WWD_Beauty_Biz - TYBI 1.A FAIRCHILD PU F Surviving Retail...

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Unformatted text preview: TYBI 1 .A FAIRCHILD PU F. Surviving Retail': Seismic Shif Hot Shopkeeper On Beating the Fat How Brand Can Hold Ont Customer Lessons Fro: The “It" Ba Phenomenc PLIJ Fall Makeu Knockout Ha ARNOLD’S NEW ORDER SHE HAS HELPED TO ENGINEER PROCTER & GAMBLE'S GROWTH FOR 20 YEARS. NOW, SUSAN ARNOLD AIMS TO WIN BIG BY REINVENTING NOT ONLY HOW P&G DOES BEAUTY BUT THE BEAUTY BUSINESS ITSELF. BY JENNY B. FINE PHOTOS BY MELANIE DUNEA WHEN IT COMES TO BUILDING A MULTIBI LLION dollar beauty and personal care company, Procter & Gamble‘s Susan Arnold makes it all sound so easy. Just delight the consumer with game-changing innova- tion (two favorite and oft-repeated maxims in the P&G lexicon) and voila—$20+ billion in annual sales. If only. Arnold, one of the main architects of P&G‘s beauty strategy over the past 20 years, knows it's not that simple. Sure, she's stayed laser—focused on the consumer and the products she offers them. But it's by shattering a cen— tury of tradition in the beauty industry and creating an entirely new business model that has enabled Arnold to help transform the Cincinnati—based behemoth from a fusty consumer packaged goods giant into one of the JUNE/JULY 200? 25 Brand: Olay Categories: Skin care and personal cleansing Background: Acquired from Richardson-Vicks. 1985 PANTENE PRO v Brand: Pantene Pro V Category: Hair care Background: Acquired from Richardson-Woks. 1985 P&G’S BILLION DOLLAR BRANDS world’s biggest (she would say the biggest) beauty companies. In so doing, Arnold has changed beauty from a trickle-down business, where in- novation is launched in the upper reaches of the prestige market before making its way into the mass market, into a trading—up scenario where the newest, most technologically advanced launches are introduced directly into the mass market, by- passing the luxury sector altogether. The continuing success of Arnold‘s strategy has raised the stakes both for the beauty industry and for Arnold herself. Thanks to her game-chang- ing plan, she‘s positioned herself as a potential candidate for one of the plummiest jobs in corpo- rate America—chief executive officer of Procter 8: Gamble. Recent speculation has current ceo AG. Lafley, who’s been in the top spot since 2002 and is 60 years old, retiring in the next two to five years. The buzz around Arnold, 53, intensified in May, when she was given the newly-created title of president, overseeing all of P&G’s business units —Beauty Care, Global Health & Well Being and Household Careuwith combined sales of an esti- mated $75 billion. Previously, in the phased—out role of vice chair» man, she had oversight of solely Beauty and Health, which accounted for over 50 percent, or about $40 billion, of P&G’s turnover in 2006. Of that, beauty accounted for about $21.1 billion, Gillette $6.4 billion and health care about $7.8 billion. according to P&G‘s 2006 annual report, which in- " THE COMPANY GATHERS DATA AND INFORMATION FIRST, AND LISTENS TO WHAT ITS CUSTOMERS AND RETAILERS WANT... [THAT’S] WHY IT HAS DONE 50 GREAT IN THE MASS MARKET.“ eluded nontraditional categories such as feminine care, personal cleansing and salon furniture in its beauty figures. Not including those categories, P&G’s traditional beauty sales were estimated to be about $18 billion for the fiscal 2005-2006 year. For fiscal 2006-2007, an estimated $23 billion is considered Beauty revenue by P&G, including the aforementioned categories but not Gillette. During her tenure, Arnold has overseen the in- tegration and explosion of some of the company’s key acquisitions, including Richardson-Vicks, Clairol, Wella and, most recently, Gillette. “ON DECK” BRANDS With sales of $500 million to $1 billion each. these brands were a driving force in Procter & Gamble's extraordinary growth over the past five years. FUSION 20030? Sales: ssoom Background: Acquired from Gillette. 2005 2006-0? Sales: $500M+ Categories: Shaving blades nd razors HEAD 8: SHOULDERS Brand: Head & Shoulders Background: Introduced in test markets by P&G. 1961 On the just-published Fortune 500 List, PSzG is ranked number 25, making Arnold one of the most powerful businesswornen in America today. Insiders and Wall Street analysts consider Rob- ert McDonald, who served as vice chairman of global operations until May when he was named chief operating officer. her primary competition for the upcoming ceo spot. Although Arnold is quick to swat away specula- tion abouther future, she's the firstto admit beauty's importance to P&G’s overall corporate health. “Beauty has been and is expected to be an engine for disproportionate growth in the company,” says the executive, in her customary rat-a-tat-tat mat- ter-of-fact style. “Beauty and health were about 30 percent of the company's sales and now we’re over 50 [counting Gillette]. We call this our decade of beauty,” she continues. “And what I mean by that is we have been building and continue to build and look to build. Our goal is to build a long-term foundation for long-term leadership and growth in this business.” The first critical elementto that growth is adiver- sified portfolio of global brands that encompasses both fast-growing and solid-growth businesses. Currently. P&G has six personal care brands that do over $1 billion in sales-Olay, Pantene, Headlk Shoulders, Wella, Mach 3 and Gillette—and seven brands in what Arnold calls the “on-deck circle,” those between $500 million and $1 billion in sales. They are Hugo Boss, SK—II, Cover Girl, Herbal HUGO BOSS 2006-07 Sales: $500M:- Categories: Fragrance and men's skin care Background: Acquired from Eurocos. 