This article has been updated to correct an error regarding Coty's status as a privately-held company. In the early 1960s, the publicly-held Pfizer bought Coty. Pfizer sold Coty to the privately-held Joh. A. Benckiser in the early 1990s.
What do Jennifer Lopez, Gwen Stefani, Victoria Beckham, and Tom Brady have in common? Aside from their gift for grabbing headlines, these celebrities all lend their names to Coty Inc. fragrance lines. To CFO Michael Fishoff, each represents a revenue stream that contributes to the private company's annual sales, which are now north of $3 billion. The 55-year-old Fishoff, who has overseen the venerable French perfume purveyor's finances since 2002, is part of the team leading the company's expansion into cosmetics and personal-care products. He recently told CFO about the yardstick he uses to measure brand performance — and why he sometimes must slow down a marketing machine fueled by Hollywood hype.
Coty brands run the gamut from new brands, like Sarah Jessica Parker, Vera Wang, and Adidas, to classics like Jovan. But more often than not Coty licenses rather than owns the brands, is that correct?
About 80 percent of the brands within the Coty portfolio are licensed. The characteristics of the licenses essentially provide ownership, but in a true legal sense we own only 20 percent of the brands. Consider our recent acquisition of the Unilever fragrance business. The biggest piece of that was the Calvin Klein fragrance, which we license from the owner, Phillips Van Heusen.
Why is Coty content to license something as important as its core brands?
There's a symbiotic relationship between the brand or celebrity and our success. We depend on each other for public relations, advertising campaigns, merchandising, and reputation. [The brands] are very sensual, and we feed off of that. [The celebrities] feed off of us because some of our fragrance campaigns can be, you know, scintillating. So whether you own the brand or license it is almost a minor detail. It's really sort of an accounting and cash-flow issue more than anything else.
How do the celebrity branding deals work?
Celebrity deals are, in principle, the same as designer deals. Most have the same basic template — royalties (a percent of sales), support-spending parameters, collaboration criteria. I will not discuss specific royalty rates, but they are variable costs, not [part of inventory].
Is it true that packaging represents most of the product expenses in the fragrance business?
For fragrances, the ingredients and packaging can represent between 70 percent and almost 90 percent of the total cost to produce. It depends on the complexity of the product design — quality of glass, overcaps, add-ons. But as the products become more expensive, it is usually the packaging rather than the pure ingredients [that cost more], although the ingredients are more complex in the more expensive products. It is not unusual in higher-cost products for packaging to represent two-thirds of the total cost.
Celebrity brands can be risky. How does Coty address that risk?
We have to have the ability to measure things quickly. The life cycle of new fragrance initiatives is much shorter now than it has been historically. Some older fragrances are not nearly as popular as they once were. In other cases, there are institutions — like Jovan — that people still buy. Our portfolio or "house" of Jennifer Lopez has been around for only five years. Obviously, its longevity will depend on [Lopez's] commercial fortunes and her activities. So we need better information, and quicker access to it, to react. If something is going extremely well, we want to have an early-warning system to say, OK, let's keep feeding it. Conversely, if something is not doing well, we want to have a similar system that says we need to rethink thisÂÂÂ . I view [daily sales] as the general pulse of orders taken in, and orders shipped, to make sure the supply chain is reasonably current.
Coty grew by 38 percent year-over-year in 2006. What accounted for that?
The [Unilever] acquisition represented a large portion of that growth. We've been growing, I'd say, 5 to 7 percent organically. Coty is an amalgamation of acquisitions and licenses — a little here, a little there, and some homegrown brands.
Will the fragrance division drive corporate growth going forward?
We hope growth comes from all arenas, but fragrances should not remain 65 percent [of the portfolio]. It will remain our number one, but as a percentage, I would anticipate that cosmetics and skin care will grow faster. About 15 percent of the portfolio is cosmetics, 15 percent toiletries, and 5 percent other — which includes skin care.
Coty was a private company at its inception in 1904, and is again a privately-held entity. Does that make it easier to work toward longer-term financial goals?
We look at [growth] annually. But we also try to manage cash flow quarterly because the more cash you get in sooner, the better your interest expense. So we put pressure on our divisions to do the right thing quarterly, but we are not bound by it. We have a motto that feeds on growth: "Faster, further, freer." That means employees are free to make decisions, further enhance their careers, and do it at a very fast paceÂÂÂ . So I don't know if you'd call us a big small company or a small big company.
What is your favorite men's fragrance?
It's interesting — my personal favorite wasn't too commercially successful. It is Echo, by Davidoff — a very elegant fragrance in a very classy bottle. The lack of commercial success was mostly attributable to the house under which the product was marketedÂÂÂ [a brand] without a sufficient level of awareness or marketing. (Davidoff is an affluent-lifestyle brand primarily associated with premium cigars and smoking accessories.) In any event, I love the product and frequently wear it.