the questions to be asking,” he added.
A number of things could derail the hard-charging American cosmetics companies: nimble upstarts pecking away at the industry leaders with niche marketing and killer Internet strategies; overexpansion in lucrative but risky markets like China; technological breakthroughs by foreign competitors who leapfrog the Americans, and even the remote — but not impossible — threat of worldwide trade wars.
Yet industry executives and analysts downplay the likelihood of this scenario in the foreseeable future for the very reasons for which the industry is dealing from a position of strength today. In part, then, this is the story of the many American companies that underwent wrenching downsizing and reorganization in the Eighties and early Nineties, thereby reinventing themselves.
Susan Babinsky, vice president of consumer products at Kline & Co., has seen firsthand the travails and triumphs of America’s cosmetics companies over the years. She attributes their resurgence and strength during the Nineties to the confluence of six key factors, one of which is the critical mass, born of the spate of mergers and acquisitions in the middle of the decade.
This factor helped make these businesses economically stronger and able to fend off competition, giving them the financial wherewithal to develop new products and market them outside the U.S. market, said Babinsky, whose international business and consulting firm is based in Little Falls, N.J.
At the same time, she said, “The skin care market took off, due to the increase of an aging population, their growing ability to afford these products and the tremendous research and development by American companies that allowed them to sell innovative products.”
Driving this trend, too, Babinsky said, “has been the growth of smaller companies that developed significant innovations.” This not only helped push the larger firms to step up their own research and development, but when the time was ripe, permitted them to “acquire smaller companies. One example was Lauder’s acquisition of MAC cosmetics, Bobbi Brown, Aveda, Jane and Stila.”
It is also vital that “there are many more consumers in emerging markets who are aware of cosmetics’ benefits and are able to afford to buy them,” she said, a trend that largely resumed last fall as Asian markets finally began their recovery from a two-year economic slump.
Electronic commerce is a driver as well. “Suddenly, anyone with their own product line can offer cosmetics to consumers around the world,” Babinsky added, making the established U.S. companies even keener to meet and beat the competition. “It’s not that the [big cosmetics] companies fear competition, but they don’t want to be left behind by e-commerce, and they recognize the huge potential this holds for them.” Besides, she said, the larger U.S. cosmetics firms have vast experience in dealing with the customs and the regulatory environment of many foreign countries, “while the smaller ones likely would be at a disadvantage in all of this.”
Finally, there’s the reality that global markets hold out the promise not only of more sales, but done right, the economies of scale that can buoy the bottom line. Said Babinsky. “You can get savings on the procurement side because you can negotiate with your suppliers on price and get more sales volume on lower margins.” Integral to this global strategy, she said, has been a “streamlining strategy” of selling a more limited number of products.
“If I can market the same product in 50 countries, rather than 50 different ones in 50 countries — the economics of the former make a lot more sense.”
None of this is lost on America’s leading cosmetics and personal-care companies that, to a greater or lesser extent, went through a reexamination of their operations and strategies and emerged with the understanding that there was little alternative to globalization. As in every enterprise, the devil is in the details.
Take J&J, which acquired the mainly U.S.-marketed Clean and Clear anti-acne product from Revlon in the Nineties and made it one of the company’s staple international products. “Now,” said Egan, “more than half of its sales are generated outside the home market. It has also globalized its acquisitions — Neutrogena and Roc — with good results, but it is not about to go on a brand-name buying spree.”
Globalization is vital, Egan maintains, for “it gives you the ability to leverage across every line in the P&L,” but only when done in a “focused” manner. In short, he said, “there is a recognition that you can only be competitive globally with a limited number of brands.”
But even as J&J has opened new markets for its cosmetics products, Egan worries that the sands could shift under its global-marketing strategies. “There is an unknown factor that won’t be clearly defined by further leverage,” he said, explaining that traditionally, about one-third of personal-care-product sales comes from food shops, drugstores and mass merchants, with the rest coming from department stores or direct marketing.
“Now, with the increasing Internet offerings, consumers can access brands outside their traditional channels, and that is what I consider the dynamic that nobody knows how to control today,” Egan said. Consequently, J&J is “experimenting with different models of e-commerce” to ensure that it continues to get its share of consumer spending. However, Egan declined to divulge the company’s plans.
While, along with other manufacturers, J&J took its lumps in the Asian-Pacific markets, the company saw a turnaround last year as a result of its investment there. This region “accounts for about 13 percent of our worldwide sales and is growing at 27 percent, versus the prior year,” he said. Despite the logistical and political challenges of doing business in China, the J&J executive said his company will continue to do so. “You move with the demographics, and in China you have a billion-plus consumers who are becoming increasingly Westernized and have an interest and need for our products.”
