Beauty: Euro Stars

"LET'S NOT BE GREEDY" may not be familiar words from the mouths of most CEOs, but that's what Aliza Jabès, head of the French natural-cosmetics company Nuxe, says about taking her time going wider into the U.S. market.

Sitting in her large office in a classic Haussmann-era building off the Champs Elysées, Jabès, 42, explains how the beauty industry is undergoing a period of major change, with more and more niche brands and organic products on the market today compared with when she bought the then struggling 32-year-old company on a coup de coeur in 1989.

Old Europe has always been a source of innovation in the beauty sector, particularly in fragrance and skin care. François Coty made his name by selling fragrance in small, decorative bottles. L'Oréal was started by a young Parisian chemist when he invented the first safe synthetic hair color in 1907. Brands like Helena Rubinstein and Estée Lauder were founded on skin-care formulas based on East European traditions. More recently, big beauty conglomerates such as L'Oréal and Estée Lauder have been shopping for new, innovative brands in old, familiar places like France, Spain and Germany. Even mass-market retailers like Walgreens are looking to capitalize on the niche market for novel, pharmacy-distributed products.

"It's a bit of a revolution," says Karine Ohana, a managing partner of Ohana & Co., a Paris-based mergers and acquisitions firm that works with many European cosmetics companies. "There is a gap in what is being offered—there is high-end or mass—and now the big beauty companies see this masstige niche for brands that are innovative but not expensive. We are about to see deep modifications in the pharmacy market in the U.S."

Of special interest are companies like Nuxe, whose sales have been booming—it reported 42% growth in net profits from 2004 to 2005—and distribution in large markets like North America is on the rise. This past July, for example, Jabès launched her skin-care products inside three Canadian chains in addition to the 80 doors where it is currently sold in the U.S. Not bad for a 140-employee company with $51 million in net profits that boldly gave its icon product—a moisturizer—the whimsical moniker Crème Fraîche, a name that might not have made it past a market test at a multinational.

And that's exactly the advantage and appeal of niche products, according to many owners and CEOs who say the innovative technology, the "storytelling" or the quirky branding of smaller beauty companies is what sets them apart and makes them appealing to the consumer.

"We can move faster than the big brands," says Jabès. "In terms of decision making, it is a much shorter process than in the conglomerates, where it goes through many, many channels." For Jabès, once the R&D process is complete, "if I like a product, I'll launch it."

Wine as beauty regimen? Aeronautically refrigerated face cream? These are not ideas you would expect to come out of a Procter & Gamble or L'Oréal, no matter how many millions of dollars such conglomerates invest in research. But for smaller brands—many of which are hot targets—the more offbeat the idea, the better. Mathilde Thomas, co-founder of the French vinotherapy brand Caudalie, feels that smaller brands can take risks, ultimately, and that's what keeps the consumer interested.