Fragrance Deluge Brightens Prestige Beauty’s Gloss for Fall

NEW YORK — The global beauty industry sees a glimmer of hope for fall.

Despite depressed sales early in the year, consumer confidence seems to be steadying, financial markets are firming and the Asian SARS panic is easing. Top executives are feeling less anxious about the second half, although no one expects to be dancing in the street on Christmas Day.

“I do feel better about the U.S. market for the second half,” said Fred Langhammer, president and chief executive officer of Estée Lauder Cos. He sees particular bright spots in color cosmetics, treatment and hair care, but the fragrance market remains weak, despite plans for about 50 launches worldwide. Overall, Langhammer pointed out that for the last 13 weeks, the prestige market in the U.S. has markedly outperformed mass beauty in terms of color and skin care.

Looking at the rest of the world, Langhammer said Japan remains difficult, but Asia shows signs of coming back. He doesn’t expect travel retail to rebound fully until the first half of next year. Europe continues to be soft, primarily due to the weakness in core markets of Germany, France and the Benelux countries. The southern circuit — including Spain, Italy and Greece — is doing well, as is the U.K.

L’Oréal, the world’s largest beauty firm, remains bullish on its yearend results after reporting on Thursday a 3.2 percent decline in first-half sales to $8.1 billion. But on a like-for-like basis, sales rose 7.1 percent. L’Oréal’s confidence is based on expectations of moderating exchange rates and sustained organic sales growth. Yearend income, excluding extraordinary items, is expected to grow at a double-digit pace.

“Thanks to these extremely encouraging figures, obtained in the most difficult conditions, L’Oréal should be able to achieve its traditional objective of like-for-like sales growth of between 7 and 9 percent per annum,” said Lindsay Owen-Jones,chairman and ceo, in a statement.

“Despite the overall sluggishness of the market, our business has performed well this year,” said Bernd Beetz, ceo of Coty Inc. “We have had solid market growth in both the mass and selective divisions, which makes us very optimistic for the second half. We are especially encouraged by the success of our launches earlier this year, including Davidoff Echo, Celine Dion Parfums, Adidas Adrenaline, Rimmel’s Sheer Brilliance Lipstick and Mary-Kate and Ashley fragrances, and we have strong expectations for the launches planned later this fall.”

“Clearly, there’s a real fragility in the marketplace, because of the economy, tourism, world tensions and many other factors,” said Arie Kopelman, Chanel’s president and chief operating officer in New York. “Deep discounts in other product categories could also really hurt the beauty category in the fourth quarter. Although we feel we’re in a good position for the second half, the real turnaround, we think, will come in 2004.”

That said, Kopelman added, there are bright spots in Chanel’s business. Color cosmetics and skin care saw some softness in the first quarter, both then saw strong gains in the second quarter, he said. Kopelman is especially bullish on scent. “We’re up over 20 percent in fragrance,” he said.

In color cosmetics, gains in the second quarter were led by the eye category, he said. “Lips, which had been soft in the first quarter, are also going up, led by a gloss business that is up 37 percent year-to-date,” he said. And skin care saw strong increases in the second quarter, led by Ultra Correction Eye, Kopelman said.

“I think that it’s going to pick up in the second half,” said Robin Burns, president and ceo of The Limited’s Intimate Beauty Corp. and its Aura Science and Victoria’s Secret Beauty divisions. Burns attributed this to a rise in consumer confidence, plus stock market gains and low interest rates that are beginning to have a small effect on people’s attitudes about shopping. However, she added, “none of these things is so vastly improved that I think we’re going to see a surge, but I do think that we’re beginning to see it already in our own business and it will continue into second half.”

Burns noted that Victoria’s Secret Beauty posted double-digit positive comps in June and expects July to be strong with the launch of Breathless. Burns expects the company’s “momentum to continue into the fall season” with the launch of a second men’s fragrance and a strong holiday program. “Industry-wise, we’re thinking it’s going to be mid- to low-single digits, but for our own business we’re expecting our growth to be in the high-single digits and that’s on top of double-digit growth last year,” noted Burns.

Bernard Potier, president and ceo of Christian Dior’s U.S. operations, is counting on a revitalized Dior beauty lineup to continue strong sales gains that the brand has already seen this year, driven by a “rebalancing” of its beauty portfolio. By yearend, the company will have repackaged all of its color cosmetics and skin care, as well as launched a slew of new products — including a men’s fragrance that Potier expects to generate serious buzz.

