Estée Lauder Looks To Build A Second Home Market In China With Osiao

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Estée Lauder Companies Inc. (NYSE: EL), a global cosmetics and personal care products manufacturer and retailer, plans to introduce a new skin care brand ‘Osiao’ to further leverage its rapid sales growth in China. The company already sells 11 of its cosmetic brands in the country. Osiao is specifically aimed at Asian consumers and the brand’s formulas contain local plants like ginseng. With sales in China growing at almost 40% last year, thanks to e-commerce which accounts for almost 2/3rd of overall sales, and the majority of that coming from the cities where Estee Lauder doesn’t have a physical presence, a local brand could drive the growth as the masses better identify with the brand and the company.

We currently have a price estimate of  $64 for Estee Lauder which is 5% above its current market price.

Making China its second home market

China’s beauty industry in 2011 rose 18.7% year-on-year to $17.1 billion, up from the 16.6% between 2009 and 2010. The rapid growth is indicative of the company’s future potential. Operations in China contributed almost 70% of the growth in Asian markets for Estee Lauder. China is its third-biggest market after the United States and the U.K., and the company is looking forward to making it its second home market. So, a local brand would lead its efforts in this direction. The Osiao product range has been developed and tested at its research institute in Shanghai and could be marketed elsewhere in Asia, if proven successful. It will have a limited release in Hong Kong before it is made available in mainland China.

Positioned as a luxury brand for women

Estee Lauder decided on a skincare product after focus groups reported that Chinese women prized clarity and luminosity in their skin the most. The Osiao brand is hence positioned as a luxury product with facial serums that cost about $200. Combined, the large population of China, increasing disposable incomes, and the rapid proliferation of beauty products represent a sizable market for the brand. We expect the company to successfully grow in this market like it did in Russia, Vietnam, and India over the past two decades.

Key Risks: Acceptance of the new brand

Persuading consumers to buy an entirely new brand could be more difficult for Estee Lauder than simply launching its global best sellers. Also, the company’s American origin could lead some to question the credibility of the products being local. The company as a brand is risking its credibility because failure of the Osiao product range could negatively impact its entire range of brands. The worst-case scenario is Osiao turning into a niche brand. Also, prevailing macroeconomic conditions could limit disposable incomes of the consumers, forcing them to turn to lower-priced alternatives. This could negatively impact the brand and Estee Lauder’s growth in China.

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