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Ever innovative Estee Lauder: the prestige market leader has a plan to boost speed-to-market and create even more cutting-edge products.

ITS PLACE in the pantheon of cosmetics manufacturers is assured, but faced with lower sales in its key travel business and weakness in its U.S. business, The Estee Lauder Companies has unveiled a new program aimed at reducing costs, getting products to market faster and developing more of the cutting-edge skin care, color cosmetics, fragrance and hair care products that have helped the company become the premier U.S. manufacturer of prestige cosmetics.

Through the first three quarters of 2002, Estee Lauder has had a rough time of it, and company officials recently announced a broad array of moves to head Lauder in the right direction again. For the third quarter ended March 31, net profits fell 22.1% to $50.7 million, as sales rose 1.6% to $1.12 billion. For the nine months, the company reported profits fell 23.7% to $217.3 million, but net sales fell just 0.2% to $3.61 billion.

At a briefing with financial analysts in April, executives announced the company will take a $108 million pretax charge in the fourth quarter to close its in-store Tommy Hilfiger shops, move its operations from San Francisco to its New York headquarters and rework its supply chain to focus on global opportunities.

In his remarks to analysts, Fred H. Langhammer, president and chief executive officer, noted that sales of skin care products rose in all regions during the third quarter. "We continue to take share in Europe, due to successful new products. In these economic times, product newness is important."

Product newness is so important to Estee Lauder that the company has embarked on an aggressive program to create new products faster and get them on department store shelves mere quickly than ever. Ed Straw, president of global operations, and Harvey Gedeon, senior vice president, research and development, recently sat down with Happi to provide details on how the company is improving its operations.

According to Mr. Straw, Estee Lauder has developed a four-prong approach to create a competitive advantage around the world. They include:

* Superior quality;

* Continued innovation;

* Improved speed to market and

* An efficient supply chain.

Mr. Straw was quick to point out that Estee Lauder doesn't have a quality problem. "But we don't always produce quality the first time and every time," he noted. "Due to the growth in brands, it is sometimes difficult to get the quality right the first time and when you don't do it right, it creates waste."

In recent years, Estee Lauder has been acquiring brands at a fast pace. In fact, the company now controls a diverse portfolio made up of well-established, well-known prestige brands (Estee Lauder, Aramis, Clinique and Prescriptives); home-grown newer brands (Origins), licensees (Tommy Hilfiger and Donna Karan) and a raft of brands large and small acquired during the 1990s, including Aveda, MAC, La Mer, Jane and Stila.

Most recently, in 2000, it added the Bumble and bumble brand. All together, The Estee Lauder Companies include nearly 20 brands that are sold in more than 120 countries. Today, Estee Lauder's lineup includes brands that are available in department stores, hair salons and even the mass market. But such a diverse offering makes it more challenging than ever to ensure consistent quality from the first time the product rolls off the production line. That's one reason why the company has added Nancy Uridil to head up quality assurance as well as distribution and inventory.

When it comes to developing innovative new products, few companies have as successful a track record as Estee Lauder. In 2001, the company launched more than 300 new products. Mr. Straw proudly noted that some of Estee Lauder's newest products have earned kudos from the beauty press and, more importantly, high marks from consumers. For example, Estee Lauder Idealist Skin Refinisher accounted for 2% of net sales following its debut. Moreover, the product, which promises to reduce flakiness, redness, fine lines and pore size, won the 2001 Cosmetics Executive Women Beauty Award for Best New Facial Skin Care Product.

Another new product, Advanced Night Repair Eye Recovery Complex, won the Best New Eye Treatment Beauty Award from Cosmetics Executive Women. The product repairs and protects the fragile eye area and is said to successfully treat the appearance of lines, dryness, puffiness and dark circles.

So Ingenious Multi-Dimension Powder Makeup, another new product, contains a breakthrough QuadraColor technology said to fine-tune itself to subtle shifts in light so that a woman always looks natural whether she's indoors or out.

Estee Lauder has always been recognized as a leader in skin care, but company executives acknowledged that there is room for improvement in other categories. For example, Mr. Straw pointed out that L'Oreal's Lancome division is the mascara market leader in prestige channels, so the company has set its sights on improving share. As a result, Estee Lauder has added seven new mascaras to its product lineup in less than a year. One of them, False Eyelashes by Prescriptives, is said to be a "voluptuous" formula that creates incredible volume, length, density and curl for a smooth, velvety finish. A special brush perfects application while conditioners keep lashes feeling healthy and smooth.

