Neutrogena Corporation Business Information, Profile, and History

Company Perspectives: While continuing the Neutrogena past

History of Neutrogena Corporation

An independent company until its 1994 acquisition by Johnson & Johnson, Neutrogena Corporation manufactures and markets a line of premium-priced skin and hair care products that are distributed in more than 70 countries. The company is especially known for its innovative niche marketing and its leading product, the clear, clean-smelling glycerine soap bar that established its role as a pioneer in the skin care arena.

Company Foundations, 1930-60

Headquartered in Los Angeles, California, the company was founded by Emanuel Stolaroff in 1930. In its early years, the company name was Natone, and its function was to supply specialty cosmetics to beauty salons related to the Hollywood film industry. Expansion began in the 1940s, when Natone spread its manufacturing and distribution of cosmetics to the larger retail market.

A 1954 business trip to Europe inspired Stolaroff to follow a new product direction that would chart the future course of Natone's operations. Belgian cosmetic chemist Dr. Edmond Fromont had developed a new soap which rinsed quickly and easily, leaving no soap residue. In fact, eleven minutes after washing with Fromont's soap--just one minute longer than with pure water--a person's skin pH would return to normal. This unique soap was called "Neutrogena." Believing that Fromont's soap would be well received by the U.S. market, Stolaroff made arrangements to import and distribute it in the United States. Early marketing plans emphasized the soap's transparency and targeted department stores and drug stores as sales venues.

Instrumental in the design of the first marketing strategies for the Neutrogena soap was Lloyd Cotsen. A former archaeologist with a history degree from Princeton, Cotsen married Stolaroff's daughter, Joanne Stolaroff, in 1953, and then went to Harvard for his M.B.A. Beginning in 1957, he became an integral and personally invested player in the family business (he retained ownership of approximately half of Neutrogena's stock until the company's 1994 acquisition). In fact, Cotsen's strategies made the soap such an important aspect of Natone's business that in 1962 the company name was officially changed to Neutrogena Corporation. In 1967 Cotsen became president of the company. Neutrogena's sales in that year were approximately $3 million, with the major product being the glycerine soap.

Niche Marketing Strategy, 1960s

Soon after his presidency began, Cotsen created the niche marketing strategy that would shape the success of Neutrogena for almost three decades. According to Business Week, Cotsen's motto has always been: "I'm not that smart, and I don't like competition." Priced midway between soaps like Ivory and Clinique, and positioned between elite skin-care products and mundane toiletries, Neutrogena was safe from competitive price wars waged by bigger companies for most of the company's history. Cotsen kept credibility high and marketing costs low (12 percent of sales in 1981, as compared to 20 percent at Clinique) by promoting Neutrogena soap through the cultivation of relationships with two institutions: dermatologists and luxury hotels. Free samples left in dermatologists' offices and repeated visits each year led to Neutrogena's unrivaled success in the soap market. As of 1981, a dedicated force, comprising 16 out of 66 salespersons, was assigned the sole responsibility of visiting 5,000 dermatologists each year, developing personal relationships with advocates in the profession. Similarly, one-ounce bars of Neutrogena were distributed to luxury hotels and resorts, where--Cotsen theorized--businessmen's wives would be likely to see them. Cotsen insisted that the mini-bars of Neutrogena retain the company name and logo, promoting name recognition along with the soap's unmistakable look and smell.

Similarly, Cotsen targeted book-review readers rather than comics-readers as his primary market, and shunned supermarket sales for years. Drugstores comprised the primary sales venue, sideskirting the problem of competition with mass-produced brands and stressing the high quality of the product. In 1966 Neutrogena was one of eleven companies named in a lawsuit by two wholesale drug companies, H. L. Moore Drug Exchange and Hyman Boxer, alleging that the refusal of Neutrogena and other companies to sell to the plaintiffs led to the elimination of price competition.

During the 1970s, the company began to explore marketing and research efforts to expand its skin care product line. Promotions for Neutrogena's new acne cleansing soap in teen publications offered a free trial-size bar. The ads proclaimed, "If you have acne, we need your help," and Neutrogena asked teens to send a quarter (to cover handling) and to give the company honest answers about the success of the soap. Over 57,000 teenagers sent in their quarters, constituting the highest response in the company's history, and a newly penetrated market. In 1973 the company went public, with a market value of $11 million. By 1980, Neutrogena entered hair care with a new product, and acne preparations soon followed.

Tragedy and controversy linked to the family business befell Neutrogena's president, Lloyd Cotsen. In 1979, while Cotsen was in New York on a business trip, his wife, son, and a young house guest were murdered in the family's Beverly Hills home. An investigation by Beverly Hills police pointed to the guilt of the Belgian businessman who had originally sold the Neutrogena rights to Emanuel Stolaroff. Stolaroff and the Belgian rival were involved in litigation, and the police contended that Lloyd Cotsen was the intended target of the murderer. The Belgian committed suicide shortly before his scheduled interview by detectives, leaving the crime unsolved. Cotsen remarried in 1981, to Jacqueline Brandwynne, a New York consultant. In 1992 Brandwynne sued Cotsen for divorce and $1.5 million, claiming that he had convinced her to quit her $150,000 a year job in New York on the condition that she would be paid in an equivalent number of Neutrogena shares each year. In return, she helped to formulate Neutrogena's success strategies. According to Brandwynne, the Neutrogena shares never materialized during the ten years of her marriage to Lloyd Cotsen.

