Audit

Revlon Inc. serves as the focal company of the following audit. Revlon Inc. is an operating subsidiary of MacAndrews & Forbes Incorporated (Revlon, 2017). Revlon Inc.’s business operations are conducted through the company’s fully owned subsidiary Revlon Consumer Products Corporation. The outstanding stock of Revlon Consumer Products Corporation is the only tangible asset belonging Revlon Inc. (Revlon, 2017). Therefore, the primary focus of this audit is Revlon Inc.’s subsidiary Revlon Consumer Products Corporation. This audit will distinguish between Revlon Inc. and its subsidiary by using “Revlon Inc.” to reference the holding company itself, and “Revlon” in reference to Revlon Consumer Products Corporation. This audit will conclude with strategic suggestions formulated on the basis of the broad environmental analysis, industry analysis, internal analysis, and SWOT analysis presented in the upcoming sections.

Company Overview

Revlon is a global beauty company that has been manufacturing, marketing and selling its products in the beauty and personal care industry for over 86 years (Revlon, 2017). Revlon owns and operates a portfolio of brands while also producing beauty and personal care products under licensed brands through its four operating segments: Consumer, Professional, Elizabeth Arden and Other. Products manufactured and sold through the four segments include a range of cosmetics, fragrances, nail polish, hair color, beauty tools, as well as other beauty and personal care products. Revlon competes globally in approximately 151 countries but reports its global sales between two geographic regions: North America and International (Revlon, 2017).

A Decade in Review: Strategic Decisions

Revlon’s corporate initiatives are driven by the company’s pursuit of sustainable growth in the global beauty and personal care industry (Revlon, 2017). Notable strategic decisions made by Revlon over the past decade involve divestures, acquisitions and related integrative and consolidation initiatives (Revlon, 2017). Revlon’s strategic decisions over the past decade and their related impact on Revlon’s financial performance are as follows:

· 2008: Divesture of Brazilian subsidiary Ceil Comercio E Distribuidora Ltda.

The divesture of Ceil Comercio E Distribuidora Ltda. (Ceil) included the sale of several non-core Revlon brands including Bozzano, Aquamarine and Juvena. The Brazilian personal care company Hypermarcas S.A. purchased Ceil for nearly $107 million in what is referred to as the “Bozzano Sale Transaction” (Revlon, 2008). $63 million in net proceeds from the Bozzano Sale Transaction was used to reduce Revlon’s debt from its MacAndrews & Forbes loan by $110 million to $107 million (Revlon, 2008) (Revlon, 2009). Debt reduction had the effect of saving the company $7 million in annualized interest (Revlon, 2008) (Revlon, 2009).

· 2011: Acquisition of Mirage Cosmetics

· 2012: Acquisition of Pure Ice brand from Bari Cosmetics, Ltd.

The $39 million acquisition of Mirage Cosmetics (Mirage) is referred to the “Sinful Colors Acquisition” (Revlon, 2011). The Sinful Colors Acquisition included the manufacturing equipment, assets, trademarks, intellectual property (IP) and other assets pertaining to cosmetic brands: Sinful Colors, freshMinerals, Wild and Crazy and Freshcover (Revlon, 2011). The $66.2 million acquisition of Pure Ice from Bari Cosmetics Ltd. referred to as the “Pure Ice Acquisition” included trademark and IP related to Pure Ice and Bon Bon Cosmetics (Revlon, 2012). Revlon incurred $22.1 in credit financing for the Pure Ice Acquisition (Revlon, 2012). Both Sinful Colors and Pure Ice are primarily nail enamel brands and are included in Revlon’s Global Color Brands (GCB) portfolio (Revlon 2011) (Revlon, 2012). Sinful Colors and Pure Ice were significant growth drivers of Revlon’s net sales until 2014 (Revlon, 2011) (Revlon, 2012) (Revlon 2014). Revlon’s net sales increased by 3.6% and 9.6% in 2012 and 2013 respectively (Revlon, 2013). Since 2014 however, lower net sales of both brands were partially responsible for offsetting Revlon’s net sales performance and the performance of the company’s Global Color Brands (GCB) (Revlon 2015) (Revlon 2017).

· 2013: Acquisition of Colomer Group Participations, S.L.

Following the $664.5 million acquisition of Colomer Group Participations (Colomer) in 2013, Revlon had two reportable segments: Consumer and Professional (Revlon, 2013). Colomer brands comprise nearly the entirety of the Professional segment. The “Colomer Acquisition” increased Revlon’s brand portfolio, global presence and provided the company with new distribution channels (Revlon, 2013). Revlon leveraged the knowledge and capabilities of Colomer through restructuring initiatives that integrated Revlon’s entire operations to achieve cost synergies and efficiencies. Although Revlon incurred approximately $45-50 million in restructuring costs, Revlon attained annualized related cost reductions of $17 million and $18 million in 2014 and 2015 respectively (Revlon, 2013) (Revlon, 2014) (Revlon, 2015). The inclusion of Colomer’s 2014 net sales of $460.9 million contributed 91% of the 29.9% consolidated net sales growth in 2014 from 2013 (Revlon, 2014). The performance of the Professional segment has since fluctuated. In 2017, the Professional segment’s net sales from 2016 decreased by 22.5% in North America and increased 2.6% internationally (Revlon, 2017).

· 2015: Acquisition of U.K. based fragrance management company CBBeauty Group

The $48.6 million acquisition of CBBeauty Group (CBB) in 2015 was primarily intended to help grow Revlon’s fragrance product category (Revlon, 2015). 70% of the CBB acquisition cost was paid using cash on hand (Revlon, 2015). The remaining 30% is due in four equal annual installments from the acquisition date and will be recorded as a selling general and administrative expense (SG&A) (Revlon, 2015). CBB produces and sells fragrances and cosmetic products under licensed third-party brand and celebrity names. Following the acquisition, Revlon introduced a third reportable segment known as Other that includes CBB related businesses and certain licensed beauty products and fragrances (Revlon, 2015). In fiscal year 2015, net sales of $28.4 million from the Other segment helped to offset the impact on Revlon’s 1.4% decline in the company’s overall net sales performance from 2014 (Revlon, 2015).

· 2015: Acquisition of Cutex U.S. from Cutex Brands LLC.

· 2016: Acquisition of Cutex International from Coty Inc. $29.1

The acquisition of complementary brands Cutex U.S. in 2015 for $8.1 million and Cutex International in 2016 for $29.1 million, enabled Revlon to streamline its existing Cutex nail care businesses that had been acquired in 1998 (Revlon, 2015) (Revlon, 2016). Cutex brand is included in Revlon’s Consumer segment’s portfolio of brands. Consolidation of the global Cutex brand contributed positively to the Consumer segment’s net sales performance in fiscal year 2016 (Revlon, 2016). The $9.7 million increase in net sales in the Consumer segment helped to offset the negative impact of foreign exchange rates that resulted in an overall 1.8% decline in the net sales of the Consumer segment during 2016 (Revlon, 2016).

· 2016: Acquisition of Elizabeth Arden Inc.

In 2016, Revlon completed the acquisition of Elizabeth Arden Inc. (Elizabeth Arden) for $1,034.3 million. Elizabeth Arden develops, manufactures and distributes beauty, personal care and fragrance products under its own brand name as well as licensed third-party celebrity and brand names. The Elizabeth Arden acquisition increased Revlon’s portfolio of brands to include among others: Elizabeth Arden Ceramide, Skin Illuminating, and PS Fine Cologne for Men. Revlon intends to leverage Elizabeth Arden’s existing sales channels and geographic reach as means to promote corporate growth. Revlon incurred expenses of approximately $96.1 million related to the acquisition and integration of Elizabeth Arden during 2016 and 2017 (Revlon, 2016) (Revlon, 2017). The acquisition increased Revlon’s outstanding debt and related interest expenses. Following the acquisition, Revlon introduced its fourth reportable segment: Elizabeth Arden. The Elizabeth Arden segment is comprised of brands included in the acquisition. In fiscal year 2017, net sales from the Elizabeth Arden segment increased by 115.8% to $952.5 million from fiscal year 2016 (Revlon, 2016) (Revlon, 2017).

Industry Overview

The beauty and personal care industry (aka cosmetics and personal care industry) pertains to the development, manufacturing, marketing and selling of skin care, hair care, cosmetic, fragrances and other related products. The global beauty and personal care industry is expected to total $650.10 billion by 2024, a 40% increase from its 2017 market value (Euromonitor International, 2018a) (PRN, 2018). Evolving consumer needs, trends, regulations, technology, macroeconomic conditions and globalization are all significant factors that shape the practices and future of companies competing in the beauty and personal care industry. In recent years, shared global concerns regarding environmental sustainability, health and wellness, and the desire for personalization have been particularly influential in the industry (“Cosmetics”, 2018). Technological advancements allowing for increased fusion between science and cosmetics is empowering industry competitors to improve the field of product personalization and better address changing consumer needs (Coresight, 2016). Color cosmetics, men’s grooming, and premium beauty and personal products are expected to constitute significant growth categories for the industry. Between 2012-2017, the market value of color cosmetics category and premium category increased by nearly 9% and 10% respectively (Euromonitor International, 2018a). Although the men’s grooming category declined by approximately 2% over the same period, expanding grooming practices by men globally is increasing the opportunity to cater to the male demographic (Euromonitor International, 2018a) (“Men”, 2017) (“The Second”, 2018). By 2020, millennials are expected to account for 30% of beauty and personal care industry sales globally (Deloitte, 2017). Despite, slower market growth of 3% or less in North America and Western Europe between 2010-2015, increased spending power in the respective regions strengthens the growth potential in developed markets (Deloitte, 2017). Growth opportunities in emerging markets such as the Asia-Pacific and Brazil is heightening competition in the industry as incumbents attempt to capture large shares of the emerging markets (Born, 2018). Consumers are increasingly willing to purchase beauty and personal care products through e-commerce channels. Beauty and personal care products sold though e-commerce channels increased by 3.6% from 2012 to 2017 (Euromonitor International, 2018b). Further highlighting the growth potential for e-commerce is the fact that internet retailing accounted for a mere 8% of sales in the beauty and personal care industry during 2017 (Euromonitor International, 2018b).

Broad Environmental Analysis

The following subsections use the STEEP analysis tool as the basis for identifying variables in the broad environment that may directly and indirectly impact the beauty and personal care industry. Relevant statistical data pertaining to the variables evaluated, such as regression analysis, correlation analysis, and peer-reviews studies were also included in order to further uncover opportunities and threats in the broad environment. The primary opportunities and threats stemming from variables in the broad environmental are presented in the SWOT Analysis section.

Sociocultural/Demographic

Trends related to sociocultural and demographic factors are particularly influential on the beauty and personal care industry compared with most other industry sectors selling fast-moving consumer products (Nielson, 2018). Companies competing in the global beauty and personal care industry must continually adapt their product offerings to address changing macro trends and related evolving consumer needs in order to remain competitive in the market. Sociocultural and demographic factors discussed in the following subsections include male grooming tendencies as well as consumer preferences towards premium, color cosmetics and wellness. The purchasing power and behaviors of consumers, particularly those in the U.S. and China, millennials, and Generation Z are contributing to the growth potential within the aforementioned trending markets and the beauty and personal care industry as a whole.

Male Grooming. The advent of technology and social media has increased the exposure of different demographics to various behavioral norms worldwide. For example, in Asia-Pacific markets, Korean television dramas and pop culture are influential in shaping the enthusiasm of the young male demographic for metro-sexual grooming behaviors (Euromonitor, 2018c). Cultural exposure is contributing to the mainstream adoption of grooming tactics being viewed as genderless (“Men”, 2017) (“The Second”, 2018) (Cosslett, 2013). Consequently, the practice of male grooming beyond merely shaving is becoming increasingly destigmatized (“Men”, 2017) (“The Second”, 2018) (Cosslett, 2013). The market for male grooming products is growing beyond merely shaving and fragrances. Male personal care product categories have expanded to include a wider variety of toiletries, skin care and makeup (“The Second”, 2018) (Cosslett, 2013). In 2016, sales growth of male toiletries in the U.S. was 6.4%, exceeding the male shaving segment by 4.3% (Euromonitor International, 2018c).

Analysis of data from 2012-2017 demonstrates that a $1 million increase in the market value of the global men’s grooming market will result in approximately a $6 million increase in the market value of global beauty and personal care industry (see Appendix A) (YCharts, 2018). The global market for men’s beauty and personal care products is expected to reach $60.7 billion by 2020, growing at a compound annual growth rate (CAGR) of 5.2% from 2015-2020 (“Focus on”, 2015) (Euromonitor International, 2018a) (Euromonitor International, 2018c). Western Europe was the largest market for male grooming in 2015 with a market value of $12.4 billion U.S. dollars (USD) (“Focus on”, 2015). The market value of the men’s grooming market in Asia Pacific currently trails Western Europe, North American and Latin America. However, economic progress in Asia-Pacific coupled with its large male population solidify the region as constituting a significant market potential for male grooming products. In 2015, the World Bank concluded that globally, men outnumbered women worldwide by over 66 million (Bauer, 2016). 75% of the global gender imbalance is attributed to the male population in China and India (Bauer, 2016). By 2020, the male grooming sector of the beauty and personal care industry is estimated to reach $11.5 billion, growing at a CAGR of 8.1% USD (“Focus on”, 2015) (Euromonitor International, 2018a) (Euromonitor International, 2018c). Figure 1 displays graphically the estimated market growth from 2015-2020 in the male grooming sector of the beauty and personal care industry in Asia-Pacific, North America, Latin America and Western Europe.

Figure 1. International Male Grooming Market Growth 2015-2020 Estimate

Data derived from: (Coresight, 2018)

Premium and Color Cosmetics. Increasing at a CAGR of nearly 4%, the premium cosmetics market is estimated to reach $127 billion by 2021 (Micallef, 2017) (“How”, 2017) (“What’s”, 2016). Sales in China and the United States (U.S.) are expected to account for 54% of growth in the premium beauty and personal care market (Micallef, 2017) (“How”, 2017). Personalization and customization offerings are considered essential to consumers in the premium beauty and personal care market (“What’s”, 2016).

China. Rising household incomes in Asia-Pacific economies are contributing to growth in the premium and luxury sectors of various industries. The concentration of wealthiest households globally are expected to stem from China by 2021 (Bu et al., 2017). As such, China is predicted to account for 44% of spending in the global luxury market by 2025 (Bu et al., 2017). The overall rise in purchasing power of Chinese consumers was credited with the premium beauty sector outperforming the mass beauty and personal care sector in 2017 (Euromonitor International 2018d). Figure 2 depicts the impact of spending on miscellaneous goods and services (including beauty and personal care products) by China’s top income segment on the value of China’s premium beauty and personal care market. There is a strong positive correlation between spending by China’s top income segment on miscellaneous goods and services (including beauty and personal care) and growth in the premium beauty and personal care market in China. A $1 billion USD increase in spending by China’s top income segment on miscellaneous goods and services has the effect of increasing the value of the premium beauty and personal care market in China by approximately $113 million USD (see Appendix A) (YCharts, 2018).

Figure 2. China’s Premium Beauty and Personal Care Market Value & Spending by China’s Top Income Segment o Miscellaneous Goods and Services 2009-2017

Data derived from: (Euromonitor, 2018)

Growth in the premium beauty and personal care industry in China is further accelerated by millennial personal expenditures. Greater purchasing power is contributing to millennials luxury consumption, beginning at an earlier age compared with older demographics. Approximately 65% of growth in China’s goods and services consumption will be driven by the millennial demographic (Bain, 2018).

United States. In the U.S., the female Hispanic and millennial demographics are the strongest drivers of revenue growth in the beauty and personal care market. In 2017, spending by Hispanic women and millennials accounted for nearly 60% of industry sales in the U.S. (“Young”, 2017). In 2017, Hispanics comprised approximately 18% of the population in the U.S., over half of whom were ages 29 and younger (Morse, 2018). Hispanics trail Asians as the fastest growing demographic group in the U.S. (Morse, 2018). By 2020, Hispanics are projected to account for 22% of the U.S. population (Roeschley, 2015). Hispanics are estimated to increase their spending in the beauty and personal care market in the U.S. by $9 billion from 2014-2019, totaling $37 billion in 2019 (Borrero, 2016). Hispanic women are less inclined to pursue bargain prices with regards to their beauty and personal care product purchases (Roeschley, 2015). Millennial women are those ages 18-34 (“Who Are”, 2016) (Jeri, 2015). 47% of millennial women comprise a significant purchasing segment of the beauty and personal care market in the U.S. (“Who Are”, 2016). Of those, 39% earn annual incomes of $125,000 and up (“Who Are”, 2016). Millennials are avid users of technology and social media. Statistics demonstrate that brand engagement through social media is greater among Hispanic millennials compared to non-Hispanic millennials, accounting for 50% and 17% of social media brand engagement respectively (Morse, 2018).

Generation Z. Generation Z (Gen Z) refers to individuals born between 1997-2015. Gen Z comprise approximately 25% of the population globally. Gen Z therefore serves as a significant market segment for various industries (Merriman, 2015) (Jones, 2018). Direct spending attributable to Gen Z globally ranges from $29-$143 billion. Gen Z’s financial influence in the market is further inflated when factoring in that 93% of parental spending is influenced by their children (Fromm, 2018).

Figure 3. Global Population Generational Composition 2017

Data derived from: (Jones, 2018) (Sterling, 2017) (Euromonitor International, 2018)

Gen Z have been coined as “digital natives” (Jain, Vasta & Khyati, 2014). Digital natives are constantly engaged with digital devices and media. According to a 2016 study on the behaviors of Gen Z cohorts aged 16-21, 70% of participants indicated they use social media as means to access content and information (Jones, 2018). 35% of participants indicated they could not exist without the platform YouTube (Jones, 2018). Ultimately, this has had the effect of exposing Gen Z to countless amounts of information daily as they access content and are redirected to and through various websites. Gen Z was raised with exposure to greater ethnic and cultural diversity compared to earlier generations (Merriman, 2015). Diversity reflected in branding is expected to Gen Z cohorts. In the U.S. 56% of teens as opposed to 43% of millennials knew someone who opted to be referred to by gender neutral pronouns (Jones, 2018). Constant online activity has diminished the attention span of Gen Z. The Gen Z attention span is famed at a mere 8 seconds compared to the reported 12 second attention span of millennials (Jones, 2018). The limited attention span of Gen Z complicates the marketing landscape for brands trying to attract and appeal to this demographic (Jones, 2018) (Van Dam, 2016). Figure 4 displays Gen Z’s percentage of population in the U.S., Europe, China and Japan, highlighting the respective market opportunity in those regions.

Figure 4. Generation Z Percentage of Population

Data Retrieved from: (Currie, 2015)

Digital connectivity has increased the demand of Gen Z for accessibility, personalization, convenience and experimentation. Although Gen Z and millennials share concerns pertaining to animal welfare, product ingredients and environmental sustainability, Gen Z is less inclined to pay higher-prices for sustainable products (Jones, 2018). Gen Z witnessed the Great Recession during their youth and are therefore more value conscious compared to the millennial demographic (Merriman, 2015). Approximately 55% of Gen Z purchases of beauty and personal care products are made through discount retailers such as Amazon (Jones, 2018). Subscription boxes and sample sizes are increasingly important to Gen Z (Jones, 2018). Furthermore, unlike female millennials, a Mintel study concluded that the majority of Gen Z females (75% ages 12-14 and 69% ages 15-17) prefer a ‘natural’ less contoured beauty appearance (Van Dam, 2016) (Jones, 2018).

Wellness Movement. There is a growing global trend with regards to consumers placing greater importance on health and wellness. The wellness movement focuses on purchasing products and engaging in activities that enhance the mind, body and spirit (Gleason-Allured & Urbanowicz 2017). The global market for natural and organic products is estimated to reach $21,776.9 million by 2024, a nearly 97% increase from the market’s value in 2016 (Gleason-Allured & Urbanowicz 2017). Expenditure data from developed and emerging economies between 2013-2017 demonstrates that there is a positive correlation between expenditures on vitamins and supplements in developed and emerging economies and the sale of liquid, cream, gel and/or bar cleansers (see Appendix A) (Passport Database). Furthermore, consumer spending on health products between 2013-2018 in developed and emerging economies is positively correlated with skin care expenditures (see Appendix A) (Passport Database). The wellness movement spans across demographic groups, as vitality and longevity are shared concerns. Personal care and beauty companies such as Burt’s Bees Inc. (Burt’s Bees) and Avon Products Inc. (Avon) are actively pursuing strategies to capitalize on the growing health and wellness market. Burt’s Bees launched supplement products in 2017, followed by Avon in 2018 (Lim, 2018). The reduced use of a variety of paraben synthetic compounds as ingredients in product formulations highlights the impact of the wellness movement on the beauty and personal care industry. In 2017, beauty products with paraben ingredients accounted for 35% of the market, a 7% decline from 2016 (Nielson, 2018). Regarding facial cosmetics specifically, paraben use has declined by 11% between 2015-2017 (Nielson, 2018). In 2017, 54% of facial cosmetics were paraben-free (Nielson, 2018).

Technological

The advent of technology is providing companies competing in the beauty and personal care industry with new tools to develop, market and sell products to consumers. Biotechnology and smart technology for example are enhancing R&D capabilities that improve upon the efficacy and customization of beauty and personal care products. E-commerce and social media are broadening the geographic reach of beauty brands to consumers worldwide. Biotechnology, smart technology, e-commerce and social media are discussed further in the following subsections.

