The Coming Year: Powder-Puff Battle Set to Begin

Competition in the U.S. cosmetics industry looks especially cutthroat this year.
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Your makeup bag is a battleground.

The U.S. cosmetics industry -- always beset by competition to be the first to offer the latest in lipstick technology -- looks to be especially cutthroat in 1999. Both established and emerging players are lining up to launch an unusually large number of new products this year, analysts say.

Merrill Lynch

analysts Heather Hay and David Kim anticipate at least 15 new major launches over the next year to 18 months and predict double-digit earnings growth for the industry leaders this year.

Among the entrants into the 1999 makeup derby:

Procter & Gamble

(PG) - Get Report

, which is rolling out its

Oil of Olay

makeup line in the U.S. after a successful European launch and is introducing

Max Factor's

new

Diva

Collection.

Johnson & Johnson's

(JNJ) - Get Report

Neutrogena

line will expand to include color cosmetics.

Avon Products

(AVP) - Get Report

also is launching new products.

Consumer-products regulars aren't alone. Retailers are also getting into the mix.

Intimate Brands'

(IBI)

Victoria's Secret

recently launched a line of color cosmetics in some stores. The shelves of

Gap

(GPS) - Get Report

and

Old Navy

feature nail polish and perfume as well as polar fleece. And

Sears

(S) - Get Report

continues to build on its

Circle of Beauty

line.

"A pickup in new product development is a result of the competitive nature of this industry," says Sally Schaadt, an analyst with

Fourteen Research

. "You have to be on top of things just to stay alive."

Most of the competition will focus on the mass market, where lipsticks sell for under $10. And it's there that specialty retailers may be siphoning off demand from drugstores and supermarkets, say Merrill's Hay and Kim, increasing pressure on traditional brands like

Revlon

(REV) - Get Report

and

L'Oreal

.

Estee Lauder

(EL) - Get Report

, for instance, recently dipped its toe into this market with its purchase of

Sassaby

, owner of the

Jane

cosmetics brand.

The prestige (i.e., expensive -- $12 and up for a lipstick) market also has emerging smaller brands like

Stila

and

Face Stockholm

, but it's dominated by Estee Lauder, which commands 47% of U.S. prestige sales with brands like

Clinique

,

M.A.C.

,

Origins

,

Prescriptives

and

Bobbi Brown

, says Carol Wilke, an analyst with

Prudential Securities

.

"Estee Lauder's biggest strength has always been its brands," says Wilke, whose firm hasn't performed underwriting services for the company. Estee Lauder has a strong lineup of new products for 1999, including

Tommy Hilfiger

-branded

(TOM)

cosmetics and a new Clinique body treatment. And for those who didn't mind forking more than $125 for an infant-sized cashmere cardigan at

babyGap

this Christmas, Origins is launching a new line of baby skin-care products.

Though new entrants will make the market more interesting in 1999, competition at both the high and low ends will only highlight the strength of existing powerhouses with a lot to spend on marketing and R&D, wrote Merrill's Hay and Kim. They rate Estee Lauder an intermediate-term accumulate (the brokerage's second-highest rating) and a long-term buy (its highest rating), projecting earnings growth of 13.6% in the December quarter. They also recommend Avon Products, giving it the same ratings, citing improved margins and better product mix in the U.S. (Merrill has performed underwriting for Estee Lauder, but not Avon).

Revlon, which makes Revlon and

Almay

makeup, draws more mixed reviews from analysts. The company stumbled in the fall, warning of lower profits because of lower orders from drugstores. Revlon also suffered from the Asian slowdown. To recover, it's got to build on the success of its

ColorStay

brand and grow sales once again.

"It's not a broken franchise, but they need to follow up on what they did," says Wilke, who rates it a hold. (Prudential hasn't done any underwriting for Revlon). Merrill, which has done underwriting for Revlon, rates it an intermediate neutral and long-term accumulate, saying its strong brand name should make it thrive again.

Analysts caution that the Asian economic hangover will continue, and if Latin America takes a downturn, big consumer-products companies will suffer. But even if the U.S. economy makes its predicted slowdown, the cosmetics industry won't suffer too much. When times are bad, a lipstick is an affordable splurge. "It's a category that consumers are willing to spend on," says Wilke.

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