Universidad de Monterrey May 29, 2007 de Monterrey Reto Felix Make Up Store: Developing a Franchise in Mexico It was early March 2007 when Gaby Kalifa returned to her office from a meeting with her father, Dr. Salvador Kalifa, and her sister, Cristina Kalifa. Responsible for overall operations, Gaby had successfully brought the family-run Make Up Store franchise in Monterrey, Mexico, from a difficult start in 2003 to break even in 2006. However, both her father and her sister expressed some disappointment with the financial results of the franchise, and Gaby agreed that more should be expected from the business than just reaching the break even point. On the other hand, she was still convinced of the potential the Make Up Store concept had in Mexico, and she started thinking about how she could move the business into a more profitable zone. Company Background Make Up Store (www.makeupstore.se) was founded in 1996 in Sweden by Mika Liias. Being the director of a make-up school in Stockholm, Mika experienced difficulties in finding beauty products of high quality at a reasonable price. He further noticed that advice from sales personnel in existing cosmetics stores was poor. Mika opened his first Make Up Store in 1996 in Stockholm with the idea of offering customers the best service, personalized make-up advice, and highest quality products at competitive prices. In the following years, Make Up Store's concept made its entry into different international markets via a franchise system, and in 2007, the brand had more than 100 stores in countries such as Australia, Canada, Denmark, El Salvador, Guatemala, Mexico, Singapore, Spain, Sweden, Thailand, and the United States. The market offering included approximately 1,000 different products under the Make Up Store brand, which included eleven product lines for both men and women: lips, eyes, nails, base, skincare, bodycare, haircare, tools, bags, accessories, and home collection. Examples for each product line are shown in Exhibit 1. According to the company's information, its cosmetic products were of high pigmentation and completely fragrance-free. No product was tested with animals. To acquaint clients with the use of the products, Make Up Store also offered workshops which were divided into individual sessions with a duration of around 50 minutes, and group sessions with a duration of approximately three hours.Market Entry into Mexico Gaby Kalifa had graduated in economics from Monterrey Tech (ITESM) in December 1999 and subsequently worked as a consultant at CEE (Consultores Economicos Especializados) and then for two years at Cemex in Monterrey, one of the three largest cement producers in the world. The two years at Cemex included a 15-month traineeship, three months in the trading department, and six months in the marketing department of the company. It was in March 2002 when Gaby traveled to Spain and got in contact with the Make Up Store brand. She immediately liked the products and brand image, and she thought that other consumers in Mexico might appreciate the brand as well. After searching for more information about the company and its franchise system, she finally decided to talk to the company's head office in Sweden to discuss the possibility of establishing a Make Up Store franchise in Mexico. In May 2003, Gaby and her sister Cristy visited Mika Liias in Sweden and presented a business plan for a market entry in Mexico. They also presented information about the city of Monterrey, its population and income per capita, cultural aspects and European influences in Mexico, and personal information about them and their family. Mika approved the business plan and granted the master franchise for Mexico. In October 2003, Gaby and her sister opened their first store at the Plaza Fiesta San Agustin, an established and well-known upscale mall in Monterrey. Make Up Stores reflected a modern ambience with a minimalist interior decoration approach and black and white as the dominant colors. Lounge music and professional illumination were elements aimed at giving the stores an elegant, up-scale appearance (Exhibit 2). The head office in Sweden put a lot of emphasis on maintaining these central elements in all stores, and Gaby was required to import almost all of the interior equipment such as shelves, tables, mirrors, lamps, etc., directly from Sweden, in order to comply with the requirements of the franchise contract. In order to lower the initial investment cost to open new stores, Gaby convinced Mika that at least some of the interior equipment might be produced in Mexico without jeopardizing the overall image of the brand. In 2007, there were a total of six stores in Mexico: two in Monterrey, one in Mexico City, one in Guadalajara, one in Merida, and one in Cancun. The three stores in Monterrey and Mexico City were owned by Gaby, and the other three stores were owned by independent franchisees. In order to open a store in Mexico, potential franchisees had to buy a franchise from Gaby at a cost of 17,500 U.S. dollars. Unfortunately, most of this money (more than 80%) was destined for the head office in Sweden, and therefore direct revenues from selling franchises were limited. However, new franchisees in Mexico automatically turned into clients for Gaby since they had to buy products from the master franchise in Monterrey. For example, the owners of the stores in Guadalajara, Merida, and Cancun had to place orders with Gaby who collected these orders and combined them into larger orders for Sweden. The initial investment for a new store was at around 1,300,000 Mexican pesos (approximately U.S. dollars 120,000). General requirements for a new store included a store space of around 40-60 square meters, 2.4 meters of interior height, a minimal store front of four meters, a minimal store length of ten meters, a store location at primary commercial streets or shopping malls, and the recommendation of being in a city with at least 200,000 inhabitants. 