The New World of Turnkey

Changes in the beauty business climate have spawned increased interest in turnkey services.

By Leah Genuario, Contributing Editor

According to a 1996 version of Webster’s Dictionary, turnkey is a noun meaning “jailer.” Fast-forward more than 10 years, and the term has escaped its narrowly defined imprisonment to live freely in the world of business.

The word turnkey is tossed around cavalierly in press releases all the time by suppliers looking to succinctly express their full range of capabilities. Brands increasingly approach their vendors with the same word: turnkey as in a turnkey project or a turnkey contract. In the beauty business, turnkey is no longer a noun. It’s an adjective, describing outsourced services ultimately leading to a finished, ready-to-go-out-the-door project.

Maesa Group partnered with the Old Navy brand and Purpose-Built to launch a holiday collection.

But which services fit under this turnkey umbrella? Market research? Formulation? Packaging? Filling? That’s not so easy to define. Many contradictions exist as to what exactly turnkey means; the services parceled as turnkey vary greatly depending upon supplier capability and brand needs.

Supplier Positioning

“The word turnkey is a very widely used, general and somewhat amorphous term that means different things to different people in the beauty industry,” acknowledges Scott Kestenbaum, VP marketing, Maesa Group, New York, NY. “The specific services offered and encompassed in a ‘turnkey’ program vary tremendously.”

Maesa Group, for example, has positioned itself as a “development” company. “We have built our model based on keeping design, engineering, package development, product development, all in-house, while subcontracting the filling…and working with the experts in fragrance and formulation development to create the best product,” says Tom Butkiewicz, president, Maesa Group.

Many turnkey vendors provide both formulation and packaging services, but not all. CoValence, on the other hand, keeps formulation and packaging separate, as they feel it works best for their customers. “CoValence offers a hybrid-turnkey service. We have packaging in stock that clients can choose from, however, the artwork for the labels/silkscreen is outsourced. In this industry and global economy, it is imperative for us to concentrate and improve upon our expertise—research, product concept and development.”

Access Business Group also focuses on a specialty, with a few exceptions—they typically request that a customer enter the business relationship with a formula and then the turnkey partnership starts from there. “Formulation development and ownership/licensing of the formulation add considerable complexity to the equation and may be kept separate for simplicity sake,” adds Randy Osmun, sales and marketing director, contract sales.

Customer Expectations

Further muddying the definition of turnkey, customers bring their own set of expectations to the table. Even if a supplier can help them from marketing concept all the way through distribution center delivery, they may not wish to partake in everything. Turnkey to one brand is not turnkey to another.

“It can get very complex,” says Paul Morris, senior vice president of global sales and marketing, Cosmetic Essence, Holmdel, NJ. “That’s where clarification is a matter of perception.”

Morris’ turnkey customers “run that gamut,” he says, ranging from customers who ship everything in and contract with his company to make the batch, to customers requesting full formula and packaging development, stopping only at marketing functions.

For Morris, the bulk of today’s turnkey projects are really “directed buy,” where the customer already knows what they want and where to get it. His job is to manage the entire project, providing one purchase order for the finished goods.

Maesa Group created 8 SKUs for specialty retailer, Urban Outfitters.

Maesa Group also provides a range of services, but customers select which ones work best for their needs. When the company was tapped for an Old Navy holiday collection project, for example, concept development, creative direction, copywriting and naming, as well as fragrance, flavor and color development were handled by brand and business development consulting firm Purpose-Built. Maesa took over in manufacturing and supply services, including product development and production management, quality assurance, operations, logistics, financing and purchasing.

Its work for an Urban Outfitters beauty line was more comprehensive, however, where Maesa developed an 8-SKU line based on the customer’s desire for something “industrial” and “rough-looking,” says Ludovic Bertron, creative director for Maesa Studio.

Speed to Market

More important, turnkey—however it’s defined—is growing. “Turnkey is increasing rapidly,” says Paul Lieber, CEO/founder of Royal Labs Natural Cosmetics, Inc, Johns Island, SC. “What’s happening is that more folks are learning about it and manufacturers are willing to do it.”

“Almost anyone will benefit from doing turnkey projects,” says Allan Burd, president of Lady Burd Cosmetics, Farmingdale, NY, whose company offers a range of formulation and packaging services. “Lady Burd has a wide variety of clients from across the globe ranging from the larger brands all the way down to the individual makeup artist.”

For customers both large and small, turnkey projects offer numerous advantages.

One of its most noticeable strengths is the streamlining of resources, thereby expediting the process from development to distribution center. “The need for speed-to-market is the main contributor,” says Victoria Colangelo, senior vice president, Mana, a full-service company offering conceptualizing, formulation, packaging design and manufacturing. “One-stop shopping is easier to manage than working with multiple vendors.”

Customers of varying sizes have leveraged this speed-to-market advantage. “The need for speed-to-market has impacted all brands…small to large,” says Colangelo. Turnkey projects are popping up in multiple beauty categories; however, some segments naturally lend themselves to turnkey production.

Colangelo adds, “Cosmetics tends to be the most requested category—being that it is the most difficult to manufacture… kits are another popular product category for turnkey, because of the many components involved.”

