www.bwconfidential.com The inside view on the international beauty industry Jan 5-18, 2017 #142

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The buzz 2 Something old, something new News roundup &A was a key feature of the beauty market in 2016. Netwatch 6 MMajor groups looked to inject creativity, digital prowess and a connection to millennials into their business through Social media monitor acquisitions. There was a clear need to buy growth. This was due in part to the difficulty of generating growth from Interview 7 traditional brands, and, say some analysts, because the majors Holding ceo Dino Pace still do not understand social media and digital in the same way as a younger brand or start-up. In 2017, it looks like the M&A Insight 9 trend will continue. Names often cited as ripe for a takeover Hong Kong are Anastasia Beverly Hills, known for its brow and contouring expertise and social-media savvy and UK-based brand Charlotte Tilbury. There are also a Store visit 12 host of smaller start-ups on the market that could interest some of the majors. , Paris, France But while the focus is on the latest digital, millennial-oriented hotshot, what about the traditional brands, which may not be seeing strong growth rates, but still account for the bread-and-butter at major multinationals? Are they set to lose out from the attention given to the new up-and-coming additions at the major groups? And how can these brands get back to growth? It is hoped that some of the latest acquisitions will help big groups better understand what is needed to reach the millennial, whether that be in social media, the latest trends or new ways of selling. And it is hoped that this knowledge will then be applied to older brands, thereby bringing them more into focus for today’s consumer. However, while buying brands may add growth, buying new strategies for old brands may be harder to pull off.

Oonagh Phillips Meet the BW Confidential Editor in Chief team at: [email protected] l PCD, Paris, January 18-19 l CosmeTokyo, January 23-25 l Cosmopack, Bologna, March 16-19 l Cosmoprof Worldwide, Bologna, March 17-20 l Esxence, Milan, March 23-26 News headlines daily on www.bwconfidential.com @BWCbeautynews l Duty Free Show of the Americas, Orlando, March 26-29 News roundup At a glance...

n Unilever to acquire Living Proof

n buys Sabon The buzz n L’Oréal invests in digital fund

n Sisley opens first Maison Sisley concept Stay informed with our daily news headlines on www.bwconfidential.com

Strategy

Anglo-Dutch group Unilever is to acquire premium haircare brand Living Proof. The brand will be added to Unilever’s Prestige portfolio. Living Proof was founded by venture capitalist Jon Flint and MIT professor Robert Langer and claims to bring bio-medical technology to haircare. The brand is sold in salons and at retail. Unilever has made a string of prestige beauty acquisitions over the past year including Murad, Dermalogica, Kate Somerville Skincare and Ren.

French group Yves Rocher has acquired Israel-based bath and body company Sabon, according to French press reports. Sabon, which was founded in 1997, is known for its artisan soaps and has a network of 130 stores globally. Its strongest market is Japan, where it has around 40 stores. The move is part of Yves Rocher’s strategy to grow its business outside of Europe.

L’Oréal has made another move to finance digital start-ups through an investment in the early-stage fund Partech International Venture VII, managed by international venture capitalist firm Partech Ventures. Partech Ventures focuses on digital companies and the investment in one of its funds will enable L’Oréal to tap into innovations in the area of prediction, personalization tools, artificial intelligence and new services, according to the group. The deal follows L’Oréal’s investment in the Founders Factory, a digital accelerator and incubator, announced last May.

US-headquartered prestige beauty company Glansaol has acquired the brands Julep, Laura Geller and Clark’s Botanicals. Terms of the transactions were not disclosed. Color brand Laura Geller was founded in 1997 by professional make-up artist Laura Geller. Tengram Capital took a majority stake in the company in 2012. Julep, a color cosmetics and skincare brand, was developed by Korean-born Jane Park in 2007. Skincare brand Clark’s Botanicals was founded in 2008 by Francesco Clark. Glansaol is a partnership between former ceo Alan Ennis and private-equity firm Warburg Pincus and was founded in 2015. The company is expected to make further acquisitions.

