By Sharon Terlep 

Cosmetics maker Coty Inc. is taking a $3 billion write-down on CoverGirl, Max Factor and other brands it acquired a few years ago, becoming the latest consumer giant to reckon with mainstream labels that are losing their grip on American shoppers.

The makeup and fragrance seller, which is controlled by European investment firm JAB Ltd., has struggled with weak sales and executive turnover. On Monday, the company said it will restructure its operations and cut jobs to ease indigestion from brands Coty bought in 2016 from Procter & Gamble Co.

Much as Kraft Heinz Co. is struggling as organic foods are winning out over processed foods sold in the center of the supermarket, Coty's mass-market brands are suffering as consumers buy fewer cosmetics and skin-care products from drugstore aisles.

Many women have shifted to higher-end and niche brands, and increasingly buy beauty products from online startups or outlets like Sephora and Ulta Beauty. Fighting back, CVS and Walgreens have looked to expand their selection while paring mass-market beauty names.

The shift has meant sales declines for many once-popular brands, including Revlon Inc.'s namesake line and L'Oréal SA's Maybelline.

Consumers are being wooed by social-media-driven brands like Glossier, a skin-care and makeup line that emphasizes a natural look, and celebrity founders, such as reality-TV star Kylie Jenner's Kylie Cosmetics.

"Clearly we are under performing, we want to close the performance gap," Coty Chief Executive Pierre Laubies said in an interview. While mass-market beauty brands as a whole are declining due to shifting consumer habits, Mr. Laubies said the bigger issue for Coty are the years of brand neglect and mishandling. "Our performance is much lower" than the overall market, he said.

Coty entered the deal with P&G with the idea that the addition of more than 40 brands, including Wella shampoos and Clairol hair dyes, would enable it to better compete against other conglomerates. But while its luxury and professional divisions have performed solidly, the company's consumer beauty unit, which accounts for nearly half of its roughly $9 billion annual revenue, has slumped.

P&G held onto its higher-end beauty brands including SK-II skin care and Olay moisturizers, whereas Coty executives have said the P&G brands they bought were in worse shape than thought. Earlier this year, Coty took a nearly $1 billion impairment charge for the business.

Exacerbating the problem, Coty remained "too stuck" on meeting financial targets set at the time of the P&G deal, and that prevented the company from taking the necessary steps to shore up the business, Mr. Laubies said.

Mr. Laubies, who took the helm last fall after the abrupt departure of CEO Camillo Pane, said that despite the challenges he believes the P&G acquisition was the right move for Coty in the long run. Mr. Laubies previously ran European coffee company Jacobs Douwe Egberts, which JAB also controls.

He said Coty needs to stanch losses and cut costs before it can realistically focus on new products and growth. Immediate priorities, he said, are cost cutting, reorganizing Coty's corporate structure and improving brand performance at retailers.

"Our goal right now is not to gain market share but to stop the erosion, " Mr. Laubies said. In the near term the company will set more-modest forecasts, he said. For the fiscal year started July 1, the company now expects revenue to decline.

As part of its restructuring, Coty will move its management from London to Amsterdam, which is closer to the company's main markets and, amid Brexit, a "cost-efficient and tax-stable location."

The company didn't specify the number of jobs cuts, but finance chief Pierre-André Terisse said they will reduce annual expenses by about $200 million, or roughly 10% of Coty's fixed costs. The company had about 20,000 full-time employees as of June 2018, prior to announcing a restructuring program a couple of months later.

Coty said it expects to book $600 million in restructuring costs over several years. On Monday, it struck a deal with creditors to provide enough funding to carry out its plan to reduce staffing and product offerings while reorganizing the business into distinct geographic units.

Wells Fargo analyst Joe Lachky said the goals seem ambitious, adding, "Coty remains a long-term turnaround story and we note that turnarounds never happen in a straight line."

JAB has run Coty since buying a perfume business from Pfizer Inc. in 1992. The firm moved in February to boost its Coty stake to 60% from 40% by offering to buy $1.75 billion in additional shares. The move came after Coty shares had fallen sharply over the previous year.

JAB has become a consumer-goods powerhouse after a string of acquisitions that gave it brands like Keurig Dr Pepper, Krispy Kreme and Pret a Manger. But Coty's purchase of the P&G brands has been problematic; in addition to switching CEOs, a senior JAB partner resigned as Coty's chairman last year.

Write to Sharon Terlep at sharon.terlep@wsj.com

 

(END) Dow Jones Newswires

July 01, 2019 16:48 ET (20:48 GMT)

Copyright (c) 2019 Dow Jones & Company, Inc.
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