SPC meets Stuart Meldrum, the man responsible for taking COSi into the post-Body Shop era, and discusses the state of the global private label market
Stuart Meldrum joined COSi in 2002 and held several positions, including UK operations director and group commercial director, before stepping up to ceo in December 2006. Holding an honours science degree from Edinburgh University and an MBA from Warwick Business School, Stuart's prior experience was in the steel industry with Corus Group and ASW Holdings, with specific roles in supply chain and operations, and responsibility for multiple manufacturing facilities.
In the steel industry Meldrum achieved significant improvements in productivity, production volume and profitability. Using his experience in these areas he initiated extensive improvements at COSi, first at the Maesteg-located facility in Wales, using lean methodology and management tools, and then at the Watersmead facility, where he has restructured the operations team and accelerated improvements throughout the plant. Moreover Cosi has been transformed from a contract manufacturing company to one closely associated with industry trends and innovation.
“Last time COSi spoke to SPC in 2002, the main strategy was to follow an in-sourcing model that was akin to contract manufacturing,” says Meldrum. “In 2004 we decided to change that. Contract manufacturing is our bread and butter and will continue to be so but we elected to concentrate more on our innovation with the express view that we wanted 50% of our business to be from products that we have developed. On the back of that we have invested a great deal of money in labs and development scientists and we now do trend shows in Shanghai and Hong Kong. We are not at the 50% mark yet but are beginning to get up towards that level, and the reason we have achieved that is through offering more value to our customers.”
A change in policy from some of the biggest players in the C&T industry means that this approach is beginning to pay dividends. In Harvard Business Review last March P&G indicated its desire to source more innovation from outside the company in order to harness the important innovation increasingly being done at small and mid-sized entrepreneurial companies. “There are signs that the quota of outsourced innovation will eventually be increased to 50% for brand owners like P&G who used to do all their R&D in house,” says Meldrum. “On their part it is a customer-driven strategy to give them more value.”
So what does COSi offer that multinationals cannot provide for themselves?
“We offer concept-to-shelf,” says Meldrum. “Essentially we start off by looking at global trends, we use competitive shopping, trend agencies, globally not just in Western Europe. We have a good idea of the trends in the fashion and furnishing industry and on the back of all that we identify what we think are the trends in the cosmetics industry. What we then do is look at our customer's brand and look at areas where we can help them and whether there are any brand extensions we can do. Essentially we will meet them and tailor an offering on our innovation and how that relates to their brand and the general trends within the world.
At this stage COSi undertakes further development work on products. “Typically at this stage brand owners will want some alterations so once we have their input we can do the full product development and manufacturing and in some cases all the distribution through our regional distribution centres. And what that gives you is a project that people can term turnkey.” This is a word Meldrum says he has heard and used in advanced engineering industries and is starting to hear more of in the cosmetics business. “That's the big advantage we offer - turnkey solutions - right from concept to shelf.”
Meldrum's experience in the steel industry gives him a unique vantage point from which to survey the C&T industry. “The biggest challenge in cosmetics is the product; the fact that we are in the lifestyle and fashion industry. It's an industry that is very driven by what the marketing people within a brand want in terms of what they think is going to sell well on the shelves. And that can mean lots of changes throughout the duration of the project. This is because marketing views can change very fast and this means dynamic production is of huge importance. The fast pace by which trends change is transferred to products changing to match them; the lifecycle of many beauty products is very short.”
Meldrum strongly believes that there is overcapacity in the cosmetics industry and this will lead to consolidation. “Margins are very tight and we have our work cut out to optimise our margins because there is lots of competition The world of sub-contract manufacturing, even if it involves product development, in Europe is still fragmented. When margins are going down there is only one thing that happens: consolidation of players like ourselves. This is a carbon copy of what happened - and is still happening - in the steel industry.”
Private view
On his opinion of the private label industry, Meldrum is candid. “To put it simply my view is that Tesco is killing everyone in private label. I don't consider what we do as private label; the dynamics of supply chains for the work we do for The Body Shop are very different to that of a Tesco own brand. But it is obvious what is happening in that Tesco is passing the burden down the supply chain and maximising its own profitability by squeezing margins. Whether you talk to the brand owners or the people supplying the brand owners or the suppliers of componentry into private label manufactures like Blacks… they are all under immense pressure for profit margin and all under immense pressure to hold stock.”
Meldrum highlights that the typical product cycle for an own brand shampoo starts at £2.99 per unit and rapidly goes down to 99p. Sales incentives for customers are also factored in so private label manufacturers find it very tough in terms of profit margins. “This is particularly the case in the UK; we do not see the same pressures apart from perhaps Germany. I know people at Mibelle and Aldi who have come under pressure from their German counterparts. But certainly we don't see that model in France despite the presence of comparable companies because consumers connect with independent retailers too.”
Post-Body Shop
The near future holds a huge change for COSi in that its long-standing connection with The Body Shop is about to expire. Meldrum expects to maintain a close relationship with the L'Oréal-owned company. “We will have a more commercial arrangement with the main difference being that the pricing will have to be more competitive. The original pricing had the liability and overhead we originally took on built into that so one of the big things we are doing is consolidation of our two UK plants so we can offer commercial prices to The Body Shop.” Meldrum points out that COSi has successfully replaced and exceeded the revenue lost when Revlon withdrew its manufacturing to the US because of poor dometic sales. “In the last four years we have built £56m of new sales. That's P&G, Unilever, St Tropez, Next and others because of the innovation and focus on customers.”
The reconfiguration of UK operations is central to many aspects of COSi's future. “Our costs are currently too high in the UK. The predominant reason for that is that we are trying to operate two plants. In Maesteg we have a plant that has lots of space and good labour availability and essentially we can fit the two plants into one and make big savings on overheads. This is to protect our profitability in the UK. Look at us, or any of our competitors, the return on profit levels are not good, perhaps around the 5% mark. This is why we are innovating in order to get a higher margin. This strategy will put a lot of pressure on the company. It is going to make cash tight and it will make day-to-day operations difficult but we are going to take some short-term pain in order to get the long-term right.”
Chinese whispers
Beyond the UK and an impending expansion to the US, COSi is focused on establishing a presence in China with the development of a dedicated plant in the Kunshan region and a presence at trade shows in the region, including Cosmoprof Shanghai.
“Eastern Europe would be a second phase of our strategy after China and the US. The reason for that is differentials in low cost economies. With Eastern Europe (and Russia) and China there are two factors. First their domestic markets are undergoing huge growth. Secondly, they are low cost economies with very low labour rates, so the reason for doing both is the same. Because of the corruption that we perceive to still exist in Russia we aren't looking to establish operations there so when we look at Eastern Europe we are looking at countries like Poland and Hungary. With China many people have gone down that path so that is something we are happy to do.
The plant in China will be run to the same principles we have used to redevelop the plant at Maesteg with high GMP and good materials flow.”
“Cosmoprof Shanghai was very useful in terms of contacts. That and other shows have been very helpful in redefining COSi as a innovation centre rather than just contract manufacturing. We showed a lot of innovative products and I would say the old perception has now been eradicated. Innovation is our lifeblood. If COSi was still a contract manufacturer I don't think it would be successful, it is good for us financially and is bang in line with what all the big brands owners want. At the time we made the change to get higher margins and add value for our customers. We have been fortunate that there has been such a major shift in brand owners’ perspectives.“