Dramatic Growth, 1970 and 1980s

Between 1973 and 1980, sales leaped by 339 percent to $29 million, and earnings grew 190 percent to $2 million. Between 1975 and 1980, return on equity averaged 21 percent, and the company distinguished itself by remaining debt-free. Neutrogena was featured in Forbes's 1979 "Up & Comers" class (the first year the magazine published such a list).

However, when the 1980s began, it appeared that Neutrogena might have drifted too far from the job it always had done best--niche marketing of its trademark soap. The company introduced new soap categories that may have confused consumers--"normal to oily" and "normal to dry"--resulting in a ten percent decrease in sales in 1981. The company heeded the warning and returned to its previous packaging and promotional strategies: changing the soap categories back to their original "dry skin formula" and "acne cleansing formula;" reviving 12- to 18-month advance planning of promotions and presentations to lock Neutrogena into retailers' schedules; returning to the practice of underselling merchandise to avoid overstock on shelves; and bolstering the dermatology sales force (now serviced by 19 salespersons) by increasing the number of samples left in doctors' offices. Back-to-basics marketing paid off for the company: profits rose 15 percent in 1982, reaching the $3 million mark, with total sales of $39 million (a 19 percent increase over fiscal year 1981), including a 28 percent leap in formerly flagging soap sales. In 1982 Lloyd Cotsen was named CEO.

Neutrogena's subsequent performance in the 1980s was brilliant. Between 1981 and 1986, the company's annual profit growth averaged 22.5 percent, with an exceedingly high 32 percent average annual return on equity. Between 1983 and 1988, Neutrogena stock demonstrated a phenomenal burst from $3 to $44. The trademark soap represented over a third of the company's $75 million annual revenues in 1985.

Aging baby boomers seemed to provide the ticket to the future for Neutrogena's marketing teams in the 1980s. Skin dries with age, and by 1989 the skin care market would burgeon to $1.5 billion. Research efforts in the 1980s thus were directed to the development of creams, lotions, moisturizers, and a liver-spot cream. Sideline efforts included the loan of a Neutrogena chemist (on moonlighting hours) to Gus Blythe, founder and CEO of the SecondWind company. The Neutrogena chemist helped Blythe create a cleaning and deodorizing formula for shoes that is not harmful to shoes or skin.

Other efforts, specifically the launching of an expensive skin-care line called "Origine Suisse System," proved unprofitable in early stages. Similarly, Neutrogena's shampoo, introduced in 1980, received a sluggish reception at first. The company demonstrated its characteristic "if it's broken let's fix it" marketing ingenuity, promoting the shampoo as a product to be used once every two weeks to remove the residue left by other shampoos. Shampoo sales grew 80 to 100 percent annually after this directional change, representing more than one-third of total sales in 1987.

When the stock market crashed in October 1987, Neutrogena was one of the last stocks to fall, and one of the quickest to recover. By April 1988, the stock was running at 31 times projected earnings of $1.05 a share for the previous fiscal year, and 1988 sales hit $179 million, with earnings as high as $23 million. With a 1989 market value of $570 million, Neutrogena had found a permanent place in Forbes's "200 Best Small Companies." With a 33 percent average annual increase in net income since 1981, the only significant concern of investors was whether Neutrogena could grow fast enough to support multiple increases more typically associated with higher technology outfits than soap companies. Some speculators, fearing slowed growth, rid themselves of the company's stock. However, long-term holders had reasons to retain Neutrogena: in 1989, Forbes pointed out that a $10,000 investment in Neutrogena in 1979 would now be worth $286,000.

In October 1989, however, Financial World asked whether Neutrogena had already saturated its upscale markets, highlighting the difficulty of identifying more buyers without lowering prices or altering image. Having penetrated 85 percent of drugstore markets, and with control over 50 percent of the specialty soap market, Neutrogena was finally beginning to lose its middle-area niche. A sure marker of this change was the imitation of Neutrogena's products by large-scale competitors including Johnson & Johnson and Revlon. When quarterly earnings growth slid from an unsustainable 70 percent to 47 percent and then to 32 percent in the first three fiscal quarters of 1988 (and when stock dropped 5 points after the third quarter announcement), Cotsen turned his attention to the broadening of Neutrogena's markets.

One way to achieve mass marketing would have been supermarket distribution, but Cotsen chose to forestall the placement of $2.25 Neutrogena bars next to 40-cent Ivory bars, instead electing to bolster proven areas. Advertising expenditures were increased from 15 percent of sales in 1981 to approximately 22 percent--twice the industry average--in 1988. Part of this increase was channeled into experimentation with television advertising. Another solution might have been a small acquisition, easy enough for the company to achieve with $15 million in the bank and no debt. Again, Cotsen instead chose to focus on the development of Neutrogena's own products. During the 1988 fiscal year, the company increased its introduction of new products, bringing out four instead of the more typical two, while simultaneously decreasing R&D expenses.

