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Why This Beauty Giant’s Business Strategy Will Pay Off

January 28, 2014 | About:
Pato Kehoe

Pato Kehoe

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The personal care industry is typically characterized by fast-changing consumer preferences and strong market competition. However, Estee Lauder Companies Inc. (EL) has done an outstanding job at maintaining its position as one of the global industry leaders. With a combination of product innovation, aggressive marketing strategies and international presence, the cosmetics company is a keeper for long-term investors like Mario Gabelli (Trades, Portfolio), who recently doubled his shares in the beauty giant.

An Extensive Portfolio, All Over the Globe

Treading the personal care market successfully is no easy task, but this major cosmetics firm has learned, through 60 years of experience, how to please its customers. By manufacturing and marketing a wide range of products in the skin care (44% of sales), makeup (38%), fragrance (13%) and hair-care (5%) department, this company has managed to set itself apart from competitors L’Oreal and The Procter & Gamble Company (PG). Its extensive brand portfolio, comprised of names like Clinique, Origins, M-A-C, Tommy Hilfiger, Aveda and Donna Karan, have contributed to the current 25% share of the global prestige makeup industry. This is also reflected in the No. 1, or 2, market position that the company holds in 18 countries worldwide, and the $10 billion in sales generated in fourth quarter of fiscal 2013.

However, what differentiates Estee Lauder the most from its competitors is the firm’s international presence. With 60% of its sales acquired through department stores, specialty retailers and salons in over 150 countries, this firm has a solid cash flow that should be able to easily maneuver any headwinds in the domestic market. Furthermore, its focus on emerging markets, which reel in one-third of its revenues, is highly beneficial, given the growing middle class and vast young population in these nations. Brazil, for example, is Estee Lauder’s fastest growing market, due to M-A-C, Tommy Hilfiger, and DKNY’s popularity.

The product lines tailored to local needs and diverse ethnicities, such as Clinique’s Shades of Africa, earn this company extra points in the brand popularity contest. And despite added costs, due to 2013’s new freestanding store openings (690 single-brand stores and 130 multi-brand outlets worldwide, particularly in emerging regions), the beauty-care firm shows no sign of major debts. In fact, operating margins have experienced a 15% bump, and EBITDA levels have tripled since 2010, closing at $1.9 billion for fiscal 2013.  

Marketing vs. Cost Reduction Strategies

In an attempt to trim costs and increase its operational efficiencies, Estee Lauder’s business strategy last year focused on centralizing its core operating functions, as well as reducing non-profitable stock keeping units. The cost reduction program, Strategic Modernization Initiative (SMI), proved highly efficient, saving the company $781 million in 2013. Furthermore, while the program will continue throughout 2014, management announced that it would be reinvesting a large amount of the cost savings in marketing for its core brands, along with product innovation. In this regard, decentralizing innovation to better adjust to its global customer preferences, is and will continue to be a key strategy in further propelling the beauty giant’s growth.

Nevertheless, some risks remain present in Estee Lauder’s panorama. When it comes to retailers, consumers' trend of venturing towards alternative outlets could damage the company’s revenue, which relies on traditional North American department stores for one-third of its revenue. Also, while the firm’s strong international presence draws in 60% of sales, volatile changes in foreign currency rates could dampen profitability. However, the 50% raise in advertising in TV and digital media these past three years, along with the High Touch service (very personal service) for customers and gift with purchase initiative, should be able to retain consumer loyalty and overcome possible headwinds.

Lastly, Estee Lauder’s celebrity power, achieved via collaborations with popular artists like Rihanna (M-A-C collection December 2013), will increase demand among teenagers and further drive revenues in 2014. This aggressive marketing strategy, the firm’s diverse and popular brand portfolio, and the 68.20% of ROC leave me feeling very bullish about this beauty expert’s future. 

Disclosure: Patricio Kehoe holds no position in any stocks mentioned.

About the author:

Pato Kehoe
A fundamental analyst at Lone Tree Analytics

Rating: 3.4/5 (5 votes)

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