FMCG

by Greg Thain

  Another significant factor behind the continued good news was the company’s success in positioning itself not as a reactive victim of the changes in how their consumers were reached, but as proactive beneficiaries. Other than its tradition of iconic advertising, Estée Lauder’s touchstone had always been a close interaction with its customers, typically in department stores. In the US, that channel was in trouble - slipping from being worth 41% of sales in 2003, to 30% in 2008. This malaise was unlikely to ease soon, although the company upgraded its in-store Clinique customer experience.

  While US department stores were becalmed, international department stores, more than doubling sales to over $2 billion in the previous five years, were Estée Lauder’s fastest growing channel. This was due in no small part to its long-term strength in that environment. So, taken together, total department stores still contributed half of total sales. Otherwise, the company was most excited about the potential offered in four up-and-coming channels:

  The Internet. Fifteen brands were now available for sales online in a growing number of countries - Korea being the latest - and total online sales leapt up 40% in the year. But the channel was much more than another outlet. Brands with limited distribution now had the chance to reach a much wider audience. In line with Estée Lauder’s trademark personal touch, Clinique, M•A•C, Bobbi Brown and Origins all offered live chat, with real make-up artists providing personalised advice.

  Direct Response TV. This was another arena where a prolonged interaction with the audience played to company strengths. It was now a significant route to market: in 2008 sales of cosmetics and toiletries on direct response TV channels exceeded $500 million. Clinique, Origins, Bobbi Brown and Ojon had all been big hits. Indeed, Ojon had been acquired primarily because it was primarily a direct response TV brand.

  Company Stores. Here the personal touch was taken even further - no constraints from department store rules and no presence of competing counters. Estée Lauder now operated 577 stores, which acted as advertising billboards in some of the world’s most prestigious real estate.

  Travel Retail. Estée Lauder brands had always been well featured in duty-free outlets. Now, many new airport terminals had opened which emphasised the development of the high-end retail component - a very helpful trend. As well as featuring in upgraded duty-free areas, stand-alone company stores were part of the strategy, and helped drive sales in this channel up by 20% in the year.

  This combination of routes to the consumer also gave the company the opportunity to develop ground-breaking, multi-channel launch strategies for new products. For example, Tri-Aktiline Instant Deep Wrinkle Filler was launched internationally in 2008 via speciality cosmetics stores, direct response TV, the internet and travel retail.

  2009

  The mid-year timing of the company’s financial year end could no longer insulate it from the global financial downturn; the company’s first ever annual sales decline was recorded. Yet, the reported decline of 7% to $7.3 billion was more due to currency fluctuations than to volume decline (only 2%). Estée Lauder reduced its SKU count by 16% and cut merchandising, advertising and sampling budgets. This was simply a very strong company enduring some difficult market conditions.

  Estée Lauder focused on driving the higher margin parts of the portfolio and the fastest growing regions; whilst propping up the brands and markets most badly hit by the downturn. Customer experience was enhanced at the Bobbi Brown counters and in the Origins stores, whilst, for the traditional fragrance brands, smaller, less expensive pack sizes were introduced. Department stores were for once allowed to display prices, discretely. Internet sales increased another 20% with Bumble and bumble going online. Estée Lauder and Clinique websites were launched in China. In local currency, company sales of skin care products powered ahead 17% in the Asia/Pacific region, with acceleration in China more than making up for a slowdown in Japan.

  2010

  Estée Lauder showed its resilience, bouncing back with a 6% sales increase to $7.8 billion. Indeed, but for the effect of currency changes inflating the record 2008 figures, this was the company’s best year yet in real terms. As the American market was still becalmed, Asia and Europe drove the growth. Sales in China increased by almost 30%, with e-commerce chipping in a 23% increase.

  One company strength was to repair the visible signs of ageing. New product launches in this area added nearly $250 million during 2010. The launch of Estée Lauder’s Advanced Night Repair was the most successful in the company’s history. The make-up artist brands were still driving ahead, 79 M•A•C stores opened around the world and the Bobbi Brown line was launched into Poland. The fragrance category slightly declined, as sales of the franchise name brands such as DKNY, Hilfiger and Sean John fell off. The unpredictability of this sub-category, and therefore its lower profitability, prompted the company to switch focus onto their own fragrance brands. They were rewarded with growth – even the venerable Aramis had a good year.

  Organisationally, the major acquisition was the Smashbox Beauty Cosmetics company, a prestige brand sold primarily in speciality beauty channels in the US and 40 other countries. A decision to discontinue the Prescriptives brand was partially withdrawn due to a social media campaign by its core followers. Estée Lauder made the formerly best-selling line available for sale online while transitioning some products into other brands.

  The company was a year into its new four-year strategy, which involved a significant restructuring (see above) and resizing of the company. The number of SKUs was reduced again, this time by 10%, and a programme to trim the workforce by 2,000 was put into place.