Biotechnology. The line between medical research and cosmetics is becoming increasingly blurred as companies in the beauty and personal care industry utilize biotechnology in their laboratories for the sake of product research and development. Cosmeceuticals, a term that fuses words ‘cosmetic’ and ‘pharmaceutical’ denotes the convergence of cosmetics, science, medicine and biotechnology (Coresight, 2016). The global market for cosmeceutical products is expected to reach $61 billion by 2020, growing at a compounded annual growth rate of 9% from 2014-2020 (Coresight, 2016). There is a positive correlation between the global healthcare industry, global dermatological industry, and the global beauty and personal care industry (see Appendix A) (Euromonitor International, 2018a) (Euromonitor International, 2018e-f). The market size of the global dermatological industry is a significant variable in explaining nearly 98% of the variation in the market size of the global beauty and personal care industry. A $1 million increase in the global dermatologicals industry will have the effect of increasing the global beauty and personal care market by approximately $35 million (see Appendix A) (Euromonitor International, 2018a) (Euromonitor International, 2018e-f).

Microbiome. The 2008-2012 Human Microbiome Project characterized various microbials that reside in the gut, skin and elsewhere in the body (Reisch, 2017) (Rosenwald et al., 2012). Skin microbiome (aka biosurfactants) refers to bacteria, parasites, mites and yeast that survive on the skin. There is a symbiotic relationship between microbes and their respective human host. The variations of microbials on the skin serve as a protective agent, hydrating and strengthening the skin to serve as a barrier that prevents infection, assists in healing and minimizes the exposure to UV radiation and allergens (Rocha & Bagatin, 2017) (Reisch, 2017) (Vecino et al., 2017). Dysbiosis refers to the disruption of microbiomes that would have a negative impact on the symbiotic relationship. Dysbiosis can cause various diseases including skin disorders such as acne, rosacea and psoriasis. Environmental factors, age, diet, personal hygiene are all examples of factors that can result in an individual experiencing dysbiosis (Musthaq, Mazuy & Jakus, 2018). Beauty and personal care companies have begun exploring product formulae that utilize live bacteria and other ingredients for the purpose of improving the activity of microbiomes. For example, Procter & Gamble Company (P&G) applied for a patent pertaining to a prebiotic formula that is intended to improve microbiome health. Similarly, L’Oréal S.A. (L’Oréal) patented and utilizes vitreoscilla ferment in its La Roche-Posay products. Vitreoscilla ferment is an ingredient derived from bacteria that was designed to create a balance of the microbiome of individuals with dry skin (Reisch, 2017). However, further research is necessary to determine the substantiated benefits of adding live microorganisms to products. Legal issues such as regulations regarding the sale of contaminated products is also a factor affecting the growth of microbiome focused products.

3D Bioprinting. The emerging technology of three dimensional (3D) bioprinting is revolutionizing the capabilities for research and product development in the medical field as well as the beauty and personal care industry. 3D bioprinters dispense complex structures such as cartilage, human cell tissues and organs (Markstedt et al., 2015). In 2015, L’Oréal announced its partnership with Organovo Holdings Inc. (Organovo), a bioprinting startup, intended to increase the rate of skin production in L’Oréal laboratories (Plaugic, 2015) (Coresight, 2016). Although L’Oréal already produces samples of human skin in its laboratories, the L’Oréal-Organovo partnership marks the first use of 3D bioprinting technology in the beauty industry (Coresight, 2016). 3D bioprinting is also creating new possibilities to replace the use of animal testing for cosmetic products and ingredients, a controversial issue discussed further in the Environmental/Natural section of the broad environmental analysis.

Smart Technology. The advent of technology has created an environment whereby mass customization is becoming scalable and affordable for both, businesses and their customers (Gandhi, Magar & Roberts, 2013). Flexible manufacturing systems, 3D printing, and product design modularization are contributing to a reduction in production costs across different industries (Gandhi, Magar & Roberts, 2013). Mass customization afforded through improving or emerging technologies enables retailers to utilize personalization as a means of differentiation designed to earn customer loyalty (Mulqueen, 2017). Personalization through customized products is expected to impact significantly the growing trend in the beauty and personal care industry (“Personalization Keeps”, 2015). A 2017 study of consumers ranging in ages from 18-64 concluded that 80% of participants were increasingly likely to purchase from a company that offered personalized options and/or experiences (Epilson, 2018). Similarly, in the United Kingdom (U.K), 45% of adult respondents indicated their preference for personalized skincare products (Steingoltz & Evans, 2017). Industry players have already begun to capitalize on personalization opportunities. For example, Shiseido Company Ltd. (Shiseido) launched a skin care line that leverages the internet of things, biotechnology and personalization. Skin data provided by consumers to Shiseido’s through the use of Shiseido’s skin assessment application is used to formulate and produce personalized skin serums. The skin assessment application is available for download on personal devices such as smart phones (“Personalization Gets”, 2015).

E-Commerce. The advent of technology and growth of electronic commerce (e-commerce) are responsible for causing a paradigm shift in business practices across various industries. (Agarwal & Wu, 2015). Consumer demand driving e-commerce growth is the result of improved operational efficiencies and supply-side capabilities of brands and retailers. Improved efficiencies and capabilities enable faster adoption of e-commerce as a distribution offering (ATKearney, 2018). Both developed and emerging economies are contributing to the growth of e-commerce globally (Agarwal & Wu, 2015). In the U.S., approximately 33% of every dollar of beauty product expenditures stems from the online market (Nielson, 2018). Figure 5 displays purchases of beauty and personal care products globally made through e-commerce increased by 3.6% between 2012-2017 (Euromonitor International, 2018b). The percentage of beauty and personal care product purchases made through mixed retailers (department stores, mass merchandisers, variety stores and warehouse clubs) fluctuated, with no more than .7% growth over the same time period (Euromonitor International, 2018b). Laws ensuring transparency and protection for businesses and consumers transacting in e-commerce markets has a positive influence on the diffusion of e-commerce, particularly in emerging economies (Agarwal & Wu, 2015). The importance of legal protection of online markets as it relates to e-commerce expansion is diminished in countries entering the maturity stage of e-commerce growth (Agarwal & Wu, 2015). Widespread connectivity afforded through mobile devices is positively correlated with global e-commerce retailing (see Appendix A) (Euromonitor International, 2018a-b) (Euromonitor International, 2018h). The percentage of households possessing smartphones between 2012-2017 explains 99% of the variation in the global e-commerce retailing of beauty and personal care products (see Appendix A) (Euromonitor International, 2018a-b) (Euromonitor International, 2018h). A 1% increase in global households that possess smartphones will have the effect of increasing global e-commerce retailing of beauty and personal care products by approximately 13% (see Appendix A) (Euromonitor International, 2018a-b) (Euromonitor International, 2018h). Between 2013-2015, the prevalence of smartphone ownership in developed and emerging developing countries increased by 16% to 37% in 2015 (Poushter, 2016). Of note is that e-commerce purchases of beauty and personal care products does not translate necessarily to consumer loyalty. Consumers described using at least four websites for browsing and purchasing of beauty and personal care products in a 2016 study (ATKearney, 2018).

Figure 5. Global Beauty and Personal Care Industry Market Size, Global Mixed Retailer Distribution & Global Internet Retailing Distribution 2012-2017

Data derived from: (Euromonitor International, 2018a) (Euromonitor International, 2018b) (Euromonitor International, 2018h).

Social Media. Social media is a compilation of online platforms and communication channels that enable global information sharing and conversational media among individuals, groups and/or companies. The seven primary categories of social media and related technologies include social networks (i.e. Facebook), blogs (i.e. Twitter), pictures and video (i.e. Instagram), wikis (i.e. Wikipedia), audio (i.e. webcast) and collaboration (i.e. Dropbox) (Clark & Sheen, 2017) (Ahmad, Salman & Ashiq, 2015). Social media allows various industries to cultivate scalable, targeted one-on-one relationships with consumers. Furthermore, social media serves as a valuable source of data regarding trends and consumer preferences than enable improved marketing efficiencies (Clark & Sheen, 2017). Brand content, user generated content, as well as influencer content help foster consumer engagement on social media. The term ‘influencer’ refers to an individual whose popularity and/or expertise in a particular area shapes the opinions of others (Clark & Sheen, 2017). In 2017, 52% of beauty consumers expressed that they have a higher degree of trust in user generated content as opposed to traditional brand advertising (Koetting, 2018). Furthermore, 21% of consumers noted that they refer to social media prior to making purchases of beauty and personal care products (Koetting, 2018). A 2018 study of Spanish consumers concluded that 33% of participants were inclined to make product purchases through social distribution channels (“These Are”, 2018). These statistics highlight the influential power of social media as well as the importance of brands encouraging loyal customers to engage in social media (Clark & Sheen, 2017).

Access to the internet has been increasing in developed and emerging countries. In 2015, the global median of adult internet users who visit social networking sites was determined to be 76% (Poushter, 2016). This value was derived from a 40 country survey, a portion of which is displayed in Figure 6 (Poushter, 2016). A regression analysis of data from 2013-2017 revealed that the percentage of the population in the U.S., China and India who use their phone to access the internet was positively correlated with the size of each respective country’s beauty and personal care market (see Appendix A) (Euromonitor International, 2018a) (Euromonitor International, 2018b) (Euromonitor International, 2018h). The percentage of the population using their phone to access the internet is a significant variable in explaining 99% of the variation of the beauty and personal care industry’s market size in the U.S. and India, and 93% of variation in the beauty and personal care industry’s market size in China (see Appendix A) (Euromonitor International, 2018a) (Euromonitor International, 2018b) (Euromonitor International, 2018h).

Figure 6. Use of Social Networking Sites by Smartphone Owners and/or Internet Users in 2015

Data derived from (Poushter, 2016)

Economic

The financial performance of beauty and personal care companies is impacted by the global economic environment. This section considers the effects of fluctuating currency exchange rates as well as unemployment rates on the beauty and personal care industry. Related regression analyses demonstrate the predictive value of the aforementioned variables in determining growth opportunities and threats stemming from the global economy. Strengthening economic conditions in Brazil as reflected in the country’s gross domestic product is also discussed due to the growth potential provided by the emerging market.

Currency/Exchange Rate. Globalization has created an environment whereby companies competing in diverse geographic markets are exposed to both, benefits and threats from currency exchange rate fluctuations. The Great Recession highlighted that economic expectations in one country can have a ripple effect, creating turbulence in the macroeconomy (Bishev & Boshkob, 2016) (Yildirim & Ivrendi, 2016). Foreign exchange rates can significantly impact a company’s costs and profitability. Analysis of data from 2012-2018 demonstrates that there is an inverse relationship between the quarterly expenses of P&G and the USD to Euro exchange rates (see Appendix A) (YCharts, 2018). P&G’s quarterly expenses were also inversely related to the USD to Japanese Yen exchange rates (see Appendix A) (YCharts, 2018). Similarly, there is an inverse relationship between P&G’s quarterly revenue and the aforementioned USD to Euro and USD to Japanese Yen exchange rates (see Appendix A) (YCharts, 2018). A1 unit increase in the USD to Japanese Yen exchange rate can be expected to decrease P&G’s quarterly expenses by approximately $50 million USD (see Appendix A) (YCharts, 2018). A 1 unit increase in the USD to Japanese Yen exchange rate can be expected to decrease P&G’s quarterly revenue by approximately $106 million USD (see Appendix A) (YCharts, 2018). However, the impact of foreign exchange rates on revenue, costs and profitability varies between companies and industries. For example, Revlon’s quarterly revenue between 2012-2018 is positively correlated with the USD to Euro exchange rates as well as the USD to Japanese Yen exchange rates (see Appendix A) (YCharts, 2018). Between 2012-2018, currency exchange rate fluctuations explained between 21-29% of the variation in P&G’s quarterly expenses and quarterly revenue, and 21-22% in the variation in Revlon’s quarterly revenue (see Appendix A) (YCharts, 2018). Business strategies such as hedging practices can help mitigate the potential negative impact of foreign exchange rates on a firm’s financial performance. (Bishev & Boshkob, 2016) (Yildirim & Ivrendi, 2016). Figure 7 depicts the volatility of the USD to Euro and USD to Japanese Yen exchange rates between 2012-2018. In 2018 and 2019, the average USD to Euro exchange rate is expected to average 1.154, and 1.151 respectively (United Nations 2018). The USD to Japanese Yen is estimated to average.0088 in 2018 and .0087 in 2019 (United Nations, 2018).

Figure 7. Fluctuations in the U.S. Dollar to Euro and U.S. Dollar to Japanese Yen Exchange Rates 2012-2018

(YCharts, 2018)

Unemployment Rate. Household income is influential in determining consumption patterns according to the theory of consumption (Ismail & Tendot Abu Bakar, 2012). Consumer discretionary spending and consumption behaviors are impacted by the unemployment rate due to its effect on national income levels (Rayma & Dr. Ali, 2016). The global economy has strengthened since the Great Recession, reflected in labor market indicators such as the unemployment rate (United Nations, 2018). Statistical analysis of data from 2012-2017 demonstrates that the annual average of the U.S. unemployment rate, the average annual U.K. unemployment rate as well as the annual average unemployment rate in Germany are inversely correlated to the market value of the beauty and personal care industry in the respective countries (see Appendix A) (YCharts, 2018). The respective annual average of the national unemployment rate was a significant variable in explaining variations in the performance of the beauty and personal care industry. A 1% increase in the U.S. unemployment rate will have the effect of decreasing the market value of the U.S. beauty and personal care industry by approximately $3 billion (see Appendix A) (YCharts, 2018). A 1% increase in the average annual U.K. unemployment rate will have the effect of decreasing the U.K. beauty and personal care industry market value by approximately £410 million (see Appendix A) (YCharts, 2018). A 1% increase in the annual average unemployment rate in Germany can be expected to reduce the market size of Germany’s beauty and personal care industry by approximately €840 million (see Appendix A) (YCharts, 2018).

Emerging Market: Brazil. The economic conditions in Brazil have been turbulent since 2014, characterized by significant economic contraction, rising unemployment and high taxes (Walker, 2014) (Born, 2018). Prior to the recession in Brazil, the country’s beauty and personal care industry was ranked third globally (Imogen, 2014) (Born, 2018). Brazil’s beauty and personal care industry has since dropped to the fourth largest globally, trailing the U.S., China and Japan (Born, 2018). In 2017 however, Brazil began to show its first signs of recovery with a 1% gain in GDP growth (Born, 2018). Economic recovery in Brazil bodes well for the beauty and personal care industry. In 2017, the beauty and personal care industry in Brazil grew 2.77%, reflecting the industry’s historic growth rate in Brazil exceeding that of the national economy by 2-3 times (Born, 2018). GDP growth in Brazil is expected to reach 3% in 2018 (Born, 2018). Considering Brazil’s GDP growth estimate, the country’s beauty and personal care industry is forecasted to increase by 6-9% during 2018 (Born, 2018). The estimated economic trajectory for Brazil has re-established the country as a promising market for growth in the beauty and personal care industry (Micallef, 2017)

Environmental/Natural

Global concerns regarding the negative impact of pollutants on the environment as well as individual health are shifting consumer expectations of brands competing in the beauty and personal care industry. Such expectations are influential in shaping current and future corporate practices and determining product offerings. This section considers pollutants, environmental sustainability, ethical consumerism and product packaging as it relates to the beauty and personal care industry.

Pollution. Pollution and related contaminants such as heavy metals have been linked with premature aging. Atmospheric pollution can cause the release of free radicals and induce the breakdown of elastin and collagen when it penetrates the skin (Robles, 2017). The World Health Organization warns that high rates of exposure to particulate matter with sizes of 2.5 and 10 microns are particularly threatening to individual health (Vannan et al., 2015) (Robles, 2017). Growing global concerns regarding the impact of pollutants furthers the global opportunities that exist for microbiome based and antipollution formulated products (Robles, 2017). For example, high levels of pollution in the Asia-Pacific has increased consumer demand for cosmetic formulations focused on protecting against pollutants in that region (Robles, 2017). The use of cultures as an ingredient in personal care and beauty products between 2012-2017 is positively correlated with the growth of the Asia-Pacific personal care and beauty industry over the same time period (see Appendix A) (Euromonitor International, 2018a) (Euromonitor International, 2018i). For every 100 tonne increase in the volume consumption of cultures, the market value of the Asia-Pacific beauty and personal care industry can be expected to increase by $1 million USD (see Appendix A) (Euromonitor International, 2018a) (Euromonitor International, 2018i).

Environmental Sustainability & Ethical Consumerism. Growing global concern for environmental sustainability has given rise to the “Ethical Living” movement (aka ethical consumerism) (Villenna, 2018) (Sharmila, Juwaheer & Sewoo, 2015). Ethical living is characterized by making purchasing decisions that consider the welfare of humans, animals and the environment (Villenna, 2018) (Sharmila, Juwaheer & Sewoo, 2015). Environmentally conscious consumers have a greater tendency towards purchasing eco-friendly and eco-labeled products (Pudaruth, Juwaheer & Sewoo, 2015). A company’s commitments to corporate social responsibility (CSR) and ethics was shown to be an important consideration made by 67% of investors, 84% of consumers and 79% of individuals seeking employment in their respective decision making (“Beauty’s”, 2017). A study on consumers and sentiments toward sustainability concluded that 26% of respondents in the U.S., and 39% of respondents in the U.K., have expectations of recyclable packaging from personal care and beauty products (Hayden, 2018). The same study also concluded that 46% of consumers in Brazil actively seek ways to recycle (Hayden, 2018) (Pudaruth, Juwaheer & Sewoo, 2015). In the U.S., 1/5th of consumers polled in a beauty survey noted that recyclable packing influenced their selection of beauty and personal care products in 2017 (Villena, 2018). The economic considerations, lifestyles, health, self-image, trust in an ethical claim, and ethical consumerism of women have been shown to be positively correlated with female preferences for eco-friendly beauty products, thus being reliable predictors in explaining 27.2 percent of female variance towards purchasing eco-friendly personal care and beauty products (Pudaruth, Juwaheer & Sewoo, 2015). Ethical consumerism has compelled many companies across various industries to explore and pursue ‘green’ or eco-friendly strategies. Between 2012-2017, there was an 8% increase in global launches of products in the beauty and personal care industry that utilize eco-friendly packaging (Hayden, 2018). In 2017, Unilever PLC (Unilever), is a food, beverage, personal care and cleaning product company. Unilever PLC (Unilever) announced that the entire company’s plastic packaging would be recyclable, compostable and/or reusable by 2025 (Hayden, 2018).

Glass Packaging. The availability of recyclable eco-friendly packaging for beauty products is increasing, paralleling the wellness movement and trend towards ethical consumerism (Tarnowski, 2016). Glass is an attractive choice for eco-conscious packaging since it is 100% recyclable. (Hayden, 2018). However, the expense of glass as compared to other packaging types has contributed to its limited use in the beauty and personal care product industry. Furthermore, glass packaging presents additional issues pertaining to breakage during production, transportation and/or during shelving (Villena, 2018). There is an inverse relationship between the volume of glass used for beauty and personal care product packaging in the U.S. and the average producer price index (PPI) of glass container manufacturing in the U.S. between 2012-2017 (see Appendix A) (YCharts, 2018). The average PPI of U.S. glass container manufacturing is a significant variable in explaining 69% of the variation in the volume of glass for U.S. personal care and beauty products (see Appendix A) (YCharts, 2018). A $1 increase in the average annual PPI for glass container manufacturing in the U.S. would decrease the U.S. glass retail/off-trade unit volume by approximately 39 million units (see Appendix A) (YCharts, 2018). Of note is that glass is useful in attracting premium beauty consumers in addition to those that are eco-conscious. Glass packaging can serve as a means of differentiation and has been used by premium brands to establish competitive differentiation (Villena, 2018).

Eco-Labeling. Eco-labeling is a growing trend that is enabling beauty and personal care brands to convey their corporate values, differentiate themselves as well as attract environmentally conscious consumers (“Extended”, 2015) (“Beauty’s”, 2017) (Hoek, Roling & Holdsworth, 2013). There are three classifications of ethical claims and related labeling used by companies. Type I involves the use of third parties to verify a firm’s own adherence to specified standards. Type II is internally generated, and Type III offers either positive or negative independent scientific information. Type I claims are most effective in influencing consumer purchasing behaviors. (Hoek & Holdsworth, 2013). The 2017 Sustainable Cosmetics Summit noted that 88% of consumers were increasingly likely to exhibit loyalty behaviors towards brands engaging in CSR (“Beauty’s”, 2017) (Hoek & Holdsworth, 2013). Environmentally conscious consumers, particularly women, have a greater tendency towards purchasing products with eco-labeling (Pudaruth, Juwaheer & Sewoo, 2015).

The use of eco-labels for beauty products varies internationally. In 2015, beauty products in Western Europe accounted for the highest amount of eco-labelling at 3%. (Ecovia, 2015). Ecocert and NaTrue certifications which verify a company’s product has been inspected and adheres to “natural & organic cosmetic standards” is particularly popular in the international beauty industry (Ecovia, 2015). The European Union (E.U.) Eco-Flower is used in Scandinavia to signify a product’s minimal environmental impact. In Europe and North America, the Leaping Bunny symbol conveys the product’s cruelty-free development and manufacturing (Ecovia, 2013). Over 30 labels and symbols representing organic and natural cosmetic standards have been used in the beauty industry since 2015 (Ecovia, 2015). However, green and ethical label proliferation as well as few streamlined standards have resulted in consumer confusion (Johnston, 2018) (Ecovia, 2015). Consumer confusion regarding ethical claims may create doubt in the validity of eco and ethical labels and symbols, ultimately having adverse effects on the intent and reliability of companies using eco-labels on their products (Hoek & Holdsworth, 2013) (Ecovia, 2015). Figure 8 displays the results from a 2012 study regarding consumer sentiments regarding green expectations and trust in corporate eco claims (O’Donnel, 2012).

