RIDING THE TIDE
A STILL BURGEONING ECONOMY AND AN UNUSUALLY ROBUST WOMEN’S FRAGRANCE BUSINESS HAVE GIVEN PRESTIGE COSMETICS MAKERS SOMETHING THEY HAVE HAD LITTLE OF IN RECENT YEARS: SOMETHING TO SMILE ABOUT.
Byline: Pete Born
NEW YORK — Despite a few nagging worries, prestige cosmetics manufacturers are heading into the second half with a degree of quiet confidence not felt in years.
The improved mood has much to do with an apparent return to health of the department store fragrance business, which has spent much of the last decade in the doldrums. The earlier easing of promotional tactics seems to have taken hold across the prestige market, and manufacturers are taking a more judicious tack in launching and developing brands, which holds promise of longer brand longevity.
There are worries, however, ranging from higher oil prices to climbing interest rates. And an uneven spring fashion business resulted in thinning traffic in the stores. But the overall picture remains bright.
Fred Langhammer took the helm of Estee Lauder Cos. in January as both president and chief executive officer, and he is steering the company on its predetermined course into the second half. Lauder’s goal, he said this week, is to continue to diversify its portfolio of brands, while also expanding the business geographically — Europe, Asia and the Americas.
While continuing to “drive on all cylinders” in developing product categories, the company is at work diversifying its distribution around the world. In the U.S., the inclement spring weather adversely affected the fashion business, Langhammer noted. Furthermore, higher interest rates promise to dampen spending enthusiasm.
Langhammer sees this as an opportunity. “People buy smaller luxuries,” he said. However, looking at the larger picture, Langhammer continued: “The retail environment is operating in a bullish economy overall. Going into fall, we have a lot of ammunition, and we have to feel good about our prospects.”
One brand that Langhammer discussed in some detail is Aveda, which Lauder acquired in December 1997. Langhammer said plans call for focusing on the heritage of the salon business, continuing with new product flow and enhancing the training program.
Langhammer noted that the number of salons have been dramatically reduced — from 22,000 to 10,000 — but he insisted that Lauder is fully committed to the salon business. “It is the heritage of the brand, and we are focusing on it,” he said.
Leonard A. Lauder, the company chairman, agreed with the points struck by Langhammer and offered: “I’m guardedly optimistic.”
He added that in the past few months, store business has been “spotty” due to the weakness of the ready-to-wear business. But trouble has a silver lining. “Cosmetics seems to be outperforming the store,” he said, adding that last year, the opposite was true.
Guy Peyrelongue, president and chief executive officer of the recently renamed L’Oreal USA, is expecting to chalk up a double-digit growth rate for this year, just as last year. His forecast includes all of the L’Oreal divisions, including mass market cosmetics and professional hair care, which recently received a massive boost with the acquisition of Matrix.
In the prestige market, the company is faring well on the fragrance front. Not only does this fall’s Ralph launch represent a major new venture for the company, but the existing scents — the two Romance fragrances, Acqua di Gio and Polo Sport — are still holding up, Peyrelongue said, adding that the 22-year-old Polo is still showing growth. “Tresor also is doing quite well,” he said. “What makes for growth is a strong program of new products,” he added, tied to judicious use of promotional fire power that enhances rather than fuels the increases. Not only will L’Oreal be launching Ralph this fall, but also Mania by Giorgio Armani.
On the mass side of the business, Peyrelongue expressed concern about the trend among chain store retailers to adopt generic fixturing in an effort to invoke uniformity on the merchandising. “I’m concerned that sometimes it can look bland,” he said, pointing out that retailers should be careful to preserve what is distinctive about the cosmetics department. What’s important, he said, is to make sure that “what makes cosmetics dynamic and fun is still respected.”
William P. Lauder, president of Clinique Laboratories USA, is thinking about how to acquire new customers following a spring of spotty overall business in the stores. And what concerns him when looking at the second half of this year is the fading amount of footfall.