2The Make-Up Market in Mexico According to Datamonitor, a leading business information company specializing in industry analysis, the Mexican make-up market generated total revenues of U.S. dollars 666.7 million in 2005, representing a compound annual growth rate of 4.9% for the five- year period from 2001 to 2005. In comparison, the U.S. and Canadian markets hat compound annual growth rates in this time span of only 2.9% and 3.7%. However, the Canadian and especially the U.S. market were larger than the Mexican market, with revenues of U.S. dollars 853 million and U.S. dollars 5.2 billion, respectively. Exhibit 3 shows that in 2005, eye make-up accounted for 35.70% of sales, followed by lip make-up (31.40%), face make-up (25.70%), and nail make-up (7.10%). Department stores (including duty-free shops) accounted for 20.7% of Mexican market's distribution, followed by pharmacies and drugstores (12.30%). Other distribution channels, including direct sales and sales through beauty consultants, accounted for the remaining 67.10%. For 2010, the Mexican market was forecasted to reach revenues of U.S. dollars 901.9 million. Mexican Bancomext (Banco Nacional de Comercio Exterior) reported that in 2003, 63.9% of cosmetics in Mexico were sold through traditional distribution channels such as supermarkets and pharmacies, whereas 36.1% were sold through direct marketing channels by companies such as Avon, House of Fuller, Jafra, and Mary Kay Cosmetics. Informal markets (including open-air markets, so called pulgas or tianguis, and street hawkers) affected the cosmetics market significantly, although no numbers were available. Among important characteristics of the Mexican cosmetics market, Bancomext suggested that a) there was a tendency for consumers to prefer supermarket chains, accompanied by a decrease in unit prices for cosmetics, b) a preference for private label brands due to diminishing consumer's purchasing power, c) an increased use of natural substances for cosmetics, and d) the Internet remaining a less important distribution channel due to a lack of consumer trust in on-line payments. Clients and Competitors Gaby divided her clients into three different segments: A first segment consisted of the franchises in Guadalajara, Merida, and Cancun, which had to buy the product from Gaby's master franchise. The typical sales of a franchise were between 150,000 and 200,000 Mexican pesos (approximately U.S. dollars 14,000 and 18,000) monthly. Institutional clients, the second segment, were clients such as Spas, salons, television stations Televisa and TV Azteca, and the Make Up Store at the Palacio de Hierro department store in Mexico City. Spas and salons were important clients because they bought make-up product for use in their facilities, but also motivated guests at the Spa to search for the products in Make Up Store. Televisa and TV Azteca were using products from different brands for their television programs, and Gaby considered it important to have a presence with these clients. Make Up Store inside the Palacio de Hierro department store in Mexico City was a special case, because, in contrast to the franchises in other cities, Gaby was responsible for the personnel in the store, whereas the store itself was managed by Palacio de Hierro. Although the Liverpool department store chain had a verystrong presence all over Mexico, Palacio de Hierro was considered by many Mexicans as the ultimate upscale department store, and having a presence in this store reected in Gaby's View the professional positioning of the Make Up Store brand. The third segment consisted of nal consumers and make-up artists who bought the product in one of the two Make Up Stores in Monterrey. Final consumers in Mexico were mostly female (around 90%), but some of the product lines were targeted at men as well. Makeup artists were important clients because typically, they were opinion leaders and able to inuence both nal consumers and potential new institutional clients. Exhibit 4 shows the percentage of sales for the three segments. The most direct competitors for the Make Up Store were MAC (Make-Up Art Cosmetics), a professional brand with presence in many countries all over Europe, North and South America, and Asia, and Bobbi Brown Cosmetics. Make Up Store, MAC, and Bobbi Brown were truly professional brands, i.e., they were used by make-up artists and in fashion shows and related events. Prestigious consumer brands such as Chanel, Lancome, or Christian Dior were higher priced, mostly used by nal consumers, and mostly