Figure 8. Consumer Expectations & Trust in Green & Ethical Claims

Data derived from: (O’Donnel, 2012)

Political/Legal

The political and legal environment is influential in shaping the policies and practices of companies competing in the beauty and personal care industry. Compliance with new and amended laws bears with it cost and profitability implications affecting companies as well as consumers in the beauty and personal industry. This section evaluates the political and legal climate through factors associated with Brexit, trade laws and tariffs, marijuana legalization, counterfeiting and other pertinent regulatory issues such as animal testing.

Brexit. In June of 2016, citizens of the United Kingdom (U.K) voted in favor of having the U.K. exit the E.U. The outcome of the June 2016 referendum is referred to as Brexit. Since Brexit related negotiations such as treaties and trade deals between the U.K and E.U are still underway, it is difficult to quantify the extent of the impact Brexit will have on the practices and financial performance of various industries internationally (Geoghegan, 2017). Currency exchange rates, labor costs, and the potential need to obtain work visas for employees working between the U.K. and E.U are all elements of uncertainty stemming from Brexit (Friedman, 2016). There is also the possibility of a “no-deal” Brexit which would have the effect of increasing labor costs, creating inflationary pressures and reducing consumer confidence (Weil, 2018a). The related economic uncertainty would likely constrain consumer spending and would negatively impact the financial performance of various companies competing globally (Weil, 2018a).

In 2016, Approximately 66.2% and 65.7% of sales in 2016 and 2017 respectively by U.K. companies operating in the beauty and personal care industry were generated from export sales made in the E.U. (Weil, 2018) (Weil, 2018a). U.K. beauty imports from E.U. member countries such as Poland, France and Germany totaled 67.1% in 2016 and 66.8% in 2017 (Weil, 2018) (Weil, 2018a). Analysis of data from 2012-2018 demonstrates that there is a significant positive correlation between the U.K. export of goods and the U.K.’s GDP (see Appendix A) (YCharts, 2018). Approximately 32% of the variation in the U.K.’s GDP can be attributed to its level of exported goods (see Appendix A) (YCharts, 2018). Furthermore, there is a strong positive correlation between the GDP of the U.K., Germany, France and Poland, highlighting the threat an economic contraction in one country can pose on other countries (see Appendix A) (YCharts, 2018). It is evident that an end to the U.K.-E.U. free trade bears significant cost implications, particularly for E.U and U.K. based beauty and personal care companies. Second to the E.U., the U.S. is U.K.’s top market for beauty and personal care exports (Weil, 2018).

The E.U. Cosmetics Regulations 1223/2009 is part of the European Economic Area Treaty that mandates common criteria and standards pertaining to cosmetic product development, manufacturing, selling and marketing in the E.U. (Lionetti & Rigano, 2018) (Dallmeier, 2016) The U.K. immediately adopted the E.U. Cosmetics Regulations 1223/2009 when the legislation was enacted in 2013 (Lionetti & Rigano, 2018) (Dallmeier, 2016). It is unclear what approach the U.K. will seek in order to maintain cosmetics trade with the E.U. Three possible approaches include: the U.K. will draft its own legislation that is in harmony with the E.U Cosmetics Regulations 1223/2009, the U.K. will join the European Free Trade Association (EFTA) and harmonize legislation accordingly as did EFTA member Switzerland, or apply to remain in the EEA thereby inherently remaining in compliance with the E.U. Cosmetics Regulations 1223/2009 (Dallmeier, 2016).

Trade Law & Tariffs. President Trump announced in September of 2018 that the U.S. would be imposing a tax on $200 billion worth of imported goods from China beginning on September 24th 2018 (Tankersley & Bradsher, 2018) (Nuthall, 2018). A 10% tariff was imposed on a range of goods from China, including beauty and personal care products. The tariff is set to increase to 25% on January 1st, 2019 (Tankersley & Bradsher, 2018) (Nuthall, 2018). Companies that source cosmetic and personal care supplies and/or products from China will need to assess the impact the tariffs have on cost of goods to determine the ultimate impact new tariffs will have on overall profitability. Mitigation strategies may need to be considered (“Impact”, 2018). For example, data analysis from December 2012-June 2018 demonstrates that the quarterly value of the U.S. taxes on production and imports is inversely correlated to P&G’s quarterly cost of goods (COGS) but is positively correlated with Revlon’s quarterly COGS (see Appendix A) (YCharts, 2018). The U.S. taxes on production and imports explained 42% of the variation in P&G’s COGS and 65% of the variation in Revlon’s COGS (see Appendix A) (YCharts, 2018). A $1 million increase on U.S. taxes on production and imports can be expected to increase P&G’s quarterly COGS by approximately $8,700 (see Appendix A) (YCharts, 2018).

The economic impact of China imposing retaliatory tariffs on U.S. exports of beauty and personal care products to China is also of concern (Nuthall, 2018). Following President Trump’s announcement regarding the proposed tariff hike from 10% to 25%, China indicated that it intended to introduce four tiers of tariffs, ranging from 5-25% on 5,207 items imported into China from the U.S. (Lim, 2018). Included in the items facing 10%, 20% and 25% of additional taxation by China include a range of beauty and personal care related items (ingredients and products) such as salicylic acid, zinc oxide, coconut oil, cocoa butter, nail polishes, and lipsticks (Lim, 2018).

Marijuana Legalization & Cannabidiol. The U.S. has legalized the use of recreational marijuana in multiple states since 2014 including: Colorado, California, Nevada, Oregon, Washington, Massachusetts, Maine, Alaska and the District of Columbia. Additionally, the use of prescribed medical marijuana is legal in Florida, North Dakota and Arkansas (“2017’s Top”, 2017). The legalization of marijuana in the U.S. has resulted in a significant growth of the U.S. cannabis market. By 2026, the legal U.S. cannabis market value is estimated to reach $50 billion (“2017’s Top”, 2017). In October 2018, Canada legalized marijuana (Porter, 2018). Recent legislative changes regarding marijuana has contributed to changing consumer sentiment towards cannabis. Cannabis use for medicinal, recreational and/or for product formulations is becoming more mainstream and increasingly popular within the wellness movement (“2017’s Top, 2017) (Mandell, 2018) (Nouril, 2017). Highlighting the normalization of marijuana is the performance of the Horizons Marijuana Life Sciences exchange traded fund (ETF), a portfolio of companies whose primary earnings stem from marijuana related sales. Although the Horizons Marijuana Life Sciences ETF is subject to the volatility of the stock market, its trading price increased by 140% from April 7, 2017 to October 15th, 2018 (see Figure 9) (YCharts, 2018).

Figure 9. Horizons Marijuana Life Sciences ETF Price April 2017-October 2018

(YCharts, 2018)

The market for cannabis spans multiple industries including food, beverage, wellness, beauty and personal care. Some companies in the beauty and personal care industry have begun incorporating cannabis derivative ingredients into their products due to related health and wellness benefits such as pain relief, anxiety reduction and anti-inflammatory properties (“2017’s Top, 2017) (Mandell, 2018) (Nouril, 2017). There is an important distinction between two of the various cannabinoids that can be harvested from the cannabis plant, namely Tetrahydrocannabinol (THC) and Cannabidiol (CBD) (Mandell, 2018) (Nouril, 2017). THC is renowned for its psychoactive “high” effect, but also provides other medicinal benefits such as having anti-inflammatory properties, increasing the retention of moisture in the skin and regulating the production of sebum (Mandell, 2018) (Nouril, 2017). CDB (from Hemp) is non-psychoactive and therefore legal everywhere (Mandell, 2018). CBD above contains a myriad of medicinal properties, beneficial for beauty products such as reducing inflammation associated with eczema, psoriasis and dermatitis (Nouril, 2017) (Thomas, 2017) (Mandell, 2018). A study on consumer sentiment towards cannabis products revealed that a lack of understanding regarding the health benefits of cannabis derivative ingredients (THC and/or CBD) was the primary deterrent for 52% of participants in sampling such products (“The Latest”, 2018). It is therefore essential that beauty and personal care companies participating in the cannabis market clearly delineate the related health benefits of products containing THC and/or CBD. Beauty products with THC concentrations greater than 0.3% cannot be sold in states or countries where THC has not been legalized such as the U.K. Due to its international legality, CBD oil is gaining greater traction within the beauty and personal care industry. In 2016, the global CBD market reached $170 million and is expected to exceed $1 billion by 2021 (Borchardt, 2017) (Mandell, 2018).

Counterfeit Goods. The sale of counterfeit goods results in approximately 15-20% in losses by companies who sell legitimate goods globally (Brodsky, 2016). In 2015, losses of 7.8% of total sales in the beauty and personal care industry in the E.U. were attributed to counterfeit sales (McKeon, 2015). Figure 10 displays the approximate losses in three different sectors of the beauty and personal care industry in the E.U. during 2015. The threat of purchasing counterfeit products, whether by consumers in the business-to-business (B2B) and/or business-to-consumer (B2C) context, is been magnified through global e-commerce distribution channels (McKeon, 2015) (GAO, 2018). E-commerce provides counterfeiters with a new means to disguise counterfeit products alongside those that are authentic (GAO, 2018) (McKeon, 2015). By 2020, global e-commerce sales are estimated to exceed $4 trillion (GAO, 2018). Counterfeited beauty and personal care products are particularly dangerous for consumers due to the health and safety risks associated with ingredients and product formulations that have not been screened to adhere to government regulated standards (GAO, 2018) (McKeon, 2015) (CBS, 2017). According to the U.S. Immigration and Customs Enforcement, cyanide, lead, mercury, arsenic and other hazardous substances have been found in counterfeited cosmetics (Ritter, 2018). Counterfeit low-quality products, particularly those that cause adverse health effects for consumers can tarnish a brand’s image to such an extent that it results in financial losses for the brand in the long-term. In 2017, the U.S. Government Accountability Office (GAO) purchased 47 products from third-party vendors selling through five reputable e-commerce sites such as Amazon and Walmart (GAO, 2018). The purchased products were within four different categories of goods that are commonly counterfeited: electronics, accessories, footwear, and cosmetics. Of the total goods purchased by GAO, approximately 43% of the products were counterfeit, including100% of the cosmetic goods (GAO, 2018). The U.S. Customs and Border Protection noted that counterfeited beauty and personal care products were becoming more commonplace than counterfeit handbags. There were over 2,000 shipments seized by the U.S. Customs and Border Protection in 2016 (CBS, 2017). Approximately 70% of counterfeit goods seized globally are manufactured in China (Brodsky, 2016).

Figure 10. Beauty and Personal Care Industry Revenue Loss in the European Union in 2015 USD Billions

Data derived from (Statista, 2018)

Personal Care Products Safety Act. The U.S. Federal Food, Drug and Cosmetic Act (FDCA) enacted into law in 1938 is less effective at regulating cosmetics as compared to food and drugs (Mueller, 2017). The FDA’s ability to regulate the cosmetic industry is diminished by the failure of the U.S. government to provide comprehensive and direct legislations related to the cosmetic industry (Mueller, 2017) (Entis, 2017). For example, narrow FDCA definitions regarding cosmetics that can be deemed “misbranded” or “adulterated” increase the difficulty in qualifying arguably questionable cosmetic goods as falling into either of the two categories (Meuller, 2017). The Wen Hair Care (Wen) products investigation launched by the FDA in 2014 highlights the deficiencies in the current U.S. regulations pertaining to the cosmetic and personal care industry. (Entis, 2017) (Mueller, 2017) (Narayan, 2018). Despite over 21,000 complaints submitted to Wen regarding hair loss and other health related side effects from consumer use of Wen products, the company’s product are still sold in the U.S. market. The FDCA does not provide the FDA with the authority to impose a product recall (Entis, 2017) (Mueller, 2017) (Narayan, 2018). The cosmetic industry is predominantly self-regulated under U.S. legislation, and largely does not require FDA approval prior to sale in the market, nor does it require brands to forward product complaints to the FDA (Entis, 2017) (Mueller, 2017). The Wen investigation helped drive the initiative to amend the FDCA with more stringent regulations pertaining to the cosmetic and personal care industry. If passed, the Personal Care Product Safety Act introduced to the U.S. House of Representatives in 2017 would reform current legislations. The bill was designed to empower the FDA to regulate the cosmetics industry similarly to the food and drug industries. The Personal Care Product Safety Act would require cosmetic companies to verify that product manufacturing is done in a clean environment, disclose product ingredients as well as consumer complaints to the FDA (Entis, 2017) (Mueller, 2017) (Narayan, 2018). Additionally, the FDA would be granted authority in regulating product labels and warnings, as well as be permitted to issue product recalls (Entis, 2017) (Mueller, 2017) (Narayan, 2018). U.S. and international cosmetic and personal care companies may incur costs related to the adherence of the Personal Care Product Safety Act, should the bill become legislation.

Animal Testing. Animal welfare and the use of animals for the purposes of product testing is a global concern garnering increased global attention and regulation. As noted in the Environmental section of the broad environment analysis, the growth of the global movement towards ethical consumerism enhances the importance being placed on animal welfare (Pudaruth, Juwaheer & Sewoo, 2015). In North America, over 600 companies were certified as cruelty free in 2017 (“European”, 2018). In 2013, the E.U. instituted the Cosmetics Products Regulation, a ban on importing and selling cosmetics that used animal testing for ingredients during production (Katner, 2013) (“European”, 2018). The 2013 ban by the E.U. highlights the E.U.’s support of animal welfare since it expanded on the E.U.’s 2004 ban of the use of animal testing for cosmetic final products (Katner, 2013). Countries that do not engage in alternative ingredient and product testing will therefore not be allowed to sell their products in the E.U. However, there are still loopholes in the E.U. Cosmetics Products Regulation. For example, the sale of cosmetic products that are manufactured using ingredients that had been tested on animals during the development of non-cosmetic goods are not included in the ban. Israel, India, Iceland, Guatamela, New Zealand, Serbia, Norway, Turkey and Switzerland have also instituted regulations that either limit or ban animal testing for cosmetic products since 2013 (“European”, 2018) (Stringer, 2018). Despite the implementation of various animal testing bans internationally, approximately 80% of countries worldwide such as the U.S. permit the use of animal testing for cosmetic purposes (Stringer, 2018). China mandates that cosmetic imports undergo animal testing further complicating the legal landscape for companies in the personal care and beauty industry (Humane Society, n.d.) The E.U. is actively pursuing animal-welfare related regulations that will compel a global ban of animal testing for cosmetics by 2023 (Stringer, 2018). Other recent international initiatives regarding the pursuit of animal testing bans are presented below.

Canada. The Canadian Cruelty-Free Cosmetics Act (aka Bill S-214) was introduced in 2015 (Schaefer, 2018). Bill S-214 is intended to prohibit animal testing for cosmetics as well as prohibit the sale of cosmetic products that were created and/or manufactured utilizing animal testing Senate. Bill S-214 will amend the Canadian Food and Drugs Act if the Cruelty-Free Cosmetics Act will be passed into law. On June 19th 2018, Bill S-214 received full support from the Canadian Senate and will now be reviewed by the House of Commons for its final stages in becoming passed into Canadian law (Schaefer, 2018).

United States. The Humane Cosmetics Act (aka H.R. 2790) was introduced into the U.S. Congress in 2017, marking its initial stage in the U.S. legislative process (Humane Society, n.d.) (Congress.gov, 2018). The bill, if enacted into law, would prohibit the testing of cosmetic products on animals beginning one year after the enactment of the Humane Cosmetics Act. Furthermore, after three years of the enactment of the Humane Cosmetics Act, the prohibition will be extended to include the transport and sale of final cosmetic products and/or its components if animal testing was used during its development and/or production. Furthermore, the California state legislature passed the Cruelty-Free Cosmetics Act (Bill S-214) in September 2018 (Reisinger, 2018). If the bill is signed into law by the Governor of California, the sale of animal tested cosmetic products will be banned in the entire state of California beginning in 2020 (Reisinger, 2018).

Industry Analysis: Porter’s Five Forces

The following section uses the Porter’s Five Force Model to assess the competitiveness of the beauty and personal care industry. The analysis demonstrates that although the bargaining power of suppliers and individual buyers is fairly low, the strength of the remaining forces fosters an industry environment characterized by extreme competition. The power of wholesale buyers, high exit barriers, intense rivalry and the threat of substitutes are necessary considerations in formulating a competitive strategy to ensure long-term profitability within the industry. (“Assessing”, 2014).

Figure 11. Porter’s 5 Force Model: Beauty & Personal Care Industry

Force	Strength
Threat of New Entrants	Moderate
Bargaining Power of Buyers	Low-Moderate
Bargaining Power of Suppliers	Low
Competitive Rivalry	High
Threat of Substitutes	High

Threat of New Entrants

Research and Development & Patents. There is an existing intersection between science and the cosmetics and personal care industry (Cosmetics Europe, 2018a) (Bogdan, 2016). In order to remain competitive and facilitate the development of new innovative products that respond to changing consumer needs, companies operating in the cosmetics and personal care industry must constantly invest in research and development (R&D) (Arno & Morrow, 2018) (Bogdan, 2016). Furthermore, R&D is often accompanied with costs pertaining to the pursuit of intellectual property (IP) protection. IP helps to create a competitive advantage by ensuring the uniqueness of a firm’s products in the marketplace (Arno & Morrow, 2018) (Cosmetics Europe, 2018a). In Europe, approximately 5% of annual sales is spent on R&D by large companies operating in the cosmetics and personal care industry (Cosmetics Europe, 2018a). Graphically displayed in Figure 12, analysis of data from 2004-2016 demonstrates a strong positive correlation between annual R&D expenses by L’Oréal and L’Oréal’s annual revenue (see Appendix A) (YCharts, 2018). Given the relationship between L’Oréal’s R&D expenses and annual revenue, a $1 million increase in L’Oréal’s R&D expenses can be expected to yield approximately $29 million in additional annual revenue for the company (see Appendix A) (YCharts, 2018). Similarly, the annual R&D expense of Johnson & Johnson Inc. (J&J) from 2008-2017 was positively correlated with J&J’s annual revenue (see Appendix A) (YCharts, 2018). A $100 million increase in J&J’s R&D expenses would likely yield approximately $300 million in additional annual revenue. (see Appendix A) (YCharts, 2018). A firm’s R&D expenses and/or investments alone are not sufficient to enhance the firm’s financial performance. Instead, a firm’s R&D capabilities and innovation that stem from R&D expenses and investments serve as contributing factors in determining a firm’s success or failure (Viki, 2016). The capital necessary to finance R&D and pursue related patents constitute an industry barrier for new entrants.

Figure 12. L’Oréal Revenue and R&D Expense 2004-2016

Data derived from: (L’Oréal, 2016) (YCharts, 2018)

Cost Disadvantages. Industry incumbents benefit from competitive advantages stemming from established supplier relationships, IP, favorable distribution channels, experience, knowledge and economies of scale (Dirisu, Iyiola & Ibidunni). New entrants are respectively faced with comparative cost and competitive disadvantages. Cost disadvantages serve as moderate barriers to entry since they can create high operational costs, limit profit margins, and threaten the ability of new entrants to implement competitive pricing models. Volatility in commercial rental prices can have a negative impact on operational costs. For example, analysis of data from January 2013-October 2018 demonstrates that the U.S. PPI for non-residential rents is a significant variable in explaining variations in Ulta Beauty’s quarterly operating expenses (see Appendix A) (YCharts, 2018). A $1 increase in the PPI for non-residential rent would result in increase of the quarterly expenses of Ulta Beauty by approximately $19 million (see Appendix A) (YCharts, 2018).

Changing consumer behaviors, the advent of technology, e-commerce and other disruptive innovations such as social media, help to reduce the extent of the barriers created by cost disadvantages for new companies. Consumers are increasingly willing to make beauty and personal care purchases online, beyond merely replenishing commonly used beauty and personal care products (“Online”, 2015). Between 2012-2017, global e-commerce sales as a percentage of sales made in the global beauty and personal care market increased 3.6% to 7.8% (see Figure 13) (Euromonitor International, 2018a) (Euromonitor International, 2018b). E-commerce provides new entrants with limited overhead costs compared to traditional brick and mortar, thereby lowering the industry’s barrier to entry (Reagan, 2017) (Hirt & Willmott, 2014). Of note is that while there is an increased consumer tendency towards making beauty and personal care purchases online, consumer expectations of traditional brick and mortar channels are changing from transactional to experiential (“Online, 2015). Research demonstrates that unique service offerings by industry incumbents can decrease annual sale losses resulting from a new entrant by 2.2-7.9% (Obeng et al., 2016). Therefore, an industry incumbent who strategically leverages its brick-and-mortar retail with unique services can exacerbate entry barriers for new companies (Obeng et al., 2016)

Figure 13. Global Beauty and Personal Care Market Value & Internet Retailing as Percentage of Global Market Sales 2012-2017

Data derived from: Euromonitor International, 2018a) (Euromonitor International, 2018b)

Regulations & Trade Laws. Varying government regulations pertaining to cosmetic and personal care products complicates the industry landscape globally (“DIY”, 2016). Compliance with new or revised regulations may require costly changes to development and manufacturing practices. Furthermore, failure to comply with regulations may result in penalty fees and/or business termination. For example, if the newly proposed Personal Care Products Safety Act is passed in the U.S., policies regarding registration, reporting and fees would be imposed on businesses operating in the cosmetic and personal care industry (Entis, 2017) (Mueller, 2017) (Narayan, 2018). Regulations and related costs threaten the ability of new entrants to compete as well as scale their respective businesses (F.E.E., 2015)

Brand Equity. Trust and perceived value are significant components of brand equity and are rudimentary in establishing brand loyalty (Kobayashi, Hara & Usui, 2017) (Upmannyu & Rajput, 2017). There is a positive correlation between brand loyalty and profitability. Thus, a 5% increase in customer retention can result in a 25-96% improvement in a company’s financial performance (Gallo, 2014). The beauty and personal care industry is characterized by intense competition and low-moderate product differentiation. Brand loyalty is therefore critical for survival in the cosmetics and personal care industry (Upmannyu & Rajput, 2017). New entrants do not have the advantage of increased market share stemming from a carefully cultivated brand image as do industry incumbents (Zhang, 2015) (Gallo, 2014). Brand equity of industry incumbents creates a barrier to entry in the beauty and personal care industry. Social media enables new entrants to mitigate the difficulty in building brand equity by providing a means to reach countless consumers globally with targeted marketing (Koetting, 2018). Social media and targeted marketing initiatives empower brands to foster one-on-one relationships with consumers to accelerate the pace at which a prospective customer moves along the relationship continuum towards loyalty (Taylor, Donovan & Ishida, 2014) (Pressman, 2015) (“Understanding”, n.d.).

