FMCG
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Pro-active thinking was at the heart of the company’s strategy during the 1990s as it made the precarious transition from being family-run to being run as a corporation. Joseph was deceased, Estée in semi-retirement in an advisory and figurehead role, and other family members uninvolved. Transition to being publicly owned was now seen as essential for the long-term health of the business. A November IPO raised more than $450 million, while the family kept much of the common stock and most of the voting stock. Many family-owned businesses struggle in these transitions, but the Lauders had, from their earliest days, recruited the best and most experienced people they could. So business continued to prosper without skipping a beat. In 1996, sales, which had grown every single year since the company’s inception, rose to nearly $3 billion.
So far, the company had been hugely successful developing its own brands, but around the IPO, they ventured into acquisitions. They targeted distinctive brands that would complement the company’s portfolio, and take it into areas difficult to develop internally. The first was Make-up Art Cosmetics Ltd. (M•A•C), aimed at professional make-up artists. This was followed by another professionals’ beauty line, Bobbi Brown Essentials.
Estée Lauder were still wary of Revlon’s success in drug stores, supermarkets and even Wal-Mart, yet were unwilling to take their own brands there. So Sassaby Inc., with its Jane brand, was unashamedly purchased for its populist appeal to teenagers.
The next deal took the company into a new product field; Aveda was purchased for $300 million - 85% of their sales coming from the channel where Estée started, hair salons. Then, the La Mer brand of high-end moisturisers was purchased. In 1997, another licensing deal was struck, with Donna Karen International Ltd., for use of the Donna Karen New York and DKNY trademarks. In 1999, another professionals’ line, Stila, was acquired, as was a British brand, Jo Malone. Another five deals soon followed, adding the Bumble and bumble, Kate Spade, Michael Kors, Darphin and Rodin & Fields brands to the portfolio.
Estée Lauder assumed an industry leadership role in selling its products over the Internet. In 1998, it formed a separate division, ELC Online, to coordinate the web activities of all the brands. While other cosmetics houses recoiled with horror at the thought, Estée Lauder had always been about in-depth interaction with its customers. The Internet was recognised as providing an ideal environment for one-to-ones, in a new and even more engaging way. In the space of a decade, the company had been transformed. From a handful of brands sold exclusively through department stores, Estée Lauder had become an industry giant covering a wide variety of channels and consumers. It was also by now a global company, with sales in the billions and promotional and advertising budgets that exceeded $1 billion. Not all the acquisitions worked – the Jane brand was sold in 2004 and Stila would soon follow – but most were contributing to the impressive growth of the company.
How Global Are They?
Estée saw no reason why her products couldn’t sell anywhere in the world and had set about ensuring they did so, beginning in 1960. Following the success of her Saks first policy in the United States, Estée was in no doubt where her international empire should start: Harrods’ of London. Given that she was no longer a hairdresser selling products in two salons, but the head of a successful and well-known American cosmetics firm, it is surprising that her request for a meeting with Harrods’ met with a blank refusal. Undeterred, she went to London for a full month, schmoozing every beauty editor in town and getting rave write-ups for her brands. Still to no avail.
The next year Estée was back and Harrods’ cosmetics buyer, worn down by the incessant requests and the avalanche of positive publicity for her brands, grudgingly gave Estée a tiny order. It would be displayed in the general toiletries section, far away from the main cosmetics brands. And oh, just for good measure, they wouldn’t do the gift-with-purchase. Far from being deterred, this was Estée’s opening. On the back of ‘now listed in Harrods', she pitched herself once again to the beauty editors. It took a few more such forceful visits from Estée before her brands were getting their due prominence in the flagship store. And this in turn helped get her brands into Harrods’ competitors, Fortnum & Mason and Selfridge’s. At first Estée was given even shorter shrift from Paris’s great department store, Galaries Lafayette. So she resorted to surreptitiously spilling some of her Youth Dew on the shop floor, which got customers clamouring to know what was the marvellous aroma?
For much of the 1960s, Estée carried her sales bag around the world, opening up concessions wherever she went: Hong Kong, Canada, Austria, Italy and Germany. Estée then handed over the task to an international sales manager. This role soon morphed into a separate division within the company, Estée Lauder International Inc. Their first store in Moscow opened in 1981 while it was still the capital of the Soviet Union. By the mid-1990s, the company was selling in over 100 countries and when Estée Lauder passed away in April 2004, 45% of annual sales, amounting to $5.7 billion, and over half of operating income, was coming from non-US affiliates.
How Are They Structured?
For much of its life, the company structure’s role was to disseminate the ideas flowing from Estée’s fertile brain. The early decision to run Clinique completely separately from the Estée Lauder brand put in place a new structure. Each brand had its own president to drive sales and marketing. The International Division was similarly structured. A matrix-type complex of manufacturing, finance etc supported these units. When the international business became too unwieldy to run operationally as one entity, heads of individual regions were put in place. This added complexity did not impede the growth of the business. Indeed, the company upheld its exceptional feat of growing sales in every single year of its existence well into the twenty-first century.
