NEW YORK — Mass market beauty executives are caught in a vise that is squeezing the life out of gross margins.
Cosmetics, once one of the most robust gross margin producers in mass market stores, is losing its profit luster as consumer demand for value drives prices down. Margins that once soared past the 35 percent mark for many retailers have dipped under 30 percent.
To deliver low prices, retailers are being forced to add more budget lines to the merchandise assortment to keep shoppers from fleeing to dollar stores or the neighborhood Wal-Mart.
Even moderately priced brands sold at mass stores are offering more buy one, get one free deals to catch the attention of bargain-hungry shoppers. And, price cuts taken by Revlon earlier this year had a negative impact on Maybelline and Cover Girl, buyers said (see related story on page 16).
Merchants who are demanding terms such as guaranteed sales, in turn, are churning suppliers. “You really have to work with retailers — and we do — to get in as a new or small company,” said Isaac Gindi, designer for Icebox Inc.
With this as a backdrop, mass market cosmetics sales continue to lag. According to Information Resources Inc., for the 52 weeks ended Aug. 10, food, drug and discount cosmetics sales are down 0.2 percent to $2.89 billion. More painful is the fact that units are also slumping, declining 3.1 percent to 692 million.
“The margins are not in makeup,” declared Allan Mottus, an industry consultant. “Retailers have to give consumers what they want and they want value.”
Cost consciousness paved the way for a barrage of new budget lines vying for shelf space. Many chains feel they have to join rather than fight the dollar retailers and plan to offer brands for a buck or less. Even Maybelline plans to offer a budget nail color called Colorama.
There are those, however, who fear lower prices will put more of a strain on gross margins. “We aren’t jumping on the dollar brands at all,” said one top drugstore executive. “We would much prefer to see quality and pricing go higher.”
Offering budget brands doesn’t necessarily equate to depressed margins, said Howard Brauner, the marketing president at Cosmetics 2000. His firm just launched a 99 cent lipstick line called Hugs and Kisses. “It can be done for the same profit when done right and in the fastest-selling items such as lipsticks,” he said. “You aren’t trading a customer down because you are going to lose them if you don’t have these price points,” he countered. And, with many chains asking for guaranteed sales, the risk is removed. Brauner does fear, however, that the proliferation of budget brands could “saturate the market.” Many compare the influx of budget brands to the horde of teen cosmetics that infiltrated the landscape over the past five years.
Beyond the budget brigade, retailers said a combination of plummeting prices — especially on discontinued items — and a lack of blockbuster hits, has chopped into profits. Several buyers said there are new terms for monies given for discontinued merchandise. Rather than using a 50 percent off strategy, for example, Maybelline and L’Oréal have dropped prices to $1.99 and 99 cents on discontinued items, said one buyer for a large chain. Revlon, which cut prices on many of its items, has gained at the expense of Maybelline and Cover Girl — but at what cost to the overall business, buyers wondered.
There’s also been a rise in promotional activity and beauty blockbuster kits. “These promotions do take consumers out of the marketplace,” said Brauner. Mottus agreed and said the blockbusters are so full of products that shoppers don’t need replenishment.
Even chains that don’t want to see prices and profits plummet said they can’t help but try to keep up with Wal-Mart. “Wal-Mart continues to erode price points and no one can recover from this,” said one buyer.
One solution served up by Mottus is for mass merchants to polish up skin care departments. “The margins are in skin care and the category can distinguish one chain from another.”
Another option is to offer exclusive lines, such as CVS’ Lumene or private labels. “The drug channel has such an opportunity to go after department and specialty store consumers. It’s a shame to see pricing wars start in beauty categories,” concluded one leading chain drug source.