| Written Assignment |
Company Overview
The company that I chose to perform my research on is The Estée Lauder Companies Inc., more commonly known as Estée Lauder. This global leader in the beauty industry has been around since 1946, founded by Mrs. Estée Lauder and her husband Joseph Lauder. It began its life as a little hometown operation featuring only four products including an all-purpose crème, cleansing oil, skin lotion and a various crème pack. Now the company beholds an identity for a diverse profile consisting of over 25+ brands featured in about 150 countries.
Estée Lauder belongs to the Toilet Preparations Manufacturing business industry (NAICS 325620 / SIC 2844). This industry oversees the blending, compounding, manufacturing and packaging formulation of skin and haircare products. There are other basic toiletry products such as toothpastes, face creams, perfumes and shaving products that are also included in this specific engineering. (Appendix A) For the purpose of this research paper, I will focus mainly on the business segment of Cosmetic & Beauty Products Manufacturing in the US. This way we can dig deeper and unveil where EL stands in the vast market of beauty gratification.
The Cosmetic & Beauty Product Manufacturing market size is measured by total revenue of the industry which is $49.2bn in 2020. (Appendix B) The average profitability ratio for the industry comes out to 7.1% when comparing the top 3 market leaders. Estée Lauder falls at 5.5% behind P&G yet higher than L’Oreal. (Appendix C) This is mainly due to the world price rise in zinc, an ingredient found in many industry products. It’s often viewed that beauty products are luxury items mostly purchased with discretionary income and it has evolve immensely over the past century. However, the industry will never deplete knowing there are items such as soap, shampoo, toothpaste and deodorant that are deemed by most to be basic survival hygiene products. This is likely why P&G is leader over the two niche makeup brands because this company focuses more on nondiscretionary goods. Moreover, the beauty industry is currently in the mature stage of its lifecycle. (Appendix D) The reason for this is because there are many emerging companies which is growing the industry. In addition, the market has clearly accepted the many product lines however there is always a need for innovation and new technology to surface. The CBPM industry exhibits a low market share concentration with the top four industry leaders generating only 23.8% of the total revenue. Estée Lauder stands at 5.4% market share behind The Proctor & Gamble Company and L’Oréal. (Appendix E) This is due to EL encompassing more high-quality products serving high-end retailers rather than being distributed through drug stores which the other two competitors do.
Findings from PESTLE Analysis
The Cosmetic and Beauty Manufacturing industry remains one of the most active and competitive businesses due to its necessary nature for all kinds of beings. Whether you are a women, a man or even a pet, grooming is a fundamental lifestyle practice. Everyone relies on their beauty routine to get them through the day; it might be sprucing up for a job interview or going out on the town with your friends. The biggest factors that contribute to the beauty industry’s environment comes from it’s economic, social and technological standpoint. Forecasting the future economy will be helpful when investing in new practices which could have immediate impact on the companies. For example, a luxury brand may not want to try a new formula or product line on the market if the economy is slowing down and people are not shopping for leisure activity. Moreover, social trends are heavily impacted by brand loyalty and fads for product innovation to follow. This also goes hand and hand with the technological impact the internet has on product reviews and e-commerce sites. This could definitely shed positive or negative light on companies at very high speed among web users. Many brands are headquarter near the coasts where most artists find themselves pursuing their dreams in limitless networking systems. California leads the highest beauty business concentration at 25.5% followed by New York and Florida both at 7%. (Appendix F) This makes it possible for beauty brands to distribute their products all over the nation through online ordering which continues to grow their business. See more detailed information on PESTLE analysis in (Appendix G).
Five Forces Summary
Profitability is closely related to the bargaining power for buyers responding appropriately to the market for goods. More specifically, how society is shopping for discretionary and nondiscretionary goods. As makeup is becoming more of a language of self-expression, there is a large customer base for individuals interested in the art of beauty products. This is generally influenced by luxury spending. On the other hand, necessary hygiene products are goods that one will always seek routinely. This has been established for decades and there are only a handful of reputable brands that are commonly found such as Crest, Colgate, Dove, Suave etc. This poses extremely high competition and high barriers of entry for emerging businesses but nonetheless, not impossible for new creations. (Appendix H)
Key Successful Drivers & Conclusion
The Cosmetic & Beauty Products Manufacturing Industry is one of the most successful business industries to this date. While many of these goods are deemed to be routine items ranging from soap bars to anti-aging creams, the industry has plenty room for growth and innovation. After reviewing the five forces that drive the beauty market, it is apparent that many reputable brands are well-positioned among their consumers while still leaving very possible entry for new businesses to rise. Social media should continue to aid with exposure and market analytics should also comply with reviews to respond to their clients accordingly. This can be anything from switching to more organic composition or more sustainable packaging. Overall, the industry is attractive and recognized to continue to flourish through their basic necessities and niche goods.
Appendix
Appendix A: Industry Product Mix
Appendix B: Financials
Appendix C: Top Players’ Financial Performance
Appendix D: Industry Lifecycle
Appendix E: Market Share
Appendix F: Market Concentration
Appendix G: Cosmetic & Beauty Manufacturing PESTLE Analysis
Political: The beauty industry must face very strict guidelines to be deemed favorable and marketable. The FDA passed a bill called the Personal Care Product Safety act which allows for intricate transparency with the fabrication of beauty products. Safety is extremely important when regarding the products put on the largest organ of your body- your skin. In addition, some countries such as Europe and Canada have harsher laws about ingredients, making it more difficult for some brands to sell within these boundaries.