Figure 14. Competitor Market Share in the Global Beauty and Personal Care Industry

Competitor Market Share
Company	2017 Revenue (USD billions)	% of Total	2012 Revenue (USD billions)	% of Total
L’Oréal	$29.472	11.3%	$27.82	10.4%
Estẽe Lauder	$11.824	4.5%	$9.714	3.6%
Coty	$7.65	3%	$4.611	1.7%
J&J	$76.45	29.3%	$67.22	25%
Shiseido	$8.957	3.4%	$8.646	3.3%
Unilever	$60.83	23.4%	$65.98	25%
P&G	$65.06	25.1%	$82.01	31%
Total	$260.243		$266.001

Data derived from: (L’Oréal, 2017), (L’Oréal, 2014), (Estẽe Lauder, 2017) (Estẽe Lauder, 2014) (Coty, 2017), (Coty, 2014), (YCharts, 2018)

L’Oréal Group. L’Oréal is a French company that manufactures and sells products in the beauty and personal care industry (L’Oréal, 2017). L’Oréal has four operational divisions: Consumer Products, L’Oréal Luxe, Professional Products and Active Cosmetics. Product categories include skincare, haircare, makeup, fragrances and hygiene products (L’Oréal, 2017). L’Oréal owns and operates 34 brands, including Lancome, Kiehls and Ubran Decay (L’Oréal, 2017). Additionally, the company’s L’Oréal Professional provides salon services (Loreal.com, 2018). The company refers to its corporate strategy as “Universalization” denoting the company’s intent to provide tailored products to meet the varying needs of consumers globally. Following P&G’s divestment of its Specialty Beauty Business to Coty in 2016, L’Oréal increased its global market share by .1% to 6.3% from 2016 to 2017. P&G’s global market share fell by .8% over the same time period. (YCharts, 2018) (L’Oréal, 2017) (Brunsman, 2016) (Euromonitor International, 2018a). L’Oréal’s revenue has increased at a compound annual growth rate of nearly 1% from 2012-2017. L’Oréal’s gross revenue in fiscal year 2017 totaled $29.47 billion (L’Oréal, 2017) (YCharts, 2018)

L’Oréal operates in 150 countries worldwide. In 2017, Western Europe, North America and new markets accounted for 31.2%, 28.3% and 40.5% of the company’s total sales respectively (L’Oréal, 2017). New markets include Asia-Pacific, Latin America, Eastern Europe, Africa and the Middle East. The percentage of sales stemming from Western Europe and North America decreased by .9% and .2% respectively from 2016, while new markets increased by 1.1% (L’Oréal, 2016) (L’Oréal, 2017). Changing consumer values towards premium products and wellness was reflected in the 1.7% and .5% increase in sales of L’Oréal’s L’Oréal Luxe and Active Cosmetics divisions in fiscal year 2017 compared to 2016 (L’Oréal, 2016) (L’Oréal, 2017). L’Oréal increased its e-commerce sales by 34% in 2017 from 2016, accounting for over $2 billion in sales. Approximately 85.9% of L’Oréal products are manufactured in the company’s 41 owned and operated facilities (L’Oréal.com, 2018). L’Oréal registered patents increased by approximately 5% from 2016, totaling 493 in 2017 (L’Oréal, 2016) (L’Oréal, 2017).

The company utilizes an acquisition and divestment strategy in pursuit of its growth initiatives that are aligned with macroeconomic conditions. For example, in June 2017, L’Oréal confirmed that the company was in contract to sell its underperforming brand The Body Shop to Natura, a Brazilian cosmetics company (Petroff, 2017). The Body Shop’s estimated worth was previously set at $1.1 billion by L’Oréal, though financial details of the divestment have not yet been disclosed (Petroff, 2017). In 2013, L’Oréal also launched “Sharing Beauty With All”, a program focused on sustainability within the company’s innovation, development and production. Sharing Beauty With All also promotes sustainability practices worldwide (L’Oréal, 2016) (L’Oréal, 2017). In 2016, L’Oréal acquired IT Cosmetics into its portfolio of brands operating under the Luxe division (L’Oréal, 2016) (L’Oréal, 2017). IT Cosmetics is a specialized product line addressing trends towards premiumization and personalization. CeraVe was acquired by L’Oréal in 2017 which is marketed under the company’s Active division as an affordable cosmeceutical product line (L’Oréal, 2016) (L’Oréal, 2017).

Estẽe Lauder Companies Inc. Estẽe Lauder develops, manufactures, and sells beauty and personal care products in the industry globally. Estẽe Lauder’s recorded earnings are reported across segmented product categories that include: Skin Care, Makeup, Fragrance, Hair Care and Other. Estẽe Lauder creates distinct global images to market its portfolio of more than 25 brands including those that are company owned as well as licensed designer brands (Estẽe Lauder, 2017) (Estẽe Lauder, 2018). The company’s diversified portfolio of brands and products range from mass market to premium. Estẽe Lauder, Aveda, Smashbox, Origins and Mac are among the company’s diversified brand portfolio. The company’s CAGR from 2012-2017 was approximately 3.3%, although the company experienced a slight drop in revenue during fiscal year 2015 compared to 2014 (YCharts, 2018) (Estẽe Lauder, 2017) (Estẽe Lauder, 2018). Estẽe Lauder recorded net revenue of $11.82 billion and $13.68 billion in fiscal year 2017 and 2018 respectively (Estẽe Lauder, 2017) (Estẽe Lauder, 2018).

Estẽe Lauder sells its products in more than 150 countries through a variety of channels. Global distribution channels include approximately 1,500 company owned branded stores, 650 branded stores managed by third-parties, department stores, specialty shops, pharmacies, spas and e-commerce (Estẽe Lauder, 2017) (Estẽe Lauder, 2018). In 2017, approximately 40.8% of sales came from the America’s market, a 1% decline from 2016 (Estẽe Lauder, 2017). Sales generated from Europe, the Middle East and Africa increased by 4% from fiscal year 2016 to 2017, accounting for 39.3% of sales in 2017 ((Estẽe Lauder, 2017). Approximately 19.9% of sales in 2017 were generated in the Asia Pacific region, a .6% decline from fiscal year 2016 (Estẽe Lauder, 2017). Estẽe Lauder incurs significant expenditures in R&D with recorded R&D expenses of $191 million, $179 million and $181 million in 2016, 2017 and 2018 respectively (Estẽe Lauder, 2017). The company owns numerous trademarks in relation to the manufacturing and sale of its products, as well as design and utility patents. The U.S. Switzerland, Belgium, Canada and the U.K. are the primary locales for Estẽe Lauder product manufacturing. Estẽe Lauder procures raw materials and packaging components from a variety of geographically dispersed suppliers. Unless required by law, Estẽe Lauder’s products and ingredients are not tested on animals (Estẽe Lauder, 2017). However, since Estẽe Lauder conducts animals testing in order to sell its products in China, the company was removed from PETA’s “Don’t Test” list (PETA, 2018). PETA’s “Don’t Test” list communicates to consumers which brands adhere to PETA’s ethical standards related to the humane treatment of animals (PETA, 2018). Recent corporate strategic initiatives include the 2015 acquisitions of fragrance and beauty brands Editions De Parfums Frederic Malle and GLAMGLOW (Estẽe Lauder, 2017). In 2016, Estẽe Lauder acquired the premium Paris fragrance brand By Kilian, as well as makeup brands Becca and Too Faced (Estẽe Lauder, 2017).

Coty Inc. Coty manufacturers and sells mass and prestige beauty and personal care products in the global market. The company’s three reportable segments are: Consumer Beauty, Luxury and Professional Beauty. Product categories include cosmetics, hair and styling, skin care, body care, and nail care. Coty has a diverse portfolio of 25 company owned brands across its three operating segments such as CoverGirl, Rimmel, and Philosophy (Coty Inc., 2018). Coty also has over 50 licensed brands in its portfolio. Coty’s CoverGirl brand was among the 43 brands the company acquired from P&G in 2016 (Coty Inc., 2018). Prior to the acquisition, Coty struggled to retain positive sales growth from 2014-2016. The acquisition significantly inflated Coty’s revenues in fiscal year 2017 from 2016, accounting for 41% of the 76% increase in year over year sales (Coty Inc., 2018). The company’s net sales were $7.65 billion and $9.398 billion in fiscal years 2017 and 2018 respectively (Coty Inc., 2018) (YCharts, 2018).

Coty products are marketed and sold in more than 150 countries. In fiscal year 2017, sales in North America, Europe and ALMEA regions (Asia, Latin America, Middle East and Africa) accounted for approximately 33%, 43% and 24% of Coty’s net revenue respectively (Coty Inc., 2018). Sales in both, North America and Europe increased by approximately 9% from 2016 and 18.37% in ALMEA regions (Coty Inc., 2018). Coty also sells its products through third party-distributors such as Wal-Mart. The contribution of third-party retailers to the net revenue of operating segments varies by geographic markets. However, no more than 10% of Coty’s total net revenue was attributable to any one retailer (Coty Inc., 2018). Coty products are primarily manufactured and packaged in facilities in the U.S., Brazil and Europe. Raw materials and some packaging components used by Coty in production are purchased from third party manufacturers. Recent restructuring strategies with regards to streamlining and optimizing supply chain logistics to improve overall efficiencies following the acquisition of P&G’s Specialty Beauty Business, has resulted in some manufacturing disruptions for Coty. In 2018, Coty recorded ownership of nearly 3,800 patents globally, including utility, design and applications (Coty Inc., 2018).

Coty’s pursuit of global growth is reflected in the company’s recent strategic initiatives beyond the aforementioned P&G Specialty Beauty Business acquisition. In 2016, Coty acquired the British premium hairstyling appliance producer GHD, as well as Hypermarcas, a Brazilian beauty and personal care company (Wong, 2016) (Coty Inc., 2018). The Hypermarcas acquisition will provide Cody with a distribution platform in the Brazilian emerging market (Swamynathan, 2015) (Coty Inc., 2018). In 2017, Coty announced its 60-40 partnership with Younique, an online platform for peer-to-peer social networking and selling (Coty Inc., 2018) (Safdar, 2017).

Exit Barriers. Competitive rivalry intensifies in an industry environment with high exit barriers (Dr. Sonmez, 2013). R&D, production facilities, manufacturing, advertising and adherence to industry regulations are among the significant costs incurred by companies operating in the beauty and personal care industry. These costs, particularly sunk costs, have the effect of creating high industry exit barriers, with the exception of a profitable company buyout (Dr. Sonmez, 2013).

Threat of Substitutes

Counterfeits & Knock Offs. Counterfeit and knock-off goods serve as substitute products that compromise the sale of legitimate goods in the B2B and B2C markets (McKeon, 2015). Counterfeit goods differ from knock-off products in that counterfeits infringe upon IP protection while knock-offs resemble but are not identical to IP protected processes, designs, symbols…etc. (Hymel, 2014). The advent of technology, namely e-commerce and enhanced manufacturing capabilities have increased the availability and ‘quality’ of counterfeit and knock-off goods. In some instances, counterfeit goods are sold through legitimate sellers who themselves have been deceived in B2B transactions (McKeon, 2015). Between 2011-2013, there was a 25% increase in global seizures of counterfeit cosmetics and fragrances (Herbert, 2017). By 2022, the global market value for piracy and counterfeiting is estimated to be as high as $2.3 trillion (ITA, 2017). The availability of counterfeit and knock-off beauty and personal care products in the market increases the intensity of competition within the beauty and personal care industry. Seized goods by U.S. Customs are segmented into various categories including the “pharmaceutical and personal care” category (U.S. CBD, 2017). There is an inverse relationship between the value of pharmaceutical and personal care goods seized by U.S. Customs and the market value of the beauty and personal care industry in the U.S. (see Appendix A) (YCharts, 2018). While there are other variables to consider, such as government policy and the efficiency of U.S. Customs, the value of pharmaceutical and personal care goods seized can reasonably be assumed to be proportional to the total volume of counterfeit pharmaceutical and personal care goods entering the U.S. market. The rising value of goods seized represents an increase in the overall amount of counterfeit goods available in the U.S. market. These goods represent substitute products. Therefore, increases in the value of counterfeit goods seized has the effect of decreasing the market value of the beauty and personal care industry in the U.S. (see Appendix A) (YCharts, 2018).

Home Remedies & DIY. The wellness movement discussed earlier, as well as the advent of technology increased consumer awareness regarding ‘at home’ beauty and personal care remedies. Various books, websites and YouTube offer an array of ‘do it yourself’ (DIY) instructions, detailing how to use grocery products such as baking soda, avocados, bananas, oatmeal…etc. to achieve desired personal care related results (Bousquet, n.d.) (Shrikant, 2017). Home remedies provide consumers with alternatives to purchasing branded cosmetic and personal care products.

Differentiation. The competitive nature of the beauty and personal care industry is magnified due to existing limited differentiation. Approaches to differentiation such as price, ingredient formulations, distribution and/or packaging are often not entirely inimitable. Cosmetic and personal care brands are compelled to continually invest in R&D to achieve first mover advantages related to differentiation (Danziger, 2018). The maturation of the market in developed economies is driving industry consolidation through acquisitions and mergers (Trefis, 2015) (Deloitte, 2017).

Ease of Substitution & Switching Costs. Limited product differentiation among the large number of competitors magnifies competition within the beauty and personal care industry. Substitute products are readily available in traditional retail outlets as well as through e-commerce. The ease of substitution further diminishes any economic switching costs that might be incurred by consumers who switch between companies selling products that are comparable in quality and price (Miah et al., 2015). As noted earlier, strengthening brand-buyer relationships and influencing consumer quality perception can increase emotional and psychological switching costs, thereby mitigating to an extent the threat of substitutes (Thuy, Hau & Evangelisa, 2016).

Internal Analysis

As noted earlier, Revlon Inc. is exclusively a holding company. The outstanding capital stock of Revlon Inc.’s fully owned subsidiary Revlon Consumer Products Corporation (Revlon) is the only material asset belonging to Revlon Inc. (Revlon, 2017) The business operations of Revlon Inc. are conducted through Revlon. The business operations of Revlon’s fully owned subsidiaries are reported in its four operable segments: Consumer (consumer division), Professional (professional division), Elizabeth Arden (businesses acquired during the acquisition of Elizabeth Arden) and Other (primarily celebrity and designer prestige beauty and personal care products) (Revlon, 2017). Therefore, the following internal analysis will focus on Revlon’s resources, capabilities and financials in order to assess the company’s strengths and weaknesses. Identifying Revlon’s strengths and weaknesses through relevant data analysis will allow for strategy formation that can improve both, the business operations of Revlon and the equity of Revlon Inc. Furthermore, key performance indicators are used to determine Revlon’s positioning compared to the industry average and the company’s competitors.

Tangible Resources

Current Assets. Revlon had $87.10 million in cash and equivalents and inventories of $497.9 million at the end of fiscal year 2017 (Revlon, 2017). Revlon’s cash and equivalents have declined since 2015 by a total of $239.8 million (Revlon, 2017) (Revlon, 2015). The company’s year ending inventory value increased by approximately 131% to $424.6 million in fiscal year 2016 from 2015 (Revlon, 2016) (Revlon, 2015). The significant increase in the value of 2016 year ending inventories was primarily due to the addition of $342.5 million in inventories that were included in the acquisition of Elizabeth Arden (Revlon, 2016).

Fixed Assets. Revlon increased the value of its plant property and equipment by approximately 67% from 2013, totaling $327.7 million in 2017 (Revlon, 2013) (Revlon, 2017). Revlon’s primary global manufacturing, R&D, warehouse, distribution and office facilities for its Consumer, Professional and Elizabeth Arden segments are located in the U.S., Canada, Mexico, Australia, Spain, South Africa, the U.K. and Italy. The total square footage of the aforementioned primary facilities is approximately 3,319,200 square feet (Revlon, 2017). Approximately 74% of the 3,319,200 square feet is company owned. The remainder space is leased (Revlon, 2017). Additional facilities are owned and leased globally such as the company’s New York and Spain executive offices. The capacity of Revlon’s current facilities is believed to be sufficient to satisfy current and estimated future production needs (Revlon, 2017). However, if sales forecasts underestimate actual product sales, Revlon may face difficulty in timely procurement and manufacturing of goods necessary to meet consumer demand.

Intangible Resources

Goodwill. Revlon increased its goodwill by approximately $3 million from fiscal year 2016 to to $692.5 million in 2017 (Revlon, 2017). The goodwill contribution from the Elizabeth Arden segment was the primary growth driver. The Consumer, Professional and Elizabeth Arden segments accounted for $216.7 million, $241.8 million and $234 million of the 2017 goodwill value respectively (Revlon, 2017). Impairment charges and foreign currency adjustments zeroed out the remaining 2015 goodwill balance of the Other segment in 2016. The Other segment therefore did not contribute to the goodwill value in fiscal year 2016 and 2017 (Revlon, 2017).

Trademarks, Patents & Intellectual Property. Revlon’s trademarks, patents and IP are considered to be critical to the company in order to sustain a competitive advantage in the industry. Revlon owns and has licensing rights to registered trademarks in approximately 151 countries. Notable trademarks include: Revlon, Cutex, Almay, Revlon ColorSilk, Revlon Professional, Elizabeth Arden, Britney Spears, and Mariah Carey (Revlon, 2017). Revlon’s trademarks and licenses in fiscal year 2017 were valued at $198.6 million with a weighted average useful life of 13 years, a nearly 53% increase from fiscal year 2016 (Revlon, 2017). Patented and/or proprietary technology is used in the product formulations, manufacturing and packaging of a variety of Revlon’s products including deodorant from Mitchum brand and nail polishes from CND Vinylux, among others. The expiration dates of Revlon’s current patents range from 2018-2035 (Revlon, 2017). The book value of Revlon’s trademarks and licenses decreased by $1.8 million from fiscal year 2016 to $12.4 million in 2017 (Revlon, 2017). Revlon intends to continue to pursue international patent protection as the company develops new proprietary processes and technologies. Much of the success of the Elizabeth Arden segment is dependent on the intangible assets of licensing and distribution rights. The loss of licensing and related distribution rights threatens the Elizabeth Aden segment’s operations, its financials and ultimately the overall profitably potential of Revlon (Revlon, 2017).

Other Intangibles. Revlon’s other intangible resources include finite-lived intangible assets such as customer relationships and distribution rights. Additionally, Revlon’s trade name serves as an indefinite intangible asset. The 2017 fiscal year value of the company’s other intangibles was valued at $381.1 million (Revlon, 2017).

E-Commerce Domains. Revlon owns and operates various brand-specific web domains. Branded websites are used by Revlon to market and sell its products globally. Branded websites include those pertaining to Revlon, Elizabeth Arden, Revlon ColorSilk, Almay, Mitchum, Revlon Professional, CND and American Crew (Revlon, 2017).

Employees. Nearly 7,800 people were employed by Revlon globally at the end of fiscal year 2017 (Revlon, 2017). Approximately 1560 of Revlon’s employees were protected under collective bargaining agreements (Revlon, 2017). Revlon believes it cultivates and retains satisfactory relationships with its employees (Revlon, 2017).

Capabilities

Research and Development. Revlon’s R&D is central to its ability to remain competitive and introduce new and innovative products into the market. In addition to product development, the company’s R&D includes a range of functions such as packaging, efficacy testing, and quality control. Integral to the success of Revlon’s products is the synergistic relationship fostered among its product development and packaging teams. Revlon currently employs approximately 200 skilled specialists in dermatology, toxicology, pharmacology, chemistry, biology, microbiology, engineering and quality control to support its R&D (Revlon, 2017). Revlon’s R&D facility in Edison, New Jersey (NJ) is purposed to serve its Consumer and Elizabeth Arden segments. Revlon’s R&D facilities in the U.S. (FL and California), Mexico and Spain serve its Professional segment. Supply chain manufacturers and laboratories are also used to support R&D for certain products. Revlon recorded R&D expenses of $31.2 million, $37 million, and $35.7 million in 2015, 2016 and 2017 respectively (Revlon, 2017).