Acquisitions-turned-global-brands have also been an integral part of the strategies of the Estee Lauder Cos., especially for increased sales in the lucrative European market. The company has purchased Stila and Aveda, in addition to Bobbi Brown Essentials and MAC. “Because of this critical mass [of brand-name products], we have realized tremendous benefits in our ability to bring a product to market and display it from the moment it is born, whether in the U.S., Europe or Asia, and to take it to the rest of the world, because we have the ‘architecture’ to do this,” said Patrick Bousquet-Chavanne, president of Estee Lauder International.
But such structures and logistical capabilities would be meaningless, Bousquet-Chavanne said, without an understanding of what drives today’s global cosmetics market and how Lauder can develop and market products and quickly dovetail them to changing consumer tastes.
To an extent, he said, “very strong product innovation emanating from the U.S., based in part on technology, has been a catalyst for strong sales to Europe and, ironically, to France, the traditional birthplace of the European cosmetics industry.” But the key to Lauder’s successful strategies is more basic than that; it is one that transcends cosmetics.
In short, consumers in Europe, Asia and elsewhere are tuned in to the American lifestyle and brands. “There is a new wave of avant-garde, cutting-edge makeup brands born in the U.S. — the MACs and Bobbi Browns of this world — with an attitude that connects beautifully with the expectations of the European consumer,” said Bousquet-Chavanne. “It is one founded on the professional-makeup-artist profile and culture, where historically the Chanel and Christian Dior brands are haute couture.”
“Obviously, the Europeans and others are watching what’s happening with this American phenomenon,” he said, “but they can’t re-create what we have overnight, because you can’t invent a brand overnight when there is a person like Bobbi Brown behind it.”
Moreover, he continued, U.S. cosmetics companies get a boost by strong European demand for “brand names in fashion such as Calvin Klein, Tommy Hilfiger and Donna Karan, and this allowed us to come in on the makeup side with Lauder and Clinique and be much more appealing.” Similarly, he said, Lauder has partnered with global fashion magazines to reinforce this image.
Equally important, though, he said, is the company’s ability to turn its global operations on a dime: “You get innovations quickly to market and execute your plans with consistency and quality around the globe, targeting things like your shade collection to the local preferences and having a strong local presence that drives your marketing thought process in each market.”
Meanwhile, he said, Lauder’s strategy of continued investment and “supporting our partners” throughout the Asian-Pacific region paid off in higher sales last year “following a slowdown in 1998.”
Bousquet-Chavanne said that supporting retailers with advertising and promotional campaigns and developing “[new] brands allowed our retailers to bring newness to their stores at a time when the market [in the region] was very difficult”. Last year Lauder launched MAC in Australia and New Zealand, Bobbi Brown in Australia and South Korea, Origins in Singapore and La Mer in Singapore and Australia.
The company reported double-digit sales increases in Japan, South Korea and Thailand last year versus 1998, and sales for the entire region rose 6 percent to $481.2 million. Overall sales rose 9 percent to $3.96 billion.
Industry analysts confirm that by making global efforts, Lauder and others are honing in on today’s trends. “Generally, the European brands focus on colors and fragrances, but the good American brands have capitalized on not only this ‘fashion’ aspect, but innovation that has produced unique skin-care products as well,” said Adelle Kirk, director of marketing for strategic services for the New York-based Kurt Salmon Associates.
Perhaps more importantly, Kirk said, U.S. cosmetics firms “have done a great job segmenting the market so that Lauder, for example, owns many brands, but each has a different look and, with its marketing, reaches different segments of the consumer market.”
Ira Kalish, director of global retail intelligence at the Los Angeles office of PricewaterhouseCoopers, said U.S. cosmetics firms were right on the money in hanging tough in their Asian markets during the recent economic turmoil. As a result they are now poised for strong sales growth in the region. In addition, while some manufacturers have voiced concerns about the rise of category killer stores as a potential drag on cosmetics companies’ profits, Kalish said this could prove a boon to their foreign sales.
“People look at a merchant like Sephora and worry about the pricing issue. But because [the company] operates globally, it is more likely that U.S. cosmetics companies will realize that Sephora is a vehicle for greater distribution of global brands, giving our firms a larger share of the export market than they would otherwise have,” he said. “And with the globalization of hypermarkets like Wal-Mart that do global sourcing, there is more potential for worldwide trade in low-end cosmetics.”
For Al Roman, Revlon’s regional vice president, Latin America, the key to expanding global sales was the transformation during the last decade of most of the world’s economies to market-based, not government-controlled, systems. “This was the driver that liberated consumers to accept new products and it gave us+an opportunity to develop global brands,” he said. This, he added, gave Revlon a chance not only to import more products to Venezuela, but to expand the firm’s existing manufacturing facilities there to make products for export to other, formerly closed, markets.
Roman’s colleague Clive Schreuder, Revlon’s regional president for Europe, Africa and the Middle East, said U.S. cosmetics companies have another ace up their sleeve that has aided them in building global markets: “The key driver for this growth in market share is that the American branches understand how to do global marketing better than anyone else.”
