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Estée Lauder, with a market capitalization of $31 billion, is an enterprise that manufactures various prestige cosmetic products across the skin care, hair care and make-up categories. The company operates primarily in the $77 billion prestige cosmetics market and reported revenues of approximately $10.4 billion in CY13. This roughly translates into a 13.5% market share in the prestige cosmetics market. In the last five calendar years, Estèe Lauder had expanded its market share from 11.5% to 13.5%. What is interesting is its ability to gain share despite weak consumer discretionary spending in most developed markets.
In this article, we briefly look at how Estèe Lauder’s strategic positioning across its geographic portfolio has helped the company gain share, despite a weak macroeconomic environment. We have a $75 Trefis price estimate, which is approximately in line to its current market price.
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Capitalizing On The Aspiring Emerging Market Consumer
The weak economic outlook in developed consumer markets such as North America and Europe, since the economic downturn in 2008-09, has forced businesses to look for other growth avenues. For companies in the consumer discretionary goods business, investments made in the Asia-Pacific and other emerging market regions prior to the economic crash in 2008 have largely offset the weaknesses from the developed markets. Factors such as increasing disposable incomes and a younger population base in emerging markets has provided a unique demographic advantage to cosmetics companies.
However, not every cosmetics player has been able to capitalize on the advantage of the emerging markets. Mass-market players such as Avon Products and Revlon have struggled to maintain sales momentum, particularly in the Asia-Pacific region, with Revlon announcing its exit from the large Chinese cosmetics market in January 2014. Compared to deep-pocketed players like L’Oréal and Estèe Lauder, Avon and Revlon had limited R&D and advertising budgets for developing and promoting locally relevant products. The low advertising budgets and limited R&D spend has restricted Revlon and Avon to launch new and trendy products and refresh their product cycles regularly. In absolute terms, Estèe Lauder had R&D expenses of over $100 million last fiscal, more than what Revlon and Avon combined spent last fiscal.
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From a product perspective, what set Estèe Lauder apart from the mass-market cosmetics manufacturers was the exclusivity in its product portfolio. Being a prestige beauty product manufacturer, Estèe Lauder has faced limited competition from either domestic or international mass-market brands, adding to its appeal to the emerging market consumer. Estèe Lauder’s strong performance in the Asia-Pacific market is evident from its strong revenue growth. Regional revenues increased about $110 million over fiscal 2012, reaching $2.12 billion for fiscal 2013. Excluding currency volatility of 1%, constant currency revenues grew 6% in fiscal 2013.
Looking ahead, Estèe Lauder has a much stronger strategic advantage against bigger competitors such as L’Oréal, Unilever and P&G. The company’s strategy to focus exclusively in prestige beauty products seems to have paid off in the emerging markets. Furthermore, the gradual recovery in the developed markets should expand discretionary income levels, enhancing consumer interest in prestige cosmetics. This should drive incremental revenues higher for Estèe Lauder in CY2014.
Market expansion is one of the core goals of Estee Lauder Companies Executive Chairman William Lauder. Read his executive bio on this Facebook page.
