Estee Lauder Companies (EL)

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Estée Lauder's main distribution channel is high-end department stores like Saks Fifth Avenue and Bloomingdales. In 2006 88% of domestic sales and 37% of overall sales were made through US department stores. In recent years however, consumers have begun shifting away from department stores to other channels like the internet and mass retailers. From 2000 to 2005, department stores' share of general merchandising has fallen from 59% to 31%. Further exacerbating this problem, is the wave of consolidation that has reshaped the Department Store industry over the last 15 years. From 1990 to 2005 the number of major department stores decreased from 75 to 17. In 2006 Federated and May Department stores (Estee Lauder's two largest customers merged). This presents further challenges for EL since mergers typically lead to fewer physical locations.

In addition to the deterioration of its primary distribution channel Estee Lauder also has low operating margins, 11% compared to the industry average of 14.7%. Factors contributing to their lackluster performance include high fees paid to department store employees, high marketing costs, and low employee productivity.

[edit] Overview of Company

Estée Lauder has traditionally focused on the prestige market, which are the high-end, more exclusive brands, but has recently attempted to tap into the growing low-end mass market. The company has four categories of products: Skin Care, Makeup, Fragrance, and Hair Care. The market for skin care products is growing the fastest, at 7% per year, while the makeup market is growing at 4% per year. The U.S. fragrance market is the most problematic and unprofitable market of the four.

Source: company reports

Source: company reports

[edit] Skin Care

The skin care product segment is one of the largest divisions in Estée Lauder and includes lotions, cleansers, sun screens, and self-tanning products. 85% of sales in this division come from the Estée Lauder and Clinique brands, while Origins (7%), La Mer (6%), and other smaller brands make up the rest. It is the most profitable of Estée Lauder’s divisions, but it is in the most competitive market. The growth of the skin care market (7%) is almost double that of the other categories, which supports expansion of Estée Lauder brands but also the entrance of competitors.

[edit] Makeup

The makeup product segment is also one of the largest divisions of Estée Lauder. The company is strong in all the major product categories, such as lipsticks, eye shadows, foundations, and powders. 51% of sales in this division come from Estée Lauder and Clinique brands, with M·A·C (32%), Bobbi Brown (10%), Prescriptives (5%), and Origins (1%) making up the rest. This is also a competitive market with young entrants, but Estée Lauder is well-positioned with a diverse portfolio of brands. M.A.C. and Bobbi Brown are two of the most popular and fastest growing brands in department stores. The overall makeup market is growing at 4% a year.

[edit] Fragrance

The fragrance division is the least profitable division of Estée Lauder. With $1.2 billion of sales in 2006, the company barely broke even. Most of Estée Lauder's fragrance business is located in the U.S., which is a particularly fickled market (as compared to the greater stability and brand loyalty in Europe). Fragrances under the Estée Lauder and Clinique brands benefit from brand-recognition but the Aramis brand has been operating at a loss.

[edit] Hair Care

The hair care product segment is Estée Lauder's newest division, and it has focused on the high-end market, growing mostly through acquisitions. There is solid demand for professional hair products, including Estée Lauder's main brands, Aveda and Bumble and Bumble.

[edit] Trends and Forces

[edit] Decline of Department Stores

Consumers have begun moving away from department stores in favor of the internet and specialty stores; overall sales at key department store chains have declined on average 1% per year from 2001 to 2005. In 2006 88% of Estee Lauder's US sales and 37% of overall sales were generated through US department stores, especially upscale department stores like Saks Fifth Avenue and Bloomingdales. EL's mamagement has committed to diversifying its revenue streams. As part of this effort, they began offering their products in Kohl's -a midtier department store- in 2005. To date the effort has not met with much success and El's overall revenue mix remains relatively unchanged.

[edit] Department Store Consolidation

Department stores have undergone significant consolidation over the last several years. This trend will negatively affect Estee Lauder's businesses. Federated for instance bought May Stores in 2006. These two stores were Estee Lauder's largest clients. After the merger, Federate closed approximately 65 stores. Moreover, the consolidated have increase pricing power and can demand prices.