If a department store cannot attract new customers, it is difficult for vendors like Clinique to add new layers of business, he noted. Some retailers have done a consistently good job of understanding what their customers want and why they like shopping in their stores, he said. Others have been uneven. The main floor of a store may have an updated image, but the assortment of merchandise upstairs is conservative. And some retailers have resorted to price promotions to generate traffic.
Clinique has used marketing, namely launching sub-brands to expand the main brand’s audience. Happy, for instance, attracted a younger customer. Stop Signs was Clinique’s entry into the anti-aging market. Now the division is coming out with Anti-Gravity, a firming light cream.
When asked about the great gift-with-purchase debate, Lauder acknowledged that there has been movement throughout the industry to ease off on the promotional pace. But he pointed out that national advertising has its place, and that the big three — Clinique, Estee Lauder and Lancome — are all dependent on promotional spending to drive their huge businesses.
With a smile, he pointed to one statistic. During the retail calendar year ended last January, Clinique chalked up a 14 percent increase. The dollar amount of that increase would equal a significant sized brand. “That growth would have ranked as the fourth biggest department store brand,” he said. “We added a brand.”
Daniel Brestle, president of Estee Lauder USA & Canada, foresees a fall that will be “as competitive as I’ve seen it.” He is heading into the fray with a number of questions in mind, including the state of the economy.
But Brestle has no qualms about waging war on the cosmetics selling floor. His point of view is that the Lauder brand has put together the right package of product introductions to fuel a good season.
“I am more optimistic than I have been for the last couple of years,” said Brestle, who acknowledged that “we went through a correction.” When asked if he felt the brand is now emerging from its tunnel of difficulty, he replied: “Absolutely.”
The Lauder brand has already gotten a boost from two spring launches — Go Pout in color cosmetics and Idealist in skin care. The latter introduction was at least part of the reason why the Lauder business was up 15 percent at Macy’s West for the first two weeks of July.
Also planned for this fall is the introduction of Beautiful Mist, as a commemoration of the 15th anniversary of the classic fragrance. In addition, new TV and print ad campaigns have been created for not only Beautiful, but Pleasures, and the ads will break in August.
As for the chronic weakness of gift-with-purchase activity, Brestle said the situation is manageable and has been brought under control. The gift market is saturated, he added, with the advent of “more effective, but fewer programs.” Brestle observed that gift promotions should be used “to complement new product introductions, not supplant them.”
Philip Shearer, who oversees the prestige brands of L’Oreal USA as president of the Perfume and Beauty division, noted that total store sales, including ready-to-wear, tended to be worse than expected in June. Furthermore, the cosmetics industry is facing somewhat stiff comparison for the second half, since last fall’s business was fueled by celebratory mood of the coming millennium. “That might make things more difficult,” Shearer noted. His guiding belief, however, is that L’Oreal has the right new products to succeed this fall. “The good projects will prevail,” he stated.
In addition to Ralph, which will be a major effort for L’Oreal, Shearer has a strong belief in Armani’s new scent, Mania. His strategy is to focus on an upscale, specialty store distribution for the new scent, differentiating it from Emporio Armani. Shearer expects it to do “very well” in proportion to its limited distribution focus.
Looking at Noa, Jean Cacharel’s hottest U.S. launch since Anais Anais in the early Eighties, Shearer said the new scent had a good spring entry, and he has “high hopes for the fall.”
Andrea Robinson, general manager worldwide of L’Oreal’s Ralph Lauren Fragrance division, agrees that the prestige fragrance market seems healthier “than it’s been in a long while.” At least the market seems rosier in terms of activity, which in turn stimulates the retail scene. And, she added, L’Oreal is among the companies that have been turning down the promotional burners.
However, there also seems to be a deepening reliance on newness, and Robinson sees companies going into “launch mode once a year.”
She raised the question of how much of the movement leads to bona fide growth. Is there more action than traction, she seemed to be asking. “It is a tricky question of whether the industry is healthier or not.”