Brazilian company Natura has acquired 100% of Australian beauty firm Emeis Holdings, which operates under the brand name Aesop. This comes after Natura took a 65% stake in Emeis Holdings in 2013. Today, Aesop operates in 20 countries. It has 77 stores and is present in 84 department stores. n n n

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n n n A new company called Beauty Pie claims to bring consumers beauty products sourced from the same suppliers as leading brands, but at a fraction of the price. The UK-based online company, which launched at the beginning of December 2016, sports the tagline All Your Makeup Without the Markup, and

The buzz works on a club membership basis. Members pay a fee of £10 ($12.45) a month to be part the club, and in return Beauty Pie claims to sell them high-end beauty products at factory cost. Non-members can also buy its products at a regular price (both the regular price and factory cost are displayed for each product). For example, a Futurelipstick costs £20 ($24.90) for non-members and £2.26 ($2.81) for members. The company operates a price transparency system, providing a cost breakdown for its factory prices offered to members, including product and packaging, safety and testing, warehousing and VAT costs. The company has already come out with a range of make-up products and plans to add 100 new color items over the next year. It will also expand to skincare, make-up brushes and beauty tools. Beauty Pie products come in the company’s own no-fuss packaging, designed to be kept light to be more environmentally friendly.

Online beauty brand and retailer Memebox has raised $60m in funding to improve its mobile shopping experience, develop a beauty product and ingredients database and build more efficient global operations. The funds were raised in a Series C extension round (the company previously raised $66m in initial Series C funding) led by new and existing investors. Investors include Goodwater Capital, Altos Ventures, Cowboy Ventures, Mousse Partners, Formation Group, Funders Club, Pear Ventures, Cota Capital and founder and former ceo Janet Gurwitch, who also sits on Memebox’s advisory board. Memebox has raised $160m since it was founded in 2012. Ceo Hyungseok Dino Ha said that while the company has been focused on developing in Asia, particularly China, it will use this latest funding to streamline its global operations. The company, which is headquartered in San Francisco, US, has offices in six countries. Memebox, which evolved from a subscription-box model to a retailer and then launched its own in-house BW Confidential brands, says that since its four own brands (Bonvivant, Nooni, I’M Meme and Pony Effect) 4 avenue de la Marne 92600 Asnières sur Seine, France launched they have seen growth of 60% quarter over quarter. The company’s mobile [email protected] app represents more than 88% of its global online transactions, with more than 94% Tel: +33 (0)1 74 63 49 61 Fax: +33 (0)1 53 01 09 79 of customers in Asia shopping through the app. Memebox says that it plans to bring the www.bwconfidential.com ISSN: 2104-3302 mobile strategies that have been successful in Asia to the US. Publisher: Nicolas Grob Editorial Director: Oonagh Phillips [email protected] Journalist & Copy Editor: Katie Nichol [email protected] Retail Journalist: Hannah Ikin [email protected] Contributors: Sophie Douez, Alex Wynne, German travel retailer Gebr Heinemann has set up a joint venture with Fraport, the Renata Ashcar, Mayu Saini, Raphaëlle Choël, Corinne Blanché, Naomi Marcoulet owner and operator of Frankfurt Airport, to take over the operation of the 27 Heinemann Subscriptions 1 year: electronic publication (20 issues) + Duty Free & Travel Value Shops, as well as concept stores at Frankfurt Airport. The new print magazine (4 issues) + daily news: €499 50:50 venture called Frankfurt Airport Retail is intended to help the companies react or US$699 [email protected] jointly to developments in the market and to changes in traveler demands, especially in Advertising [email protected] e-commerce. The companies said that they will now offer a reservation and home delivery BW Confidential is published by Noon Media option for goods sold at their stores. This means that passengers can order all goods 513 746 297 RCS Nanterre Copyright © 2017. All rights reserved. online before their journey and have them delivered to their homes. Frankfurt Airport is Reproduction in whole or in part without permission is strictly prohibited. Gebr Heinemann’s most important German location. n n n

