Facing the mirror: Estée Lauder reflects on China struggles, US sales slump

Estée Lauder, a prominent beauty brand, is grappling with a series of challenges in both the Chinese and U.S. markets. CEO Fabrizio Freda is pressured to reverse the brand's declining fortunes and strengthen its foothold in these critical regions.

The company's shares have tumbled by around 33 per cent this year, reaching their lowest point in over three years. Unlike the broader stock market rally, which saw the S&P 500 index surge by 16 per cent since the beginning of the year, Estée Lauder has not experienced a similar resurgence.

Eroding global market share

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One of the most pressing issues for the company is the erosion of its market share in its homegrown U.S. market. With U.S. sales struggling to recover to pre-pandemic levels, Estée Lauder faces stiff competition from indie brands. These smaller cosmetics companies are known for their cost-effectiveness and strong social media presence, which attract beauty consumers seeking fresh and innovative products.

In Asia, particularly China, Estée Lauder's troubles persist. Despite introducing discounts to lure customers to the duty-free island of Hainan, the travel retail business has failed to rebound as expected. This has resulted in difficulties for the company in managing excess inventory. China's economic growth slowed considerably in the second quarter, making consumers more discerning in their beauty purchases, particularly given record-high youth unemployment rates.

Amid these challenges, Estée Lauder is set to release its latest financial results soon. Earlier this year, Freda indicated that sales for the fiscal year ending on June 30 could experience a substantial decline of up to 12 per cent, primarily due to weak demand in Asia.

Future outlook

Freda, who has led the New York-based company for 14 years, has unveiled a comprehensive strategy to counter these setbacks. This strategy involves reducing reliance on U.S. department stores, which have faced their own challenges in recent years, and overhauling the supply chain in Asia. The goal is to solidify Estée Lauder's position in the Chinese market, which remains a significant growth opportunity.

In the past, Estée Lauder was a dominant force in over 350 U.S. department stores, contributing significantly to its sales. However, the shift to online shopping prompted by the COVID-19 pandemic disrupted this sales channel, leading to closures of the company's free-standing stores and layoffs. Most of Estée Lauder's North American sales came from department stores, accounting for 60 per cent of the business. Now, less than 40 per cent of U.S. sales are derived from this source.

Freda is determined to reverse this trend, expressing his desire to regain market share growth in the U.S. At the same time, the rise of digitally native beauty brands like e.l.f. Beauty, known for offering affordable and trendy makeup, has prompted Estée Lauder to refresh its brand image. The company plans to tap into the TikTok phenomenon to swiftly respond to trends and rebalance its product distribution, focusing on partnerships with retail giants Ulta Beauty, Target, and Sephora-Kohl's ventures, where mass beauty brands drive sales.

Additionally, Estée Lauder is pursuing a strategy to regionalise its supply chain, reducing dependence on China and diversifying its manufacturing and distribution locations. The company is constructing a manufacturing plant in Japan, slated to open later this year, to cater to the Asia-Pacific region. It is also establishing two distribution centers in China to enhance its presence in the market.

While some analysts applaud these investments in the Asia Pacific region, others speculate that Estée Lauder's decision to prioritise Japan indicates a shift away from China. This could be a contingency plan considering the uncertain economic rebound in China. Overall, Estée Lauder faces a complex challenge, but with a multi-pronged strategy in place, it aims to restore its market share and growth trajectory.

(With inputs from agencies)

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