WASHINGTON — The North American Free Trade Agreement could prove a bonanza for U.S. cosmetics firms doing business in Mexico.
As many import duties went from 20 percent all the way down to zero percent on Jan. 1, the Mexican market of 90 million people in a wink became prime potential consumers of American-made perfumes, toiletries and personal care products.
At least one U.S. firm, the New York-based EstÄe Lauder Cos., believes its Mexican sales will double within five years as a result of changes wrought by NAFTA.
On the other hand, the pact may mean very little, or even prove a detriment to U.S. cosmetics firms doing business in Mexico. American firms already manufacturing products there will see no duty benefit — only increased competition from U.S. imports.
There also will be little benefit for firms — such as American subsidiaries of French, Italian or Japanese companies — that do not manufacture goods in the U.S.
Unless companies establish the right distribution and marketing channels, their Mexican investments could turn sour, industry analysts assert. But on paper at least, NAFTA is the beacon for a bright future for U.S. cosmetics firms collectively, based on past experience.
Beginning in 1988, when Mexico opened its market for the first time by dropping prohibitive import duties and requirements that Mexican products contain 100 percent local materials, U.S. cosmetics sales soared from $290 million to $1.5 billion in 1992.
“Basically, we went from a situation where it was very difficult for U.S. firms to sell cosmetics in Mexico to one where you could sell any cosmetics product as long as it was safe — and this was made much easier, too,” said Louis Santucci, the Cosmetic, Toiletry and Fragrance Association’s international vice president.
Mexico’s residual cosmetics import duties, which ranged from 10 to 20 percent, still posed a barrier to U.S. products.
“We even had to pay duties on artwork created here, but as these extra costs are eliminated it will be possible to move close to having comparable prices in Mexico as in the U.S.,” said Jeanette Wagner, president of Lauder’s international division.
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Under the NAFTA regime, tariffs were eliminated entirely for 23 categories of cosmetics. In nine other categories, duties will be cut by one-fifth annually until they reach zero in 1999. For the remaining 17 products, tariffs will be cut 10 percent annually until 2004.
All U.S. cosmetic import duties for Mexican products, which averaged 6.5 or 8 percent, were eliminated on Jan. 1.
The schedule for Mexican duty elimination varies by individual product, but is set uniformly at 10 years for perfumes.
“While a 10 percent duty may not seem like much of a barrier,” the CTFA’s Santucci said, “when you add this to the costs for shipping and those paid to a distributor, they can make a difference between you being able to sell in Mexico or not, because profit margins on most cosmetics lines are very small.”
In addition, he noted “there’s an important psychological aspect to NAFTA, since it gives companies assurances about investments, which counters bad things people may have heard about in the past.”
Of course, as the trade treaty creates more and higher paying jobs in Mexico, Santucci said, “people will have higher disposable income, which we expect they will use to buy more personal care products.”
Moreover, given Mexico’s demographics, there appears a ready market for cosmetics products, said Emalee Murphy, an attorney with Bryan Cave, a Washington firm that specializes in international trade.
“Mexico’s population is overwhelmingly under age 25 and well over 50 percent are under age 15, which makes them prime candidates for cosmetics products,” Murphy said.
None of this was lost on Lauder. Last Nov. 18, the day after NAFTA was approved by the U.S. Senate, the firm launched its Clinique line in Mexico, joining its Lauder and Aramis brands.
“We will continue to increase our lines there because of NAFTA’s improvements to open the border,” Wagner said, noting its products now are sold in four doors — two each at Liverpool and Palacio de Hiero.
“With the elimination of these extra [duty] costs our products now are far more accessible to a broad range of Mexican consumers, and I expect to double our business there within five years,” she said, adding that Lauder’s affiliate there is staffed by Mexicans.
The company, though, will not sell the exact same products in Mexico as in the U.S., Wagner said, explaining Lauder’s Mexican lines will be color-shaded to meet the needs of a predominantly non-Anglo-Saxon population.
Therefore, she said, the company will sell “more lipsticks in red and brown shades and less of the pale shades and foundations.”
She noted Clinique, now sold out of four doors, will add four more this year, and expansion also is forecast for the Lauder and Aramis lines, now sold in 115 doors in Mexico.