Economic: When the economy remains at a standstill and even when it drops, the beauty industry has the ability to hang on by a thick rope due to its necessity for basic ego and survival needs. As mentioned before, most beauty products are purchased using discretionary income or as Mrs. Estée Lauder theorized herself, using the Lipstick Effect. The Lipstick Affect is the immediate gratification an individual incurs when impulse buying a simple beauty product. However, the main reason why this industry will remain successful is due to the everlasting need for haircare, body wash and oral hygiene products. Moreover, the need for hairdressers, barbers, nail salon experts, massage therapists and skin care specialists is growing while more emphasis is being put on beauty care.
Social: One of the biggest purchasing trends in the beauty industry is brand loyalty. Not only that, celebrities are using their status to market major companies which ultimately leads to the halo effect encompassing their fans. Brand loyalty is the subconscious act one develops when finding new products to purchase. If someone finds a brand working very well for them, they are likely to purchase from their multiple product lines.
Technological: The internet of things has absolutely revolutionized the way individuals research and purchase any kind of product. From watching beauty vlogs by your favorite YouTube star to reading through hundreds of reviews to see if this product matches your needs, this type of data will remain timeless. Also purchasing products in the comfort of your own home makes it very easy to explore new brands that are using global websites. E-commerce has blown up products, making it more convenient for people to find and buy without needing a retail store down the street.
Legal: Once again, the highly publicized and extremely tricky laws are required for all beauty brands to be complacent with. The Federal Food, Drug and Cosmetic Act extensively monitors the fixings contributed for all beauty brands to reach store shelves. Everything from tiny ingredients to packaging components is supervised and if anything isn’t up to par, brands can face serious fines and even get their distributing licenses revoked.
Environmental: Thankfully, there has been an extreme push for an eco-friendlier environment. Major companies are attempting to prioritize making their products “greener” and more sustainable. Unfortunately, this is hard for the beauty industry due to their many of their packages being made out of plastic and many hair sprays containing dangerous aerosols. This problem is predominantly due to the fact that products are made with irreplaceable ingredients while also attempting to say as clean as possible and safe for it’s user.
Appendix H: Five Forces on the Beauty Industry
- The beauty industry faces extremely high competition and relatively medium to increasing levels of barriers to entry. At the moment, the top 3 toiletry preparation manufacturers uphold less than 20% of market share and the rest of the business is acquired by smaller retailers of less than 500 employees. (Appendix E) The level of competition remains typically high due to respectable name brand companies and nondiscretionary goods such as deodorant and shampoo leaving little room for experimentation from new businesses.
- The existing degree of rivalry between competing firms is extraordinarily high in this industry. There are serious contracts that are established between beauty salons and retail stores to only sell specific types of brands. For example, Sephora and Ulta dominate the retail market for beauty products with limited selections varying luxury and non-luxury items. Also, many hair salons and barber shops typically sell certain brands exclusively which can be hard for new beauty firms to influence this type of business proposal with existing retailers.
- The threat of substitute products is low in this industry. The products are relatively elastic which allows for low switching costs when choosing other brands to experiment with or try out. With the internet of things being accessible in a matter of seconds, people are researching product ingredients and adapting more to natural remedies. Depending on what type of beauty shopper one is, there may be little to no difference purchasing a $4 face wash from the drugstore over the $120 one from a high-end retailer.
- When reviewing the power of suppliers, it is apparent that the chemistry of makeup is not as intricate as one might think. Most cosmetics are composed of water, emulsifiers, preservatives, thickeners, moisturizers, colors and fragrances. In addition, lots of people are becoming more aware of the synthetic substances put in their products, ultimately making them more conscious about what their buying. Many masks are now made with tea tree oil, fruit extracts, shea butter and other natural ingredients which are not that expensive. This puts the power of suppliers at a low level.
- It is very clear that the bargaining power of buyers is very high due to the extreme competition of many brands and retailers. While brand loyalty is a very high social influence for many buyers, it may take a slight price increase, negative publicity or a bad reaction for the buyer to switch over to a new product. This practice ultimately disregards the intense profit fluctuation that a mishap can have on a company.
Works Cited
Adamkasi. (2017, August 22). Porter’s Five Forces Analysis Cosmetic and Skin Care Industry. Retrieved February 12, 2020, from https://www.porteranalysis.com/porters-five-forces-analysis-cosmetic-and-skin-care-industry/
Hiner, J. (2019, December). US INDUSTRY (NAICS) REPORT 32562 Cosmetic & Beauty Products Manufacturing in the US. Retrieved February 12, 2020, from https://my-ibisworld-com.proxy.lib.wayne.edu/us/en/industry/32562/industry-outlook
Russell, F. T. S. E. (n.d.). Lauder (Estee) Cos., Inc. (The) (NYS: EL). Retrieved February 12, 2020, from https://www-mergentonline-com.proxy.lib.wayne.edu/companydetail.php?pagetype=businesssegments&compnumber=86890