[edit] Rise of Mass Retailers and Other Distribution Channels

Consumers increasingly look to mass retailers like Wal-Mart Stores (WMT), Target (TGT), and drug stores to provide them with innovative products at mass-market prices-- and these retailers have risen to the occasion. Innovative beauty products are no longer the sole domain of prestige brands sold in high-end department stores, and mass retailers' crowded beauty aisles can cater to a wide range of taste and prices.

In response, Estée Lauder is focused on diversifying its distribution channels. In 2006, North American department store sales only accounted for 37% of Estée Lauder's total sales, whereas it was 48% of total sales in 2002. As can be seen from the graph below, Estée Lauder is moving into company-owned retail stores (mostly Aveda, M.A.C., and Origins brands), salons, high-end perfumeries, and duty-free shops. "Other" includes pharmacies, Internet, and military bases. However, Estée Lauder has no presence in the mass market, and it will be difficult to gain market share in such a crowded market and price-driven market without cannibalizing its own prestige brands.

[edit] International Expansion

Approximately 50% of Estée Lauder's sales are generated in the U.S. The United Kingdom and Japan are the next two largest markets (though Japan's share of the sales in Asia have declined from 50% a few years ago to 40% now).

Non-U.S. sales account for only 15% of the company's sales in the Americas. 22% of European sales were due to expansion in the travel retail distribution channel, but the company has a weak market share in continental Europe due to the dominance of French beauty brands.

Estée Lauder is focused on growing international markets. For example, in 2006, the company agreed to sell Clinique products in approximately 100 drugstores in Canada. Sales in Europe, Africa, and Asia are bolstered by expansion into developing markets, such as South Africa and China. Developing countries are only 5-8% of Estée Lauder's sales currently but their growth rate is more than 20%. However, retail in developing countries is competitive and volatile, and some of the company's competitors had first-mover advantage in the markets.

[edit] Competition

Estée Lauder's main competitor is probably L'oreal, which competes in the prestige market with Lancome and the mass-market with Maybelline and other brands. Other prestige brands include Shiseido, Chanel, Clarins, and LMVH. Below is a chart of the market share by geography of some of the top prestige brands. As can be seen, the market is quite fragmented.(EMEA includes Europe, Middle East, Africa, and Other)

Source: company reports

Since Estée Lauder is primarily in the premium market, the dominant mass-market brands are not yet direct competitors. However, they do present barriers and future competition as Estée Lauder gradually expands into this market. Proctor and Gamble (P&G) has very strong mass-market brands including Olay, Pantene, and Cover Girl. Other strong competitors in the mass market include Unilever, and Revlon.

One of Estée Lauder's main weaknesses is that their operating margins are significantly lower than that of their competitors. This is partially due to a focus on top-line revenue growth rather than just the bottom-line profits. In addition, Estée Lauder's productivity level per employee is a great deal lower than that of its competitors. There are also cost inefficiencies in the company's system of autonomously-managed divisions, and a clear revenue-drain in the fragrance business.

Source: company reports

[edit] Competition by Category

[edit] Skin Care

The company's main competitors in skin care presently include prestige brands like Chanel and L'oreal (Lancôme), niche brands including dermatologist-sponsored products, and mass-market brands like P&G (Olay) and Avon (Anew). The high-end brands, including Estee Lauder, have increasingly high price points and compete largely based on the quality and prestige of their brands. Mass-market brands compete based on high-quality anti-aging technology and other products at lower price points.

[edit] Makeup

Estée Lauder's main competitors in makeup include L'oreal's high-end brand, Lancôme, and its mass-market brand, Maybelline. New players also enter the market frequently.

[edit] Fragrance

There is a great deal of competition in this category; there were approximately 250 product launches between 2002 and 2004 alone. Each launch involves extremely high costs and increases the competition while decreasing brand loyalty. Major competitors include LVMH, Chanel, and Elizabeth Arden. Estee Lauder faces stiff competitition in the US where there are on average more than 200 new product launches per year.

[edit] Hair Care

This is Estée Lauder's newest and weakest product group, competitively, as it barely has any market share. Proctor & Gamble and L'Oreal are the market leaders in this market.

[edit] References