A Message in Lipstick About Global Economics

If you look carefully at the brightly lit cosmetic counters in the department stores or the attractively packaged creams and lipsticks in the drugstores this holiday season, you can see the underlying trends of the global economy.

And you may even be able to glimpse the economy’s strains and get a hint about the direction of interest rates.

The $8-billion-annual-sales cosmetics business is changing, consolidating and separating winners from also-rans in ways that send signals to all industries and investors.

Right now the stock market is favoring Estee Lauder Cos., the worldwide marketer of Estee Lauder, Clinique, Prescriptives, MAC, Bobbi Brown Essentials makeup, scent and skin-care products as well as Tommy Hilfiger and Donna Karan fragrances. It has just acquired Aveda hair and cosmetic products and the Jane line of make up for trendy teenagers.

Lauder stock, first offered publicly two years ago at $26 a share, rose recently to $56 a share before falling back to $51 in the market’s swoon last week.

Analysts and industry executives are high on Lauder’s prospects not because of any one product but because the company, which had $3.4 billion in sales and $200 million in profit in fiscal 1997, has a clean balance sheet and the ability to spread its brand-name cosmetics to more than 100 countries.

Lauder is not alone in eyeing international opportunity. L’Oreal, the $2-billion-sales French cosmetics company that is backed by Nestle of Switzerland, acquired the Maybelline line this year and is making a determined push into mass markets.

Revlon Inc., once the kingpin of cosmetics, has increased sales in recent years, but its profits and its opportunities in the world market are hobbled by more than $1.5 billion of debt on which it pays more than $130 million a year in interest. The limitations on debt-burdened companies is another trend to watch as the world financial scene changes.

What’s happening is the emergence of global powerhouses in the distribution of products that sell in good times and bad. The late Charles Revson, builder of Revlon, once noted that “a woman will always find a dollar or two to buy a lipstick.�

Morrie Cohen, president of Annabelle Cosmetics, his Montreal-based family company, predicts that Lauder and L’Oreal and not many others will come to dominate the sales of lipsticks, skin creams, fragrances and other beauty products to people of many lands and varied complexions.

But, you say, a flash of lip gloss, a dab of rouge--what do these nonessentials have to do with today’s harrowing world of collapsing currencies and stock markets?

They are a sign that the promise of world markets is alive and well, and they offer clues to investor sentiment and object lessons on the role of big companies and small in evolving global industries.

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Patterns of business are changing. For decades the Lauder company, founded in 1946 by Queens, N.Y., housewife Estee Lauder and her husband Joseph, developed its own brands. Now it is reaching out to acquire companies started by talented makeup artists such as Toronto’s Frank Toskan and the late Frank Angelo, the innovators of MAC, and Bobbi Brown, who created her own trendsetting line.

In just the last three months, Lauder--now run by Estee’s son Leonard Lauder, 64--has stepped beyond upscale department store outlets to acquire Aveda, which sells in hair salons, and the Jane line, which sells in drugstores.

“It can take those brands into global distribution and multiply the opportunities,� says analyst Janet Kloppenburg of BancAmerica Robertson Stephens. That’s a benefit to the small firm. Trendy MAC cosmetics, lacking capital to get its brand into stores worldwide, would lose business to knockoff imitators if it didn’t have Lauder’s financial backing and market clout.

For all the glamour, cosmetics has always been a business of big money and risks. In 1968, the tiny Lauder company lost $20 million--the equivalent of $200 million in today’s money--before its now landmark Clinique brand caught on.

Over the years, the company has built a valuable global presence. Lauder today gets more than 25% of its sales from Europe--where economists predict renewed prosperity in 1998--and 16% from Asia, where the outlook for consumer products, as for everything else, is clouded.

Revlon, which has been part of a conglomerate and then a holding of financier Ronald Perelman in the 22 years since Revson died, lacks the international presence of Lauder or L’Oreal. And its debt will hurt its ability to expand as the world economy heads into a deflationary period.

In a deflation, when product marketers must struggle even to maintain prices and profits, “borrowing is discouraged, and those holding assets with borrowed money find it is expensive to do so,� notes investment strategist Charles Clough of Merrill Lynch, who sees deflation spreading in 1998 and 1999. If Perelman can’t refinance its debt, Revlon will suffer.

Lauder, by contrast, has no long-term debt. That’s one reason industry experts continue to favor it in the face of near-panic about international business prospects.

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The enthusiasm for cosmetics indicates caution on Wall Street. Global investors are looking to a business of relatively small purchases that will continue when larger purchases--cars, electric power plants, office buildings--are forgone.

Investors, in short, are looking to a business “that is fashion to the nth degree,� in Morrie Cohen’s words. That doesn’t mean it’s a nonessential business. Cosmetics, after all, have been around since before the ancient Egyptians. Alchemists of lead and gold have come and gone; alchemists of beauty endure. And so will the fundamental trends of the world economy, now undergoing a period of some agony and reappraisal.