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Beauty industry is not looking as ugly as it appears

By Guy Montague-Jones , 19-Jan-2009
Last updated on 19-Jan-2009 at 18:42 GMT

Estee Lauder and Elizabeth Arden have endured a dismal holiday season but the beauty industry is not looking as ugly as the figures may suggest.

It was an ironic blow when Estee Lauder revised its sales expectation for the upcoming quarter from 2-3 percent growth to a 6 percent slide, for it was former Estee Lauder head Leonard Lauder who first coined the lipstick theory to capture the idea that lipstick sales increase when the economy wobbles.

But even if the lipstick theory is unsound, the idea that the beauty industry is well insulated from recessionary pressures is far from dead. Most women are not ready to abandon beauty products altogether or embrace homemade lotions and potions. People may wait for the recessionary clouds to pass before investing in a new car but they will carry on buying cosmetics.

So if women remain attached to their beauty products, what explains the 12.5-13.5 percent sales dive in Elizabeth Arden’s preliminary quarterly results?

Importance of distribution channels

The answer lies in their distribution channels. As a luxury manufacturer they sell products in places where consumers tend not to go when they feel uneasy about their bank accounts.

If people are not coming through the department store doors they are unlikely to come out with armfuls of perfume and face cream.

It is therefore no surprise that Elizabeth Arden CEO Scott Beattie said: “The performance of our US Elizabeth Arden prestige department store business was much weaker than we had anticipated, though consistent with overall trends experienced in this category.”

Lower in-store sales are not the only problem for Elizabeth Arden coming from the department store channel. With many stores struggling to stay afloat and a steady stream of bankruptcies being recorded, the company would have cut shipments to retailers in danger of going under.

Elizabeth Arden also suffered in the latest quarter because of its well-established presence in the weakening travel retail sector. Airport travel figures are on the slide, and so just as department store sales are down because fewer people are coming through the doors, travel retail sales have slumped because fewer people are passing through airports.

So Elizabeth Arden is simply not well-placed to perform strongly in a recession but that does not mean that all beauty manufacturers are destined to swallow tumbling sales figures.

Opportunities for growth

Direct sellers, for example, are quite optimistic about their prospects. Sales forces swell as people lose their traditional jobs or have their hours cut and the quality of the average recruit also increases as other more glamorous opportunities become harder to find.

Products found in the direct selling channel also tend to be relatively cheap and attractive to consumers who are keeping a close eye on their spending.

These ideas are borne out in the data. Direct Selling Association (DSA) looked at direct sales in comparison to GDP between 1987 and 2007 and found that direct sellers perform well in troubled times.

“In a non recessionary year a one percent increase in GDP is on average accompanied by slightly more than a one percent increase in direct sales. In recessionary years, however, we can see upwards of 5 percent growth in direct sales,” DSA spokesperson Amy Robinson told CosmeticsDesign.com last week.

Private label manufacturers are another group set to perform ahead of the pack.

Unlike up-market brands in department stores, private label products are sold in supermarkets and other stores that have steady visitor numbers in good and bad times. In busy stores these products at least have a chance of being snapped up and taken to the tills.

They also compare favorably to their branded peers in a recession because consumers are paying closer attention to price.

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