What Estée Lauder agreed to do last year is to become the exclusive beauty-products supplier to Kohl’s stores, creating three new brands that the cosmetics company still will own – unlike most private-label brands sold by retailers – but which Lauder will be bound to provide only to Kohl’s in the United States. Other such account-specific branding arrangements where manufacturers continue to control the brand are popping up elsewhere in retailing; VF, the jeans manufacturer, for example, agreed to create a new brand called Blu, specifically and only for Target stores.
The practice represents an additional ratcheting up of control over the brands by manufacturers that already have gotten used to the practice of at least initially introducing a brand only in one large retail chain for several months before distributing it elsewhere. That’s what Levi Strauss did last year, for example, with its Signature line of jeans, which went first exclusively to Wal-Mart before Target and other chains could begin to sell the brand.
“The dynamics of these arrangements are an answer that manufacturers are coming up with to try to keep retailers from developing their own products,” says Aaron Keller, managing principal of Capsule, a Minneapolis-based brand consulting firm. “Because if a retailer doesn’t get these alternatives from one manufacturer, they’re going to go somewhere else. The biggest reason for this evolutionary change is that power of the retailer – the power of the channel becoming greater than that of the manufacturers.
“It’s not like during the Eighties where everyone was trying to turn everything into a commodity and we had ‘the death of brands.’ It’s a new world where retailers are saying, ‘Why do we have to destroy brand? That’s margin.’ Estée Lauder’s answer to Kohl’s is interesting. I just don’t know if it’s the ultimate answer,” says Keller.
No one does, of course. What is clear is that both Kohl’s and Estée Lauder could really use success in this new venture.
Kohl’s, based in Wisconsin, was one of the highest-flying general-retail chains of the nineties and early this decade. New stores added outside of its Midwest base and throughout the United States now total about 600. Kohl’s unique formula of value pricing for name-brand apparel trumped both discount chains and full-service department-store retailers. But over the last several months, Kohl’s once dependably strong growth in same-store sales has slumped badly, even at a time of revival across much of the retailing business. Executives of the US$ 10-billion retailer, who declined to comment for this story, are still trying to figure out how to stanch the bleeding.
Meanwhile, Estée Lauder is facing its own difficulties. The $5-billion enterprise, the world’s largest supplier of so-called prestige cosmetics, is in an escalating battle for market share with rivals such as Procter & Gamble that are much larger and also benefit from a significant presence in mass-market cosmetics. Estée Lauder has aggressively pursued acquisitions and other market-expansion opportunities in the upper end of the cosmetics business, but now faces pressures to go downscale as well.
Both Kohl’s and Estée Lauder had reasons to embrace this marriage. One of Kohl’s biggest merchandising holes has been cosmetics, which has accounted for less than one percent of its sales, according to figures provided by Estée Lauder, whereas a typical department-store chain garners about 15 percent of sales from cosmetics. Estée Lauder was looking for a way to move into a significant retail channel that straddled “mass” and “class,” which Kohl’s arguably does. But this is the first time ever that the company has developed a specific new brand only for one retail chain.
“Developing exclusive brands for [Kohl’s] was the best cosmetic option they had,” explains Dan Brestle, group vice president for New York City-based Estée Lauder. “We also thought it was the best option for us. Kohl’s wasn’t interested in bringing mass brands into their store because of margin concerns and because that would tend to put them down-market with Target and Wal-Mart. Their position as a department store with value pricing is unique. And it made no sense for us to bring in one of our prestige brands, Lauder or Clinique, because we’d be cannibalizing our own department-store business.”
So this fall, Kohl’s will be creating a new department in 280 stores for these new cosmetics brands, featuring what Kohl’s has called “a distinctive look and attractive open-sell product displays.” Kohl’s will roll out the new department and brands to all of its stores by autumn 2005. The areas initially will be about 600 square feet, Brestle says, “but there will be assistance there. The brands will be available to test, and there will be qualified beauty advisers there to give advice.”
Brestle declines to hint at other attributes of the brand, such as names, except to stress that Estée Lauder won’t be using its corporate name and brand as part of the proposition. “If you go into Kohl’s now, you’ll see the brand Villager by Liz Claiborne,” he says. “You will never see that kind of approach with any Estée Lauder brand. We grew up in a world where we compete with [our own brands] in the same environment. So you’ll never see us capitalize on our corporate name to promote a brand.”
What the cosmetics and retailing industries will see as they begin to evaluate the success of this innovative new venture, Brestle promises, is Estée Lauder taking on not only the promise but also the perils of retaining ownership of the brands and of not submitting to the conventional arrangement in which the retailer actually owns what is in essence, still, a private label.
“We made a very clear distinction that these are brands that we create, advertise and market and will own,” Brestle says. “We’re selling them exclusively in Kohl’s in the US, but the same brands can be sold around the world to other distribution channels. But while with private label a store is selling to itself and has all the liability, with this structure it’s all on us. If our inventory doesn’t sell, it sits in our warehouse and on theirs. If the pink lipstick doesn’t sell, it sits in our warehouse.”