“The arrival of Dillard’s in Mexico will be viewed as a separate opportunity and there will be others,” Wagner said, noting that Macy’s has been rumored to be looking at opening stores there.
Such opportunities are not limited to the giants of the American cosmetics industry, though. Combe Inc. of White Plains, N.Y., has moved to sell its men’s hair coloring products lines there.
Chapin Nolen, Combe’s president, said the company plans to expand retail distribution for its Grecian 2000, Lady Grecian 2000 and Just for Men into more supermarkets, mass merchandise retailers and drug stores, where they have been sold for three years.
“NAFTA will enable us to be more efficient and ship into Mexico without duties,” said Nolen.
He noted the firm has applied for an immediate duty exemption on its products. Exemptions were granted early on in the U.S.-Canada free trade pact and likely will be also granted under NAFTA, trade analysts said.
Nolen wouldn’t make sales forecasts, but made it clear he believes the Mexican market is solid and growing.
“It has a growing middle class, and if you go to a shopping center you have to drive around for 20 minutes to find a parking place. It’s that crowded,” he said.
Nolen added Combe utilizes Televisa, Mexico’s television network, and a limited amount of cable TV, explaining this is the most efficient way to advertise mass market products.
By contrast, Lauder’s Mexican ad campaigns include TV, radio and print and are part of its worldwide advertising activities, although tailored to the local audience.
Other cosmetics firms, such as Calvin Klein, Gillette and Procter & Gamble, also are making plans to step up sales activities in Mexico, but declined to provide details.
Yet, for more than a few cosmetics firms, NAFTA means little in a positive way, and may even be a negative. Avon, whose direct sales representatives have sold cosmetics in Mexico since 1958, manufactures products there.
“In the short term, it’s a wash for us since there is no positive benefit from the lowering of tariffs,” said Gail Blankey, an Avon spokeswoman. “Of course, in the long-term, NAFTA could be a benefit as Mexico’s overall economy improves.”
Parfums Givenchy Inc. has been selling its products in Mexico for several years and experiencing substantial growth, which it believes will continue as the free trade pact buoys consumers’ incomes.
However, Robert Brady, Givenchy’s president, noted that the company’s European-made cosmetics do not qualify for duty elimination when shipped to Mexico. Only those made in the U.S. or Canada qualify.
Consequently, Brady said that Givenchy, “like most multi-national companies, will have to consider restructuring based on trade blocs, since clearly, there are spheres of influence and the U.S. is the major one for Central and South America.”
Whether Givenchy sets up a U.S.-based corporation and manufactures here to gain NAFTA’s vital trade perks “remains to be seen,” he said, declining further comment.
Even for U.S. companies, selling cosmetics in Mexico for the first time will not be a cake walk, trade attorney Murphy asserted.
“In many ways Mexico is a different market from the one in the U.S. That is why for a company that hasn’t done business there before, it is important to find a good distributor or retailer,” she said. “Especially for smaller U.S. companies that may not be familiar with exporting, it will be beneficial to deal with a U.S. retailer who’s already in Mexico, or setting up operations there.”
In addition, she said it is essential that U.S. firms either have Spanish-speaking persons on staff, or sell through firms that do.
Murphy noted that U.S. cosmetics companies contemplating setting up operations or sales in Mexico can obtain information by fax about that market and NAFTA free of charge by calling a Commerce Department automated telephone service. The number, (202) 482-4464, operates 24 hours a day, seven days a week.
Should NAFTA prove the economic boon to Mexico and cosmetics manufacturers that the pact’s boosters contend, it will have a spillover effect on many Latin American nations, which would make them excellent markets for U.S. cosmetics, too, according to industry executives such as Brady.
Chile, Argentina and Brazil, as well as the Caribbean Basin nations, may well join NAFTA by decade’s end.
Lauder, for one, has established itself in European-oriented Argentina and is developing markets in Chile, Columbia, Venezuela and Peru. But Wagner said development of these markets could proceed very differently than in Mexico.
“Mexico is not a test market for us, since we’ve had experience in some Latin American countries for 25 years,” she said. “There is no such thing as a South American country as far as we are concerned. Where Argentina has a European bias, Brazil is oriented more toward Portugal and others are very Latin, so each market must be treated individually as far as products, marketing and operations are concerned.”