Allou Health & Beauty Care, Inc.

1962–1994

Allou Health & Beauty Care, Inc. distributes brand name health and beauty aid products, fragrances and cosmetics, nonperishable packaged food items, and prescription pharmaceuticals, primarily to independent retailers in the New York, New Jersey, Connecticut, Philadelphia, and Miami areas. The fragrance and cosmetic products were also being marketed nationally to discount chain stores, independent retail stores, and pharmacies, and directly to the public through Internet web sites. Allou also was distributing about 50 health and beauty aid products under the trademark "Allou Brands" and manufacturing and distributing generic hair- and skincare products. The distribution of branded prescription pharmaceuticals was through a wholly owned subsidiary, M. Sobol, Inc.

Allou Health & Beauty Care to 1994

Founded in 1962, Allou Distributors, Inc. was an obscure, privately owned, New York-based wholesale distributor named for its owners, Al Wexler and Lou Gastnay. It was providing such consumer items as toothpaste and shampoo to small mom-and-pop stores that had neither the capital nor warehouse space to buy goods directly from manufacturers. The company, which was sold to Victor Jacobs in 1985 for $1.2 million in cash, lost $586,000 in fiscal 1986 (the year ended March 31, 1986), on revenues of $34 million. In the words of a company executive, Allou at that time had "one foot in the grave and the other on a banana peel."

The Hungarian-born Jacobs was a Holocaust survivor who came to New York City after World War II. He operated a small company that assembled first-aid kits before he purchased Allou. Jacobs made Allou profitable again mainly by cutting costs and then adding more products to the company's distribution stock. The new owner decided to handle only brand name goods advertised and recognized nationally, because sales of such products could subsist on consumer loyalty even in a recession. In fiscal 1987 the company had net income of $201,000 on revenues of $38.9 million. Profit remained under $1 million a year although revenues climbed each year, reaching $71.3 million in fiscal 1990.

Under its new name of Allou Health & Beauty Care, the company went public in 1989, raising $3.6 million by selling common stock at $10 for three shares. At the time the company was distributing national brand name health and beauty aid products, as well as fragrances and cosmetics, to independent retailers in the New York metropolitan area. Health and beauty aids was the chief source of revenue, accounting for 76 percent in fiscal 1988, while fragrances and cosmetics accounted for 22 percent and the company's own brands for two percent. Allou was leasing offices and warehouse space in an industrial park in Brentwood, New York. It was also, by fiscal 1990, publishing and distributing a fragrance catalogue quarterly. Victor Jacobs was chairman and chief executive officer of the company. Nonperishable food was added to Allou's roster of products in fiscal 1990 and two years later accounted for 12 percent of company revenues.

Allou passed the $1 million mark in net income on $88.7 million of sales in fiscal 1991. It had become one of the largest distributors of health and beauty aids and fragrances and cosmetics in the Northeast and was marketing about 50 health and beauty care products under the "Allou Brands" trade name. The company had hired managers experienced in the distribution business and had installed a new computer system to keep current on inventory in order to reorder merchandise before it sold out. Salespeople were being urged to initiate business instead of just taking orders. And growing sales volume had given the company the muscle to drive a harder bargain with its suppliers.

In fiscal 1987 the company had net income of $201,000 on revenues of $38.9 million.

1928–1995

By mid-1993 Allou was distributing 15,000 products to some 8,500 retailers, who were now located in the Philadelphia and Miami metropolitan areas as well as New York City and its suburbs. It was also selling to 120 national merchandisers, including Wal-Mart Stores, Inc. The roster of goods under the Allou label had reached 75. Also in 1993, the elder Jacobs again became chief executive officer after yielding the title to his son Herman for about two years, and the company purchased M. Sobol, Inc., a wholesaler of branded pharmaceutical products doing $21.6 million in annual sales, for $1.6 million. Founded in 1928, Sobol was distributing pharmaceuticals to about 200 independent pharmacies in the Northeast.