www.bwconfidential.com - Jan 5-18, 2017 #142 - Page 3 CONFIDENTIAL CONFIDENTIAL CONFIDENTIAL CONFIDENTIAL The buzz News roundup gain insightsinto American the publicinFebruary. a two-weekpreviewandwillre-open to the NolitadistrictofManhattan openedfor beauty treatmentrooms,acaféandthebrand’sfirstParisianboutique.The70m in alistedbuildingParis’8 French brandSisleyistoopenitsfirstMaisonconceptinFebruary2017.Located excess of$1bnfromtheacquisitionwithinthreetofouryears. expected tocloseinearly2017.WalgreensBootsAllianceexpectsgeneratesavings transition period.TheRiteAidacquisition,whichwasannouncedinOctober2015,is Fred’s wouldcontinuetooperatethestoresunderRiteAidnameplateduringa approved, themovewouldmakeFred’soneoflargestdrugstorechainsinUS. approval andcompletionofWalgreensBootsAlliance’sacquisitionRiteAid.If operations, thecompaniessaid.ThedealissubjecttoapprovalfromFTCand the saleofRiteAidstorestoFred’swillalsoincludecertainassetsrelatedstore (FTC) overWalgreens’proposedacquisitionofRiteAid.The$865mcashtransactionfor in theUStoFred’sIncresponseconcernsraisedbyFederalTradeCommission market. The92m City inDecemberabidtotesttheUS soft openingofitsfirststoreinNewYork Brazilian brandNaturaembarkedona 1,400 to1,700. raised itsplansfordoorexpansionfrom the thirdquarterwith949stores,recently York Cityarea.Theretailer,whichended operates 40storesinthegreaterNew focused onsuburbanareas.UltaBeauty for theretailer,whichhasuntilnowmostly The Manhattanstoreisanimportantmove East Side,isslatedtoopeninfall2017. City. Thestore,tobelocatedontheUpper open itsfirststoreinManhattan,NewYork US-based beautyretailerUltaBeautywill healthy menureservedforspacustomers. entering theskincaretreatmentrooms.MaisonSisleyalsohasacaféwithterraceand room spacewithasofa,wherevisitorscanhavepersonaldiagnosticsessionbefore pollution. Aselectionofmake-upserviceswillalsobeavailable.Anotherareaisaliving- Exclusifs Paris,designedtohelpwithissuesrelatedcitylifeincludingstress,fatigueand for menandwomen.Sisleyalsocreatedalineoffournewskincareproducts,calledLes lines. Theskincarezonehasfivetreatmentroomsofferingfaceandbodytreatments designed likeaconceptstore,willalsofeaturelimited-editionobjectsandaccessories boutique featuresaperfumebarcreatedexclusivelyforthedestination.Theboutique, n Through the store, Natura is aiming to Through thestore,Naturaisaiming to have agreed to sell 865 Rite Aid stores Walgreens BootsAllianceandRiteAidhaveagreedtosell865stores 2 (990ft 2 ) store located in ) storelocatedin th n arrondissement,the360m publicationandprintmagazine • • • goingonintheindustryand stayingaheadofthecompetition The website -dailynews News headlinesdailyonwww.bwconfidential.com BW Confidential, theinsideviewoninternational beautyindustry

2 BW Confidentialisthedestination forkeepingup-to-datewith News headlinescomplementanalysis andinterviewsinourelectronic All majornewsontheindustry published everydayonourwebsite (3,875ft 2 ) space combines ) spacecombines • The electronic publication-everytwo weeks 2 (753ft DAILY NE STAY INFOR 2 ) • WS SERVICE MED WITHOUR The printmagazine -fourtimesayear @BWCbeautynews what’s News roundup

n n n consumer behavior and it will also use the boutique to evaluate the acceptance of its products. Natura is looking to build its international business and this move to the US is part of that strategy. The store broadens the activities of the Natura Innovation Center in New York, which opened in 2014 with the aim of nurturing innovation, The buzz building a better understanding of international business and establishing partnerships with US technology centers.

People

German flavor and fragrance company Symrise has renewed ceo Heinz-Jürgen Bertram’s contract ahead of schedule for a further five years, until 2022. Bertram has been ceo of the company since August 2009.

Bobbi Brown, the founder of Cosmetics (Estée Lauder Companies), will step down from the brand after 25 years. Bobbi Brown was founded in 1991 and was acquired by ELC in 1995. The brand is sold in over 70 countries.

