Estee Lauder's international operations are central to a three-year business-building initiative expected to fuel annual sales growth of 6 percent to 8 percent, the firm reported during its March 6 Analyst and Investor Day in New York.

The company is forecasting diluted earnings-per-share increases of 10 percent to 12 percent as a result of the initiative.

The financial targets were revealed as part of a new "optimize, diversify and grow" strategy outlined during the investor meeting. The strategy defines Lauder's next phase of growth following a five-year plan launched in 2002 that aimed for EPS growth of 12 percent to 15 percent (¹ Also see "Lauder Long-Term Outlook Shaped By Distribution Shifts, Global Expansion" - HBW Insight, 23 September, 2002., p. 3)

Outside of the U.S., the company has identified opportunities to build its fragrance, skin care and makeup businesses.

In fragrance, the firm will look to increase its share of the European fragrance market - the largest in the world - by acquiring European-style brands, developing "Euro-centric" brands and strengthening the "representation" of existing brands in the region.

Ultimately, success in Europe depends on the "proposition you are making [to] the consumer," according to Veronique Gabai-Pinsky, president of Aramis and designer fragrances. "If you bring the right concept to the consumer with a global appeal you can touch the consumer even with an American brand."

Lauder will remain focused on its prestige fragrance division, which accounts for 77 percent of its fragrance business, and will not take its prestige offerings to the U.S. mass market, despite the allure of the fast-growing segment, according to COO Daniel Brestle.

"Our intense desire to always protect brand integrity will prevent us from ever reaching the profitability levels" of some of our competitors, he said.

In addition to growing its fragrance business abroad, Lauder is aiming to reduce its cost of sales globally by reducing its number of fragrance suppliers from eight to three and increasing its reliance on outsourcing, Brestle noted.

Furthermore, the company will conduct a portfolio review to weed out brands that are not profitable. "We accept the fact that not all fragrances are created equal and not all have to last for 30 years," the exec said.

Customizing Skin Care

In skin care, Lauder researchers are developing products that cater to the specific skin needs and desires of diverse populations, according to Kenneth Marenus, PhD., vice president of regulatory affairs worldwide.

The firm particularly is targeting the Asian population, which comprises 78 million consumers who are "fuelling skin care sales in all channels of distribution, whether it be entry price points or luxury price points," according to Brestle.

To address the needs of Asian women, Lauder is focusing its anti-aging products on awarding evenly colored, bright and flawless skin, rather that reducing lines and wrinkles - the focus of western anti-aging formulas.

In its product development efforts, Lauder has found that Asian skin is more sensitive to external stimuli and has a higher pigmentation response than Caucasian skin, according to Marenus.

To further this kind of research, Lauder has entered into a research relationship with "top dermatological professors" in Kobe, Japan and opened an "innovation institute" in Shanghai, China to manufacture products specifically for the Chinese market.

"These relationships are essential to provide a continuous, innovative flow of information," Marenus said. "It's that flow of technology that really pays off."

Developing products for the Asian market figures high on Lauder's research agenda; in December, the firm said that expanding its presence in China will be an important strategy for long-term growth (² Also see "Estee Lauder Sets Sights On China As Part Of International Growth Strategy" - HBW Insight, 4 December, 2006., p. 3).

Global growth of Lauder's makeup division is being driven largely by the Estee Lauder , MAC and Bobbi Brown brands, according to Jane Lauder, senior vice president for global product marketing for Clique.

Lauder commands a 25 percent share of the $12.1 billion global prestige cosmetics market. The firm has a 37 percent market share in the U.K., a 25 percent stake in Spain and 15 percent in Japan.

Developing markets such as China and Russia have seen explosive growth in the past year, she said. In Russia, sales of Clinique makeup rose 75 percent, driven by foundation and color cosmetics. MAC sales in Russia were up 80 percent on a fiscal year basis compared with the prior-year period, even though the brand is carried in only two doors in the country.

Lauder will continue to eye emerging markets, which represent only 6 percent of the firm's business but offer significant growth potential. For example, in China, Lauder marketed only two brands in 2002 but today sells eight brands and will introduce more in the near term.

Other Growth Drivers

In addition to international expansion, "further development of core and fast growing brands, market share expansion in existing channels, and diversified distribution" will drive growth through 2010, the firm said.

In the U.S., where Lauder claims a 54 percent market share in cosmetics, the firm is considering opportunities to expand its retail footprint.

"If you look at our distribution pattern we are really urban-oriented," according to Maureen Case, global president of Bobbi Brown, Jo Malone and La Mer . "There's a lot in the interior of the country where we can go."

Lauder is also looking to diversify its retail channels in light of a decline of its department store business related to the Federated-May department store merger. The firm's department store sales account for 34 percent of its total revenue versus 46 percent five years ago.

The company's online business, direct-response television and freestanding stores also present opportunities. Additionally, the company has an "active" mergers and acquisitions program to identify "next-generation" brands. Lauder monitors about 10 candidate firms at any given time, the company noted.

Under the new three-year business initiative, the company is aiming to "optimize" its core businesses with better customer service and marketing programs.

For example, in the U.S., Lauder wants to improve the gift-with-purchase program for the Estee Lauder and Cliniquebrands, since currently it is not generating growth but maintaining sales, according to Brestle.

As GWPs account for 30 percent of the brands' business, "there is no single solution and no strategy to walk away from this business," the exec said. He added that the firm is identifying "tactical solutions" to help grow sales of the program in the low-single digits.

In addition to growing, diversifying and optimizing its business, Lauder is working to streamline costs while modernizing its operations under its "strategic modernization" initiative.

The strategy will generate $214 million in total savings from 2008 to 2010 and $130 million per year annually farther down the road. The majority of savings will be reinvested in business building.

Lauder also announced March 6 that it has entered into an agreement with Bank of America to purchase approximately 16 million shares of its common stock for about $750 million. Bank of America is expected to purchase an equal number of shares that it initially will deliver to the company within the next several months.

Lauder expects revenue in its FY 2007 third quarter (ended March 31) to increase 4 percent to 6 percent, while diluted earnings per share from continuing operations will be flat with last year.

For the full fiscal year, annual net sales are projected to advance between six percent and seven percent. Diluted earnings per share from continuing operations are forecasted at $2.10 to $2.20.

The business will continue to be impacted by regulatory issues, according to Brestle.

"Whether it's the EU with the upcoming Seventh Amendment or upcoming REACH or Canada or California, the demand is daunting," the exec said. He noted that Lauder has reformulated more than 1,300 products and repackaged 29,000 SKUs within the past four years due to regulatory requirements.

Shares of Estee Lauder were up $1.14 or 2.5 percent to 47.19 at the close of business March 6.

- Molly Laas (m.laas@elsevier.com) and Eileen Francis (e.francis@elsevier.com)

Lauder Cites Overseas Growth As Key To Building Business Through 2010

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