1992 STILL LIFE PHOTOS BY THOMAS IANNACCONE AND GEORGE CHINSEE WELLA PROFESSIONALS Brands: Koleston Perfect, Color Touch, Inspire, Blondor. Lifetex. High Hair, Categories: Professional hair care. color. perm Background: Acquired from Wells, 2003 GILLETTE Brands: Gillette. Sensor. Vector. Giltette Series. Prestobarba. Good News. Daisy, Slalom. Atra. Gillette SatinCare Categories: Shaving blades. razors. gels and creams. after—shave, deodorants Background: Acquired from Gillette. 2005 Brands: Mach 3. Mach 3 Turbo, Mach 3Turbo ' Champion. M3Power by Mach 3. M3 Power Nitro EQEREESUHQE'KEHJii-EE llllllll from Gillette. zoos THESE SIX ALL-STAR BRANDS WITH OVER $1 BILLION IN SALES EACH PROVIDE A DIVERSE CUSTOMER BASE AND SERVE AS THE FOUNDATION FOR PROCTER & GAMBLE’S WIDE PORTFOLlO OF BEAUTY AND PERSONAL CARE BRANDS. Essences, Rejoice—a value—priced shampoo sold in China—Fusion, a men’s shaving system from Gillette, and Venus, a women’s version. “A diversified portfolio gives us advantages in terms of who we work with and look at and talk to, with a broad range of consumers,” Arnold says. “It also gives us balance in terms of stability and growth. “Our strategy is working,” she declares. “VVe’ve provided disproportionate growth over the last five years. We’ve grown at a compound annual growth rate of 17 percent a year; on an organic basis, 7 percent a year.” Wall Street seems to agree. “Arnold has a bril— liant track record,” says Justin Hott, managing director in equity research at Bear Steams & Co. “She has taken P&G’s beauty brands to a level that the company has never seen before. The company gathers data and information first, and listens to hear what its customers and retailers want. It’s very disciplined on that front, which is why it has done so great in the mass market.” William G. Schmitz, an analyst with Deutsche Bank North America, agrees—with one caveat. “Arnold has rethought the way people approach beauty by taking a metric-driven and analytical model to the business,” he says, adding that the result can sometimes zap brands of marketing sizzle. “P&G's color business is marketed for profit- ability,” he says. Still, there’s no denyi ng that Arnold has been in- strumental in turning P&G into a beauty leader by parlaying underperforming brands acquired in the last 20 years into global retail powerhouses. Take Olay, for example, which Arnold estimates did about $200 million in sales when P&G acquired it as part of the Richardson-Vicks acquisition in 1985 and is now almost a $2 billion brand. “SK-II was about $50 million when we acquired it and is now over half a billion dollars. Boss [fragrances] was about $40 million and is now well over half a billion,” she says. “Dr Pantene, one of my favorites, which also came in with Richardson-Vicks and was a very niche brand. It was somewhere around $20 million, $30 million, $40 million in the late Eighties and is now approaching $3 billion in annual sales.” Though she clearly relishes ticking off the suc- cessful figures, it’s when discussing the explosive growth of Clay that Arnold becomes truly impas- sioned. “I’m old enough to remember Oil of Old Lady,” she says. ‘W’hen we acquired it, it was a pink beauty fluid—there were about 20 different prod- ucts at the time and all of them were derivatives of that. It was weak in stores, because over the years retailers had used it as a loss leader, so the pricing had spiraled down. The brand needed a fix,” she says bluntly. Fix it she did, with a gutsy strategy that broke both mass market price barriers and Olay’s tra- ditional product categories. Arnold and her team launched Olay Daily Facials Cleansing Cloths and COVE R G | R L 2006—0? Sales: ssoom Color cosmetics _ Price: $2.5 $9.99 Ei'éigr'éifid:aéfiii'ééiim from Noxell.1989 - 2005-07 Sales: $500M+ Category: ' Prestige skin care Background: Acquired from Revlon. 1991 HERBAL ESSENCES 2006-07 Sales: $5OOM+ Background: Acquired from Clairol. 