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A Strategic Management Case Study on:

Estée Lauder Companies, Inc. – 2008

“ Bringing the best to everyone we touch ”

by:

Wong Yean Chong


790814-01-5105
Faculty of Management and Human Resource Development
University of Technology Malaysia
2009
MHM1523 Strategic Management
Individual Assignment- Estée Lauder Companies, Inc

A. Case Abstract

Brief Profile and History


Estée Lauder is a major American corporation based in New York City. Estée
Lauder is one of the world’s leading a manufacturer and marketer of quality 1)
skin care, 2) makeup, 3) fragrance and 4) hair care products. The Companies was
established in 1946 and has been public since November 1995. Presently, Estée
Lauder Companies has 29 brands, sells products in over 140 countries and
territories, and employed 32,000 people worldwide. For financial year (FY) 2008,
net sales were USD$7.9 billion and net earnings from continuing operations were
USD$474 million, which recorded a rose of 12.4% in the net sales volume and
5.6% in the net earnings from continuing operations compared to FY2007. As at
FY2008, the Companies paid up capital and retained earnings stood at USD$979
million and USD$3,085.1 million respectively. In 2008, Estee Lauder appears in
the 2008 Fortune 500 company listing.

Beauty, youth, and being forever young are common themes in the personal
products industry. A young entrepreneur named Estée Lauder felt that she could
provides a product that espoused those qualities. In accordance with above belief,
Estée Lauder Companies was established in 1946 by Estée Lauder and her
husband, Joseph Lauder. Estée was always interested in beauty and began her
business selling the skin care products, meanwhile her chemist uncle, John Schotz
was concentrate in the product development. Her first products were sold to
beauty salons and hotels.

In the early years, Estée was unable to convince Madison Avenue to carry her
products. Facing this rejection, she began to market her products directly to
customers. With that success, the Lauders began targeting high-class customers
by selling products exclusively through boutiques and departments stores.

In 1948, Estée Lauder established their first department store account with Saks
Fifth Avenue in New York. During the next 15 years, the products were
selectively distributed in other stores in the United States. In 1960 the Companies
globalized their operations with he introduction of Estée Lauder products at
Harrods in London, with the Hong Kong market opening the following year.

Products and Brands


Products specification

Skin Care : Moisturizers, creams, lotions, cleansers, sun screens and


self-tanning products

Makeup : Lipsticks, lip glosses, mascaras, foundations, blushes, eye


shadows, nail polishes and powders. Also compacts,

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MHM1523 Strategic Management
Individual Assignment- Estée Lauder Companies, Inc

Fragrance : Eau de parfum sprays, colognes, lotions, powders, creams


and soaps based on particular fragrances. Also bath and
aromatherapy products

Hair care : Shampoos, conditioners, styling gels and crèmes, hair


coloring products and hairsprays

The first Estée Lauder products sold were Super Rich All Purpose Crème, Crème
Pack, Cleansing Oil, and Skin Lotion. Additional brands such as Aramis, a line of
prestige fragrance and grooming products for men was launched in 1964, and
Clinique, the first 1968. Prescriptives and Origins Natural Resources were early
brands too. The forthcoming brands sold by Estée Lauder are as MAC, Bobbi
Brown, La Mer, Kiton fragrances, Donna Karan, Aveda, Jo Malone, Bumble and
Bumble, Darphin, Rodan + Fields, American Beauty, Flirt!, Good Skin, and
Grassroots. Estée Lauder acquired more brand licensing of names such as Tommy
Hilfiger, Donna Karan, Michael Kors, Donald Trump, Sean John, Missoni, and
Daisy Fuentes. Each of the Companies’ brands has a single global image that is
promoted with consistent logos, packaging, and advertising designed to
differentiate it from other brands.

In order to meet with the different market’s need and products requirement, Estée
Lauder Companies has set up a worldwide research and development (R&D)
system, located in Japan, China, France, United Kingdom, Belgium, New York
and Canada, which able provide and conduct more intensive researches on the
products development based on different regional factors.

Estée Lauder brands include:

 American Beauty  Donna Karan  MAC Cosmetics


 Aramis  Estée Lauder  Michael Kors
 Aveda  Flirt!  Missoni
 Bobbi Brown  Good Skin  Ojon
 Bumble and Bumble  Grassroots  Origins
 Clinique  Jo Malone  Prescriptives
 Coach  Kate Spade  Sean John
 Daisy Fuentes  Lab Series  Stila
 Darphin  La Mer  Tommy Hilfiger
 Donald Trump  Kiton  Tom Ford

Marketing & Distributions


Estée Lauder prices vary from product to product and from brand to brand, but
tend to be in the mid-high to high range of the industry. Prestige pricing appears
to be an effective strategy given their target markets.