Data

Prestige beauty sales in the US were up 6% year-to-date through October 2016, according to The NPD Group. The growth rate is one percentage point lower than last year. Growth is still expected in the fourth quarter, NPD says, as the ‘binge mentality’ that began with make-up (with consumers using more products) moves into skincare. Make-up is again expected to outsell fragrance in the fourth quarter, as has been the case in the past two years. Make-up sales are driven by online buzz, with brow products seeing growth of 35%, lip color up 21% and face products growing 33% year-to-date though October. In skincare meanwhile, sales of masks were up 22%, lip treatment sales grew 22% and other face products including complexion treatments increased 13%. In fragrance, traditional flankers are driving growth. While the prestige fragrance market grew 2% year-to-date though October, dollar sales of flankers were up 18% compared to the previous year. The home scents category witnessed growth of 18%, with growth across all segments. Diffusers were up 21%, while candles saw growth of 14%. Sales of home ancillary gift sets grew 44%. ,

BW Confidentialhas donated €3,000 to the French CEW’s Centres de Beauté, which provide beauty treatments to cancer patients. The donation follows a partnership that BW Confidential inked with the CEW France to create a special-edition magazine (click here to access the issue) focusing on the winners of the CEW’s Achiever Awards. BW Confidential pledged to donate a portion of the advertising revenues of this special edition to the CEW’s Centres de Beauté and also made its own contribution to the cause. BW Confidential would like to thank its advertisers who contributed to this special issue: Chanel, Parfums Christian Dior, Lalique, Firmenich and Drom. n

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NEW

The views expressed in this section are those of bloggers and do not represent the opinions of BW Confidential Netwatch the bath and claims to clear away negative energy. the bathandclaimstoclearawaynegativeenergy. Intuition, whichoffersVioletWaterandOrangethatcanbeusedasafragrancein also beenmetwithskepticism.BrandsinthisareaincludeLosAngeles-basedHouseof and promotehealingisemerging.Whilegarneringmuchattention,thistrendhas A trendbasedonfragranceorbodycareproductsthatharnesspositiveenergy powders aresaidtoprovidelastingcolor,butonthedownsidedryoutlips. transforms intoaliquidwhenappliedtothelips.Describedascreatingwoweffect, Lip powdersarebecomingmorepopular.Bloggerslikethepowdertexturethat (pictured), whichservesasamirrorandUSBbatterypackthatcanchargedevices. which usesultrasoundandLEDlighttotreatacne,thePearlCompactMirror inspired conceptsataffordableprices.PopularinnovationsincludedeviceslikeLEDSonic Tech beautyproductsaregrowinginpopularity,andlikedfortheirprofessionally- beauty brands,especiallythosewithaKoreaninfluence,launchingtrendyproducts. high street,isahottopiconline.Bloggersnotethenumberofmassandprivate-label Fast beauty, Social mediamonitor BW Confidential BW

similar to fast fashion, where catwalk trends are quickly translated to the similar tofastfashion,wherecatwalktrendsarequicklytranslatedthe reportsonwhat’sbeingsaidaboutbeautysocialnetworks on the channel’s main players allthePlus latest predictions data, industry and listings in thetravel-retailchannel: Everything you need to know about beauty more than100 pages of insight and of analysis

Beauty inTravelRetail Collector’s Guide • • • • • • • • • Packaging... New producttrends Performance bybeauty segment Pricing Creative retailingstrategies Reaching millennials Online sales Digital strategies Global shopperhabits the beautycategoryintravelretail Perfume Holding ceo Dino Pace Brand building Perfume Holding ceo Dino Pace tells BW Confidential about his plans to build the company’s own brands and