Even before the acquisition of M. Sobol, Allou was diversifying its lines of business, with health and beauty aid products accounting for only 44 percent of revenues in fiscal 1993, fragrances and cosmetics for 37 percent, and nonperishable foods for 15 percent. With the acquisition of M. Sobol, the proportions in fiscal 1994 were: health and beauty aids, 36 percent; fragrances and cosmetics, 34 percent; nonperishable foods, 20 percent; pharmaceuticals, eight percent; and private-label products, two percent. Net income reached $3.7 million in fiscal 1994 on revenues of $205.5 million.

Seeking Higher Profit Margin: 1994--95

When a Forbes reporter visited the Allou premises in 1994, he found an operation that bore little resemblance to other companies doing more than $200 million worth of business a year. Except for Victor and Herman Jacobs, all the other company executives, including Herman's brother Jack, sat "in shabby offices with worn carpeting, water-stained ceilings, and flickering fluorescent lights." They were doing every kind of job, including picking up orders and loading trucks. The elder Jacobs wandered around the warehouse, asking workers, "So, what's news?" The Jacobses, as members of an ultraorthodox Jewish sect, were forbidden not only from eating, but even from owning, leavened foods during Passover, so each year at this holiday season they turned over their shares to a Christian executive. "Don't tell the SEC," joked Herman Jacobs to Forbes.

Idiosyncrasies aside, the Jacobses kept a very close eye on the bottom line. Unlike some wholesalers, Allou was not interested in high volume unless such sales resulted in a high profit margin. The company's 30 salespeople calculated, on computers, the gross margins of every transaction made. Although they were authorized to offer price discounts, their commissions were cut if the average gross margin fell below set guidelines. Constant vigilance had reduced losses from theft or damage from 40 cartons of merchandise a week to one a month, according to a company executive. A stock analyst, quoted in Forbes, said, "This company is so unerringly focused on their business and the service they provide to their customers that they simply outhustle their big competitors."

By 1995, however, Allou's gross profit margin had slumped from a high of 14 percent to almost as low as ten percent when the company was purchased a decade earlier. Confronted with increasing competition in pharmaceuticals, nonperishable foods, and brand name personal care products, the Jacobses decided to concentrate on areas that offered the possibility of higher profit margins. In September of that year the company began selling "designer fragrances" such as Elizabeth Arden's White Diamonds on the Internet at discounted prices. Shortly before the end of the year, Allou announced plans to manufacture several skin creams that would sell for less than prestige brands such as Estée Lauder's Fruition.

1995–1998

For the Internet, Allou established a new subsidiary called The Fragrance Counter, Inc. to sell such products by means of America Online Inc.'s computer links. Although prospective customers could not sample the products in cyberspace, Eli Katz, the subsidiary's chief operating officer, cited company findings that only half of the clients who purchase a fragrance ever smell it first in a store. The Fragrance Counter was only available through America Online, which received a commission on sales, until Allou established a web site in 1997, open to anyone with Internet access.

In October 1995 Allou purchased, for $2.2 million, selected assets of Russ Kalvin's, Inc., a privately owned manufacturer and distributor of professional haircare products. This acquisition enabled the company to manufacture and distribute salon quality hair- and skincare products through a subsidiary, Allou Personal Care Corporation, which in 1997 introduced a new Russ Kalvin Generic Brand Skin Care line. Like other health and beauty items Allou was hoping to develop, this line was a less expensive imitation of popular brand-name products.

Allou in 1998

In June 1998 Allou announced the acquisition of selected assets of Direct Fragrances Inc., a Miami-based fragrance telemarketer. This company was distributing fragrance products through more than 20,000 independent retailers in rural areas of the United States. Its customers were receiving catalogues six times a year and could place orders through a toll-free number.