2001 the antiaging line Total Eil‘ects, two efforts Arnold describes as “game-changing innovation.” Coupled with revamped packaging, improved product tex- tures and fragrances and a modernized marketing campaign, Arnold was emboldened to raise the brand’s price points, as well as prices for the entire mass market skin care category. Whereas the aver- age cost of an antiaging moisturizer at the time was about $8, Total Effects went to market with a price tag of $18. It was a risky move that paid off. Olay’s facial cleansing business has grown 25 percent over the last three years, Arnold says, while Total Effects marked the beginning of a number of different 'houfiques” within the Clay family, each of which brings advanced benefits and higher price points to the market, creating an architecture for Clay based on consumer demographics and desires that allows the brand to reach an ever increasing audi- ence. The most recent additions are Regenerist, a pentapeptide-based antiaging line, and Definity, created to eradicate brown spots, dullness and uneven skin tone. A Regenerist at-home micro- dermabrasion kit is $24.99, while Definity’s daily moisturizer rings in at $27.99. Arnold calls the strategy “launch and lever- age.” “‘We don’t just launch them and leave them, baby," she says. “We want to leverage them and grow them over time,” she says, noting Regener- ist continued to grow during the introduction of Definity. ‘We like that. It gives us an opportunity to R EJ 0 l C E 2006-0?r Sales: $500M+ Price: About 51-32 at current exchange Background: Launched in China by P&G. 1992 JUNE/JULY zoor 27 77 YOU’VE GOT TO BE ABLE TO MOVE AT A DIFFERENT PACE. YOU’VE GOT TO HAVE SOME GUT, SOME INSTINCT, SOME EXPERIENCE THAT LETS YOU KEEP MOVING. AA STILL LIFE PHOTOS BY THOMAS FANNACCONE AND GEORGE CHINSEE trade up, while making sure we‘re providing good customer value.” Arnold says Olay currently has a total market share of 30 percent. and a leading position in the “super premium tier” of the market, thanks to Definity. “When you have avery big brand, you have to give itanarchitecturethatconsumerscanseethemselves in and feel a part of,” she continues. “Otherwise, if you’re just abig brand with no architecture, no way to plow through it, it becomes bland.” In other words, creating an emotional con- nection with consumers is key. While Olay has successfully achieved just that, Arnold admits hair care giant Pantene—despite its size—hasn't yet. She and her team are focused on rectifying the perceived deficiency. “We‘re working hard to strengthen the emotional connection and to do it in the context of what’s meaningful to the con- sumer and to the brand equity,” Arnold says. In the U.S., for example, Pantene products are known for helping women grow their hair longer, so the line has partnered with the American Cancer Society on its Beautiful Lengths program. In Asia. mean- while, it has played up its shiny hair equity with a campaign encouraging young women to let their personalities shine through. And then, of course, there’s solving the biggest mood buster of them all: the bad hair day. “There are about six billion consumers in the world for hair care, and if you talk to them, about half of them will tell you they have one bad hair day a week,” says Arnold. “If I could provide benefits that reduce those bad hair days, one head at a time, we'll grow our business. And that's really what we‘re focused on doing [with hair care].” When it comes to skin care, Arnold has contin- ued Olay’s onslaught of the market, taking it into new categories such as body products, as well as co- branding it with Cover Girl and Secret for products such as antiaging foundation and conditioning deodorants. In terms of an Olay color line, though, a move that P&G unsuccessfully attempted about eight years ago, her response is terse. “We think about it.” “Then asked her assessment of why the previous efl'ort failed, Arnold will say only, “I think it was a good idea and our execution wasn‘t up to par. And I wasn’t the one who executed it so I don’t want to discuss it in detail.” Industry analysts believe part of the problem with the Olay color launch was the inordinate amount of time—six years, by some accounts—that it spent in test markets. At one time, that approach was typical of P&G's launch strategy, for products in virtually any category. Although she's a P&G liter-“Arnold has been there since earningan MBA at the University of Pittsburgh in 1980, starting off as a brand assistant on the Dawn! Ivory Snow business—she’s the first to admit the approach isn’t viable when it comes to beauty. “This isn’t a business where you can cross everyT and dot every I and research everything ad nauseam," she says. “You’ve got to be able to move at a difl'erent pace. You've got to have some gut, some instinct, some Olay Total Effects Touch of Sun Daily Anti-aging Moisturizer and Ole}! liliailyr Facials Express Wet Cleansing Cloths Since its acquisition in 1985. Olay’s sales have soared from 5200000 to around $200 million. roothglfpsy EOUC iii-mm III-mm rm Clairol Nice 11 Easy Root Touch-up While it was feared that this product might slow consumption. P&G executives have learned that 46 percent of users actually get their hair colored in salons and are new to mass market hair color. Max Factor Lip Glasses Max