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Anonymous

Former SVP of Consumer Beauty at Coty and Group VP of Beauty at Walgreens

Buying & Merchandising: Importance of Understanding Finance

What exactly is the structure of the mass market channel in the US in terms of size and split between different stores?

Walmart is about 33% of the entire beauty business in the mass market. CVS, and Walgreens, and Target, those four together make up about 75% of the syndicated data market. Walgreens would be second largest, CVS would be third, but that teeters back and forth as far as volume is concerned, and I think CVS may have taken over Walgreens this past year. I have to wait till the 2018 data comes through. Then Target also has a great business here and is the darling of the industry as far as top line growth is concerned.

I think will be continued pressure there because their operating income continues to shrink, which is what's been causing some dings to their share price, which they can get margin out of several different ways. They can cut the their SGNA but they can also ask for an increase from the supplier community to offset some of that. Everybody wants to be at Ulta [Ulta Beauty Inc.]. Literally, that's where you'd want to start your business if you want to be considered a beauty player, you would have distribution at Ulta versus any of the big four.
They're not as attractive because the cost to serve is so much higher until-- Whatever happens with Ulta on their margin requirements going forward, they may be considered very high cost to serve in the future versus what the payback's going to be. Then you have e-commerce - Amazon is a massive player, undisclosed amounts of money, but it's multi-billions for their beauty and personal care business. A couple of billion sits outside that's not recognized in the Amazon business, and they're fairly decent to do business with as far as the margin structure's concerned.

Could you elaborate on the cost to serve?

Yes, the trade fill that you would spend, the cost to do business with the drug retailers is the highest, and then Walmart and Amazon are the lowest, and Target and Ulta sit in the middle. Then you've got off-discounters like the value distribution channel et cetera that have a good-sized business. I know Ross [Ross Stores Inc.] has 500 million or something that they take out the market, a billion, that they take out the market.
Ross does like 14 billion, as a total store. You don't see it go through any syndicated data, but I know that's how big their business is, so you take that out of the market.

What's the difference in the cost of serve? How should we look at that between Ulta, and say Walgreens for example?

Yes, so a Walgreens trade fill, in the gross to net exercise, they would be spending double. A manufacturer could spend double the promotional monies, the ancillary fees, the fines that they would at a Walmart.

So can you just run through that just that this is clear for the students?

We'll break it down like this: Walgreens and CVS will ask for slotting fees, they will ask for money for the advertising, just to be in the circular, plus you have to pay for the money of selling it through the register when it's on deal. Over 70% of the business is sold on deal, so there in itself, a high low retailer is very expensive.

It’s going to cost more margin, it's going to cost more profits to do business with them than it would with an everyday low-price retailer because of the volatility of your shipments going out that you're selling at a lower cost to the supplier, and you're getting the majority of your volume through the deal, so that in itself is an enormous expense. They have things called Co-ops. There's no contracts in the US. There may be contracts around a particular marketing initiative that you've signed up for, but no one has a contract that would be equal to what would happen in Europe.

It would be different if I was talking to a group of students in France, you write out your whole entire year. It's guaranteed. Unless someone is in breach of contract. In the US, it's an open capitalistic market, which means you have to earn your space every day and the retailer can change their mind from planogram to planogram, with no repercussions whatsoever. There's no legal action that any supplier can take. It's a free enterprise market.

You can't write yourself into shipments, you have to earn them. Which makes it difficult, because everyone is on the same playing field. And that's where you're going to spend some more money. It is predictive in how much you'll spend, but there are things that can be brought forward as new initiatives from retailers such as, we have a new JBP partnership, joint business planning and we want you to spend-- Like Walgreen WBA asked for 2% of the total volume of each manufacturer. The big ones to be given into costs concessions or just write a check for margin.

Which is egregious as you can imagine. That could be $20 or $40 million that they would want for no additional shipments, nothing. They just ask for it. They have to negotiate something that would be a value-add for the customer: so Walgreens and the consumer who uses it. That kind of practice happens quite a bit in the drug channel specifically. You don't see that type of egregious behavior at a Walmart or an Amazon.

