Revlon: In Need of a Strategic Makeover
By: Orion Li, Flora Huang & Jomana Elsays
The Ivey Business Review is a student publication conceived, designed and managed by Honors Business Administration students at the Ivey Business School.
Revlon: In All Its Glory
Founded in New York City in 1932, Revlon Inc. is the eighth largest player in the cosmetics and personal care industry. Revlon Inc.’s products can be broken up into four segments: Revlon, Elizabeth Arden, Portfolio, and Fragrances. The Revlon line consists of Revlon’s flagship products for hair colouring and colour cosmetics. These products are sold through mass retail channels, drug stores, and e-commerce channels. In Q4FY21, Revlon’s products generated the highest revenue at $206 million (33.5 percent of overall sales). The Elizabeth Arden segment includes high-end products of skin care, fragrances, and cosmetics distributed through prestigious retailers and department stores. Elizabeth Arden is the next highest earner, with revenues of $173 million in the same quarter. The portfolio segment sells premium, speciality, and mass products such as American Crew to hair and nail salons. Producing the least revenue, the Portfolio segment reported $112 million. Finally, the Fragrances segment distributes owned and licensed fragrances such as Juicy Couture and generated $125 million revenue.
As a large player in the cosmetics and hair care industry, Revlon has acquired several companies. Revlon’s largest acquisition was its purchase of Elizabeth Arden for $870 million in 2016. The combination of these well-known companies aimed to expand global presence within the beauty market and accelerate growth.
The Dangers of Blending In
The beauty and personal care market comprises four categories: cosmetics, fragrances, personal care, and skin care. The industry is large, valued at $503.6 billion in 2021. The United States is the largest geographical market, generating $21.24 billion in revenue.
The beauty and cosmetics industry is saturated with most makeup being homogenous across categories, making brand strategy key for differentiation. Sephora and Ulta, for example, created a unique shopping experience for consumers, bringing products of different price points under one roof. In contrast, Estée Lauder’s The Ordinary brand competes on product innovation and price, and has garnered a strong social media presence to support its brand. Beyond the products themselves, marketing has also proven to be a tactic for differentiation. Some companies have employed social media influencers to advertise beauty products while other companies, like Korean brand Dr. Jart+, focus on quality ingredients in its marketing.
As new entrants pursue more attractive brand positioning and fill lucrative market gaps through differentiation, the market share of dominant players is at risk. Companies such as Revlon, that once monopolised the beauty and cosmetics industry, are struggling to maintain their position in the face of this new wave of competition.
Debt Ain’t Pretty
Revlon has been struggling to increase sales for many years due to operational challenges, increased competition, and changing consumer preferences. Exacerbated by the pandemic, Revlon’s sales fell 21 percent in 2020. In March 2020, Revlon planned to cut a thousand jobs to improve profitability, as its sales had declined over the past five quarters. The company also exhibits solvency risk, being highly levered with a total debt-to-equity ratio of 1.65x compared to the industry average of 1.33x. Revlon’s solvency continued to deteriorate, narrowly avoiding bankruptcy in late 2020 by convincing its creditors to extend its debt maturity. Finally, in June 2022, Revlon filed for Chapter 11 bankruptcy protection in the United States. This trend of financial instability demonstrates the need for Revlon to pivot its currently flawed business strategy.
Revlon’s operational difficulties are two-fold. Firstly, the company has a quick ratio of 0.46x compared to the industry average of 0.88x, and the resulting lack of cash flows prevented Revlon from investing in digital sales or marketing strategies. Conversely, competitors such as L’Oréal-owned NYX Cosmetics is known as a ‘digital-first’ brand and has prioritised digital investments, such as launching an app, in order to grow its user base. This disparity has put Revlon at a significant disadvantage, with the changing consumer landscape requiring companies to build a digital presence in order to succeed. Secondly, the pandemic caused both raw material shortages and price hikes in 2019 and 2020. The material shortages resulted in longer manufacturing times, and suppliers demanding repayment earlier only added to Revlon’s cash squeeze. While some smaller makeup companies reformulated their products as a solution to material shortages, Revlon’s size may make it difficult to swiftly implement a similar strategy.
Highlighting Revlon’s Competition
Increasing competition has negatively affected Revlon’s top line. Revlon’s debt repayment requirements not only limited its digital investment capabilities, but also its ability to invest in subsidiary brands that appealed to Gen-Z consumers. On the other hand, competitors Coty and L’Oréal were quick to acquire stakes in brands like Kylie Cosmetics and Youth to the People. Competitors are also leveraging digital strategies that Revlon has not fully invested in. For example, L’Oréal acquired an augmented reality company in 2018 so it could develop virtual try-on services for its customers. Its sales grew by 8 percent that year, largely due to e-commerce sales. Now, L’Oréal has begun offering augmented reality services in-store, on video communications platforms, and on social media. In contrast, Revlon only launched Revlon Virtual Mirror, an app specifically for customers to virtually test lipstick colours, in 2021.
Competition also comes from celebrity makeup endeavours and independent start-ups. Celebrity product launches are able to generate sales with minimal marketing due to the celebrities’ online following, whereas fast-to-market start-ups can leverage current trends and online sales to capture market share. Larger competitors like Estée Lauder and its subsidiaries have also relied heavily on social media and have even released branded NFTs. Revlon has not fully capitalised on the benefits of a strong digital presence in order to target younger consumers. This shortcoming further detracts from Revlon’s perception among Gen Z consumers, as a 2022 survey indicated Revlon was not amongst Gen Z’s top ten makeup brands.
