Monday, 19 April 2004

Mecca Cosmetica

Speaker: Jo Horgan
Jo Horgan, CEO Mecca Cosmetica

Jo Horgan launched Mecca Cosmetica in December 1997. The business now has a $20 million turnover and is based on cutting-edge brands with a focus on customers. Jo was the featured speaker at the April 19th BOSS CLUB seminar in Melbourne.

Transcript

This is an edited extract of the address given by Jo Horgan CEO of Mecca Cosmetica to AFR BOSS Club in Melbourne on April 19, 2004.

Since you chose to come this evening, I’m assuming most of you know what Mecca Cosmetica is, and I’m hoping some of you may even be customers.

For those of you who may not be familiar, Mecca Cosmetica is a cosmetics retail concept, housing the best, cutting edge, innovative colour cosmetics, skincare, hair care and body care from around the world under one roof. We have 10 stores across three states, Victoria, NSW, and Western Australia.

When thinking about tonight’s talk, I tried to work out a way to structure it, as I can get carried away. I’ve very loosely split it into the following chunks:

Firstly - How we set up the business, and the elements involved in pulling it together.

Secondly – the business plan, and all that did NOT go to plan.

Thirdly, and finally, reviewing the key elements I believe make Mecca successful.

So – point one….How we set up the business. How did Mecca Cosmetica come to be? There are lots of factors, but the overriding one is ‘Right Time, Right Place’. In 1996 the most dynamic change in cosmetics over the last twenty – thirty years was just beginning to gain momentum. The world’s leading makeup artists and dermatologists (a mixed bag of creative geniuses, and scientific boffins) were launching independent brands with the help of manufacturers who historically wouldn’t have been at all interested in such small businesses.

And innovative retailers were supporting these new, dynamic, but let’s face it completely untested brands – stores such as Barney’s, Fred Segal Studio in Santa Monica, Bendels. You walked into these stores and the feeling of excitement, that ‘hold on to your hats we are onto something MAJOR’ – was palpable.

At this point, having done a stint with L’Oreal in the UK, I was working with L’Oreal here in Melbourne, and I was responsible for the launch of colour cosmetics, as well as managing skincare, haircare, sun care, and fragrances. The existing cosmetics offer in Australia was very traditional – traditional brands, traditional retail environments. At the same time, I felt that Australian women were fashion forward, aware of international trends, and early adopters, so there seemed to be a disconnect between what was on offer, and what consumers would embrace if they had the opportunity.

I felt there was a real opportunity to bring these brands to Australia in an innovative retail environment. This gut feeling I had was supported by the customer research I did – the same customer research a lot of embryonic businesses do – the dinner party litmus test.

There seemed to be real dissatisfaction with the current offer, lots of horror stories of unhappy customers – you’d open up the conversation and women would be fighting for air time. Let me tell you, I still think of this when that oft quoted nugget comes up ‘happy customers tell one person about their experience, unhappy customers tell 10 friends’ and this has been one of the drivers at Mecca, but we’ll come on to this later.

Anyway, I had this idea for Mecca, and my gut feeling was that it was a winner. My gut and I are very good friends, I have always relied on it heavily, I still do, and it very rarely steers me in the wrong direction. Now there were so many hurdles to making this a reality, but the one really NOT to be underestimated was – I had no clue about retail. Working in a menswear shop whilst at Uni was the sum total of my experience. Maybe if I had known how challenging retail is I would have been daunted. I know it’s often said, but in this instance it was true – ignorance is bliss.

It’s funny, I spoke to so many people before starting Mecca, I was shameless about ringing up a friend of a friend, sometimes even a friend of a friend of a friend, and the same advice was offered again and again – retail is detail. I look back at this and realise that I listened to what I wanted to hear, and filtered out the rest. Detail is absolutely NOT my strong point, and if Mecca’s first employee hadn’t arrived like Manna from Heaven with a skill set which so beautifully complimented mine…I’m not sure what Mecca would be today.

So…having no experience in retail was an issue. Now, in terms of the key elements of setting up the business – well each one of them came with their own hurdles of differing heights. The first key element, and next major hurdle was getting the cosmetics brands to agree to come on board. Well, that’s not actually correct – the next major hurdle was just trying to get to speak to the brands. These brands were start ups, - they were dealing with overwhelming demand, cashflow constraining growth, and limited human resources. One example – I’d been talking to Philosophy for about three months, things were progressing well, then suddenly I couldn’t get on to them for love nor money.