  2011

  A record year added over a billion to the top line, a 13% increase which was three times the growth rate of the total industry. A third of this increase came from the US market. Here increased footfall in department stores met Estée Lauder’s revitalised counters, which now boasted special lighting, interactive touch screen tools and a host of new products. Business also grew in other US channels, particularly fast-growing multi-brand beauty retailers like Sephora, where Bumble and Bumble launched in 298 stores. Further expansion and investment in digital selling tools saw online sales rise yet again by an impressive 28%. Skin care products again led the way, increasing by 15% to almost $4 billion (almost a billion had been added in only two years). Even fragrances had a good year, helped by the launch of Estée Lauder Pleasures Bloom.

  On the international front, the company became leaders in China in the prestige beauty category. They were now selling 11 brands in 38 cities through a variety of department stores, company stores and multi-brand specialist retailers. Estée Lauder had recently opened a larger R&D facility to focus on new products, designed around local needs. La Mer grew by 55% through increased distribution and the launch of an E-Commerce site. Combined sales in China, Hong Kong, Taiwan and Korea grew by $181 million.

  In Brazil, the world’s third-largest beauty market, company growth was spearheaded by Clinique and M•A•C, the country’s leading brands. To make up for the relative lack of Brazilian department stores, focus was placed on opening company stores and expanding e-commerce.

  2012

  The luxury consumer was back. Spending in the prestige beauty market outpaced growth in the lower-priced offerings. This trend was very much to the company’s advantage. Indeed they outperformed the competition: their 10% record increase grew at double the sector rate. For the first time the eponymous Estée Lauder brand became the largest prestige beauty brand in the world.

  As was becoming familiar, the high growth categories were skin care, with a large range of new products, and make-up, primarily the make-up artist’s brands. The work done improving the attractiveness and customer experience in their department stores counters continued to pay dividends: US sales grew by over $250 million. Clinique consolidated its position as the number one overall beauty brand and new products in the Estée Lauder range brought many new customers into the brand.

  Outside the
United States, another 50 company stores opened and online business increased by 24%. The company had by now 340 marketing and e-commerce sites across more than 50 countries. The Estée Lauder Companies were now the clear leaders in the online beauty business, a fact confirmed in an internal benchmarking study. In the past decade, online sales had increased almost tenfold, and showed no signs of slowing down. Online was now the fastest growing sales channel for beauty sales, especially in countries lacking full department store coverage. In China the company estimated it accounted for fully half of all beauty market purchases. Opening more company stores helped drive up brand availability to 58 cities.

  Store opening was also a priority in Brazil with seven new M•A•C stores cementing the brand’s number 1 position in the beauty market. Jo Malone and Bobbi Brown also opened stores in the Middle East, a fast-growing market. In Latin America, the company assumed market leadership in Mexico, Venezuela and Peru.

  What is Their DNA?

  Perhaps the biggest strength of Estée Lauder is that its DNA can be traced directly back to its founder. There is no doubt Estée Lauder herself would completely recognise the business today. Its key strengths now were her strengths then, although updated and adapted for the challenges of today.

  Consumer Contact

  Estée Lauder said of the business that, in its earliest days, the most important aspect was making human contact. She knew who was buying and her customers knew who was selling. When she expanded to two salons, she ingrained this attitude into the fabric of her business. What she did so successfully is still a unique cornerstone, now updated into the company’s High-Touch model. The outcomes are the same today. Product selection is personalised. Consumers are educated about their own skin and how to look after it. The high involvement creates strong emotional connections and ultimately builds brand loyalty. The secret has been to evolve the method, over time and into new channels, beyond the department store. Computer touch screens have replaced Estée’s question-and-answer sheet, and the pushy saleswoman is now a beauty consultant. Perhaps the company’s greatest achievement has been to translate its USP (unique selling point) into areas such as company stores, direct response TV and, most successfully, the internet.

  Global

  Estée knew right from the start, as she was barger her way into Harrods’s, she was helping to meet basic needs applicable across all races, countries and languages - albeit that the more precise issues and solutions would differ. The company has stuck to those beliefs and runs a highly successful global operation. Indeed, there is not a country of note where the company has failed, been beaten to the punch or misread consumer needs. It has not gone to each market with a global template. Rather, the great variety amongst the biggest brands has eased access to the various markets. Estée Lauder is in an ideal position to benefit hugely from the rapidly increasing new middle classes in emerging markets - having powerful, leading positions in the BRIC markets (Brazil, Russia, India and China) and elsewhere.

  Innovation

  Innovation has always been at the heart of the company, both in what the products did and how they were sold. Throughout its existence, Estée Lauder has been a trendsetter more than a follower. Estée’s sales techniques, through Aramis and Clinique right up until the present day - when eight global R&D laboratories provide an endless stream of hundreds of new products a year – has been a permanent bench-marking process for the rest of the industry. The company’s prowess in innovation is perhaps best illustrated by the Forbes’ 2012 lists: The Estée Lauder Companies ranked number 933 in sales, number 716 in profits, number 348 in market cap and number 23 in Innovative. This is one place above Google.