In October 1998 The Fragrance Counter web site was offering a selection of 1,200 brands of perfume or cologne, including fragrances made by (or representing) such designers as Ralph Lauren, Calvin Klein, Versace, Estée Lauder, Chanel, and Giorgio Armani, ranging in price from $30 to more than $100. The Fragrance Counter was also operating The Cosmetics Counter, a web site introduced in June 1998 that was offering more than 1,000 items, including lipsticks, moisturizers, and tweezers. Katz said that within a year the cosmetics web page would include a section enabling viewers to sample a lipstick shade by filling in the color on the faces of models of different ethnic groups. Both sites offered gift cards, free shipping, money-back guarantees, and advice sections.

The Fragrance Counter subsidiary had sales of $671,000 in the quarter ending September 30, 1998, but was not yet profitable because of heavy spending for promotion. The commission arrangement with American Online was replaced in 1998 by a $12 million payment over four years that committed AOL to prominently display The Fragrance Counter to its subscribers. Allou also was paying Yahoo! Inc., Excite Inc., and Lycos Inc. to promote the cyberspace store on their portal sites and in December 1998 reached an agreement with Microsoft Corporation's MSN shopping site. The Fragrance Counter's products were being sold online only at full price in order not to compete with Allou's wholesale distribution of the same goods to retailers.

1995–1998

Allou's net income peaked in fiscal 1995 at $4.7 million on revenues of $237.5 million. Net income was $4.3 million in fiscal 1998 on revenues of $301.8 million. That year the company was distributing goods to more than 4,200 retail outlets, including small discount chains, individual health and beauty aid suppliers, and nonchain supermarkets. Fragrance and cosmetic products were also being distributed nationally to discount chain stores such as Wal-Mart and Sears, Roebuck, independent retail stores, and pharmacies, or directly through company catalogues. The company also was distributing about 50 health and beauty aid products under the trademark "Allou Brands." In addition, through Sobol, Allou was serving as a direct manufacturers' distributor of branded prescription pharmaceuticals.

Fragrances and cosmetics, which displaced health and beauty aids as Allou's leading product line in fiscal 1997, accounted for 39 percent of company revenues in fiscal 1998. The fragrances distributed by Allou included those produced by Fabergé, Inc., Chanel, Inc., and Revlon, Inc. Among the cosmetic products were eyeshadows, lipsticks, mascaras, and skincare products produced by Revlon, Inc., Coty, Lancôme, and Estée Lauder, Inc.

Health and beauty aids accounted for 35 percent of Allou's revenues in fiscal 1998. The company was distributing about 8,000 national name brand products in this area, grouped under 76 categories, from manufacturers such as Procter & Gamble Company, Johnson & Johnson, and The Gillette Company. Sales of Allou's own brands, manufactured for the company under contract, accounted for only one-half of one percent of revenues. Nonperishable packaged food items, purchased almost exclusively at discount prices from the major food companies, accounted for about nine percent of revenues. Allou reported that revenues from sales of Russ Kalvin's generic brand products were "not material."

Sobol was distributing about 4,000 branded pharmaceuticals from such manufacturers as Eli Lilly and Company, Glaxo Holdings p.l.c., Burroughs Wellcome Company, and Merck Sharp and Dohme, Inc. to about 700 independent pharmacies in the Northeast. In addition, Allou was distributing 3,000 generic prescription pharmaceutical products, purchased from manufacturers such as Schein Pharmaceuticals, Inc., Barre National, Inc., and Sidmak Laboratories, Inc. Pharmaceuticals accounted for 15 percent of Allou's revenues in fiscal 1998.

Allou Health & Beauty Care was leasing 143,894 square feet of space in Brentwood, New York, and also 80,000 square feet of space in Saugus, California, to manufacture Russ Kalvin's products. In July 1997 Jacobs family members owned 4.6 percent of the company's Class A common stock and 90 percent of the Class B stock, which entitled holders to five times as many votes per share as Class A stock. Heartland Advisors, Inc. owned 17.4 percent of the Class A shares.