sold in department or specialized stores. Finally, commercial brands such as Avon, Cover Girl, House of Fuller, Jafra, L'Oreal, Mary Kay, and Revlon were lower priced and typically sold via supermarket chains such as HEB or Wal-Mart. In Gaby's view, Bobbi Brown was a rather conservative brand, whereas MAC was to be found on the other extreme with a focus on strong and bold colors. Make Up Store held a middle position, focusing on the artistic aspect of cosmetics and on colors, reected by their slogan \"World of Colors,\" but searching for a harmonic and more natural appearance (Exhibit 5). Logistics Although Make Up Store was a European brand, around 63 percent of the products were manufactured in the United States or Canada. Because the presence of the brand in North America was limited (besides the stores in Mexico, there were two stores in Miami, one in Denver, one in Canada, three in Guatamala City, and one in El Salvador), Make Up Store did not have a distribution center in the Americas. That meant that the ordering process for the Make Up Store in Mexico was complicated and costly: Products produced in the United States or Canada were shipped to Sweden, registered and repackaged, and then shipped to Mexico. Because products did not remain inbound in Europe (i.e., customs had no control if products were, e.g., modied), they were not treated as products imported from the United States or Canada, and thus the preferential tariffs of the North American Free Trade Agreement (NAFTA) were not applied. Rather, products were treated as if they came from the European Union, implying higher customs duties for the importer in Mexico. Further, the ordering process was tedious and time consuming. The time span between ordering the product until receiving it in Mexico frequently was around four to ve weeks and sometimes reached two full months. Once the product arrived in Monterrey, Gaby had to repack it and route it to either institutional clients, her own stores in Monterrey, or the other franchises in Mexico. Because of the lengthy import process and occasional product shortages at the head ofce in Sweden, Gaby had to keep a relatively large inventory of products in Monterrey. Changes in consumer preferences and new trends in fashion required the continuous introduction of new products to the market, with old products lines discontinued. As Gaby explained, \"There are always products that sell well in one store and less so in another store, and because sales are difcult to predict and just- intime ordering is not possible, I am required to keep a large stock of products. However, when certain product lines are discontinued, I am required to remove these lines om the stores, which means important losses for me.\" Promotion Make Up Store in Mexico had used a variety of promotional tools in the past, and the promotional mix had been adjusted several times by trial and error. For example, print advertising had been used in the Mexican editions of Vogue and Glamour, but although Gaby did not have exact performance measurement data, she felt that this type of advertising was expensive in comparison to the results obtained. Advertising expenses in 2006 were 4.2 percent of sales, and the media mix (including advertisements at events) is shown in Exhibit 6. On the other hand, using public relations had been very effective for the business, as Gaby explained: What has worked very well in the past is sending the product to the press, having it photographed, and getting a recommendation from a beauty editor of a magazine. We send product kits to the Mexican editors of magazines such as Vogue, Elle, Glamour, Marie Claire, In Style, Quien, Caras, or Ocean Drive. People then come to us and tell us that they have seen the product in the beauty section of the magazine. Recommendations in magazines are more independent and trustworthy, and therefore work very well. The same is true for beauty artists: if a beauty artist recommends a product, it is more trustworthy than a paid advertisement in print, radio, or TV. Gaby also had learned to be selective with sponsoring fashion shows and related events. Sponsorships always involved providing product for ee rather than paying money to the events. However, at some events the Make Up Store brand had not been displayed openly, and although all models at the event used the brand, very few people were aware of that. On the other hand, it had happened that the beauty artist at the fashion show, when using the brand on the models, liked the product very much and started to recommend it to colleagues and clients. It was clear to Gaby that for a professional make-up brand, word-of- mouth communication and recommendations from beauty artists and magazines were highly important. Another type of sponsoring that had been successful in the past was the presence at events for a good cause, such as bingos or sweepstakes for non-profit organizations. Individuals attending these events were mostly among the more afuent, higher social classes. Gaby provided some products for the event, and in exchange the company logo was displayed on the bingo table or in other prominent places. Whereas Gaby was free in selecting most of the tools for the promotional mix, there were a few instruments which