Marketing. Revlon’s global promotional mix involves television, print, and digital advertisements, public relations, influencer marketing and social media. For example, Revlon garnered support from celebrities to promote its “LOVE IS ON Million Dollar Challenge” that crowdfunded approximately $1.5 million for women’s charities in 2015 (Kirkpatrick, 2015). Such marketing campaigns leverage the company’s philanthropic activities to engage consumers and increase Revlon’s brand image. Revlon also engages in paid, subsidized and cooperative marketing programs with retailers to jointly create point-of-purchase in-store displays as well as other tailored marketing tactics (Revlon, 2017). Revlon regularly updates its branded websites to market and promote its products, engage with consumers and drive sales. Additionally, Revlon engages in marketing approaches specific to its Professional segment that include advertising at professional trade shows and providing educational seminars (Revlon, 2017).

Materials & Manufacturing. Revlon uses its own facilities, as well as third-parties internationally for raw materials procurement and manufacturing. Revlon’s global sourcing and manufacturing strategy is intended in part to mitigate negative impacts from macroeconomic threats such as fluctuating exchange rates and/or unscheduled disruptions. The company leverages its purchase volume to reduce procurement and manufacturing costs. Revlon owns and operates facilities in the U.S. (FL and NC), Spain, Mexico, Italy and South Africa that produce products for the Consumer, Professional and Elizabeth Arden segments (Revlon, 2017).

Revlon’s facility in Oxford, NC produces a significant amount of the company’s products, particularly for the Consumer segment (Revlon, 2017). Production disruptions at the facility in NC could have a negative impact on net sales if the company is unable to meet consumer demand. In the event of a disruption at the North Carolina facility, operations across all of the company’s facilities would be compromised by logistical factors stemming from transitioning manufacturing responsibilities throughout Revlon’s other facilities. Furthermore, Elizabeth Arden strictly utilized third-party “turnkey manufacturing” prior to its acquisition by Revlon (Revlon, 2017). Revlon is actively working to consolidate and integrate the Elizabeth Arden segment’s supply and manufacturing activities into the company’s existing operations. Additional manufacturers in Europe and the U.S. are contracted to serve the needs of the Elizabeth Arden segment. Disruptions due to internal or external factors pertaining to third-party supply and manufacturing for the Elizabeth Arden segment threatens the segment’s ability to remain operable and meet demand (Revlon, 2017)

Distribution. Revlon uses a multi-channel distribution strategy that includes wholesale distributors, retail merchandisers, department and specialty stores, sales representatives and select branded stores in approximately 151 countries (Revlon, 2017). Revlon’s owned and operated e-commerce sites as well as those belonging to third parties are also used for the distribution of Revlon’s products. In 2017, the U.S. accounted for approximately 49% of Revlon’s net sales (Revlon, 2017). The remaining 51% of net sales in 2017 came from the international market, 13% of which stemmed from combined sales in the U.K., Canada and Australia (Revlon, 2017). Multinational retailer Walmart Inc., (Walmart) and its global affiliates comprised nearly 18%, 17% and 16% of Revlon’s sales worldwide in 2015, 2016 and 2017 respectively (Revlon, 2017). Revlon’s reliance on a limited number of large volume vendors may compromise Revlon’s future growth. For example, policy changes by Walmart regarding its pricing, in-store shelving placement of Revlon products and/or a reduction in purchase volume would have a negative impact on Revlon’s net sales. Revlon’s B2B customers are not contractually obligated to make future purchases from the company (Revlon, 2017). Revlon also licenses some of its trademarks such as Revlon and Red Door to a limited number of third parties which the company believes can help enhance Revlon’s brand image (Revlon, 2017). For example, Revlon has a minority interest in Red Door Spa which is operated by a third-party. Revlon believes salon services and the sale of products through Red Door Spa can help drive sales and differentiate Revlon from its competitors (Revlon, 2017).

Financial Analysis

Revenue & Profitability. Revlon’s strategic acquisitions have enabled the company to increase its net sales by 80% from fiscal year 2013 to 2017 (Revlon, 2013) (Revlon, 2017). Although the company experienced a nearly 1.4% decline in sales in 2015 from 2014, the loss in revenue was largely attributable to unfavorable currency exchange rates (Revlon Inc., 2015) (Trefis, 2016). Figure 15 depicts Revlon’s revenue growth, COGS and gross margin from 2013 through 2017. The revenue contribution of the newly acquired businesses (i.e. Mirage, CBB, Colomer and Pure Ice brand) coupled with Revlon’s ability to effectively integrate and manage COGS, enabled Revlon to improve upon its gross margin by 2% in 2014 from 2013 (Revlon, 2014). The net sales stemming from the Elizabeth Arden acquisition accounted for nearly 28% of the company’s total combined net sales in 2015 and 2016 (Revlon, 2016). Net sales growth in the Elizabeth Arden segment in North American and the international markets helped to offset the nearly 19% of net sales in the North America region of the Consumer segment (Revlon, 2016). Similarly, Elizabeth Arden sales helped to offset net sales fluctuations of the Professional segment in the North America and international regions, as well as the 38% decline in the Other segment’s (only sold in international markets) net sales during 2016 and 2017 (Revlon, 2016) (Revlon, 2017). Despite the Elizabeth Arden segment’s significant positive contribution to the company’s net sales growth, the acquisition has challenged the company’s ability to effectively manage its COGS to remain profitable. Revlon experienced a decline in its gross margin by approximately 8% from 2015 to 2017 (Revlon, 2015) (Revlon, 2017). The Elizabeth Arden’s segment’s reliance on third-party manufacturers may be a contributing factor to the company’s struggle in managing its COGS following the acquisition of Elizabeth Arden. Restructuring initiatives aimed at improving operations was implemented at the end of fiscal year 2016 (Revlon, 2016) .

Figure 15. Revlon’s Net Sales, COGS & Gross Margin 2013-2017

Data retrieved from: (Revlon Inc., 2013) (Revlon Inc., 2015) (Revlon Inc. 2017)

Revlon’s operating margin experienced a year over year decline of approximately 1-2% from 2013-2016 (Revlon, 2013) (Revlon, 2016). Revlon’s high gross margins stemming from competencies in COGS management and economies of scale helped to offset the impact of declining operating margins. The company became profitable in fiscal years 2014 and 2015, following its negative net income of $5.8 million in 2013 (Revlon, 2015). Revlon achieved a combined total of $35 million in annual cost reductions in 2014 and 2015 due to the company’s integrative restructuring initiatives in the Professional and Consumer operating segments (Revlon, 2015). The 2016 acquisition of Elizabeth Arden however has since weakened the company’s competencies in managing its costs. Despite the Elizabeth Arden segment’s contribution of $441.4 million to Revlon’s net sales in fiscal 2016 and $952.5 million in 2017, Revlon was not profitable in either year (Revlon, 2017). Revlon’s SG&A expenses increased by $184.2 million in 2016 due to the newly acquired Elizabeth Arden segment (Revlon, 2016). In 2017, Elizabeth Arden related SG&A expenses increased by 66%, and the company’s operating margin consequently declined by nearly 8% (Revlon, 2017). Revlon had a negative net income of $21.9 million and $183.2 million in 2016 and 2017 respectively (Revlon, 2017). Additional acquisition and restructuring expenses of $52.9 million not included in the line items of the operating income, further depressed the company’s 2017 financial performance (Revlon, 2017). Revlon expects to incur an additional $90-95 million in Elizabeth Arden related restructuring costs (Revlon, 2017). Restructuring expenses are aimed at reducing future long-term costs and enable Revlon to improve upon its future capabilities, efficiency, margins and profitability. In 2017, the Elizabeth Arden Integrative Restructuring Program resulted in cost reductions of $69 million in 2017 (Revlon, 2017).

Figure 16. Revlon’s Net Sales, Operating Income, Net Income and Operating Margin 2013-2017

Data retrieved from: (Revlon Inc., 2013) (Revlon Inc., 2015) (Revlon Inc. 2017)

Assets, Liabilities & Solvency. Revlon increased its total assets to $3,0567 million in 2017, growing at a CAGR of nearly 12% 2014 (Revlon, 2017) (Revlon, 2015). Revlon’s liabilities increased by approximately 39% in fiscal year 2013 from 2012 (Revlon, 2013). The significant growth in the company’s liabilities was primarily due to the pursuit of strategic initiatives involving acquisition and restructuring costs. Revlon’s liabilities have since fluctuated, paralleling the company’s growth and streamlining initiatives. Regarding the company’s quick assets and current liabilities specifically, Revlon maintained a relatively stable quick ratio of approximately 0.9-1.0 from 2013-2015 (Revlon, 2015). The 73% increase in the value of Revlon’s accounts receivables in fiscal year 2016 from 2015 (primarily driven by the inclusion of acquired Elizabeth Arden assets) helped to offset the nearly 38% increase in the company’s current liabilities (Revlon, 2017). However, the decline in Revlon’s year over year quick assets coupled with its increased current liabilities reduced the company’s quick ratio from 0.86 in 2016 to 0.57 in 2017 (Revlon, 2017).

Figure 17. Revlon’s Quick Assets, Current Liabilities & Quick Ratio 2013-2017

Data retrieved from: (Revlon Inc., 2013) (Revlon Inc., 2015) (Revlon Inc. 2017)

Figure 18 displays Revlon’s debt-to-equity ratio from 2013-2017. The company’s debt was calculated using the company’s annual long-term liabilities and current portion of long-term liabilities. Revlon has maintained negative equity over this time period, due in part to operating losses and its leveraging of debt financing to pursue growth initiatives. Net losses in fiscal years 2016 and 2017 was largely due to the combined total $490.8 million increase in SG&A expenses from the Elizabeth Arden segment (Revlon, 2017). The acquisition of Elizabeth Arden in 2016 reduced the company’s equity by approximately 5% and increased the company’s liabilities by nearly 44% from fiscal 2015 (Revlon, 2016). Although the company’s use of debt-financing subjects Revlon to various risks, such as its ability to pay its outstanding debt, floating interest rates and/or obtain further funding (discussed further in the SWOT Analysis), debt financing is less costly for Revlon than its equity financing. (see Appendix A) (Revlon, 2017). Revlon’s cost of debt is approximately 4% compared to its cost of equity at 18% as measured by the company’s weighted average cost of capital (see Appendix A) (Revlon, 2017). The company’s cost of debt is further reduced when factoring in its interest expense related to tax benefits (see Appendix A) (Revlon, 2017). The company’s negative net equity and recent negative net income have the effect of increasing the cost of equity and debt financing due to the high-risk related returns expected by investors and creditors. In 2017, Revlon had negative equity of $770.4 million and $2,895 million in long-term liabilities (includes current portion of long-term debt), reducing its 2017 debt-to equity by 0.7 from 2016 to -3.68 (Revlon, 2017).

Figure 18. Revlon’s Assets, Long-Term Liabilities & Debt-to-Equity Ratio 2013-2017

Data retrieved from: (Revlon Inc., 2013) (Revlon Inc., 2015) (Revlon Inc. 2017)

Asset Turnover, Inventory Turnover & Efficiency. Revlon’s recent strategic initiatives have significantly impacted the company’s efficiency as reflected in Revlon’s asset and inventory turnover ratios (see Figure 19). Following the acquisition of Colomer in 2013, Revlon was successful in integrating the operations of its Consumer and Professional segments to improve upon the company’s competences. Revlon’s asset turnover ratios and inventory turnover ratios both increased by approximately 7% in fiscal year 2014 from 2013 (Revlon, 2014). The company’s asset and inventory turnover ratios remained relatively stable through end of fiscal year 2015. In 2016, the Elizabeth Arden acquisition increased Revlon’s inventories by approximately $343 million (Revlon, 2016). The inclusion of Elizabeth Arden assets and inventories had the effect of slightly skewing Revlon’s efficiency performance as measured by certain key performance indicators. In 2016, Revlon’s asset and inventory turnover ratios decreased by approximately 0.05% and 0.23% respectively (Revlon, 2016). Following the acquisition of Elizabeth Arden, Revlon has struggled to effectively integrate its operating segments. In December 2016, Revlon began streamlining initiatives to remove duplicate practices and consolidate, in order to reduce COGS and SG&A expenses (Revlon, 2016). Restructuring efforts are still underway and necessary. Revlon’s asset and inventory turnover ratios at fiscal year-end 2017 signaled managerial and operable inefficiencies reflected by the continued decline in the company’s asset and turnover ratios by .05% and .17% respectively (Revlon, 2017).

Figure 19. Revlon’s Asset Turnover Ratio & Inventory Turnover Ratio 2013-2017

Data retrieved from: (Revlon Inc., 2013) (Revlon Inc., 2015) (Revlon Inc. 2017)

Benchmarking & Competencies

The following section uses financial ratios to measure the performance and competencies of Revlon in relation to the company’s competitors as well as the industry average from 2013-2017. Competitors L’Orẽal, Estẽe Lauder and Coty were chosen for benchmarking purposes due to their respective product offering and market size in relation to Revlon. The aforementioned companies’ sales growth, gross margin, operating margin, net margin, quick ratio, debt-to-equity ratio, asset turnover and inventory turnover are the key performance indicators (KPI) included in this section.

Sales Growth. Highlighting the competitive nature of the industry is the sales growth fluctuations of industry incumbents between 2013-2017. Revlon has struggled to foster consumer demand, failing to even attain the 1.52% industry average sales growth from 2013-2017 (CSI, 2018a). Although Revlon’s 2016 acquisition of Elizabeth Arden contributed to the company’s sales growth in both fiscal year 2016 and 2017, Revlon still underperformed the industry average sales growth by approximately 1.3% and 1.4% in 2016 and 2017 respectively (Revlon, 2016) (Revlon, 2017) (CSI, 2018a). Excluding fiscal year 2015 in which Revlon, L’Oréal, Estẽe Lauder and Coty all experienced negative sales growth, L’Oréal and Estẽe Lauder both exceeded the industry’s average annual sales growth from 2013-2017. L’Oréal and Estẽe Lauder’s year over year sales growth in 2017 was approximately 5.35% and 3.47% above the industry average respectively (L’Oréal, 2017) (Estẽe Lauder, 2017). Strategic acquisitions by both companies such as L’Oréal’s purchase of IT Cosmetics and CeraVe, as well as Estẽe Lauder’s purchase of By Kilian, Becca and TooFaced, contributed to their respective high sales growth (L’Oréal, 2017) (Estẽe Lauder, 2017). Coty failed to achieve sales growth from 2014-2016, but its 2016 acquisition of P&G Specialty Beauty Business was the primary driver of its significant revenue growth of nearly 76% in fiscal year 2017 from 2016 (Coty, 2017). Coty’s growth far exceeded that of industry leaders L’Oréal and Estẽe Lauder. Of note is that the industry average of 1.52% is skewed by extreme values such as a high of 14.48% and a low of -13.22% (CSI, 2018a)

Figure 20. Annual Sales Growth Competitive Benchmarking: Revlon, L’Oréal, Estẽe Lauder, Coty & Industry Average 2013-2017

Data retrieved from: (Revlon, 2017) (Revlon, 2015) (L’Oréal, 2017) (L’Oréal, 2015) (Estẽe Lauder, 2017) (Estẽe Lauder, 2015) (Coty, 2017) (Coty, 2015) (CSI, 2018a)

Gross Margin. Revlon, L’Oréal, Estẽe Lauder and Coty all retained gross margins greater than the 53.53% industry average between 2013-2017 (CSI, 2018b). Following Revlon’s acquisition of Colomer in 2013, Revlon successfully leveraged Colomer’s capabilities to improve upon the company’s gross margins by approximately 2% (Revlon, 2014) (Revlon, 2015). Revlon’s capabilities with regards to profitable corporate restructuring and consolidation of acquired businesses began to falter in 2016, as reflected in Revlon’s gross margin decline by 7.86% from 2015-2017 (Revlon, 2017). L’Oréal, Estẽe Lauder and Coty each maintained relatively stable gross margins of approximately 71%, 80% and 60% respectively during that time period (L’Oréal, 2015) (L’Oréal, 2017) (Estẽe Lauder, 2015) (Estẽe Lauder, 2017) (Coty, 2015) (Coty, 2017). The ability of L’Oréal, Estẽe Lauder and Coty to achieve gross margin stability despite integration efforts of newly acquired businesses and brands, highlights their respective competency at managing COGS and economies of scale.

Figure 21. Gross Margin Competitive Benchmarking: Revlon, L’Oréal, Estẽe Lauder, Coty & Industry Average 2013-2017

Data retrieved from: (Revlon, 2017) (Revlon, 2015) (L’Oréal, 2017) (L’Oréal, 2015) (Estẽe Lauder, 2017) (Estẽe Lauder, 2015) (Coty, 2017) (Coty, 2015) (CSI, 2018b)

Operating Margin. The calculation of the operating margin for industry incumbents in this analysis does not include line items such as acquisition related integration costs, since these costs are not considered to be regular continual operating expenses. Between 2013-2017, Revlon underperformed the industry average operating margin of 15.23%, as well as the operating margin of competitors L’Oréal and Estẽe Lauder (YCharts, 2018). As noted in the Financial Analysis section, Revlon’s operating margin declined by 11.81% to 2.8% from 2013 to 2017 (Revlon, 2015) (Revlon, 2017). Revlon’s operating margin also declined below that of its competitor Coty by 0.44% in 2016 and 0.97% in 2017 (Revlon, 2017) (Coty, 2017). Coty improved upon its below average operating margin of approximately 8.9% and 8.4% from fiscal year 2013 and 2014, reaching 11.4% in 2016 (Coty, 2014), (Coty, 2016). The cost management capabilities of Revlon and Coty were challenged by their respective acquisitions in 2016. Both Revlon and Coty experienced sharp declines in their operating margin in 2017 from 2016 by approximately 8% and 7.7% respectively (Revlon, 2017) (Coty, 2017). Comparatively, L’Oréal and Estẽe Lauder have been successful at maintaining above average operating margins from 2013-2017. Despite some minor fluctuations, both L’Oréal and Estẽe Lauder effectively integrated their acquired businesses, continuing their already profitable daily operations over the time period. In 2017, L’Oréal and Estẽe Lauder’s operating margins were approximately 18% and 16.2% respectively (L’Oréal, 2017) (Estẽe Lauder, 2017).

Figure 22. Operating Margin Competitive Benchmarking: Revlon, L’Oréal, Estẽe Lauder, Coty. & Industry Average 2013-2017

Data retrieved from: (Revlon, 2017) (Revlon, 2015) (L’Oréal, 2017) (L’Oréal, 2015) (Estẽe Lauder, 2017) (Estẽe Lauder, 2015) (Coty, 2017) (Coty, 2015) (YCharts, 2018)

Net Margin. Revlon’s inefficiency in generating a profit from its sales is highlighted when comparing the company’s net margin to those of its competitors and the industry average. As noted in the Financial Analysis section, Revlon’s sales growth and cost synergies achieved through the company’s acquisition of Colomer enabled Revlon to increase its negative net margin of -0.39% in 2013 to approximately 2.9% in 2015 (Revlon, 2015). However, Revlon’s improved profitability still significantly underperformed the industry average net margin by approximately 7.6% in 2015 (Revlon, 2015). Furthermore, Revlon was not profitable in fiscal year 2016 and 2017, primarily due to the negative impact of Elizabeth Arden related acquisition and restructuring costs (Revlon, 2017). In 2016 and 2017, Revlon underperformed the net margins of its competitors L’Oréal, Estẽe Lauder, and Coty as well as the industry average (CSI, 2018b). L’Oréal is an industry leader in terms of its ability to manage costs and remain highly profitable. L’Oréal exceeded the industry average net margin of 10.52% by approximately 3.2% in 2017 (L’Oréal, 2017) (CSI, 2018b). Between 2013-2016, Estẽe Lauder’s net margin hovered below but close to the industry average. In 2017, Estẽe Lauder improved upon its ability to generate a profit from sales. In 2017, Estẽe Lauder hovered close but above the industry average net margin by 0.04% (Estẽe Lauder, 2017) (YCharts, 2018). Similar to Revlon, Coty experienced fluctuating net margins well below the industry average between 2013-2017. In 2014, Coty was not profitable. Following Coty’s strategic acquisitions, Coty was profitable in 2015 and 2016 (Coty, 2016). However, costs related to the acquisition of P&G Specialty Beauty Business caused Coty to become unprofitable in 2017, reflected in Coty’s 2017 negative net profit margin of approximately -5.5% (Coty, 2017)

Figure 23. Net Margin Competitive Benchmarking: Revlon, L’Oréal, Estẽe Lauder, Coty. & Industry Average 2013-2017

Data retrieved from: (Revlon, 2017) (Revlon, 2015) (L’Oréal, 2017) (L’Oréal, 2015) (Estẽe Lauder, 2017) (Estẽe Lauder, 2015) (Coty, 2017) (Coty, 2015) (CSI, 2018b) (YCharts, 2018)

Quick Ratio. The liquidity positioning of Revlon and its competitors as measured by the quick ratio fluctuated between 2013-2017. During that time, the respective quick ratios of Revlon, L’Oréal, Estẽe Lauder and Coty were no greater or less than approximately 0.3-0.7 from the 0.8 quick ratio industry average (Revlon, 2017) (Revlon, 2015) (L’Oréal, 2015) (L’Oréal, 2017) (Estẽe Lauder, 2015) (Estẽe Lauder, 2017) (Coty, 2015) (Coty, 2017) (IBIS, 2018). Such fluctuations appear to be the industry norm. Estẽe Lauder however has consistently remained well positioned to cover its short-term liabilities, exceeding the quick ratio of its competitors and the industry average during 2013-2017. L’Oréal improved its 0.5 liquidity positioning from 2014 to 0.76 in 2017, nearly aligned with the industry average (L’Oréal, 2017). Revlon and Coty experienced similar downward trajectories in their respective quick ratios from 2014-2017. The declining liquidity positioning of Revlon and Coty highlight their respective use of cash and debt financing to pursue strategic acquisitions and restructuring initiatives. Revlon’s 2017 quick ratio was nearly 0.6, approximately 0.1 above Coty’s 2017 quick ratio and 0.2 below the industry average (Revlon, 2017) (Coty, 2017) (IBIS, 2018).

