Shipping in Green

It’s a Beautiful World for Super-Premium Brands

September 18th, 2013
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Analyst Insight by Rob Walker, Contributing Analyst at Euromonitor International

beauty care is on course to deliver its strongest annual performance in more
than a decade. For the three months to the end of June, category leader Estée
Lauder delivered a jaw-dropping 84% jump in profit thanks to upbeat sales
across a raft of different markets, including Italy, the UK, Japan, China and
Brazil. Total net sales for the full fiscal year broke US$10 billion for the
first time ever.

Of the
world’s biggest super-premium beauty care markets only South Korea
underperformed. This supports our view of two months ago (Seoul’s Ballooning
Luxury Goods Market Punctured by Cheaper Prices in Tokyo) when we warned of
contagion from Seoul’s mounting middle-class debt crisis.

The best
results in Estée Lauder’s portfolio came from top-tier brands, notably Crème de
la Mer, Tom Ford and Jo Malone. Each generated value growth of more than 20% in
the latest quarter. The company has since adopted a cautionary tone about the
year ahead, but we should not read too much into that. Restraint is part of Estée
Lauder’s business persona. In fact, the prospects of further upbeat results
look strong, and there are a number of reasons why.

A conservative business model

over the last two years the company has channelled greater resources behind
fewer products. Clinique, for example, dramatically cut its new product
offerings. The strategy is now bearing fruit because there has been more
targeted focus on building the cachet and prestige value of core brands. This
is playing out especially well in the emerging markets.

Estée Lauder’s expansion into emerging markets has been conservative but
astute. It is significant that L’Oréal launched into China a decade earlier,
yet Estée Lauder is fast catching up in terms of market share. Between 2007 and
2012, Estée Lauder’s compound annual growth in China’s premium cosmetics
category ran at 30%, according to data from Euromonitor International, compared
with 19% for L’Oréal (both measured at fixed US dollar prices). In China,
spending on luxury beauty care has not been badly affected by the clampdown on
extravagant gift giving.

over the last year, Estée Lauder has focused on raising brand awareness in
mid-sized cities in both China and Brazil. In China, this strategy has been
helped by a big increase in outbound travel from consumers living in the
interior. Estée Lauder is tapping into this market due to strong visibility in
key outbound destinations such as Hong Kong and Tokyo (not least in the

Estée Lauder has held firm in its commitment to prestige brands, rather than
segment too heavily into mass-market products. The latter is big business in
the emerging markets, but over-exposure at lower price points can dilute the
cachet of super-premium brands. A similar focus on high-end branding has worked
extremely well for French fashion house Hermès over the last year

Caution belies ambition

Hermès, Estée Lauder is cautious in its outlook for the year ahead,
highlighting potential for lacklustre demand in Southern Europe as well as
ongoing weakness in South Korea. However, Estée Lauder has been bold in its
portfolio focus, not cautious, and that is what will count going forward.

In a
global beauty care market where there is intense pressure to bring new products
to market, it seems counter-intuitive to cull new offerings. Yet, by so doing
Estée Lauder has freed up substantially more cash to spend on its prestige

cautious expansion drive does not imply lack of ambition either. We should expect
to see Estée Lauder-owned brands grow in visibility across the myriad of small
and mid-sized cities of China, emerging Asia and Latin America over the next
five years, albeit at a controlled pace.

It is
worth remembering that the company’s founder of the same name (who died in
2004) used to follow her brands – in person – to every store opening or new
cosmetics counter in the US and around the world. That personal touch is part
of the heritage of Estée Lauder, and ties in with the prestige value of its
brands. Resisting segmentation pressures and the temptation to accelerate
expansion in the emerging markets could become tougher, however. 

Breaking the US$10 billion sales mark

ScreenHunter_01 Sep. 18 10.35

Source: Euromonitor International

Note: Estée Lauder: Net Sales by Category, Year Ending 31 June 2013

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