High-end cosmetics take a down market route

- Last updated on GMT

Related tags: Retailing, Department store

Looking for higher growth and lower risks, the world's leading
cosmetics companies are diversifying their distribution channels,
in particular focusing on mass retail outlets which they had
previously spurned. Estée Lauder is no exception, recently
announcing plans to sell a number of its premium cosmetic products
through the 542-store Kohl's discount retailer, writes Iordan

Estée Lauder is one of the world's biggest makers of cosmetics, with brands including Estée Lauder, Clinique and Aramis, most of which are sold through a small number of upmarket department stores and speciality outlets. But this autumn, three brands - Flirt!, American Beauty and Good Skin - will be available at Kohl's department stores located throughout the US.

"We expect to benefit from further building our brands, expanding our markets globally and diversifying our channels of distribution,"​ said William P. Lauder, president and CEO.

It is not clear how many more - if any - of the company's 18 brands (including Origins, Aveda, Bobbi Brown, Tommy Hilfiger and Donna Karan) will be sold through the more downmarket outlets. Each brand has a single global image used in all its advertising and merchandising, an image which is jealously protected by the brand marketing team and vital to its success.

As such, most of the upscale brands are sold through limited distribution channels to complement the images associated with them. These outlets - upscale department stores, speciality retailers, upmarket perfumeries and pharmacies and, to a lesser extent, freestanding company stores and spas, stores on cruise ships, in-flight and duty free shops in airports and cities - were joined by professional hair salons following the acquisition of Aveda in 1997, and a year later the company also began to sell certain of its products over the Internet, rolling out a full Internet shop in 2000.

But the reality of the US market is that only half of all cosmetic sales come from department stores, meaning that keeping even just the high-end products restricted to this distribution channel does not make good business sense. As a result, Estée Lauder announced the Kohl's deal last year, although qualifying the move by suggesting that the stores would sell only products exclusive to Kohl's and which "embrace their customer needs"​. In other words, it would not sell its high-end products there and risk 'tarnishing' their image.

But over the last year the company has clearly had a change of heart. The Flirt! Brand, for example, is already available at the decidedly upscale Bergdorf Goodman store in New York - suggesting that the company is confident that the brand's image can survive passing through a somewhat less prestigious channel.

Estee Lauder is not the only leading company to start selling its products to mass retailers. Elizabeth Arden sells the same brand in both prestigious department stores and more downscale outlets, again with no apparent damage to its image.

"Our leading prestige products are increasingly being sold in mass retail outlets,"​ E. Scott Beattie, chairman and CEO of Elizabeth Arden, said recently. He explained that in 2000, prestige fragrances represented 39 per cent of total fragrance sales in the mass retail market, a percentage which increased to 51 per cent by 2003. "Prestige products are not only increasingly being sold in mass retail, but continue to take market share from mass brands at mass retailers,"​ Beattie added.

Another reason for this new distribution strategy in cosmetics industry is that it lowers the risks associated with having only one route to market - vital in such a competitive and cutthroat market.

Estée Lauder certainly believes that greater flexibility in distribution channels is the only way to improve sales and profits - adapting its offer to the preferences of consumers as to where and how they shop. But shifting to lower-cost products will take a toll. Sales for the year to 30 June were up 9 per cent (in local currency terms) to $5.79 billion, but net sales growth for fiscal 2005 is likely to be between 7-8 per cent, partly as a result of more products being sold at discounted prices.

Related topics: Business & Financial

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