1989 was a difficult year amid company growing pains. Earnings of $26.7 million on sales of $203.2 million compared with earnings of $23 million on sales of $178.9 million from the previous year. A new product introduced in early 1990 was a shampoo and conditioner for hair with color and/or permanent treatment. At the close of fiscal year 1990, Neutrogena was forced to announce that fourth quarter earnings, at $3.2 million, would be 41 percent lower than the $5.4 million earnings of the previous year's final quarter, due to softness in sales of several products in September. Sales of a tinted moisturizer and a sun block were suspended due to quality concerns. However, the company maintained that the setback was more than offset by increased international sales.

In 1987 the company's foreign subsidiaries had lost $514,000. Cotsen returned to the roots of the company's unique soap in an effort to speed foreign expansion. The Belgian company from whom Cotsen's father-in-law had purchased the Neutrogena trademark also sold the name to firms all over the world. Cotsen began negotiations to purchase the trademark from these companies in Venezuela, Australia, New Zealand, and Scandinavia. French marketing executive Christian Bardin had been hired by Neutrogena in 1982 in order to boost international sales. Bardin devised a global strategy that worked. In fact, by 1992 over 20 percent of revenues ($231 million) were generated abroad, with international sales growing by 49 percent and international sales finally contributing to the company's $21 million in earnings. Bardin's strategy was to tailor promotions to the cultural preferences of each country. Bardin achieved considerable success in Latin American markets, where sales jumped from $0 to $2 million between 1990 and 1992. In Japan, however, blunders (including an uninformed distributor, inadequate research, and failure to introduce new products over time) led the company to fail. A surprise success was achieved in the Middle East, where ads&mdashmed at women whose skin is hidden under veils--revealed considerably less skin than those aimed at Western markets.

A major executive transition occurred in 1991. After 24 years as president of Neutrogena, Lloyd Cotsen stepped up to become chairman (a position that had remained vacant since founder Emanuel Stolaroff died in 1984). Moving into the slot of president and CEO was Allan H. Kurtzman, former president of Max Factor & Co.

Acne product sales were flat in 1992, but Neutrogena introduced a new product--Antiseptic Cleaning Pads for Acne-Prone Skin--in hopes that anticipated growth in the number of teenagers would spur the market. An additional market for the product was women in their 20s and 30s, who are known to suffer from acne more than their male contemporaries. In 1993 the company made a delayed entrance into the skincare market with a new Active Cleansing range (comprising facial wash, cleansing lotion, and toner). The launching of this new product gave Neutrogena a complete skincare range for the first time in the company's history.

Acquisition by Johnson & Johnson, 1994

Competitors continued to emulate Neutrogena, and in 1993 Wal-Mart stores released a premium private label brand to compete against Neutrogena's glycerine soap at a lower price. Consolidation and acquisition of small, family-owned companies like Neutrogena became a prominent phenomenon, with larger companies seeking strategic opportunities. In 1994, after a prolonged period of speculation regarding a potential buyout, Neutrogena was acquired by Johnson & Johnson, the world's largest health products company, with a $4.5 billion corner on the consumer products market, and a major competitor. Johnson & Johnson paid a premium of $924.1 million, and $35.25 cash for each Neutrogena share (a 63 percent premium over the market price). The acquisition united Neutrogena's skin care products with Johnson & Johnson's Baby Shampoo and Baby Oil, as well as Tylenol, Band-Aids, and Retin-A (an acne treatment). In addition, Johnson & Johnson's product research resources would now aid Neutrogena in its development of more sophisticated products, to compete with Oil of Olay and Avon. Finally, Johnson & Johnson's international expertise would help Neutrogena boost international sales, which still had not taken off at noticeable levels. Neutrogena is considered an autonomous member of the international network of Johnson & Johnson companies.

At the time of the company's sale, Lloyd Cotsen owned 9.87 million of the 25.7 million outstanding company shares. The Los Angeles Times estimated that he would personally receive $347.9 million before taxes from the transaction.

In 1996 Neutrogena's skin and hair care products were distributed in more than 70 countries around the world. Facial care products included the trademark Neutrogena cleansing bars, as well as several types of cleansers, toners, deep pore treatments, moisturizers, lotions, and acne treatments. Body care products included shower and bath gel, oil spray, body mist, lotion, emulsion, hand cream, and a variety of sun blocks and sunless tanning lotion and spray. Hair care products included shampoos and conditioners, hair spray, and antipruritic liquid to relieve itchy scalp. The company's acquisition by Johnson & Johnson will certainly begin a new chapter in its history, potentially bolstering international and research efforts. How Neutrogena will adapt its long-respected marketing techniques, family management style, and niche product development to its new role as a subsidiary of the largest health products company in the world remains to be seen.

Principal Subsidiaries: Neutrogena (Mexico); Neutrogena (England); Neutrogena (France); Neutrogena (Germany).