Dec. 13 (Bloomberg) -- When Ilse Morgan lived in New York, she often bought cosmetics from Kiehl’s, a 161-year-old pharmacy on the lower east side that has grown into a global brand. Since moving to Amsterdam, Morgan has found Kiehl’s products but rarely buys. The prices, she says, are just too far above what she paid in New York.
“If it was the same, then I would happily make purchases here,” said the 42-year-old advertising manager who has lived in the Netherlands for a decade. “They lose my business with the pricing.”
While Kiehl’s is considered an affordable indulgence in its home country, owner L’Oreal SA has positioned it as a luxury product in Europe. Now, sales growth is slowing and the region remains muddled in a crisis that the chief executive officer of rival Unilever says may lead to a decade of stagnation. Kiehl's has slashed prices by about a fifth in the region, though they remain higher than in the U.S.
Analysts say Kiehl’s needed to trim prices as it risked crimping revenue growth in crisis-ravaged Europe. L’Oreal CEO 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 to 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,” said Pierre Tegner, an analyst at Natixis Securities in Paris. He estimates the brand’s 2011 sales were about 350 million euros ($455 million), or 1.7 percent of L’Oreal’s total. “The current environment is much more challenging.”
The company says the reductions, introduced in the spring, are meant to give something back to clients as it grows. Kiehl’s said it has cut prices in 21 markets in the past two years.
“We aim to share some of our success with our customers,” worldwide general manager Cheryl Vitali said by e-mail.
Kiehl’s problems are emblematic of slowing growth at L’Oreal’s luxury unit. Sales in the division, which represents 24 percent of total revenue, have decelerated in the past two quarters as demand fell in Western Europe and cooled in Asia. Western European premium cosmetics sales may increase 0.7 percent annually between 2011 and 2016, slowing from an annual rate of 1.7 percent over the previous five years, according to market researcher Euromonitor International in London.
Kiehl’s has built a global fan base with its basic, retro packaging and free samples tucked alongside each purchase. After L’Oreal bought Kiehl’s in 2000, it rolled the brand out worldwide, entering Europe in 2002 via a mix of standalone shops in trendy areas and high-end stores like London’s Selfridge’s.
The reductions have brought the price of 4.2 fluid ounces of Ultra Facial Moisturizer SPF 15 in France from 37 euros ($48) to 25 euros. An 8.4 fluid-ounce bottle of Cucumber Herbal Alcohol-Free Toner has fallen to 18 euros from 24 euros. In the U.S., the products cost $31 and $16, respectively.
The cuts make Kiehl’s an outlier in an industry that has equated quality with price ever since beauty magnate Helena Rubenstein found that raising prices boosted demand for her poorest-selling products. Those that have bucked the trend -- as premium fragrance makers did during the first financial crisis in 2008 and 2009 -- damaged their exclusivity, according to Oru Mohiuddin, an analyst with Euromonitor.
When L’Oreal brought Kiehl’s to Europe, it was able to charge more than in the U.S. because consumers were willing to pay extra for a hip American import. Now, Kiehl’s has to contend with the crisis as well as competition from premium cosmetics makers whose products offer more at a lower price, said Mohiuddin.
Kiehl’s price reductions aren’t “very good for the brand’s image,” said Mohiuddin. Still, the company had to give distributors a reason to order because its range isn’t as strong as rivals such as Aesop, an Australian maker of $55 Fabulous Face Oil, and the U.K.’s Neal’s Yard Remedies, whose products include 29-pound ($47) Sensual Jasmine Body Cream. “If you’re selling at a higher price,” Mohiuddin said, “you have to justify that in terms of product development, innovation and brand experience.”
Despite that deceleration, Kiehl’s continues to do well in the region, said Eamonn Ferry, an analyst at BNP Paribas in London. The company’s pace of growth has eased mostly because of Asia rather than Europe, Ferry said.
“The slowdown is due to a normalization of growth from the very heady levels of recent years and a general slowing in Asian cosmetic markets,” Ferry said.
Kiehl’s cuts suggest some brands may have to sacrifice margins to continue growing in Europe. Sales of premium cosmetics are slowing in the region as consumers increasingly seek value and cheaper alternatives to high-end stores, said Denise Klug, an analyst at Planet Retail in Frankfurt.
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 retailers, said Klug.
“It is important that Kiehl’s remain in its position as a luxury manufacturer,” said Klug. “They need to differentiate now more than ever from cheaper products.”
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