Figure 24. Quick Ratio Competitive Benchmarking: Revlon, L’Oréal, Estẽe Lauder, Coty. & Industry Average 2013-2017

Data retrieved from: (Revlon, 2017) (Revlon, 2015) (L’Oréal, 2017) (L’Oréal, 2015) (Estẽe Lauder, 2017) (Estẽe Lauder, 2015) (Coty, 2017) (Coty, 2015) (IBIS, 2018)

Debt-to-Equity. The debt portion of the debt to equity ratios displayed in Figure 25 was calculated using annual long-term liabilities and the current portion of long-term liabilities. Unlike competitors L’Oréal, Estẽe Lauder, Coty and the industry average, Revlon has maintained a negative equity balance from 2013-2017 (Revlon, 2015) (Revlon, 2017). Revlon’s debt financing exceeds the value of its assets. Revlon’s negative debt-to-equity ratio from 2013-2017 fluctuated by as much as 1.48, highlighting the company’s difficulty in maintaining profitable operations (Revlon, 2015) (Revlon, 2017). Compared to Revlon, L’Oréal and Estẽe Lauder’s solvency positioning from 2013-2017 was aligned with the debt-to-equity industry average of approximately 0.61 (L’Oréal, 2017) (Estẽe Lauder, 2017) (YCharts, 2018). The commonplace use of internal and investor financing in the beauty and personal care industry is reflected by the low debt-to-equity industry average. L’Oréal’s equity nearly exceeds its liabilities. L’Oréal’s debt-to-equity ratio increased from approximately 0.01 in 2013 to 0.05 in 2017 (L’Oréal, 2013) (L’Oréal, 2017). Similarly, Estẽe Lauder’s debt-to-equity ratio has remained relatively stable, increasing by approximately 0.41 since 2013 to 0.81 in 2017 (Estẽe Lauder, 2013) (Estẽe Lauder, 2017). Coty’s debt-to-equity ratio fluctuated well above the industry average in 2016 by nearly 10.77, primarily due to financing its acquisition of beauty brands from P&G (Coty, 2016). Coty significantly reduced its debt-to-equity ratio by approximately 93% from 2016 to 0.77 in 2017 (Coty, 2017). In 2017, Coty’s solvency positioning was most comparable to the industry average than that of Revlon, L’Oréal and Estẽe Lauder (Revlon, 2017) (L’Oréal, 2017) (Estẽe Lauder, 2017), (Coty, 2017).

Figure 25. Debt-to-Equity Competitive Benchmarking: Revlon, L’Oréal, Estẽe Lauder, Coty. & Industry Average 2013-2017

Data retrieved from: (Revlon, 2017) (Revlon, 2015) (L’Oréal, 2017) (L’Oréal, 2015) (Estẽe Lauder, 2017) (Estẽe Lauder, 2015) (Coty, 2017) (Coty, 2015) (YCharts, 2018)

Figure 26. Asset Turnover Competitive Benchmarking: Revlon, L’Oréal, Estẽe Lauder, Coty & Industry Average 2012-2016

Data retrieved from: (Revlon, 2017) (Revlon, 2015) (L’Oréal, 2017) (L’Oréal, 2015) (Estẽe Lauder, 2017) (Estẽe Lauder, 2015) (Coty, 2017) (Coty, 2015) (IBIS, 2018)

Figure 27. Inventory Turnover Competitive Benchmarking: Revlon, L’Oréal, Estẽe Lauder, Coty & Industry Average 2012-2016

Data retrieved from: (Revlon, 2017) (Revlon, 2015) (L’Oréal, 2017) (L’Oréal, 2015) (Estẽe Lauder, 2017) (Estẽe Lauder, 2015) (Coty, 2017) (Coty, 2015) (IBIS, 2018)

SWOT Analysis & TOWS Matrix

The following SWOT analysis considers the internal analysis of Revlon in conjunction with the broad and industry analyses in order to identify the company’s strengths, weaknesses, as well as the opportunities and threats. A visual presentation of relevant possible strategies Revlon could pursue are subsequently presented in a TOWS Matrix. The SWOT analysis and TOWS Matrix serves as a basis for strategy formation presented in the Strategic Suggestions section.

Figure 28. Revlon SWOT Analysis

Strengths

· Expanding Brand Portfolio, Distribution Channels & Geographic Reach

· R&D Capabilities

· CSR

Weaknesses

· Dependence on Few B2B Customers

· Dependence on NC Facility

· Costly & Challenging Integration of Elizabeth Arden

· Significant Debt Financing

Opportunities

· Organic, Wellness & Eco-Friendly Market

· Cosmeceuticals & Premium Products

· Male Grooming Market

· E-Commerce

Threats

· Currency Exchange

· Political Climate

· Regulations & Ethical Consumerism

· Counterfeit Market

· Industry Rivalry

Opportunities

Organic, Wellness & Eco-Friendly Markets. Evolving global consumer trends towards an increased focus on health and environmental sustainability provide brands with new and unique means of differentiation. The rising popularity of CBD based product formulations internationally is creating lucrative opportunities for brands to capture a share of the emerging global CBD market, estimated to increase by nearly $800 million from 2016 to 2021 (Borchardt, 2017) (Mandell, 2018). Differentiation is afforded not merely through organic product formulations, but through corporate practices that demonstrate CSR. Engaging in CSR empowers beauty and personal care companies with additional opportunities to address consumer values in order to drive brand loyalty behaviors (Pudaruth, Juwaheer & Sewoo, 2015). There is a significant positive relationship between customer retention rates and the financial performance of firms (Gallo, 2014). Further highlighting the opportunity presented by natural and organic products is that its market value is expected to nearly double between 2016-2024, exceeding $21 billion by 2024 (Gleason-Allured & Urbanowicz 2017).

Cosmeceuticals & Premium Products. Rising consumer demand for cosmeceuticals and premium products (particularly in the U.S. and China) is driving growth in the respective markets. The global market for cosmeceuticals is estimated to increase by approximately $36 billion from 2014-2020 (Coresight, 2016). The market for premium products is expected to increase by $19 billion from 2017-2021 (Micallef, 2017) (“How”, 2017) (“What’s”, 2016). Growth opportunities afforded by the markets for cosmeceuticals and premium products are further enhanced by the complementary nature of the markets. Biotechnology and smart technology enable companies to increasingly customize their products to meet the individual needs of consumers (“What’s”, 2016). Personalization is essential in the market for premium beauty and personal care products (“What’s”, 2016). Emerging and advancing biotechnologies are enhancing the innovative and efficacy capabilities of R&D in the creation of new products.

Male Grooming Market. The male demographic presents a significant global growth opportunity for companies competing in the beauty and personal care industry. New behavioral norms among men regarding their personal care routine enables beauty and personal care companies to expand their product lines to cater to the evolving grooming needs of men (“Men”, 2017) (“The Second”, 2018) (Cosslett, 2013). By 2020, the regional male grooming market growth in Asia-Pacific, North America, Latin America and Western Europe are forecasted to increase by $3.7 billion, $2.3 billion, $2.5 billion and $2 billion respectively from 2015 market values (Euromonitor International, 2018a) (Euromonitor International, 2018c) (“Focus on”, 2015). Companies seeking to penetrate emerging markets in Asia-Pacific, benefit from additional opportunities afforded by the expanding male grooming sector.

E-Commerce. The increasing availability of smartphones globally, as well as consumer willingness to make beauty and personal care product purchases on line is reflected in the growth of the e-commerce market within the industry. Between 2012-2017 the percentage of beauty and personal care products made through e-commerce nearly doubled (Euromonitor International, 2018b). Purchases of beauty and personal care products at retail stores declined by 2.1% over the same time period (Euromonitor International, 2018b). E-commerce opportunities are magnified by digitally savvy millennials and Gen Z, whose overall beauty and personal care related spending is expected to account for significant growth in the industry (“Young”, 2017) (Fromm, 2018). Millennial and Gen Z’s high social media use enable beauty and personal care companies to digitally target and connect with consumers to drive both traditional retail and e-commerce. Considering that e-commerce accounted for only 8% of industry sales in 2017, there is considerable room for growth in internet retailing (Euromonitor International, 2018a) (Euromonitor International, 2018b).

Threats

Currency Exchange Risk. Revlon’s products are manufactured and sold in the international market. Revlon is therefore susceptible to adverse effects stemming from fluctuations in foreign currency exchange rates. Exchange rate volatility can have a negative impact on various aspects of Revlon’s business, including consumer demand, supply costs, pricing strategies, foreign investments, and profitability. Revlon is dependent on a limited number of retailers for large volume purchase orders (Revlon, 2017). B2B customers may reduce purchase volumes in response to the impact of unfavorable currency exchange on their own operations. Revlon is therefore also threatened by adverse effects exchange rate fluctuations that may have on the business performance of Revlon’s B2B customers. In 2017, Walmart accounted for 16% of Revlon’s sales (Revlon, 2017). A significant reduction in Walmart’s purchase volume may compromise the profitability potential of Revlon.

Political Climate. The current political climate poses a threat to Revlon since the company manufactures and sells its products in the global market. Uncertainty regarding the political climate may constrain consumer purchasing behaviors, thereby threatening Revlon’s revenue growth and profitability (Weil, 2018a). Revlon is at risk of increased COGS and operational costs stemming from political climate, related exchange rate volatility, rising interest rates, new trade laws, tariffs, and regulatory changes pertaining to Brexit (Lim, 2018) internationally (Geoghegan, 2017). Spending by consumers in China is expected to account for significant growth in the market value of the global beauty and personal care industry. Recent retaliatory tariffs of 5-25% imposed on U.S. imports into China compromises the overall profitability potential from the Chinese foreign market (Lim, 2018). Furthermore, the tariff hinders the marketability of Revlon’s products in China compared to local Chinese goods.

Regulations & Ethical Consumerism. The policies and operations of companies in the beauty and personal care industry face a constant threat pertaining to compliance with new, amended and/or existing regulations. Revlon must continually ensure it adheres to varying government regulations across approximately 150 countries in which the company competes to avoid costly penalties and/or legal fees (Revlon, 2017). The U.S. Personal Care Products Safety Act for example would impose more stringent regulations on the existing and future practices of beauty and personal care companies (Entis, 2017) (Mueller, 2017) (Narayan, 2018). Revlon owns and operates several manufacturing facilities in the U.S. including its primary plant in NC (Revlon, 2017). If the Personal Care Products Safety Act is enacted into law, Revlon would be required to verify its products are produced in a clean environment (Entis, 2017) (Mueller, 2017) (Narayan, 2018). Revlon may incur costs related to changing practices in order to adhere with the potential new legislation. Ethical consumerism is prompting proposals of new legislative initiatives towards environmental and animal welfare protection (Pudaruth, Juwaheer & Sewoo, 2015). However, varying international laws pertaining to ingredient and product testing on animals complicates the industry landscape. China mandates animal testing for cosmetic and personal care products. Revlon may experience a consumer boycott and/or tarnished brand image due to animal testing for its products that are sold in China (Humane Society, n.d.) (Stringer, 2018).

Counterfeit Market. The increase of counterfeited beauty and personal care goods sold in the global B2B and B2C markets threaten the net sales potential and brand image of Revlon (Brodsky, 2016). Legitimate companies are estimated to incur losses of 15-20% from the sale of counterfeit goods internationally (Brodsky, 2016). Revlon’s brand image may be compromised by consumers who unknowingly purchase counterfeit Revlon products and do not achieve desired results and/or experience product related health complications (Ritter, 2018). Revlon may also be directly and indirectly impacted by adverse effects of the counterfeit market on the operations of Revlon’s supplier and manufacturers.

Industry Rivalry. The beauty and personal care industry is characterized by intense competition. The maturing market is compelling industry incumbents to pursue merger and acquisition strategies in order to attain and/or maintain dominance within the industry (Revlon, 2017) (Estẽe Lauder, 2017) (L’Oréal, 2017) (Coty, 2017). Revlon’s recent acquisitions have challenged the company’s integrative capabilities and cost control, as reflected in the financial performance of Revlon’s four operating segments (Revlon, 2017).

Strengths

Expanding Brand Portfolio, Distribution Channels & Geographic Reach. Revlon’s recent strategic acquisitions, namely that of Colomer and Elizabeth Arden, have expanded Revlon’s brand portfolio, available distribution channels and geographic reach across 6 continents (Revlon, 2017). The acquisitions include brand and licensing rights in profitable growth categories within the industry such as premium and men’s products. The profit potential and cost synergies stemming from the acquisitions should serve to strengthen Revlon’s positioning within the industry, once the acquisition related integrative programs are complete (Revlon, 2017). In 2017, Revlon’s Integration Restructuring Program for the Elizabeth Arden segment achieved cost reductions of nearly $69 million (Revlon, 2017).

R&D Capabilities. Revlon’s R&D related investments and expenses have contributed to the company’s extensive R&D capabilities. Revlon owned and operated R&D facility and R&D team in Edison, NJ empowers the company to continually innovate in order to introduce new products that provide the company with a competitive advantage in the industry (Revlon, 2017). Revlon’s is able to ensure quality control by testing the efficacy of its products and packaging in Revlon’s company operated facility. Furthermore, Revlon leverages the R&D capabilities of manufacturers within the company’s supply chain to strengthen Revlon's overall competency in beauty and personal care R&D (Revlon, 2017).

CSR. Revlon’s community outreach, charitable fundraising and related PR marketing serve as strength for the company in enhancing its overall value proposition. CSR is increasingly important to earning consumer trust and loyalty across different valuable demographic segments (Thuy, Hau & Evangelisa, 2016) (Jones, 2018). The intensity of competition within the beauty and personal care industry magnifies the importance of consumer loyalty. A survey conducted by Deloitte in 2015 concluded that corporate philanthropic activities were an influential factor considered by approximately 77% of millennials in deciding where to work (Kirkpatrick, 2015). Revlon’s CSR initiatives strengthen the company’s ability to attract top talent such that it can remain competitive within the industry.

Weaknesses

Dependence on Few B2B Customers. Revlon’s dependence on a limited number of global B2B mass retailers to generate revenue serves as a weakness for the company. Key mass retailers in different international markets include A.S. Watson & Company, Shoppers DrugMart, Walgreens Boots Alliance, Target, CVS and Wal-Mart (Revlon, 2017). Revlon’s bargaining power for selling terms is weakened by the company’s dependence on few B2B customers. Reduction in the purchase volume of any single primary customer could have a significant negative impact on Revlon’s market share and profitability. Furthermore, any weaknesses faced by Revlon’s primary B2B customers can ultimately create adverse effects on the financial performance of Revlon’s subsidiaries (Revlon, 2017).

Dependence on NC Facility. Revlon’s Oxford, NC manufacturing facility is responsible for the production of a substantial amount of the company’s products, particularly for its Consumer segment (Revlon, 2017). Revlon’s reliance on the NC facility exposes the company to various risks pertaining to manufacturing disruptions at the facility. Equipment failure, power outages, weather conditions, natural disasters…etc. at the NC facility could create an adverse ripple effect throughout the company’s operations (Revlon, 2017). For example, adverse financial effects could stem from the company’s inability to meet demand, or logistical problems in transferring manufacturing to the company’s other facilities.

Costly & Challenging Integration of Elizabeth Arden. The 2016 acquisition of Elizabeth Arden has insofar negatively impacted the company’s operational efficiency and cost control capabilities. Despite achieving cost reductions in 2017 of nearly $69 million due to Elizabeth Arden integrative programs, Revlon’s SG&A expenses increased by approximately 68% (Revlon, 2017). Elizabeth Arden related expenses was the primary contributing factor to Revlon becoming unprofitable in fiscal years 2016 and 2017 (Revlon, 2017). Revlon expects to incur an additional $90-95 million in integration costs related to the acquisition of Elizabeth Arden (Revlon, 2017). Revlon’s long-term survival is at risk, should projected synergies fail to be actualized. Revlon recognizes that its forecasted growth from the inclusion of the Elizabeth Arden segment may be grounded in erroneous assumptions (Revlon, 2017). Furthermore, since Elizabeth Arden strictly used third-party manufacturers for the production of its products, Revlon is less self-reliant for the overall production of the company’s products. Revlon has consolidated some of the Elizabeth Arden manufacturing into Revlon owned and operated facilities but plans to continue to use some of Elizabeth Arden’s third-party manufacturers. Since Revlon has stated that its current facilities can accommodate its existing and forecasted future needs, it is unlikely Revlon’s facilities could profitably accommodate manufacturing for the Elizabeth Arden segment should third-party manufactures be unable to fulfill their obligations. Reliance on third-party manufacturers further exposes Revlon to broad and industry environment risks that may cause disruptions in its supply chain.

Significant Debt Financing. Revlon’s indebtedness at the end of fiscal year 2017 totaled $2,897.4 million (Revlon, 2017). Revlon’s liabilities include financing secured though 5.25% and 6.25% Senior Notes, its 2016 Revolving Credit Facility, a 2016 Term Loan Facility as well as other debt financing (Revlon, 2017). Although the Senior Notes and credit agreements made during 2016 permit Revlon to obtain additional debt financing, they also contain provisions that restrict additional debt financing under certain conditions (i.e. value of the company’s assets). Such restrictions may hinder operational flexibility and create a competitive disadvantage for Revlon in the industry. Revlon’s liabilities expose the company to various risks that are magnified through additional debt financing including:

· Difficulty obtaining additional external capital necessary to fund its current operations, restructuring and growth initiatives.

· Interest expense related cash flow constraints that may negatively impact Revlon’s profitability and ability to finance internally its daily operations.

· Default risk and related penalties.

· Susceptibility to macroeconomic conditions such as those that would have adverse effects on floating interest rates.

(Revlon, 2017)

Figure 29. Revlon TOWS Matrix

Internal

External

Strengths (S)

· Expanding Brand Portfolio, Distribution Channels & Geographic Reach

· R&D Capabilities

· CSR

Weaknesses (W)

· Dependence on Few B2B Customers

· Dependence on NC Facility

· Costly & Challenging Integration of Elizabeth Arden

· Significant Debt Financing

Opportunities (O)

· Organic, Wellness & Eco-Friendly Market

· Cosmeceuticals & Premium Products

· Male Grooming Market

· E-Commerce

S-O Strategies

· Leverage CSR to attract eco-conscious market

· Utilize R&D capabilities to pursue cosmeceutical and premium market innovation

· Utilize expanding brand portfolio to increase product offering to male grooming market

· Leverage expanding distribution channels and geographic reach to increase global market share and e-commerce

W-O Strategies

· Capitalize on e-commerce to increase global market share and reduce dependency on few B2B customers

· Capitalize on growth markets (i.e. organic, cosmeceuticals, premium, millennials) to increase sales, improve operational efficiency and profitability

Threats (T)

· Currency Exchange

· Political Climate

· Regulations & Ethical Consumerism

· Counterfeit Market

· Industry Rivalry

S-T Strategies

· Leverage expanding distribution and supply channels for hedging purposes

· Leverage R&D capabilities to attract and establish strategic partnerships that can weaken the intensity of competitive rivalry

· Continue to engage in CSR to strengthen alignment with ethical consumerism

W-T Strategies

· Expand manufacturing capabilities to reduce reliance on third-parties and related risks in macro environment

· Expand manufacturing capacity to better accommodate Elizabeth Arden segment and increase economies of scale

· Further CSR to differentiate company from industry rivals

Strategic Suggestions

The following section presents key strategic initiatives that are designed to assist Revlon in taking advantage of opportunities and mitigate threats in the macro and industry environment, regarding the company’s current strengths and weaknesses. Stability, organic and hybrid growth strategies are suggested due to their respective advantages over inorganic growth given Revlon’s declining financial and operational performance. The current pursuit of inorganic growth opportunities would further threaten Revlon’s financial stability, creating what is referred to as “time compression diseconomies” (Moatti et al., 2015). “Time compression diseconomies” denotes the high costs associated with a significant instant expansion in a company’s size (Moatti et al., 2015).

Stability Strategy

Strengthen Existing Operations. Historically, mergers and acquisitions (M&A) often create a period of internal turmoil for the primary company, stemming from M&A related negative impacts on efficiencies and increased post-merger costs (Moatti et al., 2015). Depending on a firm’s post-merger initiatives and strategies, M&A related inefficiencies may or may not persist over time (Moatti et al., 2015). The acquisition of Elizabeth Arden has challenged Revlon’s integrative and efficiency capabilities as reflected in the company’s declining performance across various KPI. Revlon expects to incur an additional $90-$95 million in integrative initiative costs. Although extant studies have shown that horizontal growth through M&A can improve the bargaining power of a company, the associated M&A challenges can mitigate the overall improvement in the firm’s operational and financial performance (Moatti et al., 2015). Therefore, ensuring the effective implementation of integrative initiatives and reducing redundant non-value adding practices should be Revlon’s current primary focus (Dobni & Sand, 2018). Until expected cost and operational synergies are achieved across Revlon’s operating segments, the pursuit of inorganic growth should be avoided. Pursuing inorganic growth through M&A would likely threaten Revlon’s ability to become profitable and stabilize its operations due to M&A related costs and operational uncertainties. Organic growth however, that is, growth achieved through the use of internally developed capabilities and resources has been shown to improve both short-term and long-term corporate performance (Moatti et al., 2015) (Agnihotri, 2014). As Revlon continues to implement its integrative strategies that are expected to realize long-term annualized cost reductions, organic growth strategies can provide the company with means to capitalize on market opportunities (Agnihotri, 2014).

