Recession presents cosmetics firms with opportunities

By Guy Montague-Jones

- Last updated on GMT

Related tags Recession Economics

Recession presents cosmetics firms with opportunities
To navigate through the economic gloom, cosmetics companies should turn to Austrian economist Josef Schumpeter who once compared the Great Depression to a ‘good cold shower’.

Just as few people today believe in the restorative power of cold showers, few people are talking about the benefits and opportunities that a recession can offer.

On the surface the picture looks grim. Market leader L’Oreal announced on Friday the loss of 500 jobs in the US, which amounts to almost 5 percent of its workforce in the country.

Sales in the US are on the slide as the company suffers from falling numbers in department stores and a sharp drop in salon visits.

Many of the other leading cosmetics firms including Avon, Estee Lauder and Elizabeth Arden have slashed their forecasts in recent months.

Cosmetics sales are clearly not immune to economic woes but the prospect of falling turnover may be beneficial in the long run.

'Creative destruction'

Schumpeter asserted that recessions spark a process of ‘creative destruction’ whereby the dead wood in the economy is cut out and resources are diverted to more efficient and promising areas.

In the cosmetics industry, weak companies are already being weeded out. In Wales, long struggling Budelpack Cosi finally went into administration this month after enduring a 25 percent drop in sales.

Larger firms are streamlining their operations, closing factories and shedding weak businesses.

L’Oreal is cutting jobs in the US and closing plants in Wales and Monaco while Beiersdorf is selling off businesses on the peripheries of its successful beauty orientated core.

Importance of innovation

Faced with the prospect of a recession, companies are generally eager to cut waste and improve efficiency, but where they often fall down is on innovation.

Schumpeter says resources migrate to more fertile pastures in a recession but all too often this process is held back by budget cuts.

Research and development expenditure is invariably hit, innovation slows and future growth prospects contract.

If companies want to take advantage of the recession and get ahead of their peers, the best strategy is to maintain investment levels.

Firms must not be too guarded about innovation. So long as the balance sheet permits, targeted research spending will pay dividends in the long run.

In the present, those companies with deep pockets and innovative products are well placed to profit from the recession by increasing their marketing expenditure and grabbing market share from less fortunate firms.

Adapting quickly

The recession will also present opportunities to those companies that move quickly and adapt to changes in consumer preferences and priorities.

P&G owned Gillette is on the right track with its new advertising campaign for Fusion blades that is built around the claim that men only need to spend $1 a week on the blades.

Opportunities also exist on the side of product development. Consumers of basic toiletry products like shampoo and shower gel will be playing closer attention to prices so companies that can quickly reformulate, cut manufacturing costs and reduce prices stand to benefit.

The much-cited lipstick theory, which has found support from historical data compiled by Kline, also reveals an avenue for growth in affordable luxuries.

When the economy puts high priced luxuries out of reach, women seek consolation in inexpensive yet indulgent cosmetics.

Distribution strategy

As the economic gloom gathers companies also need to pay close attention to their distribution strategy and move away from channels such as department stores that will see far fewer people coming through the doors.

In the current environment, developing or improving an online presence is a promising strategy. Consumers are increasingly at ease with shopping on the internet and because the web has a reputation for being a bargain hunter’s paradise, it is unlikely to suffer in a recession.

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