Destocking: It's the perfect excuse for poor performance

In the past couple of weeks L’Oreal and Beiersdorf have both turned to destocking to excuse poor first quarter sales.

Perishing the thought of admitting that fewer people are buying their cosmetics, they sought out an excuse in the murky and complicated world of inventories.

The favored line of argument is that retailers are cutting back on their inventories as a temporary defensive measure, causing a sharp dip in manufacturers’ sales.

The usually unspoken conclusion is that falling sales figures have nothing to do with consumer demand, which is as robust as ever.

Then it is common practice to trot out a tired anecdote about housewives in the Great Depression rushing out to buy lipstick more than they ever did in the days of easy money.

A favored excuse​

L’Oreal CEO Jean-Paul Agon resorted to the destocking excuse to explain the disappointing sales figures from its luxury products division. He said: “Its sales have felt the strong impact… of very large inventory adjustments by distributors.”​

Of course, lower consumer demand for L’Oreal’s luxury cosmetics never got a mention.

In the words of Bernstein Research analyst Andrew Wood: “As is their normal practice, management tried to put a brave face on things, with many excuse, (including destocking, of course.”​

L’Oreal’s luxury division suffered a 17.5 per cent fall in sales while its consumer products division enjoyed 1 percent growth.

“Very large inventory adjustments”​ are an unconvincing explanation for the difference, especially when manufacturers suggest that destocking has little to do with consumer demand.

If retailers are reducing their stock of L’Oreal’s luxury cosmetics but holding on to its consumer products, it surely means they believe luxury products will stay on the shelf, while its cheaper alternatives will continue to sell.

L’Oreal is not the only cosmetics firm to resort to the destocking excuse. Beiersdorf said last week that “massive destocking at retailers was seen in the first quarter.” The degree to which destocking can be blamed for its poor results is difficult to judge.

Wood said: “There is probably some merit to this explanation given the prevalence of its use as an excuse across all consumer companies.”​

Even for financial experts assessing the significance of destocking is difficult because the relevant data is unobtainable.

One analyst at major investment bank told CosmeticsDesign.com that “destocking is virtually impossible to measure” especially in less developed markets such as Eastern Europe.

Even in the US where data is more readily available quantifying the role of destocking is pretty tricky.

Destocking certainly makes market growth figures appear worse than they really are to those who restrict their reading to the financial results of the largest cosmetics firms.

Quantifying the impact destocking is the problem and it is this inherent vagueness that makes it an ideal excuse for cosmetics companies.

Uncovering the truth​

However, there are ways of seeing through their attempts hide behind destocking.

One would expect destocking to have a similar effect on similar companies so it cannot be invoked to explain away sales that are poorer than those reported by peers.

For example, Wood said: “Destocking does not help explain why Henkel performed so much better than Beiersdorf this quarter.”​

Manufacturers would like to herd all their problems at the door of destocking but there is no getting away from falling consumer demand.

Another way of getting to the truth is looking at market research data recorded at the check-out. Comparing beauty sales across different retail channels, NPD and IRI found that the overall US beauty market dropped 2 percent in value between 2008 and 2007 and that the prestige market took the biggest hit losing 3 percent.

Cosmetics sales may well not be as bad as income sheets suggest but manufacturers must admit that it is not just a temporary blip caused inventory adjustments.

Consumers are buying fewer and cheaper cosmetics. Even the fig leaf of destocking is not large enough to disguise that fact.