"The category is dominated by Lancome, and we were perceived as weak," recalled Mr. Gedeon. "Now we plan to introduce four or five more mascaras in 2003."

The yet-to-be-launched mascaras will feature a patented brush applicator with fibers unique to Estee Lauder, according to Mr. Gedeon. The new mascaras will also employ a novel polymer system, instead of wax, to ensure that viscosity

remains the same throughout the life of the product.

Innovation remains a cornerstone of Estee Lauder's success, especially in the area of skin protection and repair. Mr. Gedeon told Happi that Lauder researchers are working with a German university to study heat shock protein, a natural, anti-stress mechanism in the skin. As the body senses stress, explained Mr. Gedeon, it creates a protein to protect key enzymes in the skin.

In another partnership, Estee Lauder is working with researchers at Case Western Reserve University to study ways to protect the entire human immune system. Even an ingredient as simple as water has captured the attention of Estee Lauder researchers. "I can spend hours talking about water," said Mr. Gedeon. "We now have the capability to make bio-compatible water that enhances the activity of the ingredients."

To Market, to Market ... Faster and Faster

Mr. Straw joined Estee Lauder from the computer industry--from Compaq to compacts, he joked--where speed-to-market is crucial to a company's success. Unfortunately, Lauder's rollouts have sometimes lagged, he said.

"What surprised me most when I joined the company was the length of the product development cycle, which in some cases was up to 18 months," recalled Mr. Straw. "When we think about ways to beat the competition, speed is key when so many of us are working on the same things."

To remedy the situation, Estee Lauder has developed a detailed plan aimed at shaving weeks and sometimes months off the launch cycle. The corporation's new global organization will, of course, allow faster sign-offs on projects. Even as many other companies are globalizing their operations, Estee Lauder has developed some novel programs aimed at improving speed.

For example, the research and development team has created a bank of tested formulas that are already in place and can be used at a moment's notice.

"We usually work between product and marketing and R&D to develop products," Mr. Langhammer told analysts. "Now we're also developing products that are almost ready, like a bench of products, where the different divisions can come in and take an idea off the shelf and move much faster."

Instead of an elaborate process of developing products, the company has parallel movements going on in research and development, packaging and product development that complement each other. This allows ideas to be deployed more quickly. "It's a major breakthrough in speed," insisted Mr. Straw.

To help speed up the process of choosing the right package, Estee Lauder has assembled a packaging library at its New York corporate office where company executives can go and quickly find the packaging concept that they seek.

As it works to improve its in-house speed, Estee Lauder is also committed to improving its collaboration with industry suppliers. According to Mr. Straw, 50 to 60 suppliers account for 60% of spending. Now the company wants to increase the number of suppliers if it will help deliver better products around the world more quickly. "We don't want to reduce the number of suppliers we use, we want to expand to regions that can supply quality at a better price. We are definitely going to Asia and Mexico."

One of the reasons Estee Lauder is looking to outside the U.S. is the strength of the U.S. dollar. While 45% of Lauder's sales are in foreign currencies, 70% of sourcing and production is paid for in dollars. "We want to be exchange neutral," insisted Mr. Straw.

As it builds a more efficient supply chain, the company is also reducing inventory and distribution costs and has started to upgrade its computer systems. The company expects to reap some savings from this supply chain program in fiscal 2002. After that, the company expects to save an additional $90-110 million during the next three years.

A Pickup in Travel?

Now more than ever, Estee Lauder is willing to travel around the world in search of the best materials at the best price. Company executives hope that consumers, too, are willing to travel abroad again. Like so many other prestige beauty companies, a large portion of Estee Lauder's business is derived from duty-free travel shops--a segment that has been hit hard by recession and the terrorist attacks of Sept. 11.

One key segment within the travel business is fragrance, a category that has been hurt for more than a year. Nevertheless, Estee Lauder remains committed to expanding its fragrance portfolio. "Fragrance is difficult around the globe and I think it will be difficult for a little while," Mr. Langhammer told analysts. "Nevertheless, we'll see a lot of action in the fragrance business because the fragrance business to a large extent also drives the travel business. If you have a strong fragrance business you have a strong travel business, and travel is one of the most profitable areas, so we'll continue to be aggressive in the fragrance area."

A Better 2003

With fiscal 2002 closing on June 30, company executives are confident that business will rebound in 2003.

"We see evidence that consumer behavior is changing," noted Mr. Straw. "Growth in Europe will remain in the double digits, demand in the U.S. is picking up and the market is turning around. We're optimistic that business will pick up in 2003."

