An introduction to the beauty and personal care industry

The global beauty and personal care industry is worth $420 billion. This market is expected to grow at around 3% per year and is expected to grow to $716.3 billion by 2025. At 3%, this "track" is growing slowly. But that's one of the reasons why the two giants are growing - the industry is gradually entering a phase of consolidation.

From a global perspective, the largest market is in the Asia-Pacific region. The region has also become a growth point for companies during the pandemic.

Sales channels are important for the beauty and personal care industry, and now everyone is going online. Estee Lauder, for example, gets 39% of its sales from traditional Department stores. But it now hopes to move online as quickly as possible - cutting 1,500-2,000 employees, closing some stand-alone stores, and investing $300 million in online savings.

International Department stores account for 22% of Estee Lauder's channel, North American Department stores account for 13%, Travel Retail accounts for 23%, and independent retail stores account for 9% (which is also what Estee Lauder wants to close, which can be divided into two categories, one is completely isolated, the other is completely isolated. There are standalone stores within merchandise), Specialty stores (11%) (such as Sferre), and their own website Brand.com (9%), which is where they need to work. Note that since Estee Lauder is the leader and will do some mergers and acquisitions, the group as a whole is expected to grow by about 6%. Estee Lauder's history of mergers and acquisitions have done very well, we will mention this later, first to form awareness of the industry.

Back to the channel, from the perspective of the whole United States, drug store and pharmacy are still the largest channels, which is why L 'Oreal bought Maybelline in the 1990s to focus on drug store and pharmacy. In the sales volume of Drug store, Pharmcy, Mass Merchandiser, including Travel Retail, 50% of them are skincare products, 30% are cosmetics, and 20% are perfume. So Curty, whose perfume accounts for 53% of revenue, is passive and has no advantage in pricing power. Even at Estee Lauder, perfume accounts for 12% of revenue but only 5% of operating profit. Here is a little bit more related to the story of L 'Oreal's entry into the American Mass Market.

In 1917, T.L. Williams saw his sister apply Vaseline on the eyelashes, inspired him to make Vaseline and charcoal mascara launched the first publicly sold mascara, combining his sister's name (Mabel) and Vaseline's English name. He named the company Maybeline. L 'Oreal bought Maybelline in 1995, mainly to enter the mass market in the United States. L 'Oreal sold $10 billion worldwide that year, and Maybelline sold customised mascara, nail polish, cosmetics, moisturisers and more, mainly through Walmart and Walgreens.

Before the acquisition of Maybelline, Lindsay Owen-Jones (head of L 'Oreal) had a conversation with Cosmair (head of L 'Oreal's North American distribution business, which was incorporated by L 'Oreal in 1994 and renamed L 'Oreal USA in 2000). Cosmair was concerned that Maybelline was losing its competitive edge, and indeed Maybelline was having a tough time. But Owen-Jones sees more than Maybelline's current problems. First, he saw a good opportunity to enter the American mass market. Before Lancome and L 'Oreal were high-end brands, so Maybelline was a complementary puzzle; Second, Maybelline does have $150 million in debt, but compared with L 'Oreal's sales of $10 billion that year, it is nothing. What's more, Maybelline's production costs are very low. Maybelline developed America's first mascara in the 1960s. It costs Maybelline 20 cents to produce a single mascara, while L 'Oreal costs 46 cents to produce similar mascara in Europe. Owen Jones wanted to acquire Maybelline's manufacturing site and process in Arkansas and move the entire process to all L 'Oreal's brand lines to achieve lower costs. Third, at that time, 93% of Maybelline's sales were confined to the United States, and through the acquisition, Owen Jones would not only gain access to many of Maybelline's retail channels in the United States, but also extend Maybelline's products around the world through L 'Oreal's global channels. Finally, as for Maybelline's products were not very popular at that time, L 'Oreal could Re-branding the old technique, "re-branding", which designed the products to be more fashionable and suitable for young people's taste, while maintaining the affordable price. In fact, L 'Oreal quickly introduced yellow and blue mascara, special makeup brushes to thicken eyelashes, lipsticks with moistening properties, and Express Finish nail polish to cater to girls who want to get ready to go. Through these initiatives, Maybelline sales doubled in just three years.

Just a word. Channels are always complementary to products. Good companies and management, as long as they have good products, are always able to adapt to new channel requirements. For example, Estee Lauder was determined not to do television advertising, because Ms. Estee Lauder (founder) felt that these audiences were very LOW, and they insisted on doing high-end cosmetics (Prestige Brands). So in the early 1980s, it was still the old way of sending letters mainly to the owners of Department Store Discount Cards. This high-end tradition does continue to this day, but Lady Estee Lauder's son Leonard is facing L 'Oreal. L 'Oreal was originally started by Mr. Ougen Xule by constantly experimenting with his own hair care products, which did not do cosmetics and skin care products at the beginning. By reshaping the Lancome brand, L 'Oreal entered the beauty market from care products and matched the corresponding strategy (also using female stars for advertising). Following the trend of technology through television advertising (and the classic line in the history of advertising: "Because I'm Worth It"), and low prices to compete for the market (low prices to take away the market of Estee Lauder, high-end and Chanel and other brands to attack Estee Lauder), Leonard still convinced his mother to quickly shift the advertising channel, into television advertising. Because of its own cream products are very good, a hit red, quickly open the market. The turn of the millennium saw the rise of Youtube and the rise of third-party beauty bloggers. Estee Lauder and L 'Oreal have been quick to sign up third-party beauty bloggers who have been praised for their "impartiality" and their ability to show how to use cosmetics through video ads. In addition, other social media such as Facebook are also important. Today, Estee Lauder's e-commerce purchases account for 22% of its revenue, making it one of the most adaptable cosmetics companies, higher than L 'Oreal's 16% and Curty's 13%. However, the scale effect is very important in this industry, because the marketing cost is high, SG&A can generally account for 40-50% of the revenue (of which advertising and promotion account for about 20% of the revenue), fortunately, the gross profit is 70% (COGS account for a small proportion), so the operating profit rate is basically 15-20%, ROIC can reach about 20%. Much higher than WACC (for example, Estee Lauder's WACC is 7%, and net debt /EBITDA is consistently below 1 times)

(Number of beauty-related Youtube views per year over the past decade.)