Organic Growth Strategies

Expand Manufacturing Facilities. Revlon is permitted to obtain a significant amount of additional credit financing, despite the company’s high indebtedness (Revlon, 2017). It is advisable that Revlon obtain the financing necessary to develop a new manufacturing facility and expand upon the capacity of its existing facilities (with the exclusion of the Oxford, NC facility). Increasing Revlon’s manufacturing capacity will increase the company’s ability to grow, as well as mitigate the threats stemming from Revlon’s reliance on the NC facility for a significant amount of the company’s product production. The acquisition of Elizabeth Arden resulted in an increase in Revlon’s use of third-party manufacturers in order to accommodate much of the production for the Elizabeth Arden segment. As noted earlier, increased use of third-party manufacturers globally exposes Revlon to various risks stemming from the political and macroeconomic environment. Increasing the company’s internal manufacturing capacity would also enable Revlon to increase its level of production for the Elizabeth Arden segment. This would have the effect of reducing Revlon’s reliance on third-party manufacturers and related vulnerabilities. The Elizabeth Arden segment’s production via third-party manufacturers was “turnkey” in nature (Revlon, 2017). By producing Elizabeth Arden products internally, Revlon may effectively reduce the degree of Elizabeth Arden related counterfeiting in the market by keeping the simplicity of its “turnkey” production procedures in-house.

Leverage CSR & R&D. Revlon’s engagement in CSR and R&D capabilities can be leveraged for the purpose of organic growth within the beauty and personal care industry. Extant literature demonstrates that a positive correlation exists between the implementation of community-based CSR activities for differentiation purposes and the rate of corporate growth (Stoian & Gilman, 2017). CSR initiatives are aligned with current macro trends for ethical consumerism and sustainability. Therefore, continuing to align Revlon’s CSR with its competitive strategy should help to drive sales growth (Stoian & Gilman, 2017). Furthermore, R&D helps to engender innovation which drives corporate growth and profitability (Dobni & Sand, 2018). Revlon’s R&D capabilities can be leveraged to innovate within industry growth sectors such as wellness, cosmeceuticals, premiumization, CBD and men’s grooming.

Hybrid Growth Strategy

Pursue Strategic Partnerships. Hybrid growth strategies involve the sharing and borrowing of resources between one or more firms such as joint ventures and alliances (Agnihotri, 2014). Revlon is in a poor financial position to pursue M&A and cope with related threats to its operational efficiencies. Therefore, strategic partnerships are suggested as such a strategy would provide Revlon with alternative means to pursue market growth and erode the competitive positioning of dominant industry incumbents (Agnihotri, 2014). The selection of strategic partners is recommended in growth sectors identified in the broad environmental analysis including cosmeceuticals, premiumization, CBD, and men’s grooming. Despite Revlon’s poor cash position, the company can leverage its extensive R&D capabilities as means to attract appropriate partners in the beauty and personal care industry.

Conclusion

The aforementioned corporate strategies should enable Revlon to stabilize its declining financial performance while also allowing the company to continue its pursuit of growth opportunities. Capitalizing on growth sectors is essential for Revlon to remain competitive within the maturing industry. However, as previously noted, Revlon must pursue growth initiatives with caution, due to the company’s significant liabilities. Financial data collection pertaining to the strategies presented in the previous section is suggested to determine optimal strategic choices and related means of financing.

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Appendix A

Figure A.1 Regression Analysis of the Global Men’s Grooming Market & the Global Beauty and Personal Care Industry 2012-2017

Figure A.2 Regression Analysis of China’s Top Income Spending on Miscellaneous Goods and Services & China’s Premium Beauty and Personal Care Market Value 2009-2017

Figure A.3 Correlation Analysis of Expenditures on Vitamins and Dietary Supplements & the Sale of Liquid/Cream/Gel/Bar Cleansers 2013-2017

Figure A.4 Correlation Analysis of Consumer Spending on Health Products & Expenditures on Skin Care 2013-2018

Figure A.5 Correlation Matrix of the Global Beauty and Personal Care Industry Market Size, the Global Consumer Health Industry Market Size & the Global Dermatologicals Industry Market Size 2013-2017

Figure A.6 Regression Analysis of the Global Dermatologicals Industry Market Size & the Global Beauty and Personal Care Industry Market Size 2013-2017

Figure A.7 Regression Analysis of the Global Possession of Smartphones & the Global Internet Retailing of Beauty and Personal Care Products 2012-2017

Figure A.8 Regression Analysis of the Percentage of China’s Population using Mobile Phone to Access Internet & China’s Beauty and Personal Care Market Size 2012-2017

Figure A.9 Regression Analysis of the Percentage of U.S. Population using Mobile Phone to Access Internet & U.S. Beauty and Personal Care Market Size 2012-2017

Figure A.10 Regression Analysis of the Percentage of India’s Population using Mobile Phone to Access Internet & India’s Beauty and Personal Care Market Size 2012-2017

Figure A.11 Regression Analysis of the U.S. Dollar to Euro Exchange Rate & P&G’s Quarterly Expenses 2013-2018

Figure A.12 Regression Analysis of the U.S. Dollar to Japanese Yen Exchange Rate & P&G’s Quarterly Expenses 2013-2018

Figure A.13 Regression Analysis of the U.S. Dollar to Euro Exchange Rate & P&G’s Quarterly Revenue 2013-2018

Figure A.14 Regression Analysis of the U.S. Dollar to Japanese Yen Exchange Rate & P&G’s Quarterly Revenue 2013-2018

Figure A.15 Regression Analysis of Average Annual U.S. Unemployment Rate & the U.S. Beauty and Personal Care Market Value USD Millions 2012-2017

Figure A.16 Regression Analysis of Average Annual U.K. Unemployment Rate & the U.K. Beauty and Personal Care Market Value GBP Millions 2012-2017

Figure A.17 Regression Analysis of Average Annual Unemployment Rate in Germany & Germany’s Beauty and Personal Care Market Value Euro Millions 2012-2017

Figure A.18 Regression Analysis of Volume Consumption of Cultures in Tonnes & Asia-Pacific Beauty and Personal Care Industry Market Value 2012-2017

Figure A.19 Regression Analysis of Annual Average U.S. PPI for Glass Container Manufacturing: Containers & the U.S. Glass Retail/Off-Trade Unit Volume in the Beauty and Personal Care Industry 2012-2017

Figure A.20 Correlation Matrix of France GDP (SCA), Germany GDP (SCA),

Poland GDP (SCA) & U.K GDP March 2012-June 2018

Figure A.21 Regression Analysis of the U.K. Export of Goods & U.K GDP

March 2012-June 2018

Figure A.22 Regression Analysis of U.S. Taxes on Production and Imports (SAAR) & P&G’s Quarterly COGS March 2013-June 2018

Figure A.23 Regression Analysis of U.S. Taxes on Production and Imports (SAAR) & Revlon’s Quarterly COGS March 2013-June 2018

Figure A.24 Regression Analysis of L’Oréal’s R&D Expenses (Annual) & L’Oréal’s Revenue (Annual) 2004-2016

Figure A.25 Regression Analysis of L’Oréal’s R&D Expenses (Annual) & L’Oréal’s Revenue (Annual) 2004-2016

Figure A.26 Regression Analysis of U.S. PPI for Real Estate Services: Non-Residential Rents & Ulta Beauty Inc.’s Total Operating Expenses Quarterly

January 2013-October 2018

Figure A.27 Correlation Matrix of the Revenue (Annual) of Beauty and Personal Care Industry Incumbents: Coty Inc., J&J, L’Oréal, P&G, Revlon, Shiseido, Estẽe Lauder & Unilever 2012-2017

Figure A.28 Revlon Weighted Average Cost of Capital Calculation



Data to Calculate Annualized Tax Rate:
	Earnings Before Taxes	Provision for Income Taxes	Effective Tax Rate
2015	110.7	51.4	0.464317977
2016	8.5	25.5	3
2017	-163.5	21.8	-0.133333333


Annualized Average Tax Rate	1.110328214
Total Debt	3827
Total Equity	1209.8
U.S. Treasury Risk Free Rate of Return % December 2017	2.7
Revlon Beta	0.11
Market Risk Premium %	5.5
Fiscal Year End 2017 Interest Expense (USD Millions)	149.8

Cost of Debt=Interest expense/Total Debt	3.91429318
*Cost of Equity= (Risk Free Rate of Return + Beta of Asset) (Expeected Return of the Market - Risk Free Rate of Return)**	18.2765

Figure A.29 Regression Analysis of the U.S. Seizures of Pharmaceuticals/Personal Care Products & the U.S. Beauty and Personal Care Industry Market Size 2012-2017

International Male Grooming Market Growth 2015-2020E

2015 Asia Pacific North America Latin America Western Europe 7.8 9.3 11.1 12.4 2020 Estimate Asia Pacific North America Latin America Western Europe 11.5 11.6 13.6 14.4 2015-2020 Estimated CAGR Asia Pacific North America Latin America Western Europe 8.1 4.5 4.1 3.0

USD Billions

2015-2020 Estimated CAGR %

China's Premium Beauty and Personal Care Market Value & Spending by China's Top Income Segment on Miscellaneous Goods and Services 2009-2017

China's Premium Beauty and Personal Care Market Value 2009.0 2010.0 2011.0 2012.0 2013.0 2014.0 2015.0 2016.0 2017.0 4.4 5.1 6.0 6.7 7.4 8.1 8.8 9.700000000000001 12.1 China's Top Income Segment Spending on Miscellaneous Goods and Services 2009.0 2010.0 2011.0 2012.0 2013.0 2014.0 2015.0 2016.0 2017.0 15.2 20.3 31.3 40.4 44.2 57.7 62.1 63.9 73.9

USD Billions Market Value

USD Billions Spending

Approximate Generational Composition of Global Population in 2017

Generation Z Millennials Generation X Baby Boomers Greatest Generation 25.0 22.0 20.0 24.0 9.0

Generation Z Percentage of Population

Population Size U.S. Europe China Japan 323.0 675.0 1400.0 125.0 Percentage of Population U.S. Europe China Japan 0.26 0.23 0.24 0.18

Millions

Global Beauty and Personal Care Industry

Distribution 2012-2017

Global Beauty and Personal Care Industry 2012.0 2013.0 2014.0 2015.0 2016.0 2017.0 461170.6 469857.1 471646.9 437284.8 441733.0 464942.4 Global Mixed Retailers for Beauty and Personal Care Products 2012.0 2013.0 2014.0 2015.0 2016.0 2017.0 12.4 12.3 12.4 13.1 13.1 12.8 Global Internet Retailing for Beauty and Personal Care Products 2012.0 2013.0 2014.0 2015.0 2016.0 2017.0 4.2 4.8 5.5 6.4 7.2 7.8

USD Millions

Use of Social Networking Sites by Smartphone Owners and/or Internet Users in 2015

Europe Asia-Pacific United States Africa Latin America Middle East Global Median 65.0 66.0 71.0 76.0 82.0 86.0 76.0

Consumer Expectations & Trust in Green & Ethical Claims

I expect companies be more environmentally friendly I would rather buy ‘green’ products from a company that has a clear set of standards for what exactly ‘green’ is The government should mandate that companies adhere to a rigorous set of ‘green’ standards When a company claims to be ‘green’, I am usually suspicious I usually trust companies that claim to be ‘green’ without verifying claims 64.0 60.0 44.0 35.0 24.0

Consumer Sentiment

Beauty and Personal Care Industry Revenue Loss in the European Union 2015

Manufacturing Wholesale Trade Retail Trade 2.040852358E9 2.244236946E9 2.244236946E9

USD Billions

L’Oréal Reveue and R&D Expense 2004-2016

Revenue 2004.0 2005.0 2006.0 2007.0 2008.0 2009.0 2010.0 2011.0 2012.0 2013.0 2014.0 2015.0 2016.0 16965.816338 18085.075425 19842.63132799998 23392.126158 25746.993303 24365.559901 25841.812671 28364.850112 27819.02096099999 29382.916063 29963.92344 26954.881996 27576.483437 R & D Expense 2004.0 2005.0 2006.0 2007.0 2008.0 2009.0 2010.0 2011.0 2012.0 2013.0 2014.0 2015.0 2016.0 580.3149189999998 617.499702 669.1661979999998 767.599981 862.303673 849.5300689999998 881.0642739999997 1004.609647 874.74406 993.809317 1011.475243 873.779305 931.010538

Revenue USD Millions

R&D Expense USD Millions

Global Beauty and Personal Care Market Value & Internet Retailing as Percentage of Global Market Sales 2012-2017

Global Beauty and Personal Care Market 2012.0 2013.0 2014.0 2015.0 2016.0 2017.0 461170.6 469857.1 471646.9 437284.8 441733.0 464942.4 Internet Retailing Percentage of Market Value 2012.0 2013.0 2014.0 2015.0 2016.0 2017.0 4.2 4.8 5.5 6.4 7.2 7.8

USD Millions

Revlon 2013-2017

Net Slaes, COGS & Gross Margin

Net Sales 2013.0 2014.0 2015.0 2016.0 2017.0 1494.7 1941.0 1914.3 2334.0 2693.7 COGS 2013.0 2014.0 2015.0 2016.0 2017.0 545.1 668.3 667.8 917.1 1151.3 Gross Margin 2013.0 2014.0 2015.0 2016.0 2017.0 63.53114337325214 65.56929417825863 65.1151857075693 60.706940874036 57.25953149942459

USD Millions

% Gross Margin

Revlon Financial Performance

Net Sales, Operating Income, Net Income & Operating Margin 2013-2017

Net Sales 2013.0 2014.0 2015.0 2016.0 2017.0 1494.7 1941.0 1914.3 2334.0 2693.7 Operating Income 2013.0 2014.0 2015.0 2016.0 2017.0 217.9 263.2 244.0 255.9 74.8 Net Income 2013.0 2014.0 2015.0 2016.0 2017.0 -5.8 40.9 56.1 -21.9 -183.2 Operating Margin 2013.0 2014.0 2015.0 2016.0 2017.0 14.57817622265337 13.56002060793405 12.74617353601839 10.96401028277635 2.77684968630508

USD Millions

% Operating Margin

Revlon Quick Assets, Current Liabilities

& Quick Ratio 2013-2017

Quick Assets 2013.0 2014.0 2015.0 2016.0 2017.0 497.6 514.2 571.8 610.3 531.9 Current Liabilities 2013.0 2014.0 2015.0 2016.0 2017.0 522.7 464.9 515.0 708.7 932.3 Quick Ratio 2013.0 2014.0 2015.0 2016.0 2017.0 0.951980103309738 1.106044310604431 1.110291262135922 0.861154226047693 0.570524509278129

USD Millions

Quick Ratio

Absolute

Revlon Assets, Long Term Liabilities & Debt to Equity Ratio 2013-2017

Assets 2013.0 2014.0 2015.0 2016.0 2017.0 1987.1 1919.2 1967.3 3023.5 3056.9 Long Term Liabilities 2013.0 2014.0 2015.0 2016.0 2017.0 2030.9 2098.4 2039.8 2929.6 2895.0 Debt to Equity Ratio 2013.0 2014.0 2015.0 2016.0 2017.0 -3.2449 -2.9041 -3.1064 -4.3787 -3.6816

USD Millions

Debt to Equity

Absolute

Revlon 2013-2017

Asset Turnover & Inventory Turnover Ratios

Asset Turnover 2013.0 2014.0 2015.0 2016.0 2017.0 0.927319539659398 0.993779279625221 0.985102277113084 0.935320990622746 0.886027235050326 Inventory Turnover 2013.0 2014.0 2015.0 2016.0 2017.0 3.763203313772869 4.030759951749094 3.92361927144536 3.014792899408282 2.496043360433602

Asset Turnover

Inventory Turnover

Competitive Benchmarking

Annual Sales Growth 2013-2017

Revlon 2013.0 2014.0 2015.0 2016.0 2017.0 0.0703953022056717 0.298588345487389 -0.013755795 9814529 0.219244632502743 0.154113110539846 L’Orẽal 2013.0 2014.0 2015.0 2016.0 2017.0 5.621675558577188 1.9773645874843 -10.04221443171595 2.306081106540338 6.873825139200626 Estẽe Lauder 2013.0 2014.0 2015.0 2016.0 2017.0 4.819016636468459 7.73053615800896 -1.721245715119241 4.471243042671618 4.990232640738768 Coty 2013.0 2014.0 2015.0 2016.0 2017.0 0.819725457029475 -2.097180099374073 -3.436154319360236 -1.048871496177636 75.90535972959921 Industry Average 2013.0 2014.0 2015.0 2016.0 2017.0 1.52 1.52 1.52 1.52 1.52

% Sales Growth

Competitive Benchmarking

Gross Margin 2013-2017

Revlon 2013.0 2014.0 2015.0 2016.0 2017.0 63.53114337325214 65.56929417825863 65.1151857075693 60.706940874036 57.25953149942459 L’Orẽal 2013.0 2014.0 2015.0 2016.0 2017.0 71.16551106828787 71.14903248798315 71.20525973680097 71.63061931419678 71.72116186438117 Estẽe Lauder 2013.0 2014.0 2015.0 2016.0 2017.0 80.10253690444618 80.32419225439428 80.51948051948048 80.63399041022907 79.38937753721243 Coty 2013.0 2014.0 2015.0 2016.0 2017.0 59.98580370394268 59.01001845504877 60.02457226064798 59.85376284748568 60.41331712481863 Industry Average 2013.0 2014.0 2015.0 2016.0 2017.0 53.53 53.53 53.53 53.53 53.53

% Gross Margin

Competitive Benchmarking

Operating Margin 2013-2017

Revlon 2013.0 2014.0 2015.0 2016.0 2017.0 14.57817622265337 13.56002060793405 12.74617353601839 10.96401028277635 2.77684968630508 L’Orẽal 2013.0 2014.0 2015.0 2016.0 2017.0 16.99677276514022 17.26744186007705 17.83764645941877 18.08494840683192 17.96938944159552 Estẽe Lauder 2013.0 2014.0 2015.0 2016.0 2017.0 15.30982056041722 16.63536576471447 14.89795918367347 15.47682472029835 16.2212449255751 Coty 2013.0 2014.0 2015.0 2016.0 2017.0 8.924307930567206 8.361894718340804 11.31689115398617 11.40005978248373 3.74756545494948 Industry Average 2013.0 2014.0 2015.0 2016.0 2017.0 15.23 15.23 15.23 15.23 15.23

% Operating Margin

Competitive Benchmarking

Net Margin 2013-2017

Revlon 2013.0 2014.0 2015.0 2016.0 2017.0 -0.388037733324413 2.10716125708398 2.930575144961605 -0.938303341902313 -6.80105431191298 L’Orẽal 2013.0 2014.0 2015.0 2016.0 2017.0 13.37087894740041 21.79211787827208 13.57502202585417 12.46493259321083 13.76207072898767 Estẽe Lauder 2013.0 2014.0 2015.0 2016.0 2017.0 10.0160091143915 10.97749981766465 10.10204081632653 9.900550523885636 10.56326116373478 Coty 2013.0 2014.0 2015.0 2016.0 2017.0 3.613602632767632 -2.139906845944283 5.28986166727339 3.607642960612541 -5.518737827274745 Industry Average 2013.0 2014.0 2015.0 2016.0 2017.0 10.52 10.52 10.52 10.52 10.52

% Net Margin

Competitve Benchmarking

Quick Ratio 2013-2017

Revlon 2013.0 2014.0 2015.0 2016.0 2017.0 0.951980103309738 1.106044310604431 1.110291262135922 0.861154226047693 0.570524509278129 L’Orẽal 2013.0 2014.0 2015.0 2016.0 2017.0 0.982748760960732 0.570540560957448 0.627524866339601 0.623125128973749 0.762378180391131 Estẽe Lauder 2013.0 2014.0 2015.0 2016.0 2017.0 1.378786312416004 1.462731560266446 1.267536857920931 0.985080193957479 1.110874955720864 Coty 2013.0 2014.0 2015.0 2016.0 2017.0 1.054606342263532 1.191260251674701 0.668916262613026 0.56883354894351 0.527316226732569 Industry Average 2013.0 2014.0 2015.0 2016.0 2017.0 0.8 0.8 0.8 0.8 0.8

Quick Ratio

Absolute

Competitive Benchmarking

Debt-to-Equity Ratio 2013-2017

Revlon 2013.0 2014.0 2015.0 2016.0 2017.0 -3.2449 -2.9041 -3.1064 -4.3787 -3.6816 L’Orẽal 2013.0 2014.0 2015.0 2016.0 2017.0 0.0134 0.1267 0.0319 0.0506 0.047 Estẽe Lauder 2013.0 2014.0 2015.0 2016.0 2017.0 0.409 0.3484 0.446 0.6277 0.8148 Coty 2013.0 2014.0 2015.0 2016.0 2017.0 1.7605 3.9032 2.716699999999998 11.3776 0.7663 Industry Average 2013.0 2014.0 2015.0 2016.0 2017.0 0.6061 0.6061 0.6061 0.6061 0.6061

