The Irresistible Attractiveness of New Categories – 1

Managements at different stages in their companys’ lifecycles, discuss entering into an entirely new product category. If there is any company management on earth that has never done this, believe me it’s a rarity. Further growth being on top of the list, there may be a variety of reasons behind each case. And companies sometimes take this up to the final step and actually expand into a totally new field.

This whole process is full of risky steps, on the other hand. Starting from picking the right category to add, involved steps are product(s) development, packaging, consumer-testing, ingredient sourcing, sales forecasting, inventory-building, marketing communications and field training, to point out the most obvious ones.

We have two examples to look into where the results of expanding into a new category have not been as one would have expected: Oriflame and Nu Skin.

This week, we will take Oriflame’s case.

Since it was established in Sweden in 1967, Oriflame sold only cosmetics products for a very long time. In 2008, it launched a “wellness” line. Leaving aside the limited-life accessories and seasonal gift items, this was company’s first major expansion into a new category. However, one can hardly say this new line was full-heartedly embraced by the management, even at its birth. The statement from CEO Magnus Brannstom in Oriflame’s 2008 Annual Report is a sign: He wrote, “Oriflame is about beauty. Beauty products, of course,” without ever mentioning the wellness products. This new product line could only find a place for itself in the same annual report on the 21st page. There, the company announced the launches in Western European and Baltics markets and said launches would continue in other markets in 2009 and 2010.

The following year, Oriflame management listed company’s seven key points of business strategy in the 2009 Annual Report. On the product line, it said, “Wide portfolio of Swedish, natural, innovative, quality beauty products at affordable prices.” again, with no mention of recently launched wellness products. In his yearly statement, CEO Brannstrom said, “Oriflame offers a complete range of high-quality beauty products inspired by the purity and power of Swedish nature.” To remind, Oriflame’s wellness products had been on several markets for more than a year and with the 2009 launches, this line had been in 37 markets by then! In 2009, the wellness products accounted for 2% of Oriflame’s global sales.

Two years after it was launched, wellness products’ share increases to 3% in 2010. However, company’s product strategy still remains as “ Wide portfolio of Swedish, natural, innovative, high-quality beauty products at affordable prices” in the 2010 Annual Report.

In 2011, Oriflame’s growth started taking headwinds: The global sales was down over 1%. Wellness products’ share this time was 4%. In other words, wellness products for the first time cannibalized company’s beauty line that the company had been most experienced at (and probably, that were more profitable).

One year later in 2012, Oriflame’s worldwide sales was almost flat as compared to previous year and the wellness products’ share futher increased to 5%.

Last year was the most disappointing of all for Oriflame with a minus 5.5% global growth. Wellness products’ share seemed to level off in 2013. It accounted for 5% of Oriflame’s sales just like the previous year. By the way, Oriflame’s product strategy in its 2013 Annual Report remained exactly the same as it had been before (i.e. no mention of wellness products).

Looking from outside, what we see here are:

1) After investing in it for eight years, Oriflame developed an entirely new product category. This line has been in the markets for six years now and the highest global share it could reach is 5%. The wellness category we are talking about here is a rapidly growing one all over the world where many companies including Amway and Herbalife are making huge sales (more than $4-5 billion each). This 5% is also half of the share of Oriflame-sold accessories that normally require much less time and money to develop.

2) In the last few years, Oriflame’s wellness line’s sales growth has not brought incremental sales but has been at the cost of cosmetics sales.

3) Looking at the annual reports, company web sites, Facebook pages and catalogues, one can hardly say this line has been regarded as a strategically important product category.

Then, the questions we have about this product line after six years are:

1) Why did Oriflame launch this line if it would not properly support it?

2) If Oriflame did stand behind this new category as required, would the company still face the downward trend in its global sales or would it be in an entirely different wave of growth?

3) Or, instead of investing half-heartedly in an entirely new product line, would the company be more profitable completely without it?

In the next part, we will look into Nu Skin’s test with the food supplements category.

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