“When you look at P&G or Lauder or the others, the marketing of their brands is done with consistent advertising and image, and while prices may vary from country to country, there’s a consistency relative to competition” with local brands, he said.
Schreuder candidly admitted that Revlon was a latecomer to the global game: “In the last few years, and especially the last few months, there’s been a significant change, and Revlon is looking at globalization as a key strategy.”
In practice, he said, “this means that we view new product launches not as ‘U.S.: stage one; rest of the world: stage two,’ but as one concept where you very quickly roll out new products virtually simultaneously everywhere. You do everything everywhere with the same stroke of the pen and have a consistent global approach to your marketing, package design and pricing positions, although with flexibility, such as using different models [in advertising] or selling different shades in Africa or Asia.”
Ironically, these same strategies and understanding are not lost on American executives for L’Oreal, the world’s largest cosmetics company, which has acquired numerous U.S. brands. Like their colleagues at other U.S. cosmetics firms, John Wendt, president of Maybelline and Laboratoires Garnier, and James Morrison, president of L’Oreal Professional Division, stress the importance of the technological superiority of products, consistency in products and marketing, and speed in reaching markets as keys for success in global business.
But other factors are also vital. “Within the corporation we try to stay true to our strategies, but we don’t think of ourselves as an American or a French business, but as an international business,” said Wendt. As such, he said, it is crucial to have in place in each market “people who know the market and have a credibility.” Ofttimes, he continued, the key to success is knowing what not to sell in a new market.
“We must be selective and choose those few products that immediately give us a balance of fashion, technology and credibility with consumers. For example,” he said, “in the U.S. you can sell more than 600 stockkeeping units in a line, but we cannot and should not expect that type of penetration in a country where the product doesn’t exist.”
Speed is also of the essence, Morrison asserted. “Fashion is global, and the way the media works today, we must know what’s coming off the runways in Paris this week and what kids are wearing in the clubs in Hong Kong, the U.S. or Europe, then quickly create specific products to capitalize on those trends.”
Case in point, he said, was his company’s plan to capitalize on “that look of undone hair that came out on the runways and in clubs and fashion collections last year. We quickly and simultaneously launched a product called Undone to capture this look. This product and the trend caught fire last fall; it became a global trend. We got on top of it, and it became a major success in our hairstyling category.”
Similarly, Morrison said that last year L’Oreal launched two new products tailored specifically for Asian consumers, and “the products were magic for us.” He is now bullish on Asia, noting that sales of the company’s products there, including those of Redken, rose 22.7 percent last year, following recent travails in the region.
No doubt, though, globalization poses its own set of challenges to companies such as L’Oreal, in the guise of strong American and European brand names.
Sometimes a company has to decide how to compete with itself as well as with other companies’ brands. Both Maybelline and Gemey are well-accepted brands in Europe. “We believe Maybelline can be a worldwide brand,” Wendt said, explaining that, consequently, the company began “calling the product ‘Gemey by Maybelline,’ then changed the weight to ‘Maybelline,’ being the signature name, ultimately dropping ‘Gemey’ altogether, with France being the last country to undergo this transition, since [the brand] Gemey is so strong there.”
Direct marketers haven’t been asleep at the switch to global market development either. Avon, which has operated internationally since the Fifties, has embarked on what fairly might be termed a crash program. Whereas global brands accounted for 11 percent of its cosmetics, fragrance and toiletry sales in 1993, this figure rose to 47 percent in 1998. The target for this year is 70 percent, said a spokeswoman.
To this end, she said, Avon launched a multipronged approach of vigorously recruiting sales representatives overseas, locally manufacturing products to avoid the currency roller coaster, stressing the advantages of its skin care products for the world’s aging baby-boomer population and rolling out a new global-advertising campaign.
She added that the campaign, which has been dubbed “Let’s Talk,” began with print ads and will break on TV in March.
Its $80-to-$90-million ad budget is about twice that of 1999, and half of it will be spent outside the U.S. Its aim, the spokeswoman said, is to “reinforce our brand’s image to consumers around the world…and it also talks about the earning opportunities” for sales representatives. In December Avon shook up its entire international division, appointing a new international executive and four new subordinates.
At Amway Corp., there is also a recognition that “more and more global consumers are aware that U.S. brands offer the most cutting-edge, efficacious products,” a spokeswoman said in a statement, adding that “[U.S.] import brands are the most trusted in Asia. European brands are also highly coveted.” Representatives of the Ada, Mich.-based firm were generally tight-lipped about how it will move on these trends, noting in a statement, “Artistry will continue geographic expansion in Eastern Europe and Scandinavia. Major product initiatives for this year will focus on the Asian consumer and addressing their unique needs in terms of fragrance, viscosity and packaging.”