They will ask for things that are value-add to their customer, the consumer of the items that you sell. But, there's lots of non-value-add cost that's built into the drug channel - non-value-add to the consumer and non-value-add to the supplier business - that's built into serving the drug channel, and it only serves the retailer. It's a value-add to the retailer but not to the consumer.

If selling at a gross level to Walgreens for example, at $100, it's going to be extra spend on non-value costs?

Then would get 60 back. 60 or 50. Even half. It could go as low as 50 depending on how bad the business is. So, if you were Revlon, you would spend probably 40 - 50% of trade fill there. It's 40% for all the ones that I know.

That spend is purely on the retailer side of things where they have to try and promote the product.

Yes. Okay, I'll be fair, so 20% of that gets passed on to consumer, but the rest is absorbed for their margin requirements. Just to do business with them. If you want to be in the circular - they call it the roto - if you want to be in the roto, then you’ve got to pay this, and there's no value-add to the actual consumer by that happening.

How much inventory do the retailers typically hold?

It varies. A lot of activity is around reducing inventory, so there are no contracts stipulating how much inventory will come in throughout the course of the year. They will say, "We want to have these KPIs satisfied," which would be a 98 in stock, a 96% fill rate in on-time delivery. They'll have something in place. Every retailer will have a different KPI that's around what their expectations are at shelf.

However, if your inventory doesn't turn, you're not selling it, you may not get an order for weeks, or months, whatever. There's no contract to say anything other than, “we will keep you at a 98.5% in stock level." Or that's the expectation from the retailers of what they’re supposed to have at Walmart, for example. At Walgreens, it would be 95, 97, whatever.

If we just take Revlon, for example, for today. It's pretty clear they're struggling in terms of profitability. How does that negotiation go between the suppliers then in negotiating a gross price?

Well, the gross price-- Here in the market, the list price is published and that is what it is. What they're trying to negotiate is how to maintain that published cost sheet. Each of these retailers could be on different efficiency brackets et cetera. Each retailer could have a different cost structure, and what they're negotiating is keeping this as close as possible to that original cost. We'll take a Revlon, because that's what you asked about.

Revlon would spend more than its fair share, more than what it needs, to maintain its distribution. It has an efficiency bracket cost, and then they pay all these discretionary fees that the retailer has. So there are these different buckets that the retailer asks for. That pure vendor income that the retailer receives from a Revlon is much greater than what it would receive from a L'Oréal or a Coty because they don't want to lose the distribution, and that's an enormous sucking zone to the operating income of that organization.

Because they're still under the mindset of more space equals more sales, which is a very dated way to look at the business. They're okay maintaining space wherever they can get it, which is strategically not the right thing for them to do in this marketplace. I would beg them to pick the right footage per store, every store they're in, and then just focus on making that sell per linear foot. Profitability and productivity go up, instead of just trying to maintain their space and pay for it. They're just paying to keep their poor distribution. And it's incredibly expensive to do that because they’re not getting the pull-throughs from the register that they need to, to offset that check. That's what they've been perpetually doing for the last eight years, that I know of. From both sides that's where I'm calculating it. From what I said on the retailer side, and what I said on the manufacture's side.

That's why they're cutting marketing funds. They say they're coming out with innovation. It's not innovation that has a good sell-through, their gross to net hasn't improved, their operating income hasn't improved. So they're paying for space that isn't productive and that fundamentally is their problem.

What percentage of shelf space or floor space of a drug store typically is for beauty? And how has it changed over the last five years?

It's pretty even still. Unless it's high beauty stores, and then you could have a seasonal general merchandise area shrinked to 20%, and then it would be 40 for health, 40 for beauty in high beauty stores. A lot of these drug stores still have a third as beauty, a third as general merchandise and food, and a third as health. That's pretty much the market, unless they're deemed high beauty stores.
So Walgreens has a top 3,000 beauty stores, within that they have a top 1,000, within that they have a top 11. That's where those Birchbox stores are going, and that gets a thousand more square feet, and they'll take that from general merchandise and food. They won't touch the health side of the business. It’s the same way with CVS. When they blew out their new 10 stores with the Glamsquad partnership - high service, high touch - they took it away from general merchandise and food, and kept health whole.