Interview its niche business

How are you weathering the tough fragrance market? The market is unpredictable with positive and negative months. But although 2016 was not easy, we are still targeting growth in terms of sell-in. If I look at market share, the picture is a little different because in certain regions like the Middle East and Latin America we have been able to outperform the market and our main competitors. The market in the Middle East is recording a drop of between 12 and 15%, but we are seeing terrific growth with Ferrari, which is a result of good projects and a strong investment in trade initiatives and media. In this difficult market, we are looking to come up with innovative ways of using fragrance. For example, for Ferrari we have patented a fragrance case that clicks onto the iPhone, which is a new way of using fragrance and appeals to young consumers who always have their phone at hand. This has worked very well in the Middle East, Latin America, the UK, Italy, Germany and in in-flight. Retailers like the idea that we are offering something different and distinctive for consumers. While this year has been tough, I am confident that we can grow the size of the company. We do sales of €90m and in 2017 our sales are set to reach €100m. We have three paths to growth: Ferrari, which is our biggest brand; Atkinsons, our niche brand, which we Perfume Holding relaunched three years ago, and I Coloniali, another brand that we own and are revamping. Key brands: Ferrari, I Coloniali, Atkinsons, Liu Jo, How do you explain growth in Brazil? Bikkembergs In Brazil, Ferrari has historically been between number three or number four, but in August Sales: €90m 2016 we ranked number two because we are investing a lot. Despite the crisis and the Sales by region currency devaluation, we are working better because we changed our distributor and so South America: 19.7% are better covering the independent doors, Renner and . With our retailers there we Italy: 19.4% have set up better marketing plans to promote the brand and to advertise it much better Middle East & Africa: 12.4% than in the past, so we are gaining market share. Asia: 12% Russia & Eastern Europe: 11% In 2014, you stated that you wanted to double the Ferrari business in four Western Europe: 10.1% years. Are you on track? North America: 7.5% In two years we should double our sales. The brand is still growing, but not in double digits. Corporate (direct sales & We are still in the process of cleaning up the market. Ferrari is a strong business, but it has contract manufacturing): 7.9% been affected in the past, and especially because of the crisis, by the gray market. So we are Sales by brand cutting this and controlling our distribution as much as we can. We want a clean market Ferrari: 42% and don’t want to compromise our image. We have already cut €10m [in sales] and we are I Coloniali/English Garden: 14% still cutting. This is the price to pay to re-conquer retailers’ confidence. La Perla: 8.5% This also means that we are attracting a new kind of consumer. In the past Ferrari was Iceberg: 6.7% discounted and now we are talking to consumers who are willing to pay €70 or €80, Tacchini: 6.4% whereas in the past it was €20. The Black line is our biggest pillar and we are revamping Atkinsons: 6% Black to trade up the image of Scuderia Ferrari. Next year we will launch Ferrari Forte in the Liu Jo: 5.5% Scuderia Ferrari line. It will be more of a premium product. n n n Other: 10.9%

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n n n How are you revamping I Coloniali? This brand has a 30-year history, but we are reshaping it and the new look hits the market in January 2017. We have revamped the brand from a bodycare line to a skincare brand In terms of for the face and body, and this will be followed by haircare and fragrance. It is not a classic skincare approach, as we are targeting consumers who are looking for an apothecary brand acquisitions, we would Interview “ with a contemporary approach to skincare; it is a natural brand with ingredients from Asia. love to have a female But it is still affordable, retailing at between €40 and €90. At the moment, the brand is only in Italy, but that is going to change—although we are brand. But if we not going to enlarge distribution quickly. We are looking at around 4,000 doors worldwide. make an acquisition, We could also launch our own stores for the brand later on. it would need to be a You revamped the Atkinsons brand in 2013, how is it performing? niche brand. There are We positioned the brand in the niche category and revamped the story. The brand now does sales of €7.4m wholesale in just 400 doors, and we think that it can reach €15m in so many perfumers sales in five years. We do not want to expand the distribution too much. We would target who have ideas and 1,000 doors maximum, with maybe some flagships and e-commerce. In April we will open our first flagship store in London. We expect good sales from this store, but the boutique is need a business more of a marketing investment to re-affirm the Britishness of the brand. If it does well, we partner and we are could consider opening more stores in key capitals around the world and maybe having 10 boutiques globally. ready to do that

You recently lost the La Perla license. Is this a big loss for you? It depends how you look at it. It is a matter of priority and focus. To achieve certain goals Perfume Holding ceo with La Perla I would have to invest so much and pay a lot in royalties. I would prefer to Dino Pace invest more in my own brands, in Ferrari and perhaps in new acquisitions that are less expensive and more fruitful for the company. ”

