Cosmetic Center touches up Merger: Cosmetic Center has teamed up with Revlon subsidiary Prestige Fragrance & Cosmetics and plans new outlets

Retailing

September 11, 1997|By Liz Bowie | Liz Bowie,SUN STAFF

Picking the partners for this match wasn't hard.

The Cosmetic Center had been floundering after the death of its forceful founder, Louis R. Weinstein. Its growth was stymied, it was recording losses and the Savage-based hair care and cosmetic company was having difficulty with getting certain products.

Along came Revlon Inc., displaying Prestige Fragrance & Cosmetics Inc., a wholly owned retail subsidiary it was ready to spin off.

Prestige, with 197 stores in outlet malls nationwide, had been a useful outlet for excess Revlon inventory. But as it expanded, it started to carry lines other than Revlon.

The combination of Prestige and Cosmetic Center Inc. was good for both companies. It gave the Weinstein family a way to get out of the day-to-day business, although family members are still involved. And it gave Revlon a way to take Prestige public without going through the expense of an initial public offering on Wall Street, according to Kenneth Gassman, an analyst with Davenport & Co. in Richmond. "That was a very smart deal," he said.

So in April, Cosmetic Center shareholders approved a merger with Prestige that netted them either one share in the new company or $7.63 for every share they held. Revlon acquired 85 percent of the new company for $27.9 million.

Howard I. Diener, a former drugstore chain executive who had run Prestige for 18 months before the merger, was charged with making the marriage thrive.

His task is to take one unprofitable chain and one marginally profitable chain in a difficult industry and mesh them into a single, public company with a new corporate headquarters, a warehouse and a new business style. The company will operate the stores under their same names.

Diener said his first move will be to expand Cosmetic Center. A decline in earnings, he argues, is partly the result of the Cosmetic Center's failure to add stores. But he admits he has a challenge ahead.

Can Diener do it?

The state of Maryland, which gave the company a $1.05 million loan on the condition that it add 168 jobs and keep 192 existing jobs in Howard County, evidently believes so.

It touted the Cosmetic Center as one of "the greatest job creation projects of the year" last month when the company opened its shiny, new corporate headquarters in a converted manufacturing building in Columbia.

The building was a former General Electric stove and air %J conditioning factory, where the Cosmetic Center has 25,000 square feet of office space next to a 205,000-square-foot warehouse with 55-foot ceilings that will allow it to expand inventory storage space if the business grows.

The Cosmetic Center was the brainchild of Weinstein, who saw opportunity in the eyeliner, makeup and perfumes that department store customers hadn't found appealing.

In 1957, he began a wholesale business, making money by swapping one store's excess blue eye shadow for another's pink lipstick. After opening its first retail stores in 1973, the chain grew to 68 stores in the Mid-Atlantic region and Chicago.

"Lou Weinstein was a wheeler-dealer who started this company dealing in 'gray' cosmetics," said Gassman.

Weinstein was able to offer customers discount prices because, instead of buying from the manufacturers, he operated on the "gray market," buying from wholesale distributors with excess merchandise and from department stores looking to unload products that didn't sell.

The practice is entirely legal, and used by others throughout the business, points out Allan Mottus, publisher of the Informationist, a health and beauty trade newsletter.

"There is nothing shady about this," Mottus said.

The problem was, however, that as the business grew, so did the need to find more products.

"He had a great business when it was a small Mom and Pop operation, but he grew too large," Gassman said.

Customers were drawn to the stores by inexpensive products, said analysts, but Weinstein couldn't get enough to satisfy the demand.

At the same time, salons and the manufacturers of hair care products who sold exclusively at the salons, became angered by the discount prices and competition at Cosmetic Center stores.

So in 1995, the Cosmetic Center agreed to buy only from the manufacturers and to set up hair salons at the company's stores -- some 60 salons now exist.

Diener said the company believed that it might see a drop in sales when some high-end hair care products disappeared off the shelves, but felt it would gradually build back business.

With salons came the credibility needed to buy the products directly -- or so the company thought. But so far, only two manufacturers, Paul Mitchell and Nexus, have agreed to sell their products in Cosmetic Center stores.

"I think there may have been a credibility problem," said Diener, who added that sales are slowly building back.

"It is an odd business," Mottus said. "There is no rhyme or logic in the salon business."

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