Estée Lauder Lowers Outlook but Continues to Bet Big on Chinese Market

Despite lowering its sales outlook for the third straight quarter due to a slower-than-expected recovery in Asia, cosmetics company Estée Lauder remains optimistic about the Chinese market.

The company, which also owns cosmetic brands such as MAC and La Mer, announced Wednesday (May 3) that it anticipated a decline in sales for the year to range between 10% and 12% — a steeper decline than the 5% to 7% range that was previously predicted.

Additionally, the company stated that organic sales in global travel retail fell by 45% in the quarter, with the decline in net sales linked to Asia travel retail in Hainan and Korea.

According to CEO Fabrizio Freda, “the shape of recovery from the pandemic for Asia travel retail” has become clearer and is proving to be more volatile and slower than initially anticipated in comparison to other regions.

Despite a strong performance in the first quarter in the U.S. and Europe, weakness in Asia, including China and South Korea, led to a decline in sales of 12% to $3.7 billion for the overall quarter.

Estée Lauder has expressed its expectation that consumer traffic in Asia will improve, with sales starting to grow in the fourth quarter. Meanwhile, L’Oréal, the largest beauty company in the world, has predicted a rebound in Chinese demand for the current quarter.

The report comes after Estée Lauder’s acquisition of the fashion brand Tom Ford for $2.8 billion, including debt, towards the end of last year.

At the time of acquisition, Tom Ford Beauty had shown robust momentum across various channels and important markets, leading to its high-ranking position among prestigious fragrances, placing in the top 15 in the U.S. and top 10 in China.

L’Oréal Is Betting Big on China

Just last month, PYMNTS reported that L’Oreal acquired Australian luxury brand Aesop from Natura & Co. for an enterprise value of $2.53 billion. By acquiring Aesop, L’Oreal is expanding into the premium skincare market in Australia and New Zealand, capitalizing on Aesop’s strong brand recognition and devoted clientele. Furthermore, the acquisition is projected to strengthen L’Oreal’s standing in the luxury cosmetics sector and streamline its global growth, particularly in China.

See also: L’Oreal Sets Eyes on Chinese Consumers, Buys Luxury Brand Aesop

The acquisition by L’Oreal is a calculated move, as the company is known for acquiring up-and-coming brands and leveraging its worldwide distribution channels to expand their reach. L’Oreal CEO Nicolas Hieronimus is confident in Aesop’s capacity for expansion, particularly in China, where the brand opened two stores in the final quarter of 2022 and in travel retail.

Aesop is recognized as one of Natura’s top-performing brands and has established a presence in nearly 400 locations spanning across the Americas, Europe, Australia, New Zealand, and Asia, including two fresh locations in Shanghai. Based on reports, the brand amassed $537 million in sales in 2022, an increase of 21% from the previous year after adjusting for currency fluctuations. Aesop realized double-digit growth in all regions and surpassed projections in its debut in the Chinese market, which is renowned for its swift expansion in the beauty industry.

China is the largest cosmetics market in the world, with projected sales of $62.8 billion in 2023. During the pre-pandemic year of 2018, about one-third of the world’s luxury goods were purchased by Chinese consumers.

But China Isn’t Ready to Spend

According to a PYMNTS’ report last month, China’s consumer spending did not experience the anticipated surge following the removal of COVID-19 restrictions.

According to a report from CNBC, the CEOs of eCommerce giants JD.com and Alibaba stated that China’s consumer spending has yet to recover from the economic downturn caused by the pandemic.

According to the report, the Chinese government declared on March 5 that their objective for economic growth this year is 5%, which CNBC classified as cautious. The officials also indicated that they foresee consumption playing a vital role in promoting growth, but it is still restricted.

Similar to L’Oreal and Estée Lauder, several companies from various sectors have been anticipating a revival in consumer spending both domestically and globally, following the lifting of pandemic-related travel restrictions in China.

Companies such as Starbucks and McDonald’s have been striving to expand their operations in China. “I remain more confident than ever that we are still only in the early chapters of our growth story in China,” stated Starbucks’ interim CEO Howard Schultz in early February.

See also: Retailers Say Chinese Consumer Spending Has Not Yet Recovered From COVID

Likewise, in the luxury goods industry, Bernard Arnault, the CEO and chairman of LVMH, declared in late January that the reopening of China would create new opportunities for luxury brands. “We have every reason to be confident — indeed optimistic — about the Chinese market,” Arnault stated at the time.

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