Is that split evenly between skin, color, and hair, and different categories?

Yes. Typically, those big pillars like skincare, haircare, color cosmetics, and bodycare, those four would get more gondola space or more fixture space. Those would be the four that would get more space. The floor could be opened up for application purposes. If they have a beauty consultant, they could open up the floor to more services. But, most of the time, the space goes to more gondola and more fixture in those four categories.

How has the change in shelf space impacting the brands and the suppliers?

Well, it's not helping the national guys because they're either maintaining their spaces or they’re losing it because the drug retailers are bringing in their own brands or partnership brands. For instance, when Birchbox came out with the additional 1,000 square feet, no national manufacturer gained more space. It came from another part of the store, but it was only given to new brands.
Walgreens will open up their walls and add more space for their own brands. So No7, Soap and Glory, all the ones that you see at Boots, so it's coming over. They give more space to that, and then they consolidate and shrink the national brand guys for sure. L’Oréal went through a haircut at Walgreens and CVS this last round.

I don't know what would have happened. I won't make any assumptions other than there could have been more attractive margins associated with the brands that they brought in than what a L’Oréal would be able to produce at the gross margin. At that margin level, however, the volume is so greatly different between an own brand and a L’Oréal. They may change that at the next reset.

What's been the change in the shelf space attributed to private label versus brands for drugstores?

It has been the most aggressive throughout this last 36 months, the most aggressive across the marketplace, at Walmart, Target, CVS, Ulta and Walgreens. The last 36 months has been the fastest pace of exclusive own brand onset that I've seen in my entire career. Just the pace of all of them getting into new brands, and trying to figure out how to get customers back through the doors.
That's what their problem is, is that they're losing foot traffic. The desperation of growing share has led to these efforts towards decimating the national brands (because they think that's the problem) and putting in new brands, which they believe is going to save their business. But those actions haven’t changed the shape of their business in this 36-month period.

Target is now starting to see an uptick in some of their new stores that they've put out in the market. Which has been great because they had such a bad period. They had a bad relationship period with their customers so that as a total box they suffered. It wasn't because of beauty, it was because of their total box through a depression. People weren't going into their stores frequently. So they changed the entire look, feel, tone of most of the brands across store and they got foot traffic coming back in.

Walmart hasn't changed the rest of the store; CVS hasn't changed the rest of the store; Walgreens hasn't changed the rest of the store. So the only outlier between Target and the rest of them, minus Ulta, is they changed the rest of the store too. They added more brands across the rest of the store, that allowed more energy in the store. I don't know what the right way to say it is. But they got the feet through the door, and the other ones didn't.

Let's just take Walgreens, or your experience of Walgreens: How would you look at the split in private label and the traditional brands in your shelf space for beauty?

Well, we won't take what I did, I'll take what they have right now. Right now they would have at least 30% of their shelf dedicated to their own brands and skincare - between skincare and color cosmetics, those two categories only. They really have a very small offering in haircare and a very small offering in indulgent bathing, personal wash, that sort of thing.

In Target, they're much more evenly distributed, they would have 25% of their space, and color cosmetics would be their own brands or partnership brands. They would have the same for skincare; they would have the same for multicultural; they would have the same for hair care. They're very consistent about carving out the same amount of space and continuing to increase that.

Dave Kimbell, who's the chief marketing officer and chief merchant of Ulta shared with me that, in their mass section, he wanted to have 30% of the space dedicated to national brands, 30% of the space dedicated to their own brands, and then 30% of the space to emerging new indie influencer brands, and that that would turn more frequently than the other 60%.

You mentioned this is roughly say 25 to 30% private label penetration. What was it three years ago? What's been the growth in that?

When I was there, when I left it was 2015, it would have been 15% total space.

Oh, well, I think we've talked about this before. The retailers look at their floor plan and their real estate by sales and profit per linear foot. The profit per linear foot was diminishing and the sales per linear foot were diminishing as well, because the foot traffic had declined because of the shift in the traffic pattern of the consumer. When that happens, that puts a lot of pressure on satisfying the most important metric, which is profit per linear foot.