The centerpiece of her fall strategy is the launch of the Lauren fragrance, which is aimed at young customers in the junior department. “We are capitalizing on the teen boom,” Robinson said, framing the opportunity as a future direction. “It is a market we have to be in.”
As a measure of L’Oreal’s resolve, Robinson has laid out a launch strategy to go after teens, “to be where they are.” That means radio and TV advertising, outposts in malls and a presence on the Internet.
She also has plans to try to hold the interest of the nation’s notoriously fickle youth. She talks about renewing the brand in the eyes of the consumer, with plans of extending Ralph into bath and body and then into fragrance extensions.
The view is also upbeat in L’Oreal’s Lancome division, where Luc Nadeau, senior vice president and general manager, is looking toward fall with an armload of new products. Lancome has been knocking down double-digit increases this fall, and he expects the momentum to carry through the fall.
For Nadeau, the key is novel product with a technological edge that breathe life into the retail scene. So far, Lancome has launched Re-Surface and Photogenic, with strong results, Nadeau said.
Coming in August will be Vinefit, a grape-based moisturizer, followed by Colour Focus, a single-pan eye shadow, in midfall. The Aroma Tonic franchise will be expanded with AromaCalm.
Sheer Magnetic, an extra-shiny lightweight lipstick, was launched two to three weeks ago, and Nadeau said he expects its strong start to propel the business into the fall. Fred Farrugia’s new color story, called Instinct, is based on shades of the forest. There are makeup accessories in a unit of the line called Kit Dentelles, which includes laced eyebrow decorations.
While echoing Shearer in noting that “the overall department store business seems a little challenging,” Nadeau added, “We are looking forward to a good fall.”
Camille McDonald, president of Parfums Givenchy Inc., sees department store business taking a healthy turn. While newness continues to drive the market, the major manufacturers have become much more judicious in scheduling their mega-product launches, basically pacing them better. “The big guns,” as she puts it, “are picking their spots. While spending $20 million apiece, the industry can’t afford to have four to five [mega] launches a season. The big guns are choosing their launch times more carefully.”
By her estimate, there are only two “big guns” for fall in women’s fragrances: Ralph Lauren’s Ralph and Truth Calvin Klein by Calvin Klein.
On the other side of the aisle, retailers “are cherry-picking their partnerships [among vendors] to create a more productive schedule of visual weeks, McDonald said. In addition, manufacturers have eased off the promotion, and there are fewer new fragrances being launched with a lift from a gift-with-purchase. “There is tendency to stage a launch promotionally with a shorter lifespan window,” McDonald said, noting that manufacturers can’t afford to invest in both in-store promotion and advertising.
By advertising more and promoting less, McDonald said, brands have a longer lifespan. This has led to a new phenomenon: “Two-to-three-year-old fragrances still getting growth. In her view, this has led to a far healthier climate with much more vitality.
In recent years, NPD BeautyTrends would typically report fragrance growth of 1 to 3 percent, which would indicate that existing fragrances would be sustaining declines in the double digits.
But now, with the intensity of launches cooling somewhat and more investment going into brand advertising, the existing business has gained breathing room.
At Givenchy, McDonald said, “we always try to intensify our focus with the use of advertising and flanker launches.” Two examples were the launch of Extravagance d’Amarige in 1998 and the introduction of Indecence this year to boost Organza. The advent of the flankers allows the company to spend advertising money against the older brands that anchor the extensions.
For the second half, McDonald said, she plans on tweaking the promotional schedule with improvements here and there. Givenchy is gearing up for a major launch next February with Hot Couture. Its importance is underlined by the company’s determination to use TV advertising for the first time in backing an introduction. But as a warmup, samples of the new women’s sense will be stuffed into the 650,000 fragrance coffrets that will be merchandised for Christmas.
All in all, McDonald is looking for a 20 percent gain in the fourth quarter, following a 10 percent increase last year and a 30 percent jump the prior year.
