ANALYSTS PRAISE KIEHL’S ACQUISITION

Byline: Alev Aktar / with contributions from Kerry Diamond

NEW YORK — Cosmair pulled off a major coup when it announced its acquisition of Kiehl’s on Monday for an estimated $80 million or more. That was the reaction from industry analysts and retailers, who said the brand’s positioning fills a void in Cosmair’s lineup.
“Kiehl’s is a brilliant acquisition because it strengthens L’Oreal’s position in the specialty store high-end segment of the business, which is an area where they have not been particularly important players,” said John Horvitz of Horvitz & Associates, an industry consultancy. “It is also an area which has been more resilient to erosion from alternative channels of distribution.
“Everybody has decided that growth by acquisition has less risk attached to it than developing new businesses internally,” he observed. “It’s so hard to build awareness for a new brand and the return on investment is so long.”
Horvitz added that Kiehl’s would benefit from L’Oreal’s vast international distribution networks. “Kiehl’s would have most likely relied upon a distributor network [overseas], which isn’t as efficient as L’Oreal’s structure.”
And as Kiehl’s grows, it will see greater economy of scale. “The line is essentially stock packaging and simple labeling, and I’m sure their margins are good,” noted Horvitz. “But that’s offset by the fact they have a large number of stockkeeping units and [they produce] relatively low quantities of any given item. If they can expand their business, their margins can improve.”
According to Amy Low Chasen, cosmetics analyst at Goldman Sachs, the Kiehl’s buyout “does suggest that management may be more acquisitive in the future along the lines of what some of their competitors — like Estee Lauder and LVMH Moet Hennessy Louis Vuitton — have done.”
She added, “This is somewhat of a departure from how L’Oreal has grown their business in the past. Before, it was basically internal growth.”
Industry consultant Allan Mottus argued that the acquisition made L’Oreal “a better balanced company” and underlined the strength of the company’s U.S. arm. “L’Oreal was overweighting their portfolio in the mass category in the last five years. Now it looks like they want to redress that. And the managers in the U.S., under Guy Peyrelongue, are growing in importance because they’re commanding a greater part of the business now.”
Kiehl’s is a great buy for several reasons, not least because it’s got real staying power. “It’s been hot for years,” he noted. And in addition to its cult brand status, the company has clean distribution. “It’s sold in the best specialty stores, they have their own outlets and they have a good mail-order business. That gives Cosmair a lot of latitude to expand distribution, or they can continue to expand freestanding stores or mail-order or online.”
Diana Temple, head of Temple & Associates, said, “Kiehl’s has an excellent brand name and it will position L’Oreal to tap into a younger and more naturally oriented consumer. People are shopping different places and you’ve got to go where the customer is,” she said.
It’s also a gift brand, said Temple. “When I think about L’Oreal as opposed to Lauder, Lauder has built a very big gift business with specialty lines at Christmas. L’Oreal, I think, historically has been underweight in the gift business.
Merchants rave about the Kiehl’s business and only wish they could get their orders faster. Leslie Faust, vice president and divisional merchandise manager for cosmetics and fragrance at Neiman Marcus, said, “Their business is fabulous and it’s been that way for quite a long time with us. There’s so much demand that sometimes it’s a challenge to keep up with it.”
At Fred Segal Essentials in Santa Monica, Calif., Kiehl’s is the number- one brand. “Their success has been directly in proportion to their high level of customer service and their willingness to sample rampantly,” said owner Robin Coe-Hutshing. “A customer cannot leave the counter without samples — and the products are good, so they’ll love them.”
Kiehl’s is also the number-one beauty vendor at Barneys New York, according to Maree Lavo, divisional merchandise manager.
Deborah Walters, vice president and divisional merchandise manager for cosmetics and fragrances at Saks Fifth Avenue, said, “We have a very dynamic, growing business with Kiehl’s. It’s one of our fastest-growing businesses and I see it becoming a core business.”
All the retailers noted happily that Cosmair would probably speed up production and shipping to stores. “There would be an upside in the business if the reordering of stock were quicker,” said Walters.
Philip Shearer, president of Cosmair’s perfume and beauty division, who pursued the brand for 2 1/2 years, said what makes the brand special — like the sampling and the customer service — will continue. Cosmair doesn’t plan to change much for the first year, he noted.
Jami Heidegger, co-president of Kiehl’s, said being part of a large corporation could help Kiehl’s on the customer service front. “The biggest requests from customers are for a cosmetics line and for a Web site,” she said. “We’d love to do them, but we just haven’t had the time.”
Kiehl’s does not have its own Web site, nor is it sold at any other site. Even if the company doesn’t dive into e-commerce immediately, Heidegger would like to use the Internet to distribute the Kiehl’s newsletter.
As for cosmetics, it’s just one of the many areas Heidegger would like to expand into. She has also talked about launching a line of products for pre-teens, inspired by her young daughter, Nicoletta.
And opening more shops is a possibility, said Shearer. The company has one store on Third Avenue in New York and there is a second boutique in Seoul, although it is not owned by Kiehl’s.