The lively fragrances of popular perfumes in Israel cannot match the strong whiff of competition wafting through the cosmetics market. The three main players - SuperPharm, NewPharm and April - are all opening new branches at a fast pace. The revamped Hamashbir Lazarchan is courting customers by offering discounts, and duty free stores feature tempting special offers.
Behind the scenes, retailers are demanding that suppliers join more and more aggressive sales campaigns that include advertising, fancy stands in stores, and extra sales staff.
April, founded in 1994 and operating 20 stores, is different from its competitors in that it sells only cosmetics and perfumes, almost all of them expensive luxury brands. SuperPharm, the market leader, has 104 stores and brings in just 30 percent of its revenue from cosmetics and perfumes.
April's growth strategy actually includes downsizing - opening smaller branches in outlying towns on the "Parisian perfumery model," as CEO Sasi Meir calls it. At the same time April will continue to open large branches in the big cities.
The small branches, with an average store space of 60-80 square meters, will open in towns without malls and in cities where the main street has busy shopping strips, like Afula and Tiberias. Meir hopes the advantage of this strategy will be less competition from the big retailers.
The strategy is also less expensive - it costs about $105,000 to set up a small store (before stock), compared to $150,000 to set up a regular branch with an area of 100-150 square meters. Rents are lower, as are labor costs also, since fewer employees are needed.
April's current business plan calls for opening seven small stores in 2004-2005. Meir says April hopes to open its first small branch by the fourth quarter of 2003. "We had a location," says Meir, "but we didn't sign a contract because we were asked to pay a vacating fee. We are willing to pay vacating fees in a mall, but not for a store in the city center."
Meir figures it will take at least 12 months for the new branches to become profitable. In the long term, however, he is sure the small branches will succeed. The April chain is very successful in smaller cities. "Our Be'er Sheva branch is one of our strongest," says Meir.
"From a financial point of view," he says, "April is capable of opening 3-4 new branches a year with independent financing. We are opening the small stores in full cooperation with the suppliers. They know we will not keep those stores fully stocked, as we do the regular stores, but suppliers also know that April generates more money at each sales point than our competitors. We are a small chain, but we do a lot more business."
Saying it with flowers
In the first half of 2003 April had 19 percent sales growth over the same period last year, with sales of NIS 65 million and a marked increase in operating profits. Meir says April has been showing a profit for the last seven quarters and some of the growth is actually thanks to the recession. A decline in overseas trips means people are buying less at duty free stores and more at local stores - and at April.
This summer witnessed a surge in overseas travel. "All the chains had to compete with the duty free stores, which were offering 3+1 specials - buy three products, get the fourth free - so local specials reached new heights," Meri says.
He says that to maintain its market share April had to absorb a significant erosion of its profits, and unlike the other chains, sales personnel are employed without any help from the suppliers. April also had to upgrade the interior design of its branches independently.
Up until a year and a half ago April was a subsidiary of NewPharm, which was owned jointly by Co-op North and the South African department store group Metro Cash & Carry. When the Borowitz Mozes Rosen investment group acquired NewPharm in late 2001, April was retained by Metro.
Meir says that in the first year after the sale of NewPharm the South African investors were not sure if they wanted to continue holding the company, which remained their only Israeli asset.
"Now the chain is generating cash, so its owners are no longer pushing to sell," says Meir. Sources in the cosmetics industry say, however that for the right price, Metro would be happy to sell April.
In the meantime April is planning to open five regular-sized stores with a new interior design in 2003 - in Modi'in, Rishon Letzion, Kiryat Ono and Givatayim. The location of the fifth store has not yet been decided. There are also plans to renovate 3-4 of the veteran branches per year, at a cost of about $100,000.
The idea is to create the right atmosphere for trying new cosmetic products using a different division of the store space, with cosmetics stands in a circle in the center of the store and make-up and treatment stations inside the circle. Perfumes would be placed on shelves along the store walls and popular-brand cosmetics will be at the entrance to the stores.
The decision to sell lower-priced brands is related, among other things, to the opening of stores in outlying towns, although such products will be sold in the other stores too. Narkis Tessler, marketing vice president for April and a former manager of the Life brand at SuperPharm, says the decision to sell "mass-market" products is strategic. The target audience for these products is young women aged 16-23, who do not use luxury cosmetics due to their price.
"The chain decided to bring mass market products into the stores," says Tessler, but only international brands such as Maybelline, and L'Oreal, not local brands, to maintain the quality of the chain's name. The popular brands are intended to attract a new generation of customers who will use the luxury brands in a few years. The mass market products will contribute only 2-3 percent to total sales."
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