Rita Mangan, senior vice president of cosmetics and fragrances at the Federated Merchandising division of Federated Department Stores, sees the fragrance business in a major turnaround. After a soft couple of years, the business was “OK” last year, said Mangan, who predicted that this fall, “the fragrance business will be in the high single digits.”
Among the expected gainers are Ralph by Ralph Lauren, Truth Calvin Klein, Mania from Giorgio Armani, Donna Karan’s new DKNY men’s fragrance and a revitalized Cashmere Mist scent, Azzura from Clarins, the women’s Cerruti Image, Zen from Shiseido, Nautica’s new men’s scent and the male version of Gucci Rush and the new Lucky You women’s and men’s master brand from Liz Claiborne.
But Federated has already had some hits from spring, namely Ellen Tracy, Christian Dior’s J’adore and Jean Cacharel’s Noa.
Also, the cosmetics business got a boost in the first half, even though the overall store business may have suffered, with the introduction of Go Pout and Idealist from Estee Lauder, Photogenic from Lancome bath and body products from Clarins and a steady expansion of the magic product line from Prescriptives.
“The fragrance business definitely has turned around,” said Mangan.
She agreed with McDonald, particularly about vendors controlling their promotional impulses better. “Launching with a gwp is definitely over,” she said, adding that there is a pattern emerging of manufacturers investing more in their brands, thus improving longevity.
For years, Robert Nielsen, president of the Prescriptives and Aramis divisions at Estee Lauder Cos., has been warning against the addictions of promotional marketing in the fragrance business.
But he sees an equally critical weakness in the business, and that is in the turnover of selling staff behind the fragrance bars in the stores.
There are roughly 10,000 beauty advisers employed by stores and another 5,000 sell-through specialists supplied by vendors, Nielsen noted. This group turns over two to three times a year.
The reason is simple: lousy pay in a tight labor economy. Nielsen estimates that the associates are paid $10 to $12 an hour, and his position is that they should be paid $18 to $20 and hour.
“We love them to death and train them more aggressively,” he said, “but we do not pay them enough.”
Robin Burns, president and ceo of Intimate Beauty Corp. and its Victoria’s Secret Beauty division, sees the economy wavering a bit. High oil prices and tightened interest rates have produced a moment in which the economy is “not robust but not in danger of recession.”
Her only concern is that economic jitters could shake consumer confidence and keep consumers out of the stores. The thinning of foot traffic is a danger that concerns Burns like other executives.
Cosmetics, however, are the kind of “low-ticket feel-good item” that is not as vulnerable to downturns. Nevertheless, Burns has planned a fall strategy that turns more on external marketing resources than in the past. This fall, the company is doing advertising insertions in Victoria’s Secret catalogs, compared with one last year. There also will be an ad campaign in six national magazines, complete with sampling.
These steps are designed to pull in customers, lessening reliance on foot traffic in the stores. One plus factor is the strong performance of the Victoria’s Secret lingerie brand, which paves the way for development of the beauty business, Burns noted.
The company also is putting the finishing touches on a new design for the Victoria’s Secret Beauty stores, which Burns promises will have as dramatic an effect as when Banana Republic ratcheted up from funky safari wear to casual fashion. Four new stores are scheduled to open in August, followed by another 40 in September and October.
Joseph Horowitz, president and ceo of Clarins USA, noted that there has been a softening in total department store business since the beginning of the year. He speculated that the growth rate of cosmetics in fashion department stores probably will equal that of last year — about 3 percent. For the year to date, he estimates that overall, same-store sales are running 1 percent ahead, while cosmetics in the same stores is moving at 3.5 percent.
He sees the Group Clarins brands chalking up double-digit increases this year. Every year, the company had edged deeper into doing skin care and color cosmetics sets for Christmas. This year, the number of holiday offerings will be increased by 50 percent. In the Thierry Mugler division, the Angel women’s fragrance is still growing, and the men’s version is making headway.
