Estée Lauder targets China

07 February 2011

BEIJING: Estée Lauder believes China could become the world's largest beauty market within the next decade, and is taking a nuanced approach in the country.

The company reported sales growth of 11%, to $2.5bn (€1.8bn; £1.6bn), during the last quarter, with Greater China helping drive this process, as totals grew 29% in local currency.

At present, the US multinational has adopted a model tailored for the long term, having recognised significant expenditure is necessary to fuel consumer demand and profits going forward.

"It's been designed on purpose to make sure that the future growth of what we believe will be the biggest market of the globe in 2020 [or] 2025 will always be … accretive to margin," Fabrizio Freda, Estée Lauder's ceo, said on a conference call.

Estée Lauder's optimism about the overall potential offered by the country is so bullish that it now defines China as a "second home", Freda added.

Tapping in to shoppers' rising affluence and desire for branded goods, which typically benefits foreign cosmetics manufacturers, needs a multifaceted strategy.

Alongside its trademark range, M-A-C and Clinique have all proved popular in China, and recent launches such as Clinique's Repairwear Laser Focus are also highly successful.

However, as levels of trial generally only stand at between 30% and 40%, marketing will play a key role in stimulating uptake.

"We are investing, obviously, in advertising our main brands to create the right awareness," Freda said.

Broader priorities include expanding its reach, and the company aims to open 90 locations across its current fiscal year, and building a presence outside areas like Shanghai and Beijing.

"We are investing into accelerating our distribution particularly in secondary cities around China," Freda said.

Elsewhere, the travel retail sector is rapidly increasing in size, and the number of Chinese consumers making journeys abroad should surge from 40m to 90m in the next three or four years.

"Chinese traveling is the biggest source of travel retail," said Freda.

These individuals are usually wealthy and enjoy buying premium goods overseas, meaning advertising in China has a dual objective.

"The importance of us winning in China, investing upfront and creating amazing desirability in China has a double implication," Freda said.

"Travel retail growth is heavily influenced by the brands which have a strong image with Chinese consumers.

"We are improving our marketing and advertising activities within travel retail to improve conversion of traffic into shoppers."

But trading conditions can be complex in China, as new rules require existing products to be reregistered, and achieving formal approval for new ingredients is extremely difficult.

While the latter issue means it is often not possible to include China in international roll outs, Freda suggested other opportunities remain.

"We have some amazing products and SKUs on many brands that still have relatively low level of awareness and trials, so we are focusing on bringing our best product to the maximum potential in this environment," he said.

Research group Trefis has predicted Estee Lauder's market share could hit 7.2% in China by 2012 and may even touch 8%, outstripping its projected global figure of 6.7% by this date.

Data sourced from Seeking Alpha, Forbes; additional content by Warc staff