Reasons Behind Estee Lauder’s Sudden Acquisition Spree

Estee Lauder (NYSE:EL), the global premium cosmetics giant, announced a string of acquisitions  in the  span of two months between October and December, 2014. The company’s last acquisition prior to these  was in May 2010, when it acquired Smashbox Beauty Cosmetics.

In December 2014, Estee Lauder announced the acquisition of GLAMGLOW, a prestige skin care brand specializing in facial mask treatments. GLAMGLOW is currently present  in global specialty multi channels and in select high-end department stores.

In November 2014, Estee Lauder completed its acquisition of Le Labo, the high end fragrance and sensory lifestyle brand, and it also announced the acquisition of Editions de Parfums Frédéric Malle, the storied fragrance brand established by the iconic perfumer Frédéric Malle.

Estee Lauder acquired RODIN olio lusso, a luxury skin care brand in October 2014. The line provides a selection of luxury skincare oils and is currently sold in high-end boutiques and specialty retail channels.

So, why this sudden acquisition spree after a long hiatus? We explore the possible reasons behind Estee Lauder’s multiple acquisitions in this article.

Our price estimate of $85 for Estee Lauder is at around 10% premium to the current market price.

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Estee Lauder is ‘Beautifying’ Its Skincare Portfolio

Skincare is the most important segment in Estee Lauder’s portfolio. In fiscal 2014 (ended June 2014), Estee Lauder’s net sales were ~$11 billion out of which 43% was contributed by skincare products. ^[1] In Q1 2015 (ended September 2014), Estee Lauder’s management admitted that the skincare growth was slow in its most important region, the U.S. (U.S. contributed to 42% of Estee Lauder’s net sales in fiscal 2014.)  A major reason for this was that the US consumers expect  innovative products, across newer skincare categories. Innovation must be extended beyond the  traditional skincare formulations like moisturizers and serums to newer concoctions such as masks and oils. ^[2] Estee Lauder possesses a strong research and development arm. This might strengthen the recent acquisitions in the beautifying mask (GLAMGLOW) and oil based treatment (RODIN olio lusso) categories and provide the perfect solutions which the U.S. consumers are looking for.

The skincare brand acquisitions bring in significant opportunity for Estee Lauder in Asia too, as a big part of the skincare consumption in the world comes from this region. There is a significant impact of Asian travelers on travel retail as well, as Asians are one of the fastest growing outbound travelers in the world. Asian specific demands and new trends render efficient distribution of suitable products in the Asian regions, important. ^[2]

Making An Erstwhile Small Brand  “Big”: Estee Lauder’s Recipe For Success

Estee Lauder’s management mentioned in its fiscal 2014 year end call, that mergers and acquisitions (M&A) related activities were high on its priority list. Over the next 3 years, it aims to generate at least 1% of total sales growth through acquisitions ^[3]. Estee Lauder’s M&A strategy has traditionally focused on small brands with global appeal, and brands with the potentials to be developed further into bigger names. Cases in point are its Bobbi Brown and MAC brands.

The recently acquired brands, which often are known for quality craftsmanship and personalization, are often targeted primarily to the luxury user segment. The founders of the acquired companies usually remain as active managers with Estee Lauder and enhance the brands with their ideas and entrepreneurship abilities.

Estee Lauder aims to capture a bigger share of the ultra-prestige consumer market and with its advanced R&D, global presence in over 140 countries, and 60 years of experience in brand building, the company aims to enhance the acquired brands’ global presence and in turn strengthen its own portfolio of offerings.

For the recently acquired brands, Estee Lauder is probably aiming for growth stories, similar to those of its previously acquired brands. For example: La Mer was a $1 million company when it was acquired by Estee Lauder in 1995. Now, the brand is one of the top five brands in Estee Lauder’s portfolio.

Innovative Luxury Brands For Ultra-Premium Customers: Estee Lauder’s Major Growth Channel

Luxury brands are a key growth driver for the company: its luxury brands like La Mer, Jo Malone and Tom Ford have been delivering double digit growth for several years. Hence, the recent acquisitions of all premium and luxury brands are best seen in this light. The company expects global prestige beauty to continue growing at 3% to 4% in fiscal 2015 and 4% to 5% thereafter.

Estee Lauder’s strategic goals include gaining a lion’s share in the prestige skin care and make up segment. The reformulation of the usual products through investment in its research and technological capabilities is one key element of its strategy.  ((Estee Lauder’s Q4 2014 Earnings Transcript, Seeking Alpha, August 2014)) and this strategy can be applied to the new brands, as well. According to Estee Lauder, the U.S. Retail landscape is on a robust growth trajectory for high end purchases, which bodes well for the company and its luxury retail brands.

The new prestige brands are relevant additions for Estee Lauder’s travel retail segment as well. For FY 2014, travel retail was one of the highest growth channels for Estee Lauder, contributing to 13% of product distribution. Luxury cosmetics are one of the highest selling items through the travel retail channel. Hence, the current acquisitions will help Estee Lauder’s growth through this channel too. See our article on how travel retail boosts cosmetics sales here.

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1. Estee Lauder’s 2014 Annual Report, September 2014 [↩]
2. Estee Lauder’s Q1 2015 Earnings Transcript, Seeking Alpha, November 2014 [↩] [↩]
3. Estee Lauder Poised To Shop After Deal Drought: Real M&A, Bloomberg, March 2014 [↩]