Unilever to divest designer fragrances?

Speculation is increasing that Unilever is looking for a buyer for its Cosmetics International business, encompassing designer fragrance brands such as Calvin Klein, Cerruti and Karl Lagerfeld. The sale could yield up to US$750 mn in proceeds, and would mark a complete withdrawal of the company from the premium fragrance arena.

Based on depressed profits and modest turnover growth Unilever initiated a 5-year Path to Growth strategy in early 2000 aimed at streamlining operations, effectively downsizing its brand portfolio from 1,600 to 400 “power brands”, and divesting low-profit yielding businesses.

For the company’s cosmetics and toiletries operation it meant the creation of Unilever Cosmetics International (UCI) to manage a global portfolio of prestige beauty and fragrance brands, and the disposal of the Elizabeth Arden skin care and fragrances portfolio in late 2000. Unilever stated that such actions highlighted its intention to focus on the development of designer fragrances, although speculation is increasingit could also be a precursor to the divestment of its remaining premium fragrances business.

Attempts to refresh its portfolio

Garnering a retail value share of almost 9% in premium fragrances in 2001, Unilever ranks 4th globally, above prestigious names such as Chanel and Gucci. But despitethe undoubted success ofitsportfolio,certainformer favourites, such as Obsession for Men and Contradiction for Men, are nowfailing to keep pace with fresher brands more attuned to evolving fashion trends and target consumers.

Thisburdenof past successes is typified by cK one. The brand initially helped to kick start the premium unisex trend in the 1990s, and with a share of almost 49% in 2001 it has proved the overwhelming leader in the subsector. However, it is now in a state of decline, triggered by the rise in popularity of gender-specific scents. While the market for premium unisex fragrances contracted by more than 22% between 1997 and 2001, premium men’s and women’s fragrances grew by 7% and 3% respectively over the same period.

To address this weakness Unilever has undertaken significant investment in new product development. To add to previous major introductions such as the eponymous Vera Wang women’s fragrance in the US in 2002, a succession of fragrance launches including Crave, the new men’s fragrance by Calvin Klein, Lagerfeld Man and Cerruti 1881 Amber are also scheduled for this year.

But since undertaking the Path to Growth strategy, premium fragrances have not compared to top performers such as Dove, Rexona and Axe/Lynx, the success of which has been built on strongbranding in core bath and shower, deodorants and men’s grooming sectors. Consequently the time could fast be approaching for this essentially mass-orientated company to divest its designer fragrances.

Premium players can build on established prestige

The auction of UCI is likely to attract interest from leading players strategically orientated towards a premium positioning. L’Oréal is touted as one of the most obvious potential bidders. It already possesses an extensive portfolio and is the world’s leading premium fragrance manufacturer, ahead of key rivals Estée Lauder and LVMH. However, any bid from the French cosmetics manufacturer may raise antitrust concerns given that the addition would increase the company’s share to almost double that of second place Estée Lauder. The sale of brands on an individual basis could dispel such apprehension, but may not suit the vendor.

For Estée Lauder the attraction would be greater penetration of European and emerging markets. The company has made a concerted drive to expand geographically, as underlined by the global brand restructuring programme initiated in June 2001. Furthermore, Lauder was hard hit by the soft retail environment in the US in the aftermath of September 11. Its overall share of premium fragrances declined from 10.6% in 2000 to 9.9% the following year largely as a result of this, and the company is striving to reduce reliance on its domestic North American market.

Mass-orientated players also in the running

Despite the challenges of managing both prestige and mass fragrance portfolios, Procter & Gamble is actively seeking to expand its fragrance business. Only in 2001 it acquired Jean Patou and Lacoste, and further acquisition would be a perfect opportunity todiversify its premium portfolio,currently led by Hugo Boss fragrances.

Wella is a possible outside contender. It has been one of the few companies within the cosmetics and toiletries industry engaged in acquisition activity in 2002. Moreover, its purchase of Escada Beauté and premium fragrances company Atkinsons in Italy would point to its determination to further establish its reputation in this sector. This acquisition would strengthen its geographic presence, most emphatically in Latin America, Australasia and Africa and the Middle East.

Despite the wavering performance of its more established brands, Unilever Cosmetics International remains an appealing proposition for a company geared towards cateringto the prestige end of the fragrances market. The success of Unilever’s recent investment in new single sex fragrances such as Nautica Latitude Longitude in the US and Truth certainly hints at the future potential of the business.