In the Clarins Fragrance Group, there’s plenty of newness this year, Horowitz said, noting that Boss by Hugo Boss and G by Giorgio Beverly Hills were launched earlier this year. Coming in the fall is Azzura by Azzaro.
Rochelle Bloom, president of Estee Lauder’s Bobbi Brown Essentials, says she thinks the market has grown more competitive with the entry of a new round of designers entering the color cosmetics market, the continual trading up of mass market brands, the upsurge of indie brands and emergence of the internet as a commercial force.
“People are looking for alternative ways of shopping,” Bloom said. “Stores are looking for what they can add.”
She observed, “It’s the survival of the fittest. Everybody has got to find their own path and stick with it.” In response, Bobbi Brown is expanding its roster of traveling superstar makeup artists from three to five, the holiday pallet is being expanded and Bobbi Brown is about to issue a beauty book aimed at teens. It will be featured at a book party at Saks Fifth Avenue July 27, the day after Brown appears on the “Today” show.
Jane Hertzmark, senior vice president and general manager of the Donna Karan Cosmetics division of Estee Lauder Cos., agrees that the market has turned ultracompetitive. “Everybody is fighting for share,” she said. “It’s about standing behind your winners, and we have a winner in Cashmere Mist.”
Hertzmark noted that the six-year-old scent, which was originally launched as an adjunct to Karan’s signature fragrance, has grown 30 percent. And the company plans on accelerating growth with an intensive sampling program. The focus of the effort is a blow-in campaign, to the tune of 40 million pieces.
This effort is in addition to the launch last fall of the DKNY women’s fragrance and the introduction of the new men’s version at the end of September. In addition, a TV campaign will be introduced in support of the women’s scent.
Intercosmetics Inc., the U.S. arm of Wella’s Cosmopolitan Cosmetics subsidiary in Germany, is preparing for the American launch of Gucci Rush for Men in the fall. But Martha Brady, president and ceo, has already had a strong year, thanks to a strategy that dovetails with the nonpromotional approach shared by others. She has adopted a “strong consumer focus of in-store animation with training and sampling.”
Brady noted, “even existing brands have done well if they were treated as if they were new.” Following last fall’s introduction of Gucci Rush for women and this spring’s launch of Ellen Tracy, the introductions supported one another, resulting in what Brady described as “a terrific June.”
The consumer approach seems to be working. “We are optimistic,” Brady said. “Across the board, existing brands are surviving better under the weight of newness. It’s very viable to do so. In the past, the focus was so much on newness; existing brands didn’t get attention.”
Brady observed, “I don’t think anybody can do that anymore.”
Neil Katz, president of Liz Claiborne Cosmetics, worries that the weakness of the spring ready-to-wear business will haunt cosmetics in the fall, particularly if the fortunes of the stores do not improve markedly. Like William Lauder, he is worried about footfall.
“When you are in the fragrance business, you live off of traffic,” Katz said. Specifically, his concern is focused on the $20 million he has wrapped up in the fall launch of the Lucky You men’s and women’s fragrances.
Since those fragrances will be aimed at Generation Y, consumers aged 18 to 35, the question of back-to-school traffic is critical.
This is particularly true since Katz is gunning to repeat last fall’s success when the launch of the Candie’s master brand swelled his department store volume by 35 percent. For Lucky You to equal that performance, the brand would have to generate a wholesale volume in excess of $30 million, according to estimates by industry sources.
The preparations are in place. Opening orders and co-op ad budgets are more than adequate. All that will be needed when the fragrances are launched in late August are customers.
As it celebrates its 10th anniversary, Lauder’s Origins Natural Resources division has been sharpening its health and wellness positioning with a spate of new products, including a Have a Nice Day Lotion to go with its earlier cream, treatment products for oily skin — Oil Refiner and Matte Scientist — new hair products and even a fragrance product launch for holiday.