Factor is now sold primarily at Wai—Mart. Wall Street analysts are eager for P&G to place more momentum behind color cosmetics soon. experience that lets you keep moving.” By all accounts, Arnold, who describes herself as “not having the world’s largest attention span,” likes to move very quickly. Alter all, this is awornan who trains for and participates in sprint triath- lons—consisting of a 1,!2-mile swim, a 12 1f2-mile bike ride and a 3-mile run—in her spare time. “If I have a 30-minute meeting scheduled with Susan, it’s going to last 10,” says Marc Pritchard, president of global strategy for PSIG. “If I have a 60-minute meeting it‘s going to last 20 and my average interaction is about two-and-a—half min- utes,” he quips. When asked if Arnold also has the capacity for patience, though, Pritchard‘s answer is immediate. “Absolutely,” he says. “She’s quick, but she’s also willing to debate and discuss things. She has an uncanny knack for knowing how to feed the winners and starve the losers." As an example, Pritchard cites the launch of Clai- rol’s Nice ‘11 Easy Root Touch-Up. “Every hair color company asks whether they should try a product like that or if it will take away from consumption,” he says. “She looked at it and said, ‘This is great. It's going to build consumption and build the market: She sees for the industry that P&G Beauty can grow the market so there's more consumption.” Arnold considers Root Touch-Up a beacon, not- ing that 46 percent of the product’s users have their hair colored at the salon. “So we’re bringing new shoppers into the [hair color] aisle and it’s grown the category and the market for the first time in years. We feel really good about that.” Successes like Root Touch-Up hold the key to P&G’s long-term growth strategy, which Arnold discussed during a recent wide-ranging 90-min- ute meeting. Her office is on the 11th floor of P&G’s Cincinnati headquarters, home to the company's top 11 corporate officers and remodeled by Lafley. Rather than the male, wood-paneled bastion pre- ferred by his predecessors, Lafley created an airy, Open-plan floor. an oasis of blond wood and stain- less steel with a vibe of hushed tranquility. Each senior executive has an area consisting ofa cubicle for his or her assistant, behind which is situated a “viewbicle,” essentially a three-sided desk with a window. A small glass-walled conference room completes each suite. For Arnold, the real action happens on the building‘s third floor, where the majority of the hair and skin care teams reside. Just as Lafley re- vamped the 11th floor, Arnold modified the third, to better reflect the beauty culture she’s trying to create at P&G. “When Susan Arnold came in, she said, ‘We’re a beauty company. I want us to look like a beauty company,” remembers Claudia Kotchka, vice president of design innovation and strategy. “It was a major Statement,” she continues, noting the decision wasn‘t without controversy. “Susan said, We're not Procter 8: Gamble making beauty products. We’re a beauty company and we’re going to look and act like one.“ To that end, the space is clean, colorful and bright. Largebeauty photographs line the walls, while scented candles and fresh flowers adorn conference rooms and communal work spaces. Arnold, too, treats herself to fresh flowers every day. Though that seems like a perk better suited to a swanky prestige beauty company, Arnold doesn’t seem particularly interested in mining the upper ends of the industry for growth. lWhen asked about the constant speculation of acquiring a prestige market leader, particularly the Estée Lauder Cos, Clarins or Shiseido, Amold’s response is tepid. “If you look at the numbers, in the global beauty mar- JUNE/JULY zoor 2,9 ket, about 70 percent of the sales are done through mass, 30 percent through prestige,” Arnold says. “P&G's beauty business would skew a little more to the mass. about 80 percent. My goal is not to drive to 70-3 0,” she continues. “My goal is to follow consumers. I want to delight consumers wherever they shop, in whatever channel, in whatever cou n- try. We will follow her.” Most recently, Arnold has followed consumers into the specialty store arena, with the acquisi- tion last January of HDS Cosmetics Lab Inc., the marketer of Doctor’s Dermatologic Formula, or DDF, skin care. Market sources estimate that P&G paid $50 million to more than $90 million, or about three to four times the sales volume of DDF—seerningly small potatoes for a company the size of Procter. (Clay's Quench Body Lotion, for example, rings up over $80 million in sales annually.) Not so, says Arnold. "This is what we do,” she says, reiterating the relatively small size of Pantene, SK—II and Lacoste fragrances when they became part of the P&G brand family. “It is exactly our model and it gives us an opportunity in the dermatological part of the business and in specialty retail.” The acquisition made sense to Wall Street as well. “DD...
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