Tuesday, April 26, 2005

Partnership between a beauty icon and a fashion icon

The Estee Lauder (EL) brand itself has been one of the slowest growers in the Lauder group, its brand sales for the first three months of this year are flat, and the death of founder Estee Lauder last April (2004) has left a void within Lauder’s management and the Lauder family, who owns about 45% of the company’s common shares and 88% of its voting stock. Increased competition from all fronts has further threatened EL brand’s aged product line.

EL has responded through a recent round of management changes, both from within the Lauder family (William Lauder, Estee’s grandson, as the new CEO), within the firm (John Demsey- now EL brand’s president), and within the industry (Addrea Robinson- new CMO). The most recent news is EL’s recent partnership with Tom Ford and Domenico De Sole’s new venture, where the successful ex-Gucci duo will be charged with launching a fragrance and line of beauty products under the EL brand.

This partnership has been interpreted both negatively and positively. It created a rift in the Lauder family where Leonard Lauder (the company’s chairman, former CEO, and son of Estee Lauder) flatly opposed the partnership. He was concerned about bringing an outsider, especially someone with the star power of Ford, would eclipse the EL name. JPMorgan analyst John Faucher commented that “(Ford’s) high-profile image will certainly bring editorial attention to the brand”, but expected the partnership to be a “modest positive” with limited impact on EL’s short-term performance. On the other spectrum, Suzanne Grayson, president of a consulting agency, and Ms. Nicholson, Citigroup’s analyst believes the partnership brings “new blood”, is “fresh and exciting” and that ‘Tom Ford for Estee Lauder’ is “trendy. It is acceptable, it is young.”

For the remainder of this article, we will evaluate this partnership through various competitive strategy perspectives and provide suggestions where appropriate.

Company/Architecture: Ford has limited exposure and successes within the fragrance and cosmetic industry- partnering with Estee Lauder could be a foreign territory for him and prove to be a huge risk for Lauder. Unlike a fashion item, a cosmetic is rarely defined by a single designer; a cosmetic is perceived by an overall image, reputation, and clientele. As a result, the time needed to change or revive its image may take longer than that of apparel.

New lines of clothing are introduced each season with four distinct opportunities a year. Moreover, fashion items have a shorter lifespan than fragrances and cosmetics (lotions, makeup, and perfume can be used for six months to one year). Hence, the architecture and structure of fashion and cosmetics industries are significantly different from each other.

Due to the extensive R&D efforts and the less frequent demand (relative to clothing), new cosmetics and fragrances are introduced at a slower rate. For a successful transition into Lauder, the importance of being the first-to-market with a new product and getting business processes “right the first time, every time” must be understood by Ford. Because Estee Lauder’s prestige cosmetics achieves high gross margin of 75%, EL brand cannot afford to lose sales and must present a complete portfolio of items to consumers at all times. Estee Lauder must instruct Ford to recreate an appropriate image with a longer horizon, unlike the constant reinventions/ short-lived fads that the fashion industry is known for.

Culture/People/Image: At first glance, Tom Ford and Estee Lauder convey different images. As a beauty industry icon, Estee Lauder represents timeless, classic beauty that has dominated the cosmetics business since the 1950’s. Meanwhile, Tom Ford has been credited with reviving labels such as Yves Saint Laurent and Gucci from traditional and predictable to edgy, provocative, and trendy.

Is Tom Ford too provocative and sexy for traditional Estee Lauder? Would an alliance damage the image of Estee Lauder and alienate loyal customers?

Analysis of the industry and increased competition indicates that Tom Ford’s talents can provide a synergy that EL needs in order to remain as an elite brand. Rivals of Estee Lauder have the advantage of associating themselves with leading makeup artists or dermatologists. By taking advantage of the emotional connection consumers have with a fashion icon, Estee Lauder is hoping this will provide a similar connection for their consumers. By the same token, EL has acknowledged William Lauder’s worries over Ford’s celebrity status. As this is can potentially damage EL in the long run, EL’s current solution is to develop a new brand- ‘Tom Ford for Estee Lauder’. Although a feasible plan, there is a reasonable chance that Tom Ford’s success could overshadow the new sub-brand’s success. EL must be vigilant in this realm to avoid a repeat of the Gucci saga. [Another issue here is that a sub-brand will not address the problems that EL is trying to rectify. It will simply appeal to a different “niche,” and might even dilute EL’s brand.

Rivals/Comparative Advantage/Cannibalization: As in other consumer-product sectors, retailers (EL’s customers) are becoming increasingly powerful. Consequently, suppliers are consolidating and size matters in cosmetics too. This is seen through Lauder’s major competitors, L’Oreal SA (twice the size of EL) and P&G (eight times the size of EL, sub-brands include Max Factor, Covergirl, and Olay). Their competitive advantages over EL vary from lower prices, drugstore availability, to larger supplier bargaining power. For EL to compete effectively, it must compete through its own set of resources, which allow it to charge a premium for its products.

In particular, EL positions itself as “the one and only pure-play prestige beauty company”. Its competitive advantage lies in new product innovation (by employing over 400 chemists) and reduced time-to-market for new products. The Lauder group is also run through decentralized sub-brands (Clinique, Stilia, Aramis, MAC, etc) with startup-like environments. Ford’s profile as a flashy, luxury designer who is used to quick design turnarounds fits EL’s these aspects of EL’s profile. However, it is worth noting that EL has a growing number of celebrity themed products (Hilfiger, P. Diddy, Donna Karan, Donald Trump) with over lapping market segments. In employing Tom Ford, EL must evaluate the threat of cannibalization within its own sub-brands and develop differentiators among them.

Both L’Oreal and P&G are currently trying to appeal to the younger audience through their lower prices and celebrity filled advertisements. Additionally, P&G has purchased Gillette in response to the growing metro male market. We believe in addition to EL’s recent additions of celebrity spokespeople (Enrique Iglesias and Beyonce), association with Tom Ford’s hipster-trendsetter reputation will add to EL’s prestige factor, and increase its popularity amongst trendy consumers’ (both male and female) who have more buying power than consumers of L’Oreal and P&G.


Hiring Tom Ford is a good strategy for EL if it seeks to revitalize its image, focusing on the younger, fashion conscious consumer who has appreciable buying power. However, EL needs to be careful about how it goes about using Tom Ford’s name, and should in particular re-consider sub branding its brand. Ford’s high profile and experience in the fashion business will help EL appeal more to its new segment of consumer, but sub-branding could very well defeat the original purpose of hiring Ford. Furthermore, EL should be careful not cannabalise its existing lines in its effort to appeal to a new audience.

Francis Ho
Lisa Huang
Aarathi Sambasivan


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