Here’s How Estee Lauder Plans To Grow In China

by Trefis Team
Estee Lauder
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In Q3 2016, Estee Lauder (NYSE:EL) registered an 8% growth in retail sales in China, lower than its all the time high of 20%, but still strong according to the company. The growth in China was primarily due to a 70% growth in e- and mobile commerce sales and 10% of the company’s business in China is now online. Estee Lauder now plans to diversify its brand portfolio in the region along with a geographically diversification by penetrating into more cities in China. It also plans to increase the number of freestanding stores, particularly in cities where there are no alternative distribution solutions such as departmental stores. While the Asia Pacific region (including China) accounts for less than 20% of the company’s net sales, it holds strong potential. Most of the company’s brands expect Estee Lauder registered  double digit growth in China for Q3 2016.  We believe that its investment in e-commerce, its diversification and increasing focus on distribution channels will drive revenues for the company from this region in future.

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Focus On E-Commerce Initiatives

Estee Lauder reported that 70% of its growth in China for Q3 2016 came from online sales which now account for 10% of total sales in the region, slightly lower  than the 12% figure for the U.S.  The company plans to explore the omni channel opportunity in the region, where its freestanding stores will be connected to the online brand and be more efficient.  The company also has a store in Alibaba’s Tmall which aims to bring luxury brands to Chinese consumers. Mainland China’s overall luxury market is estimated at $ 17.2 billion.  According to a report by KPMG, 50% of China’s domestic luxury consumption will be generated online by 2020. Estee Lauder’s investment in e-commerce initiatives in China is aimed at tapping this market and the company is already witnessing results.

Diversification – Portfolio and Geographic

Estee Lauder is looking to spread its geographical reach in China by expanding into more cities through a distribution channel of free standing stores. This model will work well in smaller Chinese cities where there are no departmental stores, but consumers are keen to buy the company’s products. Currently it operates free standing stores of its M.A.C and Jo Malone brands in the region, but expects to add other brands in future. The company believes that over time its speciality channel will also develop in China. Most of its brands, with the exception of Estee Lauder, registered double digit growth in the region for Q3 2016. The company can improve the its visibility in the region by broadening its distribution channel, increasing availability in stores and fostering e-commerce initiatives.

While Estee Lauder’s sales in China are witnessing growth currently, the company is focused on the region and plans to invest on online and distribution initiatives to generate additional sales. As the Chinese economy shifts towards consumption with an increasing demand for foreign luxury products, Estee Lauder has strong growth prospects in the region.

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