In order to get the profit per linear foot, they have to change their entire mix. If they're going to have the same amount of customers go through the door, and they're not growing that, they have to change the profit mix of the customers that they do have. In order to do that, you have to change the offering that they can buy, and that's what they've been going through.

They're thinking, "I'm not getting more customers so I need to make the customers I do have more profitable. In order to do that, I'm going to bring out brands." An own brand could have a 70% margin, and a national brand have 40%. There's a big difference there. What they have struggled with is the adoption rate of that consumer changing behavior and buying the own brand versus the national brand.
They seriously underestimated how difficult it is to make a consumer buy something that they don't know. That has been their main problem. On paper, if you just said “we're going to get 50% of the switching and that 50% makes up the volume difference,” on paper, it looks right. In real life, it’s a very slow adoption rate, and a very slow behavioral change. It's change management across the consumer market. That is very difficult to do in 36 months, as you can imagine.

Just to be clear on this, in terms of the drugstore, the retailer market structure, we're seeing a stable decline in traffic or footfall for the stores and therefore as you’re not growing the units of footfall, you need to increase the profit and change the mix to increase the profit by linear foot. So that’s changing the mix but they've underestimated the ability to get consumers to purchase private label brands.

Yes. To close the sale. Because now they're having to put their own brands on deal. I mean, that's the worst thing that could happen: that you put your own brands out there and then you start putting them on deal 26 weeks of the year. You're doing slightly better, maybe your profit is 10% better than what it was, but you still don't have the pull through. You're trying to increase trial by reducing the price of your own brand, and now you've created another behavior which is, "I'm only going to buy these brands when they're on sale." They haven't changed the value equation.

Yes, it was very self-serving in the beginning, it wasn't customer driven. I'm going through Black Belt Lean Six Sigma training, and I love it because you're squarely focused on customer demand and customer pool. You don't do anything unless you know that you're going to get paid for it. You use modeling and all that kind of stuff to do it. There's so much waste associated with these decisions. So much waste that's happening in the market.

They're looking for transformation for their own self-serving needs versus getting the customer in that mindset and moving them along. All the brands have to be deeply focused on consumer data and insights. Instead of saying, "I need to get a duplicate. I'm inspired by such and such brands. I'm going to copy it and put it out in the market."

That is not deeply rooted in anything other than a self-serving mechanism of the company. In the end profitability, if they have to end up marking this stuff down and deleting it, then it has a drain on the profit. There is no one they can ask to offset the price of their markdown. It's the retailer. You’ve got to think about this a little more to change their economic model.

What exactly are they getting wrong? Again if they're not focusing enough on the customer, is it that the product quality is wrong or the marketing story is wrong or--?

Yes, the marketing story. it's all about marketing in beauty as you can imagine. The product has to work - number one. In beauty, it starts and ends with products. It has to work. It has to do whatever the package says it's going to do and it has to be a good product. Number two, there is virtually no storytelling that happens from these own brands. They don't know about social. They don't know the power of the voice of the community which they're trying to break into. They don't have much following whatsoever. The big brands do and so do the indie.

The independent brands, that were born digitally, have a great following. Think about Glossier, which here in the States is a fast-growing brand. The products aren't really that great, but their consumers think they are. In their head, they think these products were made for me because, "I gave her my opinion about what needs to be done and she took it and I'm going to be loyal to her forever."

They're not that great technically. They're not that great - they’re okay - but they believe they are. That is priceless. The believability of what a brand is able to do for their community drives loyalty and purchase and profit. More than I'm just going to do a national brand comparison like the old-school way of doing national brands where it's next to Dove. That is a transactional relationship. They'll buy Dove when it's on sale and they'll buy the national brand when Dove isn't on sale.

That is the most dated way to do brands. As a marketing team, you've got to definitively know why you exist. And do people know why you exist? And what story are you going to create in order to keep that relationship alive and healthy. What soul are you creating for the brand? That does not come through in own brands across any of these retailers.