Estée Lauder sells its products mainly through upscale department stores,
specialty retailers, upscale perfumeries and pharmacies, and prestige salons and

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MHM1523 Strategic Management
Individual Assignment- Estée Lauder Companies, Inc

spas. In addition, its products are sold in freestanding company-owned stores and
spas as well as its own and other authorized retailers’ Web sites. Estée Lauder
also available at stores on cruise ships, on television direct marketing channels,
and at in-flight and duty-free shops.

Estée Lauder was the first cosmetics company to offer free samples and gift-with-
purchase and continues this strategy today. The Companies was also the first in
the industry to introduce consistent brand imagery around the world. For this
purpose, the Companies uses celebrities as endorsers in testimonial advertising for
commercials on TV, as well as in magazines.

It is also notable, unlike other cosmetic company, Estée Lauder concentrated on a


single international image, they didn’t have different advertisement campaigns in
each country and the image was the same worldwide.

Management and Ownership


Estée Lauder Companies is managed primarily by Lauder family members and a
majority of stock is owned by members of Lauder family which controls about
70% of voting shares. Estée’s son Leonard Lauder is Chairman Emeritus of the
Board of Directors. William P. Lauder, a grandson, is Chairman of the Board and
Executive Chairman. On 1st July 2009, Fabrizio Freda became President and
CEO, who will be responsible for developing the Companies’ overall vision,
strategy, financial objectives and investment priorities. The Companies’ Board of
Directors consists of 13 Directors, four of which are members of the Lauder
family

Financial Highlights
Append below are the Estée Lauder Companies’ sales according to the four (4)
product segment and regional sales contribution (as per FY2008):

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Individual Assignment- Estée Lauder Companies, Inc

Estée Lauder’s 2008 sales increased 12.4% to USD$7.9 billion due to growth in
all the product segments in all geographic regions, notably strong performance in
European and Asian market each of which increased 21% in net sales compare to
FY2007 performance. Operation income also hitting the new history high point
recorded USD$810.7 million, an increase of 8% from previous FY. However, by
region, the operating income from Americas has dropped 32% or USD$108.1
million from 2007 which revealed the Americas market was affected by the
softness of the global retail environment due to economic recession. It’s variety of
globally recognized brands in specialized market niches such as the professional
makeup industry and high-end market has helped to offset its losses from the
global slowdown, besides, the operation income from Hair Care products also
slipped 73% or USD$31 million from USD$42.5 million in FY2007 to USD$11.5
million which giving explanations that the operating expenses for hair care
products rather high against to it’s sales revenue.

Also notable that the Companies’ Long-term Debt constantly increased after
FY2007 which recorded a huge shoot up of USD$596.3 million to USD$1,028.1
million from USD$431.8 in 2006. There is also a rose of USD$136.1 million to
the Companies’ Goodwill and Other Intangible Assets.

Industry Factors and Competitors


Much of the expected growth in the personal products industry will be fueled by
the rising demand from emerging and developing markets. Estimates have shown
that in “the next 20 years… 70 million people across the globe [will] reach an
income level that allows purchasing of cosmetic products. The world’s aging
population will multiple by 2.5 times in the next 40 years, representing over 33
percent of the total population. Additionally, the life expectancy of the aging
population will continue to improve, with the difference between men and women
gradually diminishing.

The men cosmetics market is booming, specialists predicted in a medium-term,


i.e. five years, the male market for the care will account for 15% of the market for
the women. China’s cosmetic market is estimated to climb up to 100 billion RMB
by 2010, as in year 2008 total cosmetic sales recorded 70 billion RMB.

The Companies will continue to devote substantial sums to research and


development of new and appealing products. However, given the competitive
pricing at megastore, the Companies may be challenged to continue their patterns
of innovative research. Additionally, there have been consumer complaints and
inquiries into the use of animal for new product testing.

Authorities has notified manufacturers that it would start to enforce labeling that
included the statement “Warning-the safety of this product has not been
determined”. However, these issues are not new and having affected the industry
for more than 100 years.

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MHM1523 Strategic Management
Individual Assignment- Estée Lauder Companies, Inc

Concerns about the use of aerosols and fluorocarbons which first emerged in the
mid-1960s and recent restrictions on products that can be carried in-flight have
created uncertainty in the outlook for the travel retail business, which in FY2006,
the travel retail business comprised approximately 7% of the total net sales, and
accounted for approximately 20% of operation income.

