China Gloss Fades With Revlon Exit

| About: Revlon, Inc. (REV)

We'll start off this new year with what could well become a major theme for 2014, with word that make-up giant Revlon (NYSE: REV) is officially pulling the plug on its China operations. The timing of this move, which was officially announced just before year end, was most likely related to accounting issues, as Revlon probably wants to take some or all of its resulting $22 million write-down in the fourth quarter. But that said, Revlon's withdrawal shines a spotlight on the tough market for consumer goods in China, as a slowing economy leads many to cut back their spending on non-essential daily items like make-up.

Revlon's withdrawal puts a real face on China's rapid economic slowdown over the last year - a phenomenon that gets reported a lot but often lacks details on the impact to consumers and businesses. Many of my friends, both foreign and local Chinese, often tell me about the sharp slowdown their companies are seeing, and how restaurants and shops that used to be full all the time are now often nearly empty. That contrasts sharply with another picture that central leaders would like to encourage and is more common in the media, as Beijing tries to build up domestic consumption to offset weakening exports and inbound investment.

Flagging local demand, combined with a fiercely competitive domestic market, were undoubtedly big factors behind Revlon's decision to pull out of China, a move that will result in the loss of 1,100 jobs (English article). The move looks relatively cosmetic for a company of Revlon's size, as China now accounts for just 2 percent of total revenue and the withdrawal will only result in savings of about $11 million a year.

The decision is part of a broader restructuring for Revlon, which is pulling back from China and other peripheral areas to focus on its core markets. The move looks a lot like a similar about a year ago by online job site Monster Worldwide (NYSE: MWW), which sold off a lackluster China unit it had owned for several years to focus on improving performance of its core U.S.-based business (previous post).

I don't follow the China cosmetics and personal care consumer markets that closely, though I do know that global giants Procter & Gamble (NYSE: PG) and Unilever (NYSE:UL) are extremely active and aggressive in the market. I do also know that traditional retailers, which are probably Revlon's main sales channels, are also struggling to compete with a crowded and fast-growing field of e-commerce players. That fact saw French giant Carrefour (OTCPK:CRERF) briefly consider withdrawing from China last year or putting its operations into a joint venture, while Britain's Tesco (NASDAQ:TESO) actually did pull the plug (previous post).

Like many smaller foreign companies that haven't invested heavily in China, Revlon is probably realizing it either needed to get much more serious if it wanted to do business in the market or abandon any plans for traditional retailing. Despite this departure, I wouldn't be surprised if the company quickly comes back and opens an online shop on one of the growing number of open platforms operated by nearly all the major e-commerce firms, including Alibaba, Jingdong and Suning (Shenzhen: 002024).

In terms of broader implications, Revlon's move does seem to indicate that 2014 will continue to be a tough year for retailers and consumer product manufacturers in China. The country is still aiming for economic growth of 7.5 percent, and I'm fairly confident it will meet that target. But that figure is far less than the 10 percent rate for much of the last decade before 2013, meaning consumers will have less money in their pocketbooks to spend on everything from home appliances to make-up.

Bottom line: Revlon's withdrawal from China could be followed by its opening of an online shop, but also shows that a tough market will persist for consumer product makers in 2014.

Disclosure: No positions.