For six weeks the phone was either engaged, or saying number experiencing difficulties, faxes were going unanswered – and we’re not talking about a few phone calls, I was a certifiable stalker with all the brands I dealt with. I’d get a bee in my bonnet, and I would stay up all night, and I would call the different brands nine, ten times a night, speaking to answering machines, bemused but firm assistants, the building security guards, anybody, until the decision makers finally thought, ughhh, I’ll talk to her just to make her go away. Anyway, back to the Philosophy story…I’d broken through this barrier with Philosophy, and suddenly I was back in communication Siberia.

Finally, about seven weeks later, I got through, my first plaintive cry being ‘where have you been?’. It turns out Oprah had decided to sing the praises of Philosophy on her show, calling it her very own face lift in a bottle. All of America was suddenly clamouring for a piece of Philosophy, and their small office in Arizona was groaning under the pressure of three months worth of emails.

I finally convinced all the brands to meet with me. I was SO excited, I thought things were really moving…that is until my first meeting. I was meeting with Nars, and Jennie, the CEO, looked at me, and asked me one of those unanswerable rhetorical questions…’we have a handful of shops in America, we have one shop in the UK, we can’t produce the goods quickly enough, we aren’t in Europe, or Asia, is Australia really the next logical market for us?’.

We really didn’t need to dwell on the fact that I didn’t have a physical shop to show them, and had no retail experience for me to know I wasn’t on to a winner. I heard sentiments to this effect across London, Paris, New York, Los Angeles and San Francisco over the next three weeks. So I came home knowing that getting these brands over the line wasn’t going to be easy. Not one had said yes, or given any indication of saying yes.

I spent the next couple of months looking at the issues from their point of view. I made it ALL about them. I decided the only way I could get them over the line would be if I made it simple AND compelling for them. So, I offered to behave like a local retail account – I would pick up the goods ex works, organise all shipping, duty, training, visual merchandising, PR, launch, ongoing marketing.

All they had to do was sell me the product – with me paying up front naturally, much to the horror of my accountant – and I would take care of the rest. And I would really take care of it. I used my experience as a brand manager as a way to reassure them that I would care for and nurture their brands – because this was another fear they had – that having established their brands as the icons of cool, hip and happening – that they’d hand their precious jewel over to someone who just didn’t get it.

I was helped enormously by the fact I’d met with an architect who was really excited about the idea, loved the concept, and who actually designed a ‘this is what the store would look like if there was actually a store’. We both then collaborated with a graphic designer to put together this beautiful book, and really, it was superb, that presented the concept, and the store design, showing the brands that they would be hero of the space. Showing the brands something visual gave them the comfort that it would be done well.

This whole brand courting process started in October of 1996, and I finally got them to sign on the dotted line in June 1997. By the end of it I felt like a cross between a juggler, a contortionist, and a united nations negotiator – no one wanted to sign until everyone else had signed, so it was a case of trying to get them all over the line at the same time. I had started with 20 brands on my wishlist, thinking if I could get five over the line that would be brilliant – in the end every single one said yes, so I was in a fantastic position of being able to choose what I thought would be the key brands.

Now that I had the brands, I felt like I had an asset, and could really press the ‘good to go’ button. So, now we come to the next key element - a shop – and lo and behold, another hurdle. And that first all encompassing hurdle - not having any experience in retail - once again reared its ugly head, as I didn’t realise that shopping for a shop wasn’t like shopping for a pair of shoes. Instant gratification is almost unheard of.

I thought I had done my homework – costed rents, identified preferred locations, reviewed draft contracts – but nothing could prepare me for the shock of dealing with distinctly disinterested, patronising real estate agents who seemed to view me as some chick trying to do a fluffy cosmetics thing – probably because I wanted something to keep me busy.

I’ll never forget turning up to view one shop with my husband in tow – now keep in mind he hadn’t seen the hundred of others I’d already been through, and whilst he’s brilliant, he wasn’t yet brilliant on cosmetics – and the real estate agent completely ignored me and addressed my husband, assuming of course he would be stumping up the money for his ‘little lady’s hobby shop’. It took Pete about an hour to calm me down after that experience.