Ulta may have the most soulful own brand with the Ulta Beauty brand, because Ulta Beauty itself has a soul. It carries through in the product offerings. They're okay products too. They work, whatever. They have a better adoption rate because people believe in Ulta as a brand itself. Mary Dylan is a marketer at trade. Her first job was as a marketer, so she knows the importance of creating the ethos and the purpose of the brand, and feeding that.

These other brands are not getting that fuel. When you don't get the fuel, the first natural reaction to drive trial is reduction of price. The vicious cycle repeats itself again, but you're doing it on your own brands instead of the national brands that we're doing that with in the first place. The reason No7 does so well in Boots is because it's been there for 60 years. It has a story. Mrs. Boots made it herself. People get it. And it's only available in Boots.
It comes over in the US and people are like boots are what you put on your feet. It is that far different from Boots because of the amount of care that was taken for six decades in the UK. It’s not the same amount of care that's brought here in the US. It's just not. That's the bestselling brand that there is. It's because it had 15 years of leg life at Target before it even went into Walgreens. Now that it's at Walgreens, it's a zero-sum game at this point. It's not growing. It’s not growing, except at Walgreens. That is a problem for that brand.

How do the drugstores look at indie brands? What's the penetration rate? You mentioned roughly 25% to 30% private label in drugstores.

Yes. The indie brands, they would take space away from the national brands, but they wouldn't be considered exclusive brands to the retailer. They like these new up-and-coming brands. They typically have a short shelf-life, so a lot of brands come into the shelves and they're there for 12, 18 months, then they leave the shelf. Maybe one out of 10 stick really. It's about a 10% survival.

How can they choose that, though? Could you walk me through that process? Let's say you're pitching it or I'm pitching a new brand to Walgreens.

It's not really scientific how the buyers pick those brands. It is really, "I like this brand." There's no science or method behind it. Other than the buyer says, "Oh I really like this brand." Maybe it has a good following. "I think the products are really great. I think I can do something with this because it sits within our customer price range or whatever." There's literally no science at the retail level to say, "This is the right brand to add."

You'd purchase, what, a month's worth? What's the kind of contract you'd have?

No, they would do a six-month cycle. They would do a six-month cycle because of the Capex that a brand has to spend, and it may only have a six-month life and will not make the return. These brands get super excited, but the buyer's like, "It's not really doing that well." They do not have any science again to say, "It's going to take 18 months for this to start getting some traction, to get the payback on the fixture, this is what the partnership needs to look like, are we in it for the long haul?" It’s like dating. These indie brands are dating these retailers.

What is that decision then? Because if you're taking let's say Coty [Beauty] or a national brand away, you're taking one which guarantees at least sales per linear foot or even profit per linear foot away and taking a risk on this. If it's not scientific and it's a bet on the new brand, how do they look at destocking a national brand?

They'll say, "What's my lowest dollar per linear foot? What's my lowest profit per linear foot? What's the brand that has the lowest loyalty rate?" That part is scientific on, "What should we delete?" Because those are known facts. Those are things that they can use to take decision. The combination of that and the weighting of loyalty is different by retailer. The sales and profit is known to the-- Well, only sales is known to the supplier community.
The retailer will say, "The algorithm is sales plus profit plus loyalty." Rank it, rank the brand and then rank the skews within the brand. Then you say, "This brand was once a six-foot brand. It only needs to be four feet based off this algorithm." Pretty elementary algorithm by the way. "It is going to be four feet now. Okay fine. I have two feet to play with." Then it just goes to straight emotion. I swear to God. It's like, "Oh I love this, that, that and that."

Oh my god. What I know now I wish I knew when I was 25 and I had a billion-dollar business at Walmart. I'm like, "What the hell was I thinking." That's why I know what they do.

Are Ulta more strategic or a bit scientific?

No, they're not more strategic or forward looking at all. No. They're even at the place now where they think they need more prestige for God's sake, their whole floor is like loaded with color cosmetics prestige. Where they need to focus their attention, in my professional opinion, is the back of the house, which is their salon business. The margin from getting that consumer into the shop every couple of weeks is so much greater than more prestige color cosmetics on the floor. It’s like, “what are you doing?” It is led by emotion, "Oh, we make it whatever," you already have the whatevers, you have a lot of that stuff on the floor.

