Cosmetic changes rock

Cosmetic changes rock

The lucrative cosmetic counters of Myer and David Jones are under threat from the internet, writes Sue Mitchell. When Myer slashed cosmetics prices by 10 per cent just before Christmas, women were snapping up lipsticks, eyeshadows and foundation by tho armful.

Myer's strategy was almost unprecedented in the department store sector, where premium
cosmetics are rarely discounted, and certainly not before Christmas.The discounting achieved its purpose, helping to boost Myer's December-quarter sales. However, industry players claim it has
contTibuted to unusually lacklustre cosmetics sales since because many women bought in bulk before
Christmas. More significantly, Myer's move demonstrated that price is a key factor in demand for cosmetics, contrary to the long-held belief that women will happily pay the asking price for a bit of "hope in ajar".

Broker Deutsche Bank says Australians pay 25 per cent to 40 per cent more for premium cosmetics than consumers in the United States and can save an average 40 per cent by buying cosmetics online.Deutsche analyst Alexi Baker-McLennan believes David Jones and Myer, which account for 60 percent ofthe $1.6 billion of premium cosmetics sold in Australia each year, could lose business to the internet as increasingly value conscious consumers seek better deals online. "Online retailers offer a strong value proposition and therefore look likely to take market share in the premium cosmetics space," Baker-McLennan says. Baker-McLennan is speaking partly from personal experience. She buys 70 to 80 per cent of her premium cosmetics from online retailers such as Strawberrynet.com and midwestskincare.com. But Baker-McLennan also points to be strong growth in online cosmetics sales overseas. Online cosmetics retailing is growing at 30 per cent a year and now accounts for 2 per cent to 5 percent of the total market in the United States.

Deutsche Bank estimates that online retailers could account for 8 per cent of premium cosmetics
sales in Australia within six years, crimping sales and margins at David Jones and Myer. Cosmetics are an important category for the department stores. They account for 15 per cent of total sales and 25 per cent of gross profits, delivering gross margins of 70 per cent, Deutsche says. However, David Jones chief executive Mark McInnes rejects the Deutsche Bank findings and says the calculations and assumptions are "naive and factually incorrect".

He rejects the suggestion that Australians are paying too much for premium cosmetics compared
with consumers in the US. According to Deutsche, the recommended retail price for 50 millilitres of Clinique's Moisture Surge Extra is $75 in Australia, while US consumers pay about $40.96 (excluding shipping and based on an exchange rate of US83¢). A 15ml jar of Estee Lauder's Re-Nutriv Ultimate Lifting Eye Creme costs $200 in Australia and $120.48 in the US.
However, McInnes says Deutsche calculations include GST and fail to take into account US state and
federal taxes such as VAT, which add about 10 per cent to prices at the point of sale. Cosmetics and
fragrances from Europe and Asia also attract a 5 per cent duty.
McInnes estimates the department store's gross margin on premium cosmetics is about 47 per cent rather than 70 per cent. He agrees with Baker-McLennan on one point: growth in online retail will present challenges for established bricks and mortar retailers such as David Jones. "But on a five to 1O-year basis David Jones will win because it has all the brands," he says. Cosmetics retailing is all about colour, touch and smell, says McInnes, and you can't get that experience over the internet.

"Estee Lauder and L'Oreal will not allow their products to be commoditised," he says. The total Australian cosmetics market is worth about $2.7 billion, according to Datamonitor, and is relatively mature, growing at about 3 per cent a year. Growth is fuelled by product innovation and new categories, backed by slick
marketing campaigns and editorial coverage in women's magazines.

While margins on premium cosmetics are high, it is still a high volume, fast moving conSIDner goods market. The major suppliers such as L'Oreal and Estee Lauder, which together account for 75 per cent of the market, favour the premium department stores as partners to achieve distribution economies of scale. Unlike Europe, Britain, the US and Asia, Australia lacks thesophisticated speciality cosmetics
retailers such as LVMH'sSephora. Australia's largest speciality cosmetics retailer, Jo Horgan's 25-
store Mecca Cosmetica chain, deliberately stocks niche and specialist brands such as Stila,
Nars and Kiehls. "Cosmetics companies are near perfect suppliers," says Baker-McLennan, "because they typically pay for fitouts, provide inventory on consignment, subsidise staff costs, train staff and fund gift-with purchase promotions." Baker-McLennan concedes that good bricks and mortar retailers
will always beat internet retailers on customer service and in-storeexperience. "But we don't think
this creates an insurmountable hurdle for internet retailers, she says. "What they lack in service they make up for in price." What's more, 50 per cent of purchases are women replacing used products, meaning they don't need that cosmetic counter to get what they want. Cosmetics houses and their bricks and mortar customers may have to reduce prices or invest more in promotion and marketing to keep customers shopping in store, she says.