In 2009, William Lauder handed over his chairman’s role to then CEO, Fabrizio Freda, and the two announced a major change in company structure to simplify the bloated mix of brand, regional and functional heads. Henceforth, the brands would now fall into one of four groupings, organised according to the channel and consumer segmentation of the individual brands
· High-end prestige brands and make-up artist brands
· Estée Lauder, M•A•C, Bobbi Brown, Prescriptives, La Mer, Jo Malone, Tom Ford Beauty
· Prestige skin care and alternative channels
· Clinique, Origins, Ojon
· Fragrance licensing
· Aramis and designer fragrances
· Salon and Pharmacy channel
· Aveda, Bumble and bumble, Darphin
In addition, regionally, the North American business, together with Canada and Puerto Rico - where many of the brands had been operating fairly autonomously - was conjoined into one North American affiliate, providing a single point of contact for its customers. With 42% of sales coming from this one unit, it was a huge multi-billion dollar enterprise in its own right.
What Have They Been Doing Recently?
2004
The 58th successive year of sales growth saw a company-record increase of $700 million, making the top line up to $5.8 billion. Five of the company’s brands - Estée Lauder, Clinique, Aramis, Donna Karen fragrances and Tommy Hilfiger fragrances – were available in over 120 countries, Clinique in over 130. Estée Lauder and Clinique were growing rapidly in China, Aveda was launched in Japan and M•A•C was growing fast in Brazil via its own stores. Darphin, a high-end botanical beauty brand sold primarily through independent European pharmacies, was acquired. The company set up BeautyBank, an internal, new concept think-tank, as a separate division. BeautyBank’s initial output was three new brands, which were launch through the Kohl’s chain of 600 department stores. With Ashley Judd signed up as a brand face and P. Diddy as the latest licensed fragrance, the machine was humming.
The scale and scope of the Estée Lauder business with over 8,000 product lines was now vast. Innovation was a core part of the strategy: 400 scientists were working in six research centres around the world, churnin
g out 300 new product launches in the year. The Estée Lauder Beyond Paradise launch, utilising essential oils developed exclusively for the company, was a huge success. It reached the top five best-selling fragrances in US Department stores, and contributed to the company having five of the top ten.
However, with about one-third of sales coming from products launched in the previous three years, the company was on something of an innovation treadmill. A percentage of the new products each year needed to make good, to compensate for the percentage of the earlier introductions that didn’t make the grade. Once companies find themselves on this treadmill, it is very hard to get off.
2005
Sales reached a new high of $6.3 billion. Growth was coming from around the world. In the US, where sales increased by a quarter billion, Estée Lauder had four of the top five best-selling fragrances in department stores. But the fragrance market was getting tougher all the time. The company was now marketing a range of over 90 prestige fragrance brands with over 200 new ones being launched by the industry each year. Fragrance marketing was now much less about a manufacturer’s credentials, and mostly about the marketability of the attached celebrity name. By focussing on here today gone tomorrow celebrities, the life span of the average new fragrance had plummeted; and so had profitability, as a large wedge of the profits was handed over to the name.
Overall, Estée Lauder’s portfolio was in good shape. The range of brands had expanded over the years, and now stood at 26 with the addition of fashion designer Tom Ford’s name. Yet, 70% of sales was coming from the five core brands the company had developed themselves: Estée Lauder, Clinique, Aramis, Prescriptives and Origins. A key reason for the health of the core brands was their now almost ubiquitous global reach. Clinique was launched into Vietnam during the year, soon followed by Estée Lauder. Not that the other brands were having bad years. M·A·C launched into both India and China during the year, both countries where the core brands had paved the way. They were growing strongly: Clinique and Estée Lauder, launching in another 23 Chinese cities, almost doubled sales.
However, the trend in the portfolio was clear. Skin care and make-up were now the key categories, with sales of approximately $2.4 billion each. These numbers were almost double the size of the difficult fragrance business, and nearly ten times the size of the small but rapidly growing hair care category. While fragrance sales crept up only 3% on the year, the other categories all grew in double digits.
2006
The sales increase was below par, at just 3%: signs that the company was entering choppy waters. Management questioned some of the previously unshakeable icons of the business model. Despite all the diversification of two decades, Estée Lauder was still heavily reliant on US department stores, which accounted for around a third of total sales. The problem was that this trade channel was in trouble, being squeezed at either end: by category killer chains and by Wal-Mart. This lost footfall meant a huge struggle for the company to keep growing sales. A second problem was the slow but inexorable decline in the effectiveness of the gift-with-purchase promotional technique. This had been expensive at the best of times, but now was so widely copied as to be ubiquitous. It was becoming more a cost of doing business than a driver of increased competitiveness.
