Chinese Customers to Shrug Off Price Hikes for Cosmetics
Aug 3rd 2011 2:30PM
Updated Aug 3rd 2011 2:40PM
Estee Lauder (EL) recently raised prices 8% to 10% in China. This move comes after the other leading global player in China, L'Oreal, increased prices by 5% to 10% on its Christian Dior, Lancome, Biotherm and Chanel brands of cosmetics. We believe that Estee Lauder's increased prices in China will have negligible impact on its China sales, given the robust demand for beauty and skin care products. The hikes will provide some much needed relief from margin pressures due to rising commodity prices.
We value Estee Lauder's stock with a Trefis price estimate of $91.22 per share, which is roughly 10% below its current market price.
Chinese Customers Will Spend on Brand Names
Estee Lauder has raised its prices primarily to absorb rising commodity prices, meaning that the gross spread should remain relatively flat. Hence the impact on cash flows shall, at best, be muted.
The risk associated with raising prices is that it could drive consumers away to competition. This is particularly evident in products such as laundry detergents and diapers, where there is not much product differentiation and consumers are price elastic (they buy less as prices go up). Estee Lauder makes premium cosmetics and consumers that are led by brand image and product quality rather than prices. As a result, we do not expect to see any noticeable loss in market share on account of the rising prices.
Strong Economic Outlook Will Lift Shares
The Chinese economy has been relatively resilient to the economic downturn and has been posting high single-digit growth rates. The status of employment and disposable income levels also hint at a promising industry outlook, and we don't believe Chinese consumers -- male or female -- will shirk away from spending on premium cosmetics because of moderately rising prices. See our recent note on China's impact on Estee Lauder: China, the Next Engine of Growth for Estee Lauder.Trefis is an online investment research platform targeted towards individual and professional investors. Trefis also includes a community of users that can create and share their models and analysis on trefis.com.
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