St. Ives Finds New Package Is a Washout : Marketing: The Chatsworth producer of shampoos and conditioners learns that its customers like the old style better.

In the fiercely competitive business of personal-care products, a marketing mistake can be deadly. Just ask St. Ives Laboratories Inc. in Chatsworth.

St. Ives is a relatively small producer of shampoos, lotions and other health and beauty aids sold under the Swiss Formula brand name. Most of its goods are sold to mass merchandisers such as K mart and Thrifty at relatively inexpensive prices. It leaves the upper end of the market to Procter & Gamble Co. (Head & Shoulders and Prell shampoos) and other much bigger rivals.

During most of the late 1980s, St. Ives enjoyed consistent annual growth. But late last year, it made a marketing goof that hurt its profits in the first half of 1990.

The company had been selling two bottles, one shampoo and one conditioner, in a single hair-care “system” package that was wrapped in clear plastic so consumers could see the bottles. But in late 1989, it changed the package to one that covered the bottles.

The move bombed. By obscuring the bottles, the new package made them look smaller than before, and it otherwise failed to get shoppers’ attention the way the old package did, said Thrifty Corp. President Daniel Seigel.

Scrambling to halt the slide in sales, St. Ives immediately began putting the hair products back into the old clear packages. By the end of the second quarter, it reported that the “unacceptable packaging” had been replaced or sold. Seigel confirmed that St. Ives sales at Thrifty are rebounding.

But the damage was done. St. Ives’ net income in the first six months of 1990 plunged 48% from a year earlier, to $1.63 million, as sales fell 12% to $51 million. This came on top of the decline in all of 1989, when St. Ives’ earnings tumbled 16% to $3.8 million and its sales inched up only 1% to $105 million.

The 1989 results were partly hurt by the company’s agreement to pay $1.43 million to settle a lawsuit brought by Floreat International Ltd. Floreat had sued St. Ives for terminating its contract to distribute St. Ives products in the United Kingdom.

It’s all more than St. Ives executives apparently care to discuss publicly. Gary H. Worth, St. Ives chairman and chief executive, did not respond to requests for an interview. A secretary for John L. Boyle, its chief financial officer, said Boyle was unavailable to comment.

But Wall Street made its unhappiness clear. St. Ives stock, which went public at $13 in 1987 and climbed to $17.75 last year, closed Monday at $6.38 a share in over-the-counter trading.

“Of course we’re disappointed by the company’s results,” said Jack Laporte, president of the T. Rowe Price New Horizons Fund, a Baltimore-based mutual fund that is St. Ives’ biggest institutional investor with about 200,000 shares. But Laporte is sticking with St. Ives because “we still think there’s a solid franchise there that is not fully reflected by the value of the stock.”

No company likes to make a marketing goof, but it’s a misstep that St. Ives especially can’t afford. As is evident in any drugstore, there are dozens of competitors trying to sell shampoos, skin creams and other personal-care goods. Just standing out from the crowd is a challenge, and St. Ives’ marketing budget is dwarfed by those of such giant rivals as Procter & Gamble and Revlon Inc.

So St. Ives has developed a two-pronged attack: It tries to undercut others on price, and it tries to snag customers in the stores with catchy packaging and displays. That’s because St. Ives believes that most people decide which hair conditioner or liquid soap to buy when they’re standing in the store.

At a K mart in Northridge, for instance, the St. Ives package that combines 16-ounce bottles of shampoo and conditioner sells for $3.27. Nearby, an 11-ounce bottle of Vidal Sassoon shampoo alone costs $3.58.

That St. Ives stumbled in the repackaging of its hair-care products surprised some analysts. Diana K. Temple, who follows St. Ives for the investment firm Salomon Bros., which handled St. Ives’ initial public stock offering, said St. Ives “should have test marketed more” to see if the new packages appealed to the public.

“Historically they’ve done it on one product at a time,” Temple said of St. Ives’ past marketing shifts. But in this case, “they essentially addressed the entire line and there was more risk involved.”

Worse yet, St. Ives’ mistake occurred as some of the company’s competitors became “very aggressive,” expanding product lines or cutting prices, she said. That means St. Ives probably lost market share that it will have trouble regaining. Among other things, Helene Curtis Industries Inc. cut the price of its Suave hair-care products and expanded its Salon Selectives line.

But not all is gloomy at St. Ives. The company’s balance sheet is very healthy, as it has no long-term debt and about $14 million in cash and investments that are readily convertible into cash. As of June 30, St. Ives’ current assets--money due the company from customers within a year--totaled $38.4 million, nearly four times the $10.3 million it had in current liabilities, which are bills St. Ives must pay within a year.

Also, the slowdown in the national economy could play into St. Ives’ hands. Temple said there is already evidence that many consumers, worried about a recession, are opting to buy less-expensive shampoos and other beauty items--such as those sold by St. Ives.

St. Ives also can worry little about the prospect of a hostile takeover, because Worth and other executives own a controlling 54% of the company’s stock. One investor, Stephen J. Redding, a vice president of Nexxus Products, a hair-care concern based in Santa Barbara, has gradually accumulated a 15.7% stake in St. Ives, but he has said he’s buying the stock as an investment.

Nexxus, in fact, is one of St. Ives’ biggest customers, having accounted for about $19 million, or 18%, of St. Ives’ sales last year. St. Ives sells health and beauty products to Nexxus as part of its custom label business, because Nexxus in turn sells the items to consumers under its own label.

Was St. Ives’ mistake unusual? Not at all, said Harvey A. Goldstein, vice president for Rachel Perry Inc., a Chatsworth hair-care company that sells mostly to beauty shops and other specialty stores. Companies occasionally guess wrong on new marketing ideas, but must keep tinkering nonetheless to keep shoppers excited about their products, he said.

“If the package doesn’t do that, then it fails,” he said.