How will this impact the company financially and are you looking at new brands to compensate? I will lose €8m. We are developing our new brand Bikkembergs. This brand launched in 2016 and in three years it should achieve €6m in sales and then in five years it should do €10m. We are creating a community for this brand, which is known for sport, around indoor football. You have to do this to talk directly to consumers to drive them to the store, as today you cannot wait for the retailer to do this. We also have Liu Jo which is growing steadily. In two years we have built the Liu Jo business to more than €5m wholesale. We are enlarging the distribution of this brand, which is currently in Italy, Benelux, Russia and Poland. We have launched in the Middle East and are bringing it to Latin America. For us Liu Jo can be bigger than La Perla. Then we have I Coloniali and Atkinsons, so it is a matter of focus; we cannot do everything, and I prefer to do fewer things, but well and to invest my money wisely. In terms of acquisitions, we would love to have a female brand. But if we make an acquisition, it would need to be a niche brand. We would not be able to buy an established niche brand, but there are so many s Perfume Holding is looking at innovative ways perfumers who have ideas and need a business partner and we are ready of using fragrance. For Ferrari it has patented a to do that. n fragrance case that clicks onto the iPhone

www.bwconfidential.com - Jan 5-18, 2017 #142 - Page 8 CONFIDENTIAL CONFIDENTIAL CONFIDENTIAL Hong Kong Challenged Insight Business in Hong Kong continues to be tough, which is forcing brands to take a new approach to the market

fter nearly two years of declining sales, Athe beauty market in Hong Kong continues to suffer, largely due to a steep drop in Chinese tourism. According to industry sources, the prestige market saw sales drop 6% in the first nine months of 2016. This follows a decline of 4% in 2015, and few are optimistic about a change in the market’s fate any time soon, despite more encouraging signs in September and October. (It is estimated that prestige sales represent around 60% of the beauty market in Hong Kong.) “I don’t see the near future being much brighter for consumption,” says Frédéric Cohen, Group general manager for Hong Kong and Macau. “After two years of decreases, the declines will start to narrow, and we should soon reach a baseline before some kind of a rebound, which we hope to see in the second half of 2017, maybe 2018.” I don’t see the future For around five years up to 2014, Hong Kong’s beauty sales grew at an average annual “being much brighter rate of around 15%, with Chinese tourists accounting for up to 80% of business for some international brands, according to sources. for consumption. While the slowdown has eased somewhat in recent months, incoming visitor numbers After two years are still declining. Visitor numbers fell 2.4% in October 2016, with a 3.5% drop in Chinese visitors, according to data from HKTB Insights & Research. “The third quarter of 2016 was of decreases, the slightly better, yet business is not really improving. It is still going down,” says Cohen. The declines will start total number of inbound tourists to Hong Kong fell 5.7% in the year to the end of October to 46.7 million, with the number of arrivals from the mainland falling 8.2% to 35.4 million. to narrow, and we should soon reach a Chinese go elsewhere The reasons for the slowdown are predominantly macroeconomic. After the Umbrella baseline before some Movement of late 2014, during which Hong Kong nationals protested against Chinese kind of a rebound, intervention in local politics, many Chinese consumers began to feel unwelcome and unsafe there. At the same time, due to the depreciation of the Chinese yuan and the which we hope to see comparative strength of the Hong Kong dollar, which is pegged to the US dollar, the price in the second half of differential between Hong Kong and the mainland has eroded, making it less appealing as a shopping destination. The Chinese government has also introduced measures limiting the 2017, maybe 2018 number of journeys made by its nationals to one day a week, impacting sales of “daigou,” where professional shoppers bring back goods to sell in China. Chinese shoppers, in such a context, are increasingly traveling to destinations further afield like Japan, South Korea, the Clarins Group general UK and Russia. Increased brand availability in mainland China is also having an impact. manager for Hong Kong and “Spend per [passenger] has been dropping in Hong Kong and the strong Hong Kong Macau Frédéric Cohen” dollar has significantly impacted the saving proposition versus China domestic,” observes LVMH-owned travel retailer DFS senior vice president global merchandising beauty Ariel Gentzbourger. Nevertheless, she says that “beauty [is showing] resilience versus the higher end offer in fashion or watches, jewelry and accessories.” She adds that business in the category has improved in the fourth quarter. n n n

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n n n “Hong Kong used to have the big advantage that it was cheap, it was close [for the Chinese], and it was simple. None of that applies anymore,” industry expert and former L’Oréal executive Stephen Mosely comments. “Until something changes to make it an Insight attractive destination, it’s going to see fewer and fewer travelers, and be more and more reliant on local spending.”