It's not getting you more operating income and you're just adding to more of what is not getting you more operating income. It defies my logic. I don't think there's anything strategic about what they're doing now. Now, going into it, a couple years ago, absolutely. It was huge white space like, "We don't have these big brands, we don't have the classics, we don't have the prestige brands, let's focus there." Okay, great, they did that, now what? Their 'now what' is still the same. That is where they're going to run into a bit of a problem meeting shareholder expectations because that’s run its course.

Now, they can change within what they have, I think that would be a smart idea to say, now, “how do we start downsizing some of our prestige brands to allow new brands to come in, but we're going to focus on the salon business because that has a very high vacancy rate currently.” That's just like a hotel, you've got to focus on that or you won't have a business. Having that shift would be much more strategic. If I were to call Dave and say, "Please let me work on a project for you." A transformation project would be including how do you grow? what do the inputs need to be in order for your outputs to be different for salon?

Let me take that project on for you because I think that will change the economic model of your entire enterprise. Seriously, that's how big I think the salon business is, that they're not tapping into because they're still focused on prestige Colour Cosmetics, so they're out of whack there for sure. The buyers are still very emotional, they will take brands on a journey. I've heard numerous stories where the buyers will be like, "Oh yes, yes, we want it, we want it, we want it." They go through a huge cost. We're still on Indie brands. The Indie brands get super excited, they start building fixtures and the buyers like "Oh, just let the line review and sorry we can't add it." They say yes to everything and then then only about a handful will get in, if that, one or two.

They hand back the space to national brands then after that?

No, it's really that Dave is trying to make that national brand as efficient as it can be. A Covergirl [Beauty] has four feet there. L’Oréal still has a really good size eight-foot run. Maybelline has a good eight-foot run. Nyx still has an eight-foot run but it's on a very old fixture. That was the original exclusive brand there and now that it's at Walmart, I think they're going to shrink Nyx. I would imagine that they would shrink Nyx to half its size and then they could introduce new mass or “masstige” brands in that space. That would be the smartest thing for them to do when their premier spot in the mass section also has a premier spot in Walmart, they may want to consider doing something different there.

They would take space away from there. They're getting so tight with Revlon; I don't know if they would even be so bold as to reduce that because Revlon will pay whatever it takes to keep their space. It’s not a good strategy for me or for them. I hope that they're being very mindful about what's the right space allocation within this. With Davis at 30% national brand, 30% own brand, but they don't have that right now.

This is his vision over time and then 30% would be indie brands, influencer brands - that would be continuing change, twice a year kind of stuff. They would be very short runs, maybe that's a fixture and they would change it out with new products and new brands. I don't know how they would get a brand to pay for that six months cycle.

What are the national brands going to do about this change and shelf space then in the mass channel? How are they reacting to the change?

The national brands have a great opportunity to show how creative they are, and the best storytellers win, literally. They need to increase their marketing game and put their big girl panties on and actually do something that is bold and different and dynamic and intimate with consumers again. Because it still feels that there's a distance between a big brand and the end consumer; there's still that distance, versus an Indie brand that’s very intimate with their community. They know them, they know what they like, they're into them. A big brand can be super intimate on point with the campaign, this is showing their creative genius and prowess in this space. The best storytellers win and they have got to up their marketing game.

Not more money, they just need to be smarter and more creative. The best marketers in the business do not work at Revlon. Maybe they should tap into them and say, "How do I hire these independents to help us at least get some buzz with consumers instead of trade?" They get a lot of buzz with trade, they talk to themselves. Like trade magazines, they don't get a lot of buzz with consumer and that's fundamentally what the big brands need to do is to go back to their roots and say, "How did we get big in the first place?"

How do you think this will play out, looking at Ulta for example, when they’re targeting the 30, 30, 30 split?

