Revlon Can't Pretty Up News of China Exit

There's nothing attractive about the cosmetics retailer leaving China.

Jan 6, 2014 at 9:34AM

It used to be when a company wanted to save money, it abandoned factories in the U.S. and headed overseas to China, substituting cheap foreign labor for American workers as a means of padding the bottom line.

With the rise of the Chinese middle class, however, labor costs there have risen and the Middle Kingdom is no longer the low-cost safe haven to which companies flock, instead turning to Vietnam, Cambodia, and Malaysia for succor. Heck, some companies are even reshoring to the U.S. Google made a lot of hay by stamping "Made in the U.S.A." on its Moto X smartphone this past summer.

Now Revlon (NYSE:REV) has become the latest company to say goodbye to China, announcing it would shut down operations in the country and ax 1,100 employees in a bid to save some $11 million annually. While it manufactures its cosmetics at facilities here in the U.S., and in France and South Africa, its Chinese operations consist of a sales force of 940 "beauty advisors" that have been retained by a third party agency but are on Revlon's books.

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Although the cosmetics giant generated more than $1 billion in sales through the first nine months of 2013, sales were down 1.3% from the same year-ago period and dropped by 3.5% in Asia. When controlling for unfavorable currency exchange rates, China and Hong Kong alone offset by 4.1 percentage points the increase in the region's net sales in the first nine months of the year.

China's proved to be a difficult market for U.S. cosmetics companies. Whereas rival Estee Lauder estimates it's gained market share there, others like Avon Products saw revenue plunge 67% in China in the third quarter, a significant acceleration from the first six months of the year, when revenue fell just 28%. Procter & Gamble has also said it's losing market share in China.

As China's economy continues to slow, demand for more goods wanes as well. China's services sector fell for the fourth straight month in December, as did manufacturing. The economy is expected to grow just 7.6% for 2013, the slowest expansion since 1999.

While many of the companies that have left China are manufacturing operations that no longer find the country an easy source of low-wage labor, retailers have had trouble navigating the sales flow here, too. Despite all of China's potential, reaching the consumer hasn't been easy for many. Best Buy closed all of its stores in China in 2011 due to poor sales, instead focusing on a local chain it acquired, and Home Depot closed all of its stores there in 2012. Last year, U.K. supermarket giant Tesco also abandoned the go-it-alone approach, opting to partner with a Chinese hypermarket operator.

With Revlon's exit, it will incur some $22 million in pre-tax charges due to the restructuring, of which $20.9 million was recorded as a charge in December, and it expects $8 million worth of the savings it generates to benefit 2014 results. And that's about the best lipstick the beauty queen can put on this pig.

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Fool contributor Rich Duprey has no position in any stocks mentioned. The Motley Fool recommends Google, Home Depot, and Procter & Gamble. The Motley Fool owns shares of Google. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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