No doubt: Estée Lauder CEO remains ‘enthusiastic’ about China despite growing concerns
This quarter, net sales declined for Asia Pacific, due primarily to the resurgence of COVID-19 in China, which resulted in reduced retail traffic, travel restrictions, and stresses on its logistics facilities in Shanghai.
According to the firm, organic sales fell by mid-single-digits as it saw a steep decline in brick-and-mortar. The 25% growth of its online sales could not offset the decline.
“After a strong February in Mainland China, traffic slowed more sharply in March to pressure brick-and-mortar sales. Additionally, for us, the distribution centres for our Mainland China business are in Shanghai and operated with limited capacity. Tourism, to Hainan Island, was also curtailed in March, after a vibrant start of the quarter,” said Fabrizio Freda, president, CEO and director of The Estée Lauder Companies, speaking during the firm's latest earnings conference.
Freda said there was “no doubt” that the current limitations in China were temporary. “There is no doubt that these current limitations in China will prove to be transitory, although there will be a far greater impact on our results in the fourth quarter than they were in the third quarter.
“Looking ahead, we are confident in the resilience of the Chinese consumers and the untapped opportunity driving our investments in the market. We expect a reacceleration of growth when this moment of COVID abates.”
When asked if he saw any ‘softness’ in China connected to the impact of the economy slowing or recession risk, Freda said the firm had not seen any impact.
“I want to clarify that the long-term fundamental of global prestige beauty in China, and in travel retail in China remains very, very good. Actually, I personally have never been more enthusiastic about the opportunity. When the market rebounds also should be much more profitable."
He added that the firm will continue to invest in China, highlighting its soon-to-be-launched innovation centre.
“We are going to open soon our R&D centre in China, which is a very big event and a very manifestation of long-term determination to continue to be locally relevant and serving the specific needs of this market. And obviously, we are going to do as soon as the COVID restrictions will allow us to proceed.
“We will tailor the investment to the level of access to consumer that the restriction will permit, but we will invest in the growth, in the innovation centre. There will be more brands in China coming soon, additional cities coverage as soon as the restrictions will allow… The category growth expansion beyond skin care, make-up and fragrances are coming up strongly.”
A promising Q3
Estee Lauder reported net sales of U$4.25bn for its third quarter ended March 31, 2022, an increase of 10%. Net sales grew 9% organically, with growth across all categories from skin care to hair care.
“We delivered strong sales growth and better-than-expected profitability in the third quarter of fiscal 2022 in the face of accelerated headwinds as the quarter evolved, including COVID restrictions in the Asia Pacific region,” said Freda.
“Every category grew organically, led by Fragrance’s outstanding performance globally and the makeup renaissance in western markets. Eleven brands contributed double-digit organic sales growth and further demonstrated our diversification, empowered by our multiple engines of growth strategy. Consumer demand remained robust even in this more inflationary environment.”