  Brand Management

  If a class of MBA students sought paragons of brand management, they might start with the usual suspects: P&G, Unilever and so forth. But brand management has also been an unmistakable core strength of Estée Lauder. All of the original brands that built the company have been so nurtured and adapted that they remain relevant today. Take Estée Lauder and Clinique, for example. Virtually every acquired brand has gone on to much greater heights under company stewardship: M•A•C. Brand equities have been zealously protected, in particular through managing the process of expanding beyond the department store core of the business. That process continues today. Which brands should appear in which retail environments has always been a company obsession - iron discipline in this area is the key reason why the Estée Lauder brand itself is now the world’s leader.

  Summary

  It is difficult to see anything but continued success for The Estée Lauder Companies. Of course, they are as exposed to spending downturns in the economy and currency fluctuations as any other global company selling high-end products. Yet, their strengths in brand portfolio, consumer contact, innovation, emerging markets and E-Commerce mean that any such problems will be more bumps in the road than major derailments. They have strong competitors but they are exceptionally well-positioned competitively. They have never been a company to slavishly follow what someone else is doing.

  Although the company has been publicly quoted for almost two decades, it is still in the control of the family. It deserves much credit for cherishing the company’s heart and soul, while bringing in outside expertise to keep it up-to-date and relevant. They are a case study of how a family firm should evolve over time. Estée Lauder is immune from hostile takeover so can continue to take a more balanced view between short-term and long-term. This has always been one of the company’s defining characteristics: Aramis and Clinique would never have made it in a next-quarter-results culture. Estée would be proud.

  Unilever

  Where Did They Come From?

  Unilever came into being on 2nd September 1929 when the British firm Lever Brothers and the Dutch-owned Margarine Unie signed an agreement to create Unilever. Both companies were at that time long-established - the merger created one of Europe’s largest companies – but many of the attributes of Unilever were to derive from the personality of the founder of Lever Brothers, William Lever.

  William was born into the grocery trade, his father owning a small wholesale grocery business in the North of England, and in 1867, despite his mother’s wishes he train to be a doctor, William entered the family business at the age of sixteen. As the owner’s son, William did not have an easy ride; he was put to work in the warehouse preparing orders for delivery to local shops, a job that included the onerous task of cutting soap to each retailer’s requested quantity, the soap having been delivered to Lever’s in large unwrapped chunks for William to cut and wrap in greaseproof paper. Surely there must be a better system than this, thought William, his first business lesson: there had to be potential in improving things.

  William soon talked his father into giving him a travelling salesman’s job, sealing the deal by offering to forego the salesman’s salary and stick to his existing arrangement of bed, board and pocket money. That William was a natural salesman was apparent from the off. He was also a hard worker, his favourite book being Samuel Smiles’ Self Help, a series of biographies of famous and successful men from humble beginnings who succeeded through determination and hard work. William applied its lessons diligently, expanding his sales territory far beyond its existing boundaries and taking customers from other wholesalers. This was William’s second business lesson: expansion brought success.

  William’s third business lesson came several years later when he and his brother James, both now effectively running the business, put in a big order for eggs from Ireland and were dismayed at the Liverpool dockside to find them largely broken and cracked. Between them they designed a crate to keep wholesale orders of eggs intact and took it to the Liverpool Patent Office. Following the passing of the Trademark Act in 1875, the office also handled the new area of trademark applications, which prompted William, on a whim, to trademark the name Lever’s Pure Honey. He then began stamping it on the cut down bars of generic soap (still being processed in his warehouse), which he so
ld at a price premium. He had discovered the power of a good brand name.

  By 1884, William, now the dominant partner in charge of a large, successful wholesale enterprise, albeit still owned by his father, when the lessons he had learned all came together. His own business told him that soap was booming - indoor plumbing was becoming more common - and he wanted a bigger piece of that cake. So he went back to the Liverpool Patent Office to discuss possible new brand names for a soap he did not yet have the facilities to manufacture. Taken by one of the patent agent’s suggestions - Sunlight - William’s first idea was to source a range of quality soaps from several suppliers and package them all under the Sunlight brand name – a concept not dissimilar to a retail private label brand, but at the wholesale level of the supply chain. In reviewing the candidate soaps, he was taken by one, which he thought stood head and shoulders above the others.

  However, once the supplier heard the term ‘exclusive supplier’ and started talking up his price, William realised he would forever be at the man’s mercy. For the plan to work, he had to buy the recipe. But the Lever brothers, as mere employees, still had little to no capital, so they tapped up their father who, after much grumbling, handed over a lump sum which, augmented by the brothers from other sources, was enough to buy the recipe and lease a soap works in the town of Warrington. Two soap-making experts who came with the factory tweaked the recipe to solve a few issues and soon had a winning formula based on Copra oil (derived from coconuts), tallow (from American and Australian sheep and cattle), cotton oil, and resin (from pine trees). The resulting mix was scented by citronella imported from Southern Asia but came without the usual industry filler of silicate of soda: William wanted to market his soap as ‘Pure’. The next step in his USP was to cut the bars to size in the factory, wrap them not only in parchment paper but box them, using the newly accessible litho printing processes to create a powerful full-colour visual on the box. This was revolutionary stuff for 1885. Production started in January 1885. Two years later, his factory was bursting at the seams, making 450 tons a week. William bought a site for a gigantic new factory, and called it Port Sunlight.