All this was coming on top of continued challenges in the fragrance category. Sales declined, despite makeovers for the venerable Youth Dew, White Linen and Pleasures brands. The saving grace in the year was the make-up category, which drove most of Estée Lauder’s growth. M•A•C was the company’s fastest growing brand, launching into Russia as well as China and India. Elsewhere in the portfolio, the super-premium skin care brand, La Mer, had quadrupled sales since 2002.
The management’s strategic review resulted in the development of five strategic imperatives to negotiate the more difficult trading conditions, viz.
· Optimising the brand portfolio. Already the modernisation of some of the iconic brands was begun, and the M•A•C and Bobbi Brown brands were accelerated in their global rollout.
· Strengthening product categories. The eighth of the company’s global R&D facilities had opened during the year in Shanghai. This resource promised to be a key competitive edge in the future, as appropriate for the world’s largest, single-focus prestige cosmetics company.
· Strengthening and expanding global presence. Given the troubles besetting the American department store retail channel (unlikely to improve anytime soon), an increased rate of expansion overseas - particularly in China, Russia, India and Brazil - would be the cornerstone of the future growth strategy.
· Diversifying distribution. Internet, travel retail (duty free), and the company’s own stores represented the fastest areas of growth, and would be given incremental focus and resources going forwards.
· Achieving operational and cost excellence. The business had come a long way since Estée and Joseph had cooked up four products in a converted restaurant kitchen. Now over one billion a year individual units were manufactured across 8,000 stock keeping units (SKUs). Surely scope existed for improvement to be facilitated by the implementation of SAP business enterprise software throughout the company, starting with Aveda.
2007
A 9% increase drove sales over the $7 billion barrier, with success across the board. It was a stellar year for new product launches, with four new brands added to the existing roster of 27. The mergers and acquisitions arm disposed of Rodan & Fields, and acquired the Ojon Corporation. Tom Ford Beauty added to Estée Lauder’s range of brands in the ultraluxe niche. Two Daisy Fuentes fragrances were launched exclusively in Kohl’s and a Coach-branded fragrance was introduced through distribution in Coach stores. Finally, at the lower end of the market, Estée Lauder collaborated with the Ford Motor Company to launch Mustang onto the mid-tier retail channel.
This variety of launch channels reflected the strategy to reduce reliance on department stores and reach a wider range of customers in new and different ways. Internet sales grew another 25% with the expansion of the online business to the UK, Australia and France. Certain brands were listed in Sephora, Canada’s Shoppers Drug Mart and ULTA’s 450 beauty superstores. Estée Lauder now had more than 450 free-standing stores around the world for its prestige brands, and Origins was available in the European pharmacy channel. No channel was deemed unworthy; Bobbi Brown’s debut on QVC resulted in the shopping channel’s most successful beauty launch for twenty years. This was clearly an expansion out of Estée Lauder’s department store heartland. Yet, because it was driven by new brands with different target markets, it in no way diluted the equities of the still very profitable original brands.
Internationally, the Americas were the most sluggish region, creeping forwards only 3%. Sales elsewhere increased by mid-teen percentages - albeit this was somewhat exchange-rate-assisted. Even after stripping out currency effects, business outside the Americas moved ahead by a full 10%. The company now had 35 international affiliate organisations, including a newly opened one in Brazil and the acquisition of a distributor in Turkey. These supported sales in over 130 countries. Eight brands were now available in China with Estée Lauder leading the way in 32 cities.
2008
Estée Lauder added almost a billion in top-line sales, a 12% increase that seemed to belie the global economic crisis. True, a third of this growth came from favourable currency movements, but it was still an impressive performance. Meanwhile, sales in their largest market, the US, didn’t grow at all - the consumer spending malaise was hitting the department store trade harder than most other channels. Skin care was again the best category, and generated almost $3 billion in sales. Their performance was driven by the Asia/Pacific region’s very strong sales of skin-whitening products and a continued fast growth in China. Make-up, another $3 billion category, grew 10% with around two-thirds of the growth coming from the make-up artist brands, M•A•C and Bobbi Brown. These two inspired acquisitions of the mid-1990s had prospered under Estée Lauder’s guidance.
· The company’s core product range was well aligned to the aspirations of the fast-growing middle classes around the world. In most of the Asian and European markets in which it competed, Estée Lauder was the fastest growing luxury brand; and sales increased 22% in the Middle East.
· The company was flexible in positioning itself. In Asia, where beauty equated to radiant complexions, they focussed upon skin care products that brighten and protect the skin (La Mer’s top two international markets were Japan and Hong Kong); whereas in Russia and Brazil, two of Estée Lauder’s fastest growing markets, they appealed to classic fragrance brands and the latest innovations in make-up.
· Emerging markets, by now accounting for 9% of sales, had vibrant and fast-growing high net worth consumer segments, ideal for the company’s brands. Both China and Russia were now $100 million markets and two core brands, Estée Lauder and Clinique, became the company’s fifth and sixth brands there - both opened their own stores.