I think that will take Dave five years to get there and within that five years, then there'll be more science around how long should a brand be on shelf before you cut it? What's the guaranteed profitability model on these national brands that we can always count on based of what their spend is? There's lots of modeling that could happen in the next five years. He's not going to make that cut right away, they can't afford to take the mark down. Again, if you just look at their operating income, they can't mark down the national brands and pay for it themselves and the Indie brands can't pick up that bill. They're going to have to do it slow and steady to get the inventory that they don't want out of the door.

The drug stores they'll maintain their private label?

It's already at that point where you're not seeing-

I think it's going to slow down in the next 12 months because people are going to be like, "Holy shit, we have a lot of inventory and we can't afford to do anything with it," and you're not going to have the freshness and the newness there and they're going to rely on the national brands. It's all cyclical. They're going to rely on the national brands, "Please, can you give me something? Can I get some new PDQ? Can I get a new launch? Can I be exclusive on that launch? Please, please, please, please, please, I hated you but now I don't."
It's just an emotional, stupid relationship. It's not based on facts whatsoever. That's the game that's played though and this will give the national brands an opportunity to show their strengths, what they're good at, how they got big. They need to have a very humble position to start out with because in the mind of the consumer they're old and tired and dated. They're going to have to start super humble and not say, "Oh, we're big and everybody should love us." It's, "How do we get people to love us again. If they trust us…"

Let's say you're at L’Oréal or Coty today, is it just the channel question, whereby you need to go more digital or social? Or fundamentally is it the market change, in that the consumer now has so much more choice and can go after a certain niche?

Yes, L’Oréal, if they can't do it, they buy it. They've been very good at M&A. So if they can't do something, they buy the right brands, I think their M&A group is brilliant. Now, when it gets inside of L’Oréal, it's like a dysfunctional family that needs therapy but they're very smart when it comes to, "What do we not do well, and how do we learn the fastest?"

That's part of their DNA that makes them super-fast and progressive. That's what keeps them really good and high quality and a trusted supplier at the table. They haven't lost that with the retailer. That is priceless. The retailers trust them on the beauty business. They beat their chest and say we know it better than anyone else and they do, as far as knowledge is concerned. Execution is different. But knowledge, there's no one who knows that better. They're all purebred beauty. No one knows that better. Coty had Camillo who - I like Camillo, but he's an RB guy - he doesn't know anything about beauty or problem solving for that matter because there's still a lot of problems that need to be solved there. You need someone who's really good at saying, "What are the problems and what do we need to do to change your outcome and have brilliant marketers help execute that?" The execution of these new campaigns to get inside consumers' heads is critical.

The noise in digital: there are 500 million tweets a month or whatever. It is crazy. So much content and data is going to continue to come out to the market. How do you say, "This is who we're going to focus on? And what inputs do we need to focus on to get the outputs that we want?" The discipline required and new execution: those will be the two new mantras of these big brands. “How disciplined can we be? What do we need to be disciplined on? How can we outsmart our competition creatively in a way that our consumers can only give us credit for it?”

Is there any difference in terms of why L’Oréal is so dominant in the mass channel? Is it just down to the brands they have? Or is the negotiation at table different versus the likes of Coty?

No. I don't think their negotiations are different at all. They're actually much more pleasant to do business with than a Coty for example. Because they're more flexible, so they do have some flexibility. They make you feel like you're the only one on the planet. I've been at two retailers and I felt like I was the only person on the planet every time their presidents walked through the door and I'm still very good friends with them. They're fantastic at the personal relationship part of being the retailer's trusted adviser really.

Mary Dillon [CEO of Ulta] called out L’Oréal and Karen Fondu, who used to be the president of L’Oréal, crediting her for helping them be better in supply chain, publicly. It's a big deal. She loves Leonard Lauder, she loves William. She'll publicly recognize these companies that have taught them something about their own business, that are also experts at the consumer part. L’Oréal at their core are focused on great product and satisfying the consumer and that is about as simple as you can get. That's why they're so good.

Is there anything else that you would advise students should understand about the mass channel?

For your students there's a couple of things that I would encourage, which would be, understand how each of these channels make money. The economic model in which they get to their operating income is really important to understand while they're in college, while they're at university.

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