After clothing and accessories, the second largest social media segment by product category is health and beauty.

Nowadays, Augmented Reality technology is rising, and the two companies are also willing to spend money to constantly ensure that the technology of marketing channels is ahead. Of course, the premise is to have a good product. With a good product, even if the channel is a few years behind, the story of Estee Lauder tells us that the market will always come back.

The beauty and personal care industry can be divided into skin care products, hair care products (such as Aveda), cosmetics, and fragrances (such as Estee Lauder's Zumlon).

Over the past decade, skin care products have seen the fastest growth, hair care products and cosmetics are basically the same, while perfume accounts for a relatively small proportion. Previously, we also saw that skin care products accounted for 44% of the revenue and 75% of the operating profit of the Estee Lauder Group, which is not only the largest plate, but also the most profitable plate. Similarly, among the major sectors of L 'Oreal, skin care products are also the largest sector, accounting for 39%.

So what is the specific difference between skin care products and cosmetics? Skin care products include serum, day/night cream, face cream, eye cream, etc., which mainly solve the following three problems of the skin: cleansing (such as toner to remove the stratum corneum, promote the smooth metabolism of the skin), hydration, isolation (concealer, moisturizing also counts). The rest of the beauty products used on the body belong to cosmetics. Makeup includes Color Corrector (to remove red or black circles), Concealer (to cover scars or imperfections), foundation (to increase the radiance /radiance of the face to cover uneven skin), Matte Primer /Silicone Primer (filling voids /pores and fine liner /fine liner), Powder /Powder (reducing excessive light reflection caused by oily skin), etc.

The history of Estee Lauder is interesting. The biggest company in the 1950s was Revlon, and the head of Revlon wanted to buy out Estee Lauder, but Ms. Lauder refused. In 1968, Estee Lauder launched the Clinique series, which is mainly for hypoallergenic (low allergen), fragrance-free (no fragrance), relatively friendly and suitable for all kinds of skin. Cosmetics and skin care products developed by dermatologists. The brand comes up with a twice-daily, three-step Cleanse that starts with a cleanse, followed by Exfoliate and finally Moisturize, increasing the number of products used in the process and the amount customers spend. At the same time, this customized route for oily skin, dry skin, and combination skin was unique at that time, and it was widely loved by some women who were worried about skin allergies and could not be taken care of by traditional cosmetics. At first, when Leonard proposed the idea, Ms. Lauder was reluctant, but Leonard convinced Lauder not to put his name in the name of the new brand. Clinique was unprofitable for the first few years, and Leonard had to lay off 10% of his workforce (something he had never done before), causing some upheaval in the company. Looking back on the past, whether it is Clinique, TV commercials, or later mergers and acquisitions, or even the lipstick tip cut a flat surface for easy application, Leonard is a very willing to take risks, willing to keep pace with the evolution of the company price, it is no wonder Estee Lauder can achieve today's market value of 100 billion dollars.

By the 90s, the entire beauty and personal care industry had become saturated, and the best way to grow was through mergers and acquisitions. But Ms Lauder is still old-fashioned and reluctant to make acquisitions, for the simple reason that there has never been one before and it has all grown organically. But what Leonard saw at this point was that if I went in for an acquisition, I could get a new product line up very quickly, without having to invest in research and development; However, the acquired parties are generally regional brands, and it is difficult for them to go global. Some operators do not like doing business management and other trivia at all, so it is better to use the channels of Estee Lauder to develop and grow, and their own appeal is to retain "Creative Rights", which is what Estee Lauder is willing to do. Because we bought them for their creative talent. Like the MAC, which was first acquired in the '90s, Frank Toskan originally created Professional Makeup for models (" first manufactured makeup for models, but then the models wanted this makeup for their sisters, friends, and so on...” ), but especially popular with young people, the customer base is very broad, its products belong to colorful and playful, so called radical expression of selfhood, not "cosmetics for your grandma". In fact, the MAC product line is not competitive with Estee Lauder, which is why Leonard chose MAC as the first acquisition object practice. The acquisition board did not approve, but Leonard felt that MAC was like Estee Lauder decades ago, and still insisted on taking it, buying it in two batches for $600 million, and by the time the acquisition was completed in 1998, it had achieved $250 million in revenue, which was a very successful acquisition. By joining the Lauder Group, MAC took off. Bobby Brown, for example, was founded by a couple of drug chemists to make Subtle, accentuating existing features. Instead of using the Bold colors that others liked to use, it was very much in line with the younger generation's preferences at the time, and it quickly emerged, and it was a good acquisition. When it came time for the merger, Frank was strongly against it because he thought why would you buy a new brand when you already bought us? Leonard convinces Frank that the two brands have very different audiences. He does not micro-manage either brand, both retain creative /creative rights for the founders, both retain their separate structures from each other, do not let the two fight each other or attract talent, do not share resources, but through the parent company to give as much support as possible.