Debt-to-Equity

Absolute

Competitive Benchmarking

Asset Turnover Ratio 2013-2017

Revlon 2013.0 2014.0 2015.0 2016.0 2017.0 0.927319539659398 0.993779279625221 0.985102277113084 0.935320990622746 0.886027235050326 L’Orẽal 2013.0 2014.0 2015.0 2016.0 2017.0 0.722862135250221 0.734247121440183 0.710828876024961 0.740075960688103 0.736220000944474 Estẽe Lauder 2013.0 2014.0 2015.0 2016.0 2017.0 1.482246582521728 1.461142933262288 1.339488186285778 1.290781035994476 1.137415227742774 Coty 2013.0 2014.0 2015.0 2016.0 2017.0 0.734838067238845 0.696895693779904 0.697020156366462 0.666298977364127 0.517195221709179 Industry Average 2013.0 2014.0 2015.0 2016.0 2017.0 0.76 0.76 0.76 0.76 0.76

Asset Turnover

Absolute

Competitive Benchmarking

Inventory Turnover Ratio 2013-2017

Revlon 2013.0 2014.0 2015.0 2016.0 2017.0 3.763203313772869 4.030759951749094 3.92361927144536 3.014792899408282 2.496043360433602 L’Orẽal 2013.0 2014.0 2015.0 2016.0 2017.0 3.088644309084331 3.070394195569894 2.863935045262764 2.833869228525797 2.851484058160354 Estẽe Lauder 2013.0 2014.0 2015.0 2016.0 2017.0 1.931728247914182 1.792599360438556 1.67344011475018 1.759012823614808 1.776886620488516 Coty 2013.0 2014.0 2015.0 2016.0 2017.0 2.96108237166733 3.044549608355092 2.990129339686862 3.107867568529726 3.74258526940188 Industry Average 2013.0 2014.0 2015.0 2016.0 2017.0 3.4 3.4 3.4 3.4 3.4

Inventory Turnover

Absolute

SUMMARY OUTPUT

U.S. Dollar to Japanese Yen Exchange Rate (X)

P&G Quarterly Revenue (Y)

Regression Statistics

Multiple R0.46934

R Square0.22028

Adjusted R Square0.18315

Standard Error1900.69

Observations23

ANOVA

dfSSMSFSignificance F

Regression121433186.542.1E+075.932850.02386

Residual2175865185.113612628

Total2297298371.65

Coefficie

nts

Standard

Error

t StatP-value

Lower

95%

Upper

95%

Lower

95.0%

Upper

95.0%

Intercept28978.34731.3729256.124724.5E-0619138.938817.819138.938817.8

US Dollar to

Japanese Yen

Exchange Rate

-105.70743.39839336-2.435740.02386-195.959-15.4555-195.959-15.4555

SUMMARY OUTPUT

Average Annual U.S. Unemployment Rate (X)

U.S. Beauty and Personal Care Market Value USD Million (Y)

Regression Statistics

Multiple R0.96941

R Square0.93976

Adjusted R Square0.9247

Standard Error1279.2

Observations6

ANOVA

dfSSMSFSignificance F

Regression110211475710211475762.40393980.00139

Residual46545404.511636351.13

Total5108660162

Coefficie

nts

Standard

Error

t StatP-value

Lower

95%

Upper 95%

Lower

95.0%

Upper

95.0%

Intercept98156.72402.9973940.8476062.1466E-0691484.9104828.480991484.9104828

Average Annual US

Unemployment Rate

-3081.04390.024526-7.89961640.00138899-4163.93-1998.16247-4163.93-1998.16

SUMMARY OUTPUT

Average Annual U.K. Unemployment Rate (X)

U.K. Beauty and Personal Care Market Value GBP Million (Y)

Regression Statistics

Multiple R0.98026

R Square0.96091

Adjusted R Square0.951137

Standard Error134.8608

Observations6

ANOVA

dfSSMSFSignificance F

Regression11788331178833198.327886870.000581

Residual472749.7118187.43

Total51861081

Coefficie

nts

Standard

Error

t StatP-value

Lower

95%

Upper

95%

Lower

95.0%

Upper

95.0%

Intercept14445.79257.643656.068896.05819E-0713730.4615161.1213730.4615161.12

Average Annual UK

Unemployment Rate

-410.54841.40243-9.916040.000580646-525.5-295.597-525.5-295.597

SUMMARY OUTPUT

Average Annual Unemployment Rate in Germany (X)

Germany's Beauty and Personal Care Market Value Euro Millions (Y)

Regression Statistics

Multiple R0.98315

R Square0.96659

Adjusted R Square0.95824

Standard Error112.866

Observations6

ANOVA

dfSSMSFSignificance F

Regression114742481474248115.730.00042

Residual450954.612738.7

Total51525202

Coefficie

nts

Standard

Error

t StatP-value

Lower

95%

Upper

95%

Lower

95.0%

Upper

95.0%

Intercept19781.7370.0553.45687.3E-0718754.320809.118754.320809.1

Annual Average of

Unemployment Rate in

Germany

-842.15678.2833-10.75780.00042-1059.51-624.807-1059.51-624.807

SUMMARY OUTPUT

Volume Consumption of Cultures in Tonnes (X)

Asia-Pacific Beauty and Personal Care Industry Market Value (Y)

Regression Statistics

Multiple R0.94694

R Square0.8967

Adjusted R Square0.87087

Standard Error1404.46

Observations6

ANOVA

dfSSMSFSignificance F

Regression16.8E+076.8E+0734.72120.00415

Residual478899901972498

Total57.6E+07

Coefficie

nts

Standar

d Error

t StatP-value

Lower

95%

Upper

95%

Lower

95.0%

Upper

95.0%

Intercept1173163357.7134.93934E-06107993126638107993126638

volume consumption

of cultures in tonnes

0.092550.015715.892470.004150.048940.136160.048940.13616

SUMMARY OUTPUT: glass volume use u.s (X) , average PPl galss container manufactring (Y)

Annual Average of U.S. PPI for Glass Container Manufacturing: Containers (X)

U.S. Glass Retail/Off-Trade Unit Volume Beauty & Personal Care Industry (Y)

Regression Statistics

Multiple R 0.83115

R Square 0.69081

Adjusted R Square 0.61352

Standard Error 8.51846

Observations 6

ANOVA

dfSSMSFSignificance F

Regression 1648.517648.5178.937160.04036

Residual 4290.25672.5641

Total 5938.773

Coefficie

nts

Standar

d Error

t StatP-value

Lower

95%

Upper

95%

Lower

95.0%

Upper 95.0%

Intercept 1040.42151.7226.857410.00237619.1741461.67619.174 1461.671698

Average Annual U.S. PPI for Glass Container Manufacturing: Containers -39.161413.0996-2.989510.04036-75.5318-2.79104-75.5318 -2.791040619

France GDP

(SCA)

Germany

GDP (SCA)

Poland GDP

(SCA)UK GDP

France GDP (SCA)1

Germany GDP (SCA)0.994956091

Poland GDP (SCA)0.971768820.956309551

UK GDP0.98402960.993607840.949817261

SUMMARY OUTPUT

U.K Exports of Goods

U.K. GDP

Regression Statistics

Multiple R0.56926

R Square0.32406

Adjusted R Square0.29702

Standard Error28839.5

Observations27

ANOVA

dfSSMSFSignificance F

Regression11E+101E+1011.98560.00194

Residual252.1E+108.3E+08

Total263.1E+10

Coefficie

nts

Standar

d Error

t StatP-value

Lower

95%

Upper

95%

Lower

95.0%

Upper

95.0%

Intercept18173683214.32.183950.038561035335311910353353119

UK Exports of Goods3.753131.084093.462030.001941.520425.985851.520425.98585

SUMMARY OUTPUT

U.S. Taxes on Production and Imports (SAAR) (X)

P&G quarterly COGS (Y)

Regression Statistics

Multiple R0.6556118

R Square0.4298268

Adjusted R Square0.4026757

Standard Error728.83038

Observations23

ANOVA

dfSSMSFSignificance F

Regression18409280.8898409280.88915.83091180.0006835

Residual2111155068.07531193.7175

Total2219564348.96

Coefficient

Standard

Error

t StatP-value

Lower

95%

Upper

95%

Lower

95.0%

Upper

95.0%

Intercept19997.8852781.3289647.1900467044.3621E-0714213.7952578214213.825782

US Taxes on Production and

Imports (SAAR)

-0.0086560.002175506-3.978807840.00068345-0.01318-0.00413-0.01318-0.00413

SUMMARY OUTPUT

U.S. Taxes on Production and Imports (SAAR) (X)

Revlon Quarterly COGS (Y)

Regression Statistics

Multiple R0.8081516

R Square0.653109

Adjusted R Square0.6365904

Standard Error40.834545

Observations23

ANOVA

dfSSMSFSignificance F

Regression165927.6171265927.6171239.5377493.095E-06

Residual2135016.661151667.460055

Total22100944.2783

Coefficient

Standard

Error

t StatP-value

Lower

95%

Upper

95%

Lower

95.0%

Upper

95.0%

Intercept-779.2949155.8309122-5.000900515.981E-05-1103.363-455.227-1103.36-455.227

US Taxes on Production and

Imports (SAAR)

0.00076640.0001218886.2879049783.0949E-060.00051290.001020.000510.00102

SUMMARY OUTPUT

L’Oréal R&D Expenses USD Millions (Annual)

L’Oréal Revenue USD Millions (Annual)

Regression Statistics

Multiple R0.98161

R Square0.96357

Adjusted R Square0.96025

Standard Error847.321

Observations13

An intersection exists between science and the cosmetic and personal care industry.

ANOVA

dfSSMSFSignificance F

Regression12.1E+082.1E+08290.9132.9E-09

Residual117897476717952

Total122.2E+08

Coefficie

nts

Standar

d Error

t StatP-value

Lower

95%

Upper

95%

Lower

95.0%

Upper

95.0%

Intercept398.8051458.280.273480.78955-2810.843608.45-2810.843608.45

R&D

Expense

29.23151.7138417.05622.9E-0925.459433.003625.459433.0036

SUMMARY OUTPUT

J&J R&D Expenses (Annual) USD Billions

J&J Revenue (Annual)

Regression Statistics

Multiple R0.90644

R Square0.82163

Adjusted R Square0.79933

Standard Error2.34383

Observations10

ANOVA

dfSSMSFSignificance F

Regression1202.433202.43336.84930.0003

Residual843.94835.49353

Total9246.381

Coefficie

nts

Standar

d Error

t StatP-value

Lower

95%

Upper

95%

Lower

95.0%

Upper

95.0%

Intercept36.21185.346566.77290.0001423.882648.54123.882648.541

R&D Expense3.800580.626096.070370.00032.356825.244332.356825.24433

SUMMARY OUTPUT

US Producer Price Index: Real Estate Services: Nonresidential Rents (NSA) (X)

Ulta Beauty Inc Total Operating Expenses (Quarterly) (Y)

Regression Statistics

Multiple R 0.93863

R Square 0.88102

Adjusted R Square 0.87441

Standard Error 25.666

Observations 20

ANOVA

dfSSMSFSignificance F

Regression 187799.787799.7133.2849.4E-10

Residual 1811857.4658.743

Total 1999657.1

Coefficie

nts

Standar

d Error

t StatP-value

Lower

95%

Upper

95%

Lower

95.0%

Upper

95.0%

Intercept -1869.66183.861-10.16896.9E-09-2255.94-1483.39-2255.94-1483.39

US Producer Price Index: Real Estate Services: Nonresidential Rents (NSA) 19.36751.6775911.54499.4E-1015.84322.89215.84322.892

(Annual)

Coty Inc

Revenue

Johnson &

Johnson

Revenue

L'Oreal SA

Revenue

Procter &

Gamble Co

Revenue

Revlon Inc

Revenue

Shiseido Co Ltd

Revenue

The Estee

Lauder

Companies Inc

Revenue

Unilever NV

Revenue

Coty Inc Revenue1

Johnson & Johnson Revenue 0.6788083581

L'Oreal SA Revenue0.4300628660.6785941291

Procter & Gamble Co Revenue0.108694253-0.1595349410.3502430521

Revlon Inc Revenue0.6681102530.7891229480.126384678-0.549635151

Shiseido Co Ltd Revenue0.5860434490.221440610.498424160.0682074440.1172271111

The Estee Lauder Companies Inc

Revenue

0.6154144340.8644052630.224408549-0.492458760.9787430420.0120951361

Unilever NV Revenue-0.140512453-0.2696127860.5181975490.715396367-0.7364398940.430724761-0.7056700591

SUMMARY OUTPUT

U.S. Seizures of Pharmaceuticals/Personal Care (X)

U.S. Beauty and Personal Care Industry Market Value USD Millions (Y)

Regression Statistics

Multiple R0.86807

R Square0.75354

Adjusted R Square0.69193

Standard Error2587.48

Observations6

ANOVA

dfSSMSFSignificance F

Regression18.2E+078.2E+0712.230.02496

Residual42.7E+076695032

Total51.1E+08

Coefficie

nts

Standar

d Error

t StatP-value

Lower

95%

Upper

95%

Lower

95.0%

Upper

95.0%

Intercept14321718213.87.863070.001419264719378692647193786

U.S. Seizures of

Pharmaceuticals/Personal Care

-840.18240.248-3.497140.02496-1507.22-173.145-1507.22-173.145

SUMMARY OUTPUT

Men's Grooming Global Market Value USD Millions (X)

Global Beauty and Personal Care Market Value USD Millions (Y)

Regression Statistics

Multiple R0.95595

R Square0.91385

Adjusted R Square0.89231

Standard Error4819.58

Observations6

ANOVA

dfSSMSFSignificance F

Regression19.9E+089.9E+0842.43040.00287

Residual49.3E+072.3E+07

Total51.1E+09

Coefficie

nts

Standar

d Error

t StatP-value

Lower

95%

Upper

95%

Lower

95.0%

Upper

95.0%

Intercept14992247301.83.169470.0338718590.828125218590.8281252

Men's Grooming

World Market Value

USD Millions

6.192150.950616.513870.002873.552838.831473.552838.83147

SUMMARY OUTPUT

China's Top Income Segment Spending on Miscellaneous Goods & Services USD Billions (X)

China's Premium Beauty and Personal Care Market Value USD Billions (Y)

Regression Statistics

Multiple R 0.96509

R Square 0.93139

Adjusted R Square 0.92159

Standard Error 0.67328

Observations 9

ANOVA

dfSSMSFSignificance F

Regression 143.075743.075795.02482.5307E-05

Residual 73.173170.45331

Total 846.2489

Coefficie

nts

Standar

d Error

t StatP-valueLower 95%

Upper

95%

Lower

95.0%

Upper

95.0%

Intercept 2.437230.574164.244860.003821.079553083.79491.079553.7949

China's Top Income Segment Spending on Miscellaneous Goods

and Services

0.113360.011639.748072.5E-050.085863210.140860.085860.14086

Global Beauty and Personal

Care Industry Market Size

Global Consumer Health

Industry Market Size USD

Global Dermatologicals

Industry Market Size USD

Global Beauty and Personal Care Industry Market Size USD Millions 1

Global Consumer Health Industry Market Size USD Millions 0.6444256061

Global Dermatologicals Industry Market Size USD Millions 0.9881993240.5356143411

SUMMARY OUTPUT

Global Dermatologicals Industry Market Size USD Millions(X)

Global Beauty and Personal Care Industry Market Size USD Millions (Y)

Regression Statistics

Multiple R 0.988199324

R Square 0.976537903

Adjusted R Square 0.968717205

Standard Error 2885.528304

Observations 5

ANOVA

dfSSMSFSignificance F

Regression 110396669011039666901124.8660.00154

Residual 324978820.788326273.593

Total 41064645721

CoefficientsStandard Errort StatP-value

Lower

95%

Upper

95%

Lower

95.0%

Upper

95.0%

Intercept -66780.0140246899.54024-1.4238948540.24967-21603582475.3-21603582475.3

Global Dermatologicals Industry Market Size USD Millions 35.144816633.14513659211.174337140.0015425.135645.15425.135645.154

SUMMARY OUTPUT

Global Possession of Smartphone % (X)

Global E-Commerce Retailing of Beauty and Personal Care Products (Y)

Regression Statistics

Multiple R 0.99507

R Square 0.99016

Adjusted R Square 0.9877

Standard Error 0.15503

Observations 6

ANOVA

dfSSMSFSignificance F

Regression 19.67229.6722402.433.6443E-05

Residual 40.096140.02403

Total 59.76833

Coefficie

nts

Standard

Error

t StatP-valueLower 95%

Upper

95%

Lower

95.0%

Upper

95.0%

Intercept -0.400190.32444-1.233450.28493-1.30098720.50061-1.300990.50061

Global Possession of Smartphone 0.129220.0064420.06073.6E-050.111336540.147110.111340.14711

SUMMARY OUTPUT

Percentage of China's Population using Mobile Phone to Access Internet (X)

China's Beauty and Personal Care Market Size USD Millions (Y)

Regression Statistics

Multiple R 0.964786

R Square 0.930813

Adjusted R Square 0.913516

Standard Error 11890.34

Observations 6

ANOVA

dfSSMSFSignificance F

Regression 17608255570760825557053.81415970.00183816

Residual 4565520719141380180

Total 58.174E+09

Coefficie

nts

Standard

Error

t StatP-valueLower 95%

Upper

95%

Lower 95.0%

Upper

95.0%

Intercept -14283360925.9802-2.34436730.07900014-311990.5126324.8-311990.51526324.8

% of China's Population using Mobile Phone to Access Internet 5157.486703.0557067.33581350.001838163205.489967109.483205.4899627109.48

SUMMARY OUTPUT

Percentage of U.S. Population Using Mobile Phone to Access Internet (X)

U.S. Beauty and Personal Care Market Size USD Millions (Y)

Regression Statistics

Multiple R 0.996818

R Square 0.993646

Adjusted R Square 0.991527

Standard Error 387.7188

Observations 5

ANOVA

dfSSMSFSignificance F

Regression 17051892270518922469.1070.000215397

Residual 3450977.6150325.9

Total 47.1E+07

Coefficie

nts

Standard

Error

t StatP-valueLower 95%

Upper

95%

Lower

95.0%

Upper

95.0%

Intercept 60069.56970.372861.903599.29E-0656981.4046263157.756981.463157.7

% of U.S. Population using Mobile Phone to Access Internet 410.296318.9435621.658880.000215350.0094732470.583350.009470.583

SUMMARY OUTPUT

Percentage of India's Population Using Mobile Phone to Access Internet (X)

India's Beauty and Personal Care Market Size USD Millions (Y)

Regression Statistics

Multiple R 0.99935349

R Square 0.9987074

Adjusted R Square 0.99827654

Standard Error 4802.67616

Observations 5

ANOVA

dfSSMSFSignificance F

Regression 153464138762534641387622317.9071.97312E-05

Residual 369197094.8623065698.29

Total 45.3533E+10

Lower 95.0%Upper 95.0%

432398.5709472740

Coefficient

Standard

Error

t StatP-valueLower 95%

Upper

95%

27754.8143931683.8

Intercept 452569.116338.06103871.404978136.05E-06432398.5709472740

% of India's Population using Mobile Phone to Access Internet 29719.3137617.292203448.14464451.97E-0527754.8143931683.8

SUMMARY OUTPUT

U.S. Dollar to Euro Exchange Rate (X)

P&G Quarterly Expenses (Y)

Regression Statistics

Multiple R0.47014

R Square0.22103

Adjusted R Square0.18394

Standard Error823.047

Observations23

ANOVA

dfSSMSFSignificance F

Regression14036462.81840364635.95870.02359

Residual2114225543.01677407

Total2218262005.83

Coefficie

nts

Standard

Error

t StatP-value

Lower

95%

Upper

95%

Lower

95.0%

Upper

95.0%

Intercept10024.82009.7038514.988186.2E-055845.3614204.25845.3614204.2

US Dollar to Euro

Exchange Rate

-5833.92389.920738-2.441040.02359-10804-863.791-10804-863.791

SUMMARY OUTPUT

U.S. to Japanese Yen Exchange Rate (X)

P&G Quarterly Expenses (Y)

Regression Statistics

Multiple R0.51539

R Square0.26563

Adjusted R Square0.23066

Standard Error799.139

Observations23

ANOVA

dfSSMSFSignificance F

Regression14850903.8648509047.595870.01184

Residual2113411101.97638624

Total2218262005.83

Coefficie

nts

Standard

Error

t StatP-value

Lower

95%

Upper

95%

Lower

95.0%

Upper

95.0%

Intercept10600.21989.2902395.328662.8E-056463.2914737.26463.2914737.2

US Dollar to

Japanese Yen

Exchange Rate

-50.28918.24671225-2.756060.01184-88.2352-12.3429-88.2352-12.3429

SUMMARY OUTPUT

U.S. Dollar to Euro Exchange Rate (X)

P&G Quarterly Revenue (Y)

Regression Statistics

Multiple R0.53955

R Square0.29112

Adjusted R Square0.25736

Standard Error1812.3

Observations23

ANOVA

dfSSMSFSignificance F

Regression128325071.672.8E+078.624010.00788

Residual2168973299.983284443

Total2297298371.65

Coefficie

nts

Standard

Error

t StatP-value

Lower

95%

Upper

95%

Lower

95.0%

Upper

95.0%

Intercept30442.54425.2533616.879268.5E-0721239.639645.321239.639645.3

US Dollar to Euro

Exchange Rate

-15454.15262.469282-2.936670.00788-26398-4510.21-26398-4510.21

Audit

Running Head: Strategic Audit: Revlon Inc. Strategic Audit: Revlon Inc.

Running Head: Strategic Audit: Revlon Inc.

Strategic Audit: Revlon Inc.