Shake-Out in the Skin Game

Recession squeezes some of the big names in cosmetics

In the midst of the Great Depression of the 1930s, Charles Revson introduced opaque nail polish and created Revlon Inc. Ever since, the cosmetics industry has been regarded as a good business even for bad times. Women, the theory went, could always be counted on to spend at least some of what little disposable income they had to look attractive and feel good about themselves.

So much for that theory. Certain top-of-the-market cosmetics lines have continued to do well in the current slump, including Estee Lauder, Elizabeth Arden and the Cosmair lines of Lancome, Guy Laroche and L'Oreal. The affluent customers for those products have remained affluent through the recession, and even less well-off women have splurged occasionally to give themselves a psychic lift.

But some of the biggest and best-known companies in the business, including industry leaders Revlon and Avon Products Inc., have seen their fortunes slip with the economy. Revlon last year had sales of $2.4 billion, with earnings of $175 million. But during the first half of 1982, profits plunged 27%, to $68 million, forcing a layoff of some 1,000 workers in August. Avon, a darling of Wall Street money managers during the late 1960s and early 1970s, has also begun to suffer. The company ding-donged its way to $2.6 billion worth of worldwide door-to-door sales of cosmetics to middle-and lower-middle-class women in 1981. Since then, first-half profits have slipped by 15%, to $79 million.

One reason for the squeeze on both companies is the strength of the U.S. dollar, which has crimped overseas sales. Revlon in particular made the mistake of force-feeding its gigantic product lines, 3,000 items in all, into small countries, where there was simply not enough customer demand. The company made a similar mistake in the U.S. by giving its retailers too many different products to sell, and at a time when high interest rates were forcing up the cost of stockpiling unsold inventories.

What has really hurt the giants more than anything else, though, is that cosmetics has become a relatively stagnant industry. During the 1970s, annual sales grew to about $10 billion, but the growth rate since has slowed considerably. Changing social conditions have affected sales: potential new customers, in the form of women entering the labor force for the first time, are not quite so numerous as they used to be. Says Roger Shelley, a Revlon vice president in charge of corporate affairs: "That kind of shot in the arm is missing now, as we look forward into the 1980s."

The industry's hottest segment at the moment is skin-care products, with Dallas-based Mary Kay Cosmetics Inc. the growth leader: 1981 sales were $235 million, a 41% rise over 1980. Though the firm uses a direct-sales approach similar to Avon's, Company Founder Mary Kay Ash has concentrated almost entirely for the past 19 years on skin-care products, as opposed to cosmetics-style makeup. Consequently, the firm now finds itself in a timely and profitable mesh with the American healthand-fitness craze. The company has also built a large and loyal female sales force by offering big money to top sales directors ($30,000 to $40,000 a year in bonuses and commissions), along with such incentives as diamond bumblebee brooches and pink Cadillacs.

Overall the message in the industrywide shake-up seems plain enough. In the mature cosmetics market of the 1980s, bigness is no guarantee of fast growth. It may actually be a hindrance in a business where carving out specialty niches has become crucial to success. Such niches can dramatically boost the income of smaller companies, like Mary Kay, but the revenues from them have comparatively little impact on the income statements of multibillion-dollar powder-puff giants that were once small themselves.

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