When Ilse Morgan lived in New York, she often bought cosmetics from Kiehl’s, a 161-year-old pharmacy in the East Village that has grown into a global skin-care brand. Since moving to Amsterdam a decade ago, the 42-year-old advertising manager has been able to find Kiehl’s products but rarely buys them. Local prices, she says, are just too far above what she paid in New York. One staple, the 8.4-fluid-ounce bottle of Cucumber Herbal Alcohol-Free Toner, for instance, sells for €18 ($23.70) on the Continent; it costs a third less in the U.S. “If it was the same, then I would happily make purchases here,” says Morgan. “They lose my business with the pricing.”
Kiehl’s is considered an affordable indulgence in its home country. But French beauty conglomerate L’Oréal (OR:FP), which bought the quirky U.S. brand in 2000, has positioned it as a luxury product in Europe. That worked fine when the economy was booming and consumers outside the U.S. willingly paid extra for a hip American import, but the economic crisis has hurt Kiehl’s. To boost growth, L’Oréal has taken a tack luxury brands usually avoid: price-cutting.
Kiehl’s says it’s reduced prices in 21 markets worldwide in the past two years, with an average drop of about 20 percent for its age-defying creams and goos. “We aim to share some of our success with our customers,” worldwide general manager Cheryl Vitali said in an e-mail about the European price reductions last spring. Analysts say Kiehl’s needed to trim prices or risk crimping revenue growth in crisis-ravaged Europe.
L’Oréal Chief Executive Officer Jean-Paul Agon told analysts in November that the brand’s revenue expanded “above 20 percent” in the first nine months of the year. That compares with 56 percent growth in 2011. “Five years ago, it was easier to build a new price point in areas or markets where Kiehl’s wasn’t [previously],” says Pierre Tegner, an analyst at Natixis Securities in Paris who estimates the brand’s 2011 sales were about €350 million, or 1.7 percent of L’Oréal’s total. “The current environment is much more challenging.”
Kiehl’s problems are emblematic of the slowing momentum at L’Oréal’s luxury products unit. Sales growth in the division, which represents 24 percent of the parent’s total revenue, has decelerated in the past two quarters as demand has fallen in Western Europe and growth has slowed in Asia. That scenario may not change anytime soon: Industrywide, Western European premium cosmetics sales may increase only 0.7 percent annually between 2011 and 2016, slowing from an annual growth rate of 1.7 percent over the previous five years, according to market researcher Euromonitor International.
Kiehl’s has built a fan base with basic, retro packaging and free samples tucked alongside each purchase. Since the line’s European debut in 2002, the products have been sold through a mix of stand-alone shops in trendy areas and high-end stores such as London’s Selfridges. Its price reductions have been substantial. The cost of a 4.2-ounce container of Ultra Facial Moisturizer SPF 15 in France fell from €37 to €25. (In the U.S., the cream costs $31.) The 8.4-ounce bottle of cucumber toner has fallen to €18 from €24. Such cuts make Kiehl’s an outlier in an industry that has equated quality with price ever since the early 1900s, when beauty magnate Helena Rubinstein found that raising prices boosted demand for her worst-selling products. Those that have bucked the trend—as premium fragrance makers did during the 2008 financial crisis—damaged their exclusivity, according to Oru Mohiuddin, a Euromonitor analyst who says Kiehl’s price reductions aren’t “very good for the brand’s image.”
Kiehl’s cuts suggest some luxe brands may have to sacrifice margins to continue growing in Europe. While Kiehl’s price adjustment was “a necessary step” that may help it attract new customers and bring back those who have suffered in the crisis, the company has to be careful not to get into a fight with mass-market brands, says Denise Klug, an analyst at Planet Retail in Frankfurt. “It is important that Kiehl’s remain in its position as a luxury manufacturer. They need to differentiate now more than ever from cheaper products.”