Boosting local spend Faced with this, brands have been making increased efforts to better target local consumers, often neglected in the past, with more appealing in-store experiences and ramped up social-media strategies, for example. But given the weight of sales to inbound tourists—Hong Kong has a resident population of seven million, but welcomes more than 50 million visitors each year—targeting local consumers alone is not enough. “Initially we refocused on local consumers but we can’t think only that way,” says Clarins’ Cohen. “Hong Kong welcomes eight times its population every year. Even though it’s slowed down in the past couple of years, Chinese traffic should keep increasing in coming years, everywhere in the world. And Hong Kong should maintain a significant share of that,” he believes. And in the slowdown, not all brands and categories are suffering equally. AmorePacific’s Sulwhasoo and L’Oréal’s Yves Hong Kong beauty sales 2015-2016 Saint Laurent and are reportedly gaining market 2015 2016 $bn % change share, while other Asian brands like and SK-II are also $bn (estimate) 2016/2015 performing well, sources say. “Chinese consumers in Hong (estimate) Kong are getting more sophisticated,” says Cohen. “They used Total beauty 2.13 1.99 -6.5 to focus on traditional international brands because [these sales brands] were more aggressive in China 10 years ago. However, Source: Hong Kong Trade Statistics now they have access to a wider variety of beauty brands including Japanese and Korean brands, which offer natural Hong Kong prestige beauty growth by category Asian heritage and a perception of higher relevancy to their January-September 2016 beauty needs.” Category Growth rate % “Hong Kong has always been about survival of the fittest and that hasn’t changed,” says Mosely. “Within that framework, Skincare -10 some brands can be stunningly successful and grow their Make-up +6 market share, but other brands that might be successful Fragrance -5 elsewhere in the world can really suffer.” Indeed, some of the Total prestige beauty -6 big-name international brands are said to be suffering, with Source: Industry sources declines in the region of 20% in 2016, according to sources. This is partly because the landscape has been changed by the incursion of Korean brands, boosted by the appeal of the Hong Kong retail sales by distribution channel K-wave. Last year, South Korea became Hong Kong’s second- January-October 2016 largest importer of cosmetics after France, according to trade Channel Sales Jan- % change statistics, overtaking the US. Oct 2016 2016/2015 According to Cohen, it is not just South Korean brands that Department stores HK$37.1bn -7.6 are benefiting. “In terms of Korean influence, brands like YSL (US$4.7bn) have made a huge jump in the market thanks to a total revamp Medicine & cosmetics HK$34.4bn -0.3 and a very efficient product placement in a Korean TV drama stores (US$4.45bn) and celebrity endorsement,” he explains. “The influence of Source: Hong Kong Census and Statistics Department (includes all Korea comes from brands, but also from marketing in n n n product categories sold in each store channel)

www.bwconfidential.com - www.bwconfidential.comwww.bwconfidential.com - Jan 5-18, 2017- Jan 5-18, #142 2017 - Page #142 10 - Page 10 CONFIDENTIAL CONFIDENTIAL CONFIDENTIAL CONFIDENTIAL Hong Kong