Now, whilst these exchanges were annoying, they belied a more significant issue – there were no shops to be had. The only shops available were one’s I didn’t want. I didn’t think the concept would fly in a new shopping strip in a far flung suburb, and the shops I did want…namely the first block in Chapel Street, just off Toorak Road, naturally weren’t available.

This went from being all very inconvenient for the first three months to being a significant issue. In the brand agreements was a clause stating that if Mecca hadn’t opened a store by March 98, the contracts would be null and void. So by the time the 14th November arrived, I was desperate. A shop materialised on Toorak road – that’s not actually true, it took a lot of pushing and pulling – but ultimately we finally knew we had a shop on 14th November, and we signed a lease on 17th November 1997.

So, onto the final hurdle, having a shop that was open and trading – preferably before Christmas. Oh, and of course, an opening party to celebrate (another lesson – never have a launch party the same week you open the shop, let alone the same day). So we sent out invitations to hundreds of people – and this is before we had ripped out the staircase, knocked an atrium through the first level floor, poured a new concrete floor, and installed a shop fit. I think it may even have been before we realised we had designed and manufactured the shop fittings thinking the store was a metre wider than it was.

It shouldn’t be a surprise to anyone that we were still putting lipsticks on shelves at 6am the morning of the 10am launch, having waved goodbye to the builders at 4am – and this is after I had roped all my friends in to unpack all the stock, and suddenly become cosmetics merchandising experts in the two days leading up to the launch. One of the things I’ll never forget – we had glass display shelves, balanced on not very sturdy pins, and I was upstairs counting off stock, and I kept on hearing these glass shelves shattering, and it wasn’t until there was the fifth almighty crash, that we realised we had to stop, and come up with the ‘work around’ of sourcing some plumbing plastic piping, to surround the pins. There have been a million work arounds in this business, but the mental torture of those glass explosions make that one particularly memorable.

So, I hope this gives you a snap shot of what was involved in starting Mecca. I know I’ve spent a bit of time on this first shop – and some of you may be thinking, crickey, one down, nine to go, we’ll be here ALL night – but don’t worry, things speed up from here. I really do think the first step is always the most complicated and challenging, and things really do gain momentum from there – sometimes not in the direction you’d want, but you know things are moving.

This really brings me to the second point I want to cover – the reality of a living, breathing business versus the lovely, neat business plan. One thing I now know, business is messy.

It’s interesting, it was clear we had a viable business. We had the best, emerging, innovative brands from around the world in a totally different and appealing retail space – modern, light, accessible, with the products as the hero of the space. Customers could touch and play with all product, and they weren’t fighting with overwhelming design or visual merchandising paraphernalia. The concept was clear.

And, looking at the concept once it had launched, I think the general consensus in the industry was that yes, here was a viable concept for maybe one or two stores in Australia – maybe three or four max, but that was it, as there just wouldn’t be significant demand for these niche, prestige priced cosmetics in this market.

The only problem was, I had drawn up a business plan for a minimum of ten stores. We did get to the 10 stores, but annoyingly, the business plan had 10 stores in five years, and as it happens, it took just over six years. Sometimes things just don’t go your way, and not achieving the ten stores in five years was extremely frustrating for me. But during this time I learned a very valuable lesson – there are times when the smartest thing to do is to sit tight, do nothing and wait for the right opportunities. Don’t go hell for leather, and make decisions that don’t make financial sense just because it’s part of the ‘plan’. I suppose I should focus on the fact we proved the industry wrong, and ultimately the business plan right – we did get to ten stores, just not in the specified time frame.

I don’t want it to sound like most events unfolded just as the business plan predicted or loosely as predicted. Far from it – if I want some light relief I can always look at some of the assumptions we made in that original business plan. There’s one page I look at with particular wonder…the contingency page. It outlines the actions we would take in the event of unpredicted problems arising.

The first point is...what do we do if the Australian dollar loses value vs the US dollar (since 90% of our purchases were made in US dollars). It states that if the dollar lost 10% of its value – if it dropped from 78 cents to 70 cents we would buy forward at 70 cents. As you can imagine, this was of scant comfort a year later when the dollar was 55 cents, or a year after than when it was 45 cents.