With a solid core of new products and a plan to get them to market faster than ever, Estee Lauder executives insist that the company is well-positioned to take advantage of the upturn in the economy.
A Strong Top 10 Finish

Estee Lauder is the No. 5 player in the global cosmetics and toiletries
market, according to Euromonitor International, Here's a look at the
top 20 companies and their share of the market for 2001.

Company % Share

L'Oreal Group 9.1
Unilever Group 9.0
Procter & Gamble Co. 8.4
Colgate-Palmolive Co. 4.2
Gillette Co. 3.7
Avon Products Inc. 2.8
Beiersdorf AG 2.7
Shiseido Co. Ltd. 2.5
Johnson & Johnson Inc. 2.2
Kao Corp. 2.0
Henkel KGaA 1.8
LVMH Moet Hennessy Louis Vuitton 1.5
Revlon Inc. 1.5
Kanebo Ltd. 1.3
GlaxoSmithKline Plc 1.3
Coty Inc. 1.2
Pfizer Inc. 1.2
Wella AG 1.2
Alticor Inc. 1.1

Source: Euromonitor International

RELATED ARTICLE: Leonard Lauder looks at the changing retail landscape.

SINCE HE ENTERED the family business back in 1958, Leonard Lauder has seen it all in the retail channel. As chairman of The Estee Lauder Companies, his views are highly regarded in the beauty industry. He shared several of those views during a presentation to the Cosmetic, Toiletry and Fragrance Association during the group's annual meeting in Boca Raton, FL, on March 1.

Although Mr. Lauder's career spans more than 40 years, his education began at a much earlier age. "As a boy, my father took me to lunch every Sunday, and every Sunday I ordered the most expensive item on the menu. (My father) would laugh and say, `You eat just like a buyer,'" joked Mr. Lauder.

"Well, 50 years later, my father wouldn't recognize the retail landscape. Nearly all the companies he knew have disappeared and the only ones left are Saks 5th Ave. and Neiman Marcus."

Mr. Lauder predicted consolidation will continue at a rapid rate. In Europe, for example, small parfumeries will be gobbled up by large chains, and in the U.S., small regional retail chains remain vulnerable to acquisition.

Turning to the beauty industry, Mr. Lauder drew distinctions between LVMH's recent purchases and the acquisitions made by Estee Lauder and L'Oreal. "LVMH needs brands to feed Sephora. Now the question is, will the company continue to purchase brands if it sells Sephora USA?"

Deploying Niche Brands Around the World

In contrast, Lauder, Shiseido and L'Oreal all share the same motivation when it comes to acquisitions. All three are driven by the word, NEW! "We're all buying niche brands that are available in one country and then plugging them into international operations," he noted. Mr. Lauder insisted, however, that there is no danger of the niche brand well drying up. "As soon as you purchase one niche brand, another appears, so there won't be consolidation there."

Besides consolidation, the retail and beauty industries must learn to cope with the value concept, according to Mr. Lauder. "My mother and her friends never heard the words, `Attention, Kmart shoppers!," mused Mr. Lauder. "They wouldn't go near those stores, but today we have a value equation. Value and the concept of the smart shopper are with us today.

"Can department stores get their value-service equation right? Yes, if Wall Street gives them a chance." But he also noted that department stores have cut inventory and service and questioned if they will be ready when the tough times at retail turn around.

The Brick and Click Equation

Changing the topic to e-business, Mr. Lauder noted that of the top 10 e-tailers, only No. 1 (Amazon) and No. 2 (E-bay) are pure plays. The next eight, including Wal-Mart, Target and Sears, are all traditional retailers who have operations. "E-commerce is here to stay, but it needs to be combined with bricks-and-mortar, catalog or something," he said, noting that 24% of women in the U.S. said they have used the internet to make a purchase.

Turning to communication with consumers, Mr. Lauder insisted that magazines will continue to capture a greater share of consumer attention for new products. He noted that in the U.S. younger women rely on magazines for new product information, while those over 40 prefer word of mouth.

Although he is confident that the retail picture will improve, Mr. Lauder said he is less certain about the perception of U.S. goods. "What worries me is the slow loss of quality reputation of U.S. manufactured goods," he told the audience. "Europeans look at us as great marketers, but not great quality. If we're going to be here 25 years from now, we have to figure out how American-made goods can have better quality."
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Author:Branna, Tom
Publication:Household & Personal Products Industry
Date:Jun 1, 2002
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