Glossing Over Consumer Preferences
Finally, Revlon has not kept up with changing consumer preferences. The pandemic decimated retail store foot traffic, and in-store shopping is not likely to rebound as in 2022 urban shopping centre foot traffic is still 16 percent below pre-pandemic levels. For a brand that relies heavily on drugstores and other retailers, this trend severely disadvantages Revlon. This can be seen in part by Revlon’s 2022 Q2 revenue dropping 5 percent more from 2021 than competitors. Another pandemic-induced consumer trend is a growing interest in skincare, as demand for makeup decreased under quarantine measures. However, Revlon did not have significant capabilities or brand awareness in the skincare segment. Competitors like Estée Lauder, in contrast, are much stronger in this category and were able to pivot appropriately.
Setting the Foundation
As a legacy brand, Revlon’s bankruptcy filing is hardly the end. With its rich history, Revlon can remain relevant in some categories that, if positioned well, can allow the brand to recover and even grow.
Revlon’s heavy reliance on debt has prevented it from navigating challenges and investing in research and development (R&D) initiatives, which are key to succeeding in this market. Restructuring capital by divesting underperforming brands will allow for brand repositioning in the cosmetics market and focus on categories that better align with current market trends. Chapter 11 bankruptcy is a reorganisation bankruptcy that allows businesses to maintain operations, create a plan to repay creditors, and reorganise its capital structure. Maintaining a good relationship with vendors in the cosmetics supply chain is essential to succeeding in this industry. With Revlon’s $3.5 billion debt load, and low cash levels, restructuring is necessary to implement a strategic recovery plan.
Revlon could benefit from divesting subsidiary brands that don’t align with its long-term goals. The Japanese beauty brand Shiseido applied this strategy, selling off its mass-market brands to a holding company in 2021 to focus on its luxury skincare segments. Revlon’s subsidiaries cover a range of product segments including makeup (Revlon), skincare (Elizabeth Arden), men’s grooming (American Crew), nail care (Cutex, CND). While this diversity can provide sales stability, it complexifies supply chains and operations, spreads resources thinly, and makes it difficult for Revlon to achieve a unified goal across all brands. Revlon can employ a similar strategy to Shiseido by divesting Cutex and CND. Not only were these nailcare subsidiaries not drivers of Revlon’s Portfolio segment growth in 2021, but they have relatively little brand value or differentiation. A possible buyer for these nail care brands could be Revlon’s competitor Coty, as it owns similar brands like OPI and Sally Hansen and may be interested in deepening that portfolio.
A Strategic Makeover
Once capital is received from the proposed divestments, Revlon can pursue strategic realignment. Despite Revlon’s long history, the brand has lost cultural relevancy over the last few decades, causing a decline in sales. As a well established name in the drugstore makeup market, a brand repositioning can help Revlon reclaim its top spot. With inflation reaching a forty year peak, consumers are seeking cheaper alternatives to cult beauty products. Consequently, now is an opportune time for Revlon to repurpose its products and shift its strategy. Data from Google indicates that the term “dupe” has risen 40 percent globally year-over-year. Additionally, the dupe industry is a cult favourite topic for beauty influencers, as comparison reviews have gone viral on social media platforms like YouTube and TikTok. Many drugstore brands have capitalised on this opportunity by launching products that “dupe” luxury brands. This strategy is most successful when product launches prioritise product performance, while still keeping selling price low.
Revlon Salon has successfully implemented this strategy in the past. For example, its Revlon One-Step Hair Dryer was admired by fans for its high performance, low price point and easy to use features. The Dyson AirWrap’s release in 2018, boasting patented technology that prevents hair damage, grabbed market share from Revlon. To counteract this, Revlon positioned their product as a dupe for Dyson’s product, using its low price point ($750 vs $45) to appeal to price conscious consumers. This positioning strategy was evidently successful, as social media users often compared the two products, advocating for Revlon’s ability to achieve identical results at a significantly lower price point. As of November 2022, Revlon’s Blow-Dryer Brush is a best-seller and has won many awards, including the prestigious Allure Best of Beauty Award and Readers’ Choice award.
Within the makeup industry, e.l.f. Cosmetics is a drugstore brand that is well-known for continuously launching dupe products and succeeding within this space. The brand produces high quality, vegan, and cruelty-free makeup with prices ranging from $3-10. When developing products, e.l.f. Recognizes that an industry KSF is rapid innovation. The brand can take products from the initial idea stage to selling on their website within 13 weeks. This allows management to quickly react to market trends and push out new products that “dupe” luxury, viral products. For instance, at the end of July 2022, e.l.f. launched a $14 dupe for the Charlotte Tilbury Flawless Filter, which retails at $40. This launch was in reaction to the luxury products worldwide success, leading to it selling out everywhere online and becoming a viral product on TikTok. Similarly, e.l.f. also launched a dupe to Anastasia Beverly Hills’ brow freeze. E.l.f.’s quick reaction to market trends allows for successful product development. Creating products that essentially do the same thing as these famous luxury brands also creates positive publicity for e.l.f. as they have now become the go-to brand for cheaper alternatives.
Following in the footsteps of the successful drugstore brand e.l.f., Revlon can allocate proceeds and resources from its divestments into R&D initiatives to develop a product life-cycle and supply chain system that allows for quick, innovative production. This will also allow Revlon to launch products that better align with market trends, thereby entering the dupe market. Entering this market is also lucrative for Revlon, who have an older age demographic, as this will allow them to shift to younger demographics, and build brand loyalty with these young consumers.
Time to Makeup for its Past
While Revlon is saddled with debt and has been unable to compete with peers and align with changing consumer preferences, the cosmetics powerhouse can make a comeback. By restructuring through appropriate divestments and using the resulting capital to undertake strategic repositioning, Revlon can differentiate, gain relevance, and fulfill market gaps.