Top competitors in the cosmetics business are diversified with many brand names
and a wide range of products. Basically, the Companies faced direct and
significant competition from L’Oreal, Avon, Revlon, Elizabeth Arden and Bare
Escentuals which targeting the similar market segment and product orientation.
Append below is the comparison of top Estée Lauder’s competitors:

FY2008 Comparison of Top Estée Lauder’s Competitors (in $millions)


Sales
Net % of Sales
Growth Operating Net
Company Sales Revenue Profit from
from Margin Earnings
Margin Overseas
FY2007
L'oreal £17,541.80 2.8% 11.12% 14.64% £1,948.30 74%
Avon Products $10,558.9 7.6% 8.19% 12.53% $875.30 78%
Estée Lauder $7910.80 12.4% 6.12% 10.25% $473.80 53%
Revlon $1346.8 (1.5%) 0.97% 11.51% $57.90 43%
Elizabeth Arden $1141.08 1.2% 1.74% 4.30% $19.90 40%
Bare Escentuals $556.16 8.8% 17.61% 31.51% $97.96 3.5%

Latest Development and Other Progress


Estée Lauder’s has acquired Ojon Corporation, a privately held hair care and skin
care company based in Canada that sells its products primarily through direct
response TV and specialty stores in July 2007. The acquisition also providing
economic opportunity for indigenous peoples in Central America, is a good
example of the Companies’ commitment to social responsibility.

The Companies also recently announced that they purchased a minority interest in
a privately held company that manufactures, markets and sells beauty products in
India under the Forest Essentials brand. Forest Essentials is a prestige Indian
beauty brand based on ancient naturalistic Ayurvedic principles, to in a greater
understanding of Indian beauty traditions.

On the recent market news, Procter & Gamble Co. was predicted to acquire Estée
Lauder and Shiseido in order for the world’s largest consumer products company
to add more beauty products and increase penetration in emerging markets, which
has been determined to has strongest sales growth.

Estée Lauder kicked off its largest sampling program to date-America’s Night to
Repair. 250,000 10-day samples of NEW advanced Night Repair Synchronized

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MHM1523 Strategic Management
Individual Assignment- Estée Lauder Companies, Inc

Recover Complex distributed at all Estée Lauder department and specialty store
counters in nationwide. Night Repair was an innovative, award-winning formula
that targeted damaged skin and helped visibly repair it during the restorative hours
of sleep. Estée Lauder was also among the first skincare companies to understand
the fundamental link between DNA damage and skin aging, and the importance of
skin's ability to repair its own DNA.

Breast cancer activist-the Estée Lauder Companies’ annual Breast Cancer


Awareness Campaign involves all of the 18 brands that make up the Estée Lauder
Companies. They collectively represent The Breast Cancer Research
Foundation’s (BCRF) first and largest corporate supporter. Estée’s daughter-in-
law was the creator of BCRF’s signature pink ribbon. Over USD$35 million has
been raised for the BCRF with its retail partners.

Citizenship and excellence have long been a hallmark of the Estée Lauder
Companies. Estée Lauder herself was post-humously awarded the President
Medal of Freedom, the United States’ highest civilian award. Their commitment
to excellence, innovation and community support had won they various of awards
and recognition, namely: 1) Fortune Magazine-Most Admired Companies & 2008
Forbes-America’s Most Admired Companies, ranked No. 2, 2) Marie Claire-Prixe
D’Excellence, 3) Cosmetics/Personal Care Packaging Magazine-Editors’ Choice
Awards, 4) Human Rights Campaign’s Corporate Equality Index for GLBT
Employees, 5) AmeriStar Packaging Awards, 6) The 3M Integrity Award, 7)
amfAR Award of Courage and etc, which reflecting the Companies are not only
business oriented but also very much on social, environment and public concern.

B. Vision Statement
“Bringing the best to everyone we touch”.

By "The best", Estée Lauder means the best products, the best people and the best
ideas. These three pillars have been the hallmarks of the Companies since it was
founded by Mrs. Estee Lauder in 1946. They remain the foundation upon which
the Companies continue to build our success today.

In the Companies’s 2008 annual report, the Companies vision has been clearly
sound as follow:-

“The global leader in prestige beauty: a well diversified, brand-building


powerhouse of unrivaled creativity and innovation”.