This has been, without question, the biggest challenge our business faced. You buy forward at 70 cents for six months, and suddenly you’re looking at an increased cost of goods of over 40%. You can’t turn around to your customers – who you are still desperately trying to recruit and build rapport with – and say, oh, sorry, look, world economy upended, we’re having a 40% price hike. I think that’s a bet the business move that you’d be bound to lose. But in the face of an issue which I like to put down to bad luck and bad timing, I think we also had some great luck. We’d built very strong relationships with our brands, they were very happy with what we were doing, and they were really supportive during this time. They gave us a price break, which helped enormously, and we did increase our pricing by about ten percent. I won’t lie – they were lean, mean times, but I tell you what, it’s taught all of us in the business to be very thrifty. Also to think smart, move fast, be agile, and get the greatest bang for our buck.

Other wild variations in the business plan… back to finding store locations. We listed the locations we wanted – and as you’ve already heard it just didn’t work like that at the outset. On the positive side, I didn’t factor in what has ultimately happened as we rolled out our stores. Over the last couple of years, we have gone from a position of not being able to secure sites, to landlords wanting Mecca as a tenant, and being very supportive. The reason - Mecca as a tenant is a great compliment to a fashion retailer, without cannibalising fashion retail sales. That’s not something you would know to factor into a business plan until it actually starts happening. Also, I gave real estate agents a bit of a hard time earlier, which isn’t really fair, as generally the people we deal with now are a pleasure. And by working with them, we’ve secured some great sites.

Another threat we anticipated in the business plan was not having access to the brands anymore – whether they went out of business or were bought up by multi nationals. The contingency plan was ‘oh, we’ll pick new brands’. Which isn’t ideal, as you spend so much energy, effort and resources building these brands, you don’t want to lose them. Also, these brands are some of the fastest growing, dynamic brands globally, they are the brands to be hanging on to. Now, as it turns out many of our key brands were bought up by multi nationals – which is hardly surprising, as Stila for example was the fastest growing brand in the US, the category was carving out significant marketshare, and the phenomenon could not be ignored.

It’s funny, at the outset, I really saw ‘the big boys’ Lauder, L’Oreal, Shiseido et al as the enemy. As it turns out, they have been most supportive of the Mecca concept – especially Lauder, and L’Oreal Luxury division locally. As they have bought up some of Mecca’s key brands, not only have they continued exclusive supply, they have taken a real interest in how the business works, and what they can do to support it.

It’s been a very pleasant surprise. I guess the same could be said for the department stores in Australia – I always thought that we would be too small for them to even notice, and then when they did, I would have expected them to want to roll over the concept. As it turns out, Mark McInness from David Jones who originally sought out the concept in mid 1998, and who took the time to meet with me on many occasions in my ‘office’ which was a little coffee shop next to our shop, also took the time to understand the business, and then upended all the ‘rules and regulations’ at David Jones – of which there are many - to accommodate Mecca’s introduction in 1999. I’m not going to pretend the entire relationship has been easy – I have to say it’s been one of my more interesting learning curves – but ultimately they are supportive of Mecca, and have supported it to succeed.

It may sound like I’m poo pooing the business plan, - because so much of the business didn’t go to plan – both in bad ways and in good ways. But actually, I have to say, researching and constructing it was the best discipline. And to be honest, I probably wouldn’t have done it – well to be honest, as one of the world’s best delegators – I didn’t actually do it, I got my husband to do most of it, and he did a brilliant job – but it probably wouldn’t have been done if we weren’t looking for financing. Now, here’s three bits of great luck we had along the way...the first person I presented the business plan to, looking for advice, suggested we find a way to finance the first store ourselves – even if it meant we had to make some compromises to the design, to the amount of stock, to the launch, and then raise finance once we were able to demonstrate we had a concept.

I really didn’t see how we could do it, but having met with three underwhelming bankers, we got lucky a second time - we finally struck upon a fantastic banker – yes, really – who went through the business plan with a magnifying glass, got his boss to support it, and they took a real risk, and financed the business with an unsecured loan.

And then…the third piece of luck – although it didn’t seem like it at the time, we went into the New Georges, and at that time I was angst ridden that we didn’t have our own shop fit, that we had to use Georges fixturing, what did this mean to our branding and positioning, but in retrospect it was brilliant, as it meant we got to open a second location using up very little resources.