were implemented on the institutional level. For example, all Make Up Store franchises around the world employed a discountsystem for different types of clients. Important opinion leaders such as well-known make-up artists and celebrities obtained a 30-percent discount on all products. Beauty salons, spas, and fashion models obtained a 20percent discount. Finally, Make Up Store offered a membership to consumers which enabled them to buy products at a ten-percent discount at any Make Up Store. In Mexico, consumers paid 145 pesos (around US. dollars 13) for a one-year membership. The membership included six to seven invitations a year to cocktail parties, sometimes with well-known make-up artists, where consumers were able to participate in sweepstakes and to learn about new products. Make Up Store members also obtained an additional ten percent discount on their birthday and at the cocktail parties. The membership scheme for nal consumers had generated a database of around 800 active members in Mexico. However, members frequently did not renew their membership. Finally, Gaby used the ofcial Make Up Store magazine to promote the brand. The M magazine was launched in 2005 in English and contained articles about make-up artists, celebrities, and high-quality photos om models using the product. As one of the 2006 issues suggested, M was \"conceived as an arena for some of the world's hottest makeup artists, hairstylists, photographers and fashion models. Every issue features photos created with one goal in mind: to visualize the most poetic, wild, sophisticated looks possible.\" The magazine was available at the stores, where clients could pick it up personally. Gaby also sent the magazine to a number of clients of the Palacio de Hierro in Mexico City, because she felt that clients of the prestigious department store were probably good targets for her own brand. In Gaby's view, M was very effective in convincing clients that Make Up Store was a professional brand used by well-known beauty artists and fashion models. Therefore, Gaby thought the M magazine still had potential and maybe should have more weight in her promotional mix. The Future of Make Up Store in Mexico Gaby believed that a major challenge she was facing was that brand awareness was very low in Mexico. She observed that many people who tried the brand liked it, but not many people actually knew about the brand. Mexico, and especially the Northern part of Mexico, was heavily inuenced by the food, fashion, and life style in the US. Gaby thought that if the brand had more presence in the United States, brand awareness in Mexico would increase as well. A second issue was related to segmentation, targeting, and the positioning of the product. Although the product was unisex, male consumers constituted only 10 percent of Gaby's clients, whereas 90 percent of nal consumers were women. The male market segment had indeed a huge growth potential, but on the other hand it was still difcult to persuade men to use beauty products in a traditionally macho- oriented society with clear role distinctions between men and women. Gaby asked herself how she could raise brand awareness and position the product adequately, given her limited nancial resources. Should she focus more on nal consumers, institutional clients, or the franchises? What promotional tools should she use, and how should the promotional mix look like in the future? How could she overcome the logistical problems and the necessity to have relatively large inventories of the products? What other issues had she to consider in order to grow the business and make it more protable? With all these questions in mind, Gaby felt she needed a systematic approach to make the right decisions in the future. She had promised her father to present a strategy and concrete action plans the rst week of May, which gave her approximately eight weeks to work on the different issues. Exhibit 1 Make Up Store Product Lines Product Line Products Example Lips Lipsticks Eyes Shadows, Eye Dust, Eyeliners Nails Nailcare and Nailpolish I Bases Powder, Neutralizer, Concealer Skincare Cleanser, Masks, Cremes Haircare Shampoo, Conditioners, Wax, Mousse, Hair Spray Bodycare Body Wash, Soap, Bath Salt Tools Brushes, Sponges, Tweezers, Curlers Accessories Brooches Bags Makeup Bags, Brush Cases Source: Make Up Store Exhibit 2 Make Up Store Ambiance Make Up Store Stockholm, Sweden Make Up Store Monterrey, Mexico MAKE UP STORE Make Up Store Cancun, Mexico Source: Make Up Store 8\fExhibit 4 Make Up Store's Clients in Mexico Consumers and Franchises Make-up artists 43.8% 39.7% Institutional Clients 16.4% Source: Gaby Kalifa, Make Up Store Mexico 10Exhibit 5 Competitors for Make Up Store in Mexico According to Price Level Price Level Brands Chanel High end Lancome Christian Dior Make Up Store Mid-priced, professional Make-Up Art Cosmetics (MAC) Bobbi Brown Cosmetics Avon Cover Girl House of Fuller Low end, commercial Jafra L'Oreal Mary Kay Cosmetics Revlon Source: Based on the perception of Gaby Kalifa, Make Up Store Mexico 11Exhibit 6 Advertising Media Mix (Including Events), 2006 Print 17.02% Other 20.53% Local TV 1.35% Events 17.03% Radio 23.43% Webpage 1.84% Billboards 18.80% Source: Gaby Kalifa, Make Up Store Mexico 12