“One of the advantages we see with newness is that it drives consumers to the counter, where we then have the opportunity to introduce them to our existing products,” said Potier. “That way, we drive both new products and we also drive existing business. And we look for opportunities to cross-sell.”

Added Potier, “Newness allows us to get the buzz going, and it then has a cascade effect on the rest of the business. Also, when you have newness, you don’t sleep — you’re always looking for new strategies and opportunities. That’s a state of mind that is especially critical in the current economic climate.” In fact, he said, it’s important to remember that newness doesn’t just have to mean products coming to counter. “Newness, to a consumer, can be something classic that they haven’t seen before,” he said, noting that it’s important for retailers to partner with brands to get that message across to consumers.

Potier expects growth in fragrance, skin care and color cosmetics in the second half, citing gains in the first half. “In color, we were up 6 percent in the first half, where the overall market was flat, to cite one example,” he said. “I think we’ll beat those numbers in the second half.”

Potier is also a strong advocate of spending to promote existing products, noting that the company continues to strongly support all of its first-half launches. “New items shouldn’t be supported for the first three months, then left out on their own,” he said.

Camille McDonald, president and ceo of the New York-based Parfums Givenchy and Guerlain Inc., sees a strengthening of confidence. With that, coupled with a continued onslaught of women’s fragrance introductions for fall, McDonald thinks it will be easier to anniversary last fall’s women’s introductions. But the men’s category will be tough, due to the relative lack of launches this year. As a result, McDonald predicts a 3 to 5 percent increase in the women’s category and a drop in men’s, leaving the entire business flat. That would be an improvement over spring, considering that the fragrance category was running decreases through May.

Perhaps McDonald’s greatest source of hope comes from the belief that during the past two years, “we all have become better business people,” both manufacturers and retailers, when it comes to strategizing, planning, forecasting and inventory control.

“As everyone in the industry knows, the fragrance industry has had a tough 2003,” said Hilary Dart, president of Calvin Klein Cosmetics. “However, we believe we will start seeing a turnaround, even if it is slight this fall. As the fragrance category continues to be a challenge, our focus will remain on the consumer in 2003 by continuing our innovation. It’s about exploring new territories with existing fragrances and adding newness and value to attract consumers.”

Classics are a key part of that strategy, said Dart. “Classic fragrances continue to be relevant to consumers and our strategy of limited editions has worked for our classic fragrances,” she said. “It helps the parent brand by attracting new and lapsed users. It’s all about creating excitement without a major launch. These initiatives add newness and excitement to the brands, while also reaching a new, broader audience.”

“At Unilever Prestige, the focus is on the Vera Wang brand which has been the ‘shining star’ of our portfolio this year,” said Laura Lee Miller, president of Unilever Prestige. “We have had a very successful first half with Vera Wang in the U. S. — we achieved a number 11 ranking in NPD for May and retail sales are 50 percent ahead of 2002 through June.”

The Vera Wang brand expanded into London in March with an exclusive launch at Harrods, but Miller emphasized the plan is to go slowly internationally. Turning to fall, Miller said, “We realize that the fall season will be highly competitive with launch activity and we are committed to holding our position at retail. The bevy of launches this fall will bring customers into the stores….This is where they make their final decisions. Now is a time when a brand needs to emotionally connect with consumers.”

“When I first saw the April results, I said, ‘Maybe this will [last] a week or two,’ but I’ve seen sustained improvement though April, May and June,” said Joseph Horowitz, president and ceo of Clarins Group USA. “[Though] the industry in total has not been all that rosier, it has gotten better. The prestige marketplace as a whole might show a couple of points of growth before the year is out.

“[Clarins] has been better,” he added. “For the last 2 1/2 months, I have seen a significant improvement trend across all of our brands to the point where it’s actually pleasing at the moment because we’re starting to see double-digit [gains] in some of our brands — and we haven’t seen that type of trend in a very long time.”

Clarins Group’s U.S. arm could end the year with mid- to high-single digit improvements, according to industry estimates. “We have a lot of exciting newness and the marketplace is saying newness is better than oldness — the new stuff is moving and the old stuff is going backwards very fast,” said Horowitz.

“I am optimistic,” said Donald J. Loftus, president and ceo of Cosmopolitan Cosmetics USA Inc. “Every year I can’t imagine it being worse than last year,” he added, half jokingly. Nevertheless, “based on the trends we’re seeing now, I think fall is going to be fine.”

Loftus believes industry-wide gains could reach the high-single-digit range. According to industry estimates, Cosmopolitan’s U.S. arm is currently running up about twice that, or between 15 and 20 percent, across all brands. These first-half gains, coupled with major second-half launches within three of the company’s biggest brands — Escada, Burberry and Gucci — have the potential to double the company’s business, according to projections by industry sources.