n n n Korea towards Chinese consumers. We did some strategic endorsing with the new Clarins lip oil; it was extremely successful with some key opinion leaders in Korea and therefore created a halo effect on the whole region.” Insight In terms of category, prestige skincare sales, which still represent the lion’s share of the market, reportedly declined 10% in the year to September, and while all segments are suffering, the whitening category has been particularly hard hit, with certain international brands withdrawing investment from the segment. Hong Kong used Make-up sales, meanwhile, were up 6% in the same period after seeing the same “to have the big growth rate in 2015, although consumers in Hong Kong and China are still not heavy color-cosmetics users. “At the moment, make-up is quite successful, but we’re talking advantage that it about something from a rather small base,” comments Mosely. Clarins introduced was cheap, it was its make-up products in Hong Kong this fall, says Cohen, and is seeing strong results, especially for and lip products. Travel retailer DFS is also seeing brisk demand close, and it was for make-up in its Hong Kong stores, Gentzbourger comments, citing the strength of simple. None of that designer brands like YSL, Tom Ford and Givenchy. applies anymore. Until Retail and rental costs something changes The tough market is being felt by retailers, with total sales in department stores, a preferred destination for Chinese shoppers, declining 7.6% in the year to October, according to data to make it an from the Hong Kong Census and Statistics Department. In such a context, department attractive destination, stores are increasingly focusing on promotions, observers say. Health and beauty retailer SaSa saw retail sales in Hong Kong and Macau decline 3.6% it’s going to see in the six months to September 30. Although the retailer saw an increase in the number of fewer and fewer transactions made, average transaction values dropped more than 6%. SaSa is working to adapt to changing market preferences with faster product launches, shorter product cycles travelers, and be more and lower-priced, trendy Asian products. and more reliant on During the years prior to 2014, a wealth of new malls and stores sprang up, and many international brands opened multiple standalone boutiques. But since the crisis, this has local spending become a thorn in their side, as landlords have not been reducing rental costs in line with the market decline. “The landlords of the malls kept increasing the rents even though business is decreasing, so most brands now are looking at their distribution to make sure it Industry expert and is still relevant,” says Cohen. Mosely adds: “Retail at the moment depends a lot on getting former L’Oréal executive rental reductions. Consequently, most retailers have been downsizing, because commercial Stephen Mosely” rents have been incredibly expensive.” SaSa, for example, is looking to reduce the cost of its store rentals in tourist areas. Clarins will end 2016 with nine standalone stores in Hong Kong, having closed four doors during the course of the year. Observers anticipate that other brands will also reduce their footprint. Faced with all these challenges, many brands are scaling back their overall investment. “In any business, if your business is decreasing, your investment needs to be re-calibrated, especially if it’s not only something temporary,” says Cohen. “It’s been two years already. We have to scale down and we have to be creative and innovative in our business model and understand where the market is going and keep adapting our models to stay relevant to our consumers and to the market.” Innovation and better, more targeted marketing are key to maintaining business in Hong Kong, and there are certainly pockets of growth, especially in make-up. But for many brands and retailers, it continues to be a case of weathering the storm as best they can. n

www.bwconfidential.com - www.bwconfidential.comwww.bwconfidential.com - Jan 5-18, 2017- Jan 5-18, #142 2017 - Page #142 11 - Page 11 CONFIDENTIAL CONFIDENTIAL CONFIDENTIAL CONFIDENTIAL Store visit credit: Cedric Odet

Digital focus Urban Decay’s first French store highlights technology and digital try-on

’Oréal-owned Urban Decay has put the focus on digital for its new Paris Lstore. The two-story 120m2 (1292ft2) boutique in the Marais district of the French capital features a digital tool for creating interactive GIFs on the ground floor, as well as a screen connected to the brand’s Vice app, which allows shoppers to virtually try on the 100 shades in its Vice range that launched in June. The store’s basement is home to the UD Lounge, which focuses on make-up artistry, and is where make-up classes and services take place. There are four make-up artists at the store. The make-up classes are priced at €60 for individuals (reimbursed when €120 is spent in-store) and €20 in a group Urban Decay Paris (reimbursed when €60 or more is spent in-store). store The store also offers shoppers a complimentary make-up look done by a l Location: 48, rue des Francs- professional (focused on eyes, lips or skin). The Standard, a look for the face, Bourgeois, Paris, France eyes and lips, is priced at €30 for 30 minutes, while The Full Monty (priced l Opened: December 2016 at €45 for 45 minutes), can include contouring and the application of false l Size: 120m2 (1,292ft2) eyelashes and is said to be suited to special events. l Special features: The store stocks some 650 make-up skus, 200 of which are exclusive products. creation of animated Store exclusives include gift sets such as the Vault Vice (30 ) and the GIFs, exclusive products, Naked Vault Volume III (which is composed of all of the brand’s Naked palettes). collector shades, make-up Also stocked are collector shades and a lifestyle offer, with US-made T-shirts. n demonstrations, tips and classes

www.bwconfidential.com - Jan 5-18, 2017 #142 - Page 12 CONFIDENTIAL CONFIDENTIAL CONFIDENTIAL CONFIDENTIAL Store visit credit: Cedric Odet

s The Urban Decay store’s decor features neon light detail (left) and shoppers can virtually try on the 100 lipstick shades in the brand’s Vice Lipstick range (right) credit: Cedric Odet

s The UD Beauty lounge focuses on make-up artistry, and consumers can have make-up looks done by experts

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