Lipstick and lettuce just don't mix.
While that determination may not seem earthshaking, the decision six months ago by Giant Foods Inc. that it would no longer sell cosmetics in its supermarkets is helping to breathe new life into another local firm, Cosmetic & Fragrance Concepts Inc. of Savage, Md.
What it meant to the discount cosmetics retailer was that a potentially disabling competitor was out of its hair -- or, more precisely, out of its hair care products. Giant, the market mammoth whose in-store drugstore business has boomed in recent years, could have been a mighty spoiler for Cosmetic & Fragrance Concepts.
In recent years, the health and beauty aid business has divided into two camps -- drugstores that specialize in low-end products such as inexpensive shampoos and makeup, and department stores that devote prime selling space to more expensive, big-name products. Bringing these twains of the business together is what Cosmetic Centers, the company's retail outlets, try to do, beating drugstores on selection and department stores on price.
Going head-to-head with large retailers such as Giant and Nordstrom Inc. is tough enough, but a range of internal problems at Cosmetic & Fragrance -- including inexperienced management, inefficient operations and even a disastrous computer breakdown during its peak selling season in late 1988 -- has prevented the business from realizing its potential, industry observers say.
In an attempt to reach that potential, the chain has initiated a raft of changes in the past year, including relocation, cost controls, new management and new stores. The 30-store chain has opened three outlets in the past two weeks, and four more are due before Christmas.
"Our concept of high-volume, low-margin retailing is outstanding and we just have to come through with well-appointed, well-merchandised and well-staffed stores," said Ben Kovalsky, who was brought on board as president just over a year ago -- chosen by chairman and principal owner Louis Weinstein to bring a new level of professionalism to a business formerly run by Weinstein family members.
With three decades in the retail trade, working first for Herbert H. Haft when the retailer-turned-financier owned Dart Drug Stores Inc. and then heading the Haft family's Trak Auto Corp. operation, Kovalsky hopes to use his skills to apply an aggressive sales plan and cost controls to boost Cosmetic & Fragrance profits.
Competitors are watching. "They definitely have a place in the sun if they take this good niche concept and work it more," said David Eisenberg, president of Peoples Drug Stores Inc. of Alexandria.
"We watch what they do carefully and try to price out products to compete with them," said John Whitacre, general manager of Nordstrom in the Washington area. "So we shop them and know they have the right idea in portraying themselves as a place you can get department stores goods at better prices."
The stakes in the bruising retail world of eye shadow, lotion and sweet-smelling perfumes are high. In 1989, manufacturers sold $17.5 billion worth of cosmetics, fragrances and other toiletries -- making it an estimated $21.7 billion industry at the retail level. The industry's profits are up 32 percent in the past quarter, even in these soft economic times. With its value-oriented image, Cosmetic Center executives see an opportunity for a big Christmas.
The company, founded in 1957 as a family-owned wholesale cosmetic business, opened its first outlet in 1973 and moved strongly into retail in the early 1980s throughout the Washington, Baltimore, Richmond and Chicago areas. It sold its first shares to the public in 1986, but as it grew, needed professional management. Kovalsky was brought in as a consultant in January 1989 and by spring was running the place.
A typical Cosmetic & Fragrance shop has 5,500 square feet of space containing about 25,000 items, everything from top-of-the-line Lancome products to the cheap-and-basic Head & Shoulders shampoo at prices ranging from 10 percent to 50 percent less than the manufacturers' suggested retail level. While all goods are discounted, some are discounted less.
Stores, mostly located in strip shopping centers, are decorated with female shoppers in mind -- 85 percent of Cosmetic Center customers are women -- with bright, wide aisles, soft colors and catchy displays. Customers can pick out products themselves or get help from staff, a melding of the bare-bones drugstores and overly attentive service at department stores.
"I like it because there's none of those scary makeup ladies like at Bloomingdale's, and I don't feel cheap as I do when I buy in a drugstore," said one older woman shopping in Beltsville.
"What they do is appeal to the shoppers who want one-stop shopping," said George Hechtman, partner at Richmond's McMillan/Doolittle retail consulting firm.
But getting enough merchandise at the right prices has been difficult. Big-volume general merchandisers like F&M Distributors Inc. and K mart Corp. get deals on product prices not available to Cosmetic & Fragrance. And at the high end, manufacturers are pressured by full-price department stores not to sell to discounters.
Cosmetic & Fragrance often obtains merchandise through third-party sources, called "gray marketers," that disregard manufacturers' entreaties not to discount prices or that resell to those who will. While the practice is not illegal, it causes uncertainty about the quality and availability of supplies. In 1986, Cosmetic & Fragrance Concepts got 60 percent of its inventory from secondary sources. Now, Kovalsky said, the level is 30 percent.
Instead, Kovalsky has pressed his courting of major manufacturers, which have become a bit more receptive as they watched some of their biggest customers, the department stores, lose market share. Traditionally the big stores used their cosmetic and fragrance departments as cash cows, marking up some items two and three times the wholesale price.
But those markups have let others chip away at their customer base. Food stores now capture 28.4 percent of sales and drugstores 26.8 percent, while department stores account for only 16 percent of sales. Mass merchandisers such as K mart and Wal-Mart Stores Inc. boast another 14.6 percent. Specialty operations like Cosmetic & Fragrance Concepts account for the remaining 14.2 percent, and that share seems to be growing.
"They are going to get an increasingly better part of this mature market," said Andrew Shore, analyst at Prudential-Bache Securities Inc. in New York. "And they are going to get it right from department stores, which are dinosaurs."
But to get all that stuff to the shelves, Kovalsky said, the company's internal changes are important. Operations moved to Savage, just off Interstate 95 halfway to Baltimore, in mid-September from a disorganized three-building operation in Beltsville. Corporate and distribution operations are now consolidated under one roof at the new 103,000-square-foot facility, which is airy and organized with aisles laid out exactly like the stores for easier disbursement of inventory.
Financial results are improving. Since 1986, revenue has climbed from $34.9 million with a $833,542 profit to $58.3 million for the first nine months of fiscal 1990 with $1.3 million in profit. (Sales for the fiscal 1990 year ended Sept. 30 are estimated at $75 million.) And same-stores sales, the revenue of stores open more than a year, which is considered a measure of long-term success, are up 13 percent, double national averages.
"We can grow in other markets, just about anywhere, I think," said Kovalsky. "But it takes more than an idea."