“We’re having incredible success with Escada, Burberry and Gucci,” said Loftus. “My feeling is that if we are doing this well with existing fragrances and the [current] trends are great, the fall launches, which are blockbusters, should be huge.

“Tough business times make people smarter,” he remarked. “You have to be more demanding that what you’re doing is working for you.” This means ensuring retailers have the right stock, he noted, and being careful where one spends co-operative and national advertising dollars.

Loftus’ main concern about the second half is what tack retailers will ultimately take. “There’s always a tendency to lock the back doors after October results come back and the third quarter is disappointing — we deal with that every year. I just hope retailers don’t buy so tight that we can’t react to the customers.”

Prestige beauty executives in Europe also are finding some things to be upbeat about for the remainder of 2003.

There’s a belief that a spate of new product launches could well give a lift to otherwise flagging businesses. They also think certain key markets are showing signs of recovery. “The second half will be good,” stated Philippe Benacin, president of Inter Parfums SA. “We’re optimistic.”

Inter Parfums Inc. has raised its full-year profit forecast to between $11.6 million and $11.8 million, a 23 to 26 percent improvement over last year’s earnings of $9.4 million. The New York-based beauty manufacturer had previously expected full-year net income of $11 million. The earnings revision is based on better-than-expected full-year sales, which, if the dollar remains at current levels, are now forecasted at $165 million to $168 million, 27 to 29 percent better than last year’s sales of $130.4 million. Previously, Inter Parfums had forecasted sales of $150 million. The company owns 77 percent of Paris-based Inter Parfums SA, and the French firm’s results are consolidated accordingly.

The introduction of new scents, such as Burberry Brit, should provide momentum to Inter Parfums SA’s revenues, according to the company, which is expected to close 2003 with an 11 percent sales uptick year-on-year.

“The only growth driver today is new products,” maintained Lancaster Group Worldwide’s senior vice president of commercial Patrick de Lambilly, which closed its year ended June 30 with double-digit growth on a like-for-like basis.

Some markets in North America, the Middle East and South America are picking up. “I think the market that will recover fastest is the U.S.,” said Dario Ferrari, ceo of the Milan-based Intercos.

“The Arab countries are working very well,” continued Ferdinando Silva Coronel, managing director at Giver Profumi, which is forecasting 3 percent sales growth for 2003. Some Asian markets are showing some signs of recovery, as well.

Some firms, like Maurer + Wirtz, experienced only a light fallout from the SARS scare. “In some areas, we already feel a positive change and are optimistic about the fourth quarter,” said the company’s international sales director, Gottfried Weiergraber. “We think we can make up the slack.”

However, SARS did push back the company’s Chinese expansion plans. “But it’s just a delay, not a real setback,” qualified Weiergraber.

For Beiersdorf, on the other hand, a spokesman said: “There’s been no visible change in our Asian business. First there’s sell-in, then sell-out, [so] if there was to be an effect, it would be felt a bit later. But luckily, SARS didn’t materialize into a huge problem, as feared.” Yet, with so many unexpected events in the recent past and today’s instability, numerous executives say it’s impossible to make firm predictions. “I don’t make any forecasts at this stage,” said Remy Gomez, president of Beauté Prestige International. “I think the name of the game is unpredictability.”

Meanwhile, another French beauty executive said he doesn’t expect the country’s fine fragrance market, which is practically flat in value terms and down by 2 to 3 percent in units, to change in the near term.

However, other segments continue to show promise. Among them:

• Prestige beauty products in the low-to-mid price range, according to Paolo Bevegni, director of Micys Co.’s international division.
  
  
• Seasonal makeup offerings, said Angela Creasy, perfumery buyer at Liberty department store in the U.K. “Women now are really into updating their looks,” she explained.
  
  
• The tween and teen markets, according to Intercos’ Ferrari. “We have been asked to develop some simple products: mascara, glitter, lip glosses — mostly for the Asian market,” he explained. “If tweens learn to use lip gloss at age eight, they will continue using color through their teens and [onward].”
  
  
• Men’s and antiage skin care, according to Roberto Venini, director of Guaber Group.
  
  Such approaches to product teamed with creativity may be the recipe required to boost the beauty industry. But Gabriele Pungerscheg, president of European Designer Fragrances at Unilever Cosmetics International, says the market really needs to be cleansed of irrelevant products and attract customers in unexpected ways.