Just how significant is the potential time-saving? Sometimes, it is dramatic.

Christopher White, president of The Filling Station, which offers filling, packaging, blister card packaging and gift baskets services, provides an example that clearly demonstrates a turnkey manufacturers’ speed-to-market advantage:

“Our last project of 2009 was a carry kit of four, 2oz. bottles in a vac form with a plastic bag to carry it in. [The brand] was paying $2.10 by sourcing 5,000 on their own, and we provided the same for $2.48 with re-orders taking three weeks instead of two months.”

Mana says it recently shortened the lead time for a new mascara product launch by 25%. “We synergistically developed a formula/package combination that provided them with all the individual characteristics/benefits they were looking for. Had this not been turnkey, we would have been going back and forth with their packaging department to get the packaging function that we needed to make it work with our formula,” adds Doug Williams, president of Mana Asia.

Convenience and Cost

Two other important factors are the convenience and cost advantages associated with turnkey projects. In many cases, downsizing has been a dim reality given the economic climate. Companies are trying to do more with less, and contract manufacturers expertly fill the gap, saving headaches and many times, offering overall savings.

“The economic downturn we’ve seen in the last year or so has caused everyone to tighten their belts,” says Betti Ann Catino, director of product development for World Wide Packaging (WWP), a contractor offering a complete range of packaging solutions, custom and stock molding, and turnkey operations. “Turnkey contracts offer cost benefits that appeal to our partners. But in addition to the cost benefits, more and more people are choosing turnkey contracts because of the convenience. Turnkey contracts offer one-stop shopping. This includes reduced head count, reduced lead times and reduced inventory management.”

The Filling Station does more than fill; The company is also involved with packaging, blister card packing and gift baskets.

The project management aspect of a turnkey supplier is a welcome service in today’s beauty business. “It is easier for the customer to turn over their specifications and pay for the finished good versus trying to manage and coordinate separate pieces and parts of the process,” says Osmun of Access Business Group.

As can be expected, this project management relationship yields additional advantages besides convenience. “Many times there is a cost savings as a result of adding customer volumes to the contract manufacturer’s volumes. The client benefits from sharing the equipment with other clients and is not required to keep a full-time expert staff on the payroll,” adds Osmun.

“Maybe on a direct price, having one supplier is more expensive. But when you factor the non-direct costs, like internal project managers, equipment costs, and travel, there is a great economic advantage in having one supplier only. Yes, it is a truly one-stop [experience] with Alcan Packaging Beauty,” says Jose Filipe, vice president and general manager beauty solutions worldwide, Alcan Packaging Beauty.

Cost advantages go deeper than just straight cost savings, however. Lieber of Royal Labs Natural Cosmetics, Inc., sees improvement in cash flow management as a brand’s largest benefit.

For example, a tube, he says, generally has a 12-week lead time. “The contract manufacturer will generally have some type of upfront money spent in January but the turnkey project will not pay off until possibly May. The contract manufacturer has just carried the cost of the project for the client, freeing up cash flow,” says Lieber.

This arrangement inherently poses some risk for a contract manufacturer, which is why Lieber says he generally only works with larger, mass brands presenting a likelihood of high volumes.

Related to the cost-issues, brands cannot afford to invest in expensive equipment for a product that may or may not be successful. “More and more branded goods companies are investing in equipment that runs ongoing staples,” says Morris.

“The big companies understand their know-how and expertise relates to brand and customer management,” agrees Filipe, “Hence, they tend to favor suppliers that can provide a real added-value on the production side and deliver high-quality turnkey solutions. Investment in production becomes something that they are not prepared to invest in. Note that there has been no investment in production facilities from big players in the cosmetic industry in recent years.”

Innovation

No matter how inexpensive and convenient the planning, development and production of a new product may be, it is all for naught without innovation. Contract manufacturers partner with brands to push the envelope of formulation and packaging innovation. These vendors, oftentimes, are in a better position to do so.

“Why reinvent the wheel when you can have a team of experts who have been doing this for decades do it for you? It just makes sense,” says Burd. “Almost anyone will benefit from doing turnkey projects. The smaller brands don’t always have the resources they need, so doing turnkey is very beneficial to them. But even larger brands benefit from working with us because we have resources and experience that they do not.”

“With customers, innovation is key,” agrees Catino of WWP.This priority was apparent in the company’s development of a Summer Collection for a client. “The customer wanted an oversized bronzer in a square case—something which is not common because it is challenging to press a square powder compared to a round one. To accommodate the customer, we tooled a pan and customized the bronzer formulation.”

In tandem with the bronzer, WWP worked closely with the brand to create an eyeshadow quad with a texturized formulation, as well as a finely milled loose, powder blusher, a pearlized lipgloss and a moisturizing lipstick. “The entire offering provides the consumer with all the tools needed to create a beautiful, bronzed summer glow,” adds Catino.

It Takes Two

When it comes to turnkey manufacturing, a successful product is born when the two partners coordinate well together.

“I’m a big believer in strategic partnerships or strategic alliances. The one aspect of turnkey is being strategically partnered with your vendors,” says Lieber. “The most effective working relationship is when the client gets a better product, better margin and better cash flow and the vendor gets a bunch of business.” -