Since then, we have built the business organically, and whilst in some ways this has been frustrating – mainly as we have had to grow more slowly that I would have hoped – it’s extremely liberating not to have to answer to financiers, and to be able to make decisions that will be beneficial to the business in the long term, even if the costs are disproportionate to what the business should be carrying.

So, we’ve now covered point two – the entertainment value of reviewing your business plan after the fact…and on a more serious note, the value of a business plan.

Onto point three…the key elements to Mecca’s success. Now, I’m going to have to try very hard not to climb on to my soap box, as I feel incredibly passionate about what I see as the absolute key driver of our business.

As I have already said, there was a feeling that the natural cap for a concept of independent cosmetics retail stores was four, and I believe it is this one key that has allowed us to get to ten stores, and will allow us to continue to grow. I’ve spent a lot of time talking about the importance of the brands, and the role of a modern store environment in differentiating the offer from what was already available in the market.

And certainly these two points – brands and environment - are key aspects to the business…but it is the third key aspect which I believe truly differentiates Mecca – that allow us to be unique, that makes it difficult to copy our concept, that allows us to effectively recruit customers, and allows us to grow. It’s the third aspect of our business which in essence sets up apart. The third aspect of our business is providing the customer with a superb experience.

It’s the most important aspect of this business - because let’s face it…no matter how fantastic a lipstick is, if you don’t find it, or you don’t know how to apply it, or you don’t get excited about it, or you don’t enjoy learning about it and trying it on – well, then it could be any old lipstick. The challenge is…it’s also the most difficult thing to execute consistently.

The customer experience is the thing we obsess about at Mecca – with every fibre of our bodies. From the outset, we built the business model allocating more resources to staff than anyone else in the industry. My reasoning was….would I prefer to have a fabulous experience that wows me – and the only way that will happen is if someone creates that experience for me, or would I rather a hum ho, whatever, normal experience and get some free product in a gift with purchase.

So we took from the marketing budget, and gave it directly to the staffing, and decided our frontline staff WOULD be a key part of our marketing – as well as being THE key to our entire business – they carry the weight of the Mecca world on their shoulders. We didn’t have a huge amount of money to spend on advertising to drive customers into the stores, or tricked up bells and whistles in store to get customers to come back in, so we had to completely rely on our customers having a great experience, telling their friends, and being our unpaid advocates.

It really comes back to the dinner party litmus test I referred to at the outset. I knew if we could provide a good customer experience people would come...it may take some time, but they would come, and if we provided a bad experience they would stay away in droves. That is the power of word of mouth.

We have achieved same store growth of over 20% year on year, even in our oldest shop which has been open 6 years, and also in our largest turnover shop, so in general, we must be giving our customers a positive experience. This reliance on our customers – not only in terms of buying our products, but also in terms of being our walking, talking advertising - has been a complete blessing, as it has kept us focused on the single most important thing in our business – our customer.

Because retail is detail you can get overwhelmed with all the little things there are to do, and as the customer isn’t in front of you jumping up and down in the same way as some of your other deadlines are, it’s possible for them to lose the top billing – at Mecca that is something we try and ensure never happens.

I think I may have crept onto my soap box there for a minute…but I’m hoping I’ve got the point across that Mecca lives and dies by the customer experience we provide.

It all sounds good in theory, so, how have we gone about trying to ensure a fantastic customer experience every single time? When we talk about providing an outstanding customer experience we qualify this as providing an experience where we inform, educate, and entertain. I know that I can’t provide the outstanding customer experience, it comes down to the front line staff at Mecca, and their willingness and ability to do so.

As a result, we know our frontline staff is our most important asset, and we approach them accordingly. As I’ve already mentioned, we allocate more funds to staff, to ensure they are well paid, and well trained. We are committed to training – a week to two weeks before you start, and then every second Tuesday night, and half day trainings whenever we have international brand guests out.

We call our frontline staff ‘Mecca Hosts’, - I know, my one concession to a cheesy Americanism – as I wanted to get back to the basics of what we as a retailer should be providing to customers, and I believe that ‘Mecca Host’ embodies it. I wanted our staff to feel the responsibility and pride a host feels when they provide a fantastic experience for a guest.

