Why Acquisitions Could Be the Key For Estee Lauder

The global skin care market is estimated at $112 billion in 2015 and is projected to increase to $158 billion by 2022.  Estee Lauder‘s (NYSE:EL) share in this market is around 8%.  Skin care revenues account for more than 40% of Estee Lauder’s total revenues with an  EBITDA margin of 26%. L’Oreal, which commands nearly 15% of the skin care market, and has a presence in all the segments from premium cosmetics to the drugstore variety, is able to generate an EBITDA of  23%.  Improved market share in this segment, without compromising on margins, can have a significant impact on Estee Lauder’s profitability, and inorganic growth may be the right strategy.

See Our Full Analysis for Estée Lauder

Declining margins and market share cause of Estee Lauder’s woes

Using Trefis interactive technology, we did a comparative analysis between market share and margins of the skin care segment of Estee Lauder and L’Oreal.

The market share gap between these two companies is projected to increase over the forecast period.  Our bear case scenario for declining demand for Estee Lauder’s flagship brands might keep its market share a tad below 8% over the next few years.  L’Oreal, on the other hand, is projected to steadily gain market share.

Despite being a premium luxury brand,  Estee Lauder has been able to generate only a slightly higher margin compared to L’Oreal.  In our bear case scenario where weak travel retail growth affects Estee Lauder, its EBITDA margin comes very close to that projected for L’Oreal.  If Estee Lauder is able to increase its revenues in the skin care segment by improving the market share and maintaining the current level of margins, its profitability will improve significantly.

Growth exists in new markets where acquisitions could be the key

The Asian cosmetics market is projected to grow at a CAGR of 4.0% during 2015-2020.  ^[1]  Skin Care companies are looking to tap into this market mainly via acquisitions.  For instance, L’Oreal acquired Magic, China’s leading brand in cosmetic facial masks. The company reported a 5.8% growth in Asia (ex Japan) in 2014 ^[2] and this was partly due to the solid growth of Magic.

Estee Lauder’s acquisitions are aimed towards innovative luxury brands, to attract customers, especially through the travel retail channel. While its growth strategy cannot be like L’Oreal, acquiring relevant brands in the prestige cosmetics segments will enable it to capture a larger market share. There is a significant impact of Asian travelers on travel retail as well. (Read Reasons behind Estee Lauder’s Sudden Acquisition Spree.)

Estee Lauder’s sales in Asia Pacific for the last fiscal year declined marginally.  This decline was partly due to foreign currency fluctuations, excluding which the sales would have grown by 1%. ^[3] Adding new products to its portfolio through strategic acquisitions would help Estee Lauder gain market share, especially in Asia and other new markets.

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1. ApacMarket.com [↩]
2. L’Oreal SEC Filings [↩]
3. Estee Lauder Fiscal 2015 and Full Year Results, Estee Lauder Press Release, August 17, 2015 [↩]