Hosts are motivated to go way beyond the call of duty to ensure they provide a great experience, in a way I don’t think is ingrained in a normal customer service representative’s psyche. In addition, we have a policy to accept all product returns – which is pretty much unheard of in the industry. Also, our staff is encouraged to go beyond the call of duty if there is a customer complaint, they know there’s no such thing as conceding too much.

And, whenever there is a customer complaint either myself or Mecca’s Retail Development Manager follows up with it personally. I really do believe the attitude towards customers is set at the top of an organisation, and when staff seeing you jumping through hoops to make customers happy, they get it, they understand the standard, and they adopt it.

Now, I’m a realist. I recognise that not every single customer experience has been or is fabulous, but overall I really do believe we offer a superior customer experience. We need to continue improving, that is why the management team – along with a HR consultant - has allocated one day of every week this year to devising and implementing a comprehensive system to develop our people, who in turn will be better equipped to look after our customer.

It consists of product training, soft skills training, people development, succession planning, frontline ownership of results, sharing in the upside of the business, and I think these things will ultimately allow us to continue to improve our customer experience.

I’ve made it clear that I think our staff is the key to providing an outstanding customer experience… but I also believe our marketing strategy contributes to an outstanding customer experience. I’ve already talked about the fact that funds have been taken from marketing and put into staffing…so the marketing budget is thin. So with every dollar we have to spend, we always ask – does this do anything directly to improve the customer experience.

With that as a starting point, we have built a program based on international makeup artists and skincare specialists coming into store – which provides information, education AND entertainment. We’ve also built a customer database of over 50 000 customers who have purchased in the last year and we mail them out a brochure two or three times a year – and this brochure sums up Mecca – we never put product or an unrealistically beautiful model on the cover, we keep the text chatty, ‘real’, and a tad irreverent – we are talking cosmetics, not world peace – and we construct them so our customers to find them entertaining, not patronising.

Mecca has been helped enormously by the editorial coverage and magazine support we have received from the outset. Obviously the beauty editors have their fingers on the pulse of what’s going on internationally, and they were aware of this shift in the industry, so when Mecca came to Australia, they embraced not only the brands, but also Mecca as a concept.

Everything I’ve talked about – the highs, the lows – it’s all good stuff. But without a fantastic team, none of it would be possible. Mecca is built up of an amazing group of people – right from its first employee – a friend of mine’s baby sitter’s sister, she had a commerce degree and everything, but still, it’s hardly what you would call targeted recruiting – anyway, she is now Mecca’s business manager and manages the whole back end of the business.

I did become a bit more structured in recruiting, and it took me six months – it was almost a courtship – to recruit the person responsible for running the entire front end of the business. The three of us – the three musketeers as I like to call us - work so closely to drive the business onwards and upwards. I get down on bended knee and thank my lucky stars everyday for them, and the team we have built around us – we have a truly extraordinary, committed team.

With recruiting people, I’m a great believer in backing the people, not the experience they have. I’m really putting my money where my mouth is on that front at the moment, as we’ve just hired a lawyer and a corporate financier who I’m betting will be able to morph into business generalists and help us to continue driving the business.

So, to recap the third point…the customer experience is the single key that will make Mecca a thriving business. We will only be able to provide an outstanding customer experience if we invest in our front line staff, have a customer focused marketing strategy, and ultimately, if we have a passionate, committed group of people driving the business. I do think we have the essential ingredients, and we are continually striving to improve our offer, and as a result I am confident about Mecca’s future.

I’ve taken you on a whistle stop tour of the business. I do hope you’ve got a sense of how we got it stated, some of the lessons we learned on the way, and some of my beliefs about what will make this business successful.

Anyway, I no feel like I’ve been talking for ever, so I’ll leave you with two thoughts...

Firstly, I feel like a bit of a fraud standing up here talking to you at all. Despite all its drama, it’s still a small business. Over time we’re planning and hoping it will be a big business, but in the scheme of things it is really small.

Secondly, I think it is really easy to pop your rose coloured spectacles on, get the air brush out, and sanitise the entire experience. Let me tell you, it has been hard, hard, hard – certainly there’s been a great deal of fun, but at the same time there have been plenty of white knuckle moments (the dollar, the closing of Georges just to name two). I will say, that through the unbelievable highs, and the gut wrenching lows, there hasn’t been a day where I didn’t feel complete.

Venue

Westin Hotel, 205 Collins Street, Melbourne