C. Mission Statement / Work Principles/ Citizenship


The employees of the Estée Lauder Companies are committed to working
together with uncompromising ethics and integrity. They strive to always:

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 Being responsible citizens in every community we serve


 Understanding that we are part of a larger whole and that our actions have
consequences
 Striving to continuously look for new and better ways to do things to
constantly raise our standards
 Providing consumers with innovative cosmetic products of the highest quality
and safety standards
 Delivering outstanding service by treating each individual as we ourselves
would like to be treated
 Building partnerships with our stakeholders based on fairness and trust
 Pursuing profit-but never at the expense of quality, service or reputation
 Eliminate waste and reduce inefficiencies in order to provide maximum value
to our customer
 Enhance our reputation of image, style and prestige
 Create an environment that fosters personal growth and well being
 Most of all, staying committed to working safely together with
uncompromising ethics and integrity

D. External Audit
Opportunities
1. International expansion. Estée Lauder has earned extensive experiences in
new international market expansion coupled with its well-known brand and
quality products which reach out to customers of all income ranges therefore
the Companies will not facing much difficulty for the new market
development. As at today, the Companies successful enter to 140 countries,
further expansion will gain and enhance the Companies’ market share and
business volume.

2. Increase of worldwide disposable income, as estimated, 70 million people


across the globe will reach an income level that allows purchasing of
cosmetic. This is happening now in BRIC, European region Africa, where the
people spending power has increase and demanding for more upscale personal
products. Both China and Russia, for example, exceeded USD$100 million in
sales for the first time and European region topped the USD$3 billion sales
mark in FY2008. As recorded, Russian women boast one of the highest
spends on beauty products in the world.

3. World aging population will multiple by 2.5 times in the next 40 years,
representing over 33% of the total population. Regardless of European or
Eastern countries, the trend is inevitable. Many skin care manufacturers have
been aiming for this portion and market, eg: in Japan, well known cosmetic
brand-SK II has been targeting old folks for their skin smooth series, of which
managed to capture the Asian market.

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MHM1523 Strategic Management
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4. Despite softness economic globally, but the emerging market, BRIC has
cushioned down the effect and continuously growing. As per China 2009
Quarter 1 GDP’s grew 6.1%, which is higher than the economics’ prediction,
and the nation 2009’s GDP is expected to hit 7.5-8% and India is expected to
reach a GDP grow of 6-7% in 2009.

5. Global warming and environment pollution effects, lead to more demand on


clinical and preventive cosmetics products, especially in growing countries
like China and India. The Companies’ hall mark brand, Clinique and Origins
has gained the top market share in this category.

6. The market of the cosmetics for men is constantly increase and forecasted
world growth rate of 2.3% per year between 2005-2010. The Companies has
been stepped into men’s cosmetic market in 20 years back, the increasing
trend definitely an opportunities for the Companies to expand its market
shares and sales revenue.

7. Constantly increasing of online purchase trend, as Nielsen Global Online


Survey, 875 million consumers worldwide have made a purchase on the
internet. South Korea tops the list on a per capita basis, with 99 percent of
Internet users making an online purchase, followed by the United Kingdom,
Germany and Japan. This shopping channel is foreseen to increase double
digit yearly with the more easy access and upgrading of connection facilities
everywhere.

8. Availability of other quality local and international cosmetic brands for


acquisition. Eg, Japanese’ Shiseido Co. Ltd and China’s Beijing San Lu
Factory which is locally well known and having consistent customer base. The
well experiences and techniques of the Companies in acquisition exercise
since 1968 when Estée Lauder acquired the main competitor, Clinique, should
be an additional advantage to the Companies.

9. Opportunities in fashion related industry, Eg: handbags and jewellery which is


another profitable business to do with women and brands. This might be
another opportunities for the Companies’ business expansion and
diversification, as the Companies have superb expertise in the upscale luxury
market and large distribution channel.

10. More high aims stores/counters distribution and exclusive air ports exist. Eg,
South East Asia’s luxury goods shopping paradise-Singapore, on it most
famous upscale shopping area, Orchard Road, 3 new upscale shopping arcade
have and will be opened in 2009, namely: ION Orchard and Orchard Centre.
Besides, more large and impressive air ports with exclusive shopping zone
been in operation in recent years, all this provide the expansion of marketing
and distribution channels for the Companies’ products. International air port
in Dubai, Singapore and Amsterdam provides exclusive shopping

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environment for travelers to pick up luxury goods before depart, which the
sales are expected to be increased significantly.

11. Constantly growing in global fashion and entertainment industry. Its M.A.C
has been closely associated with the Bollywood film community since 2005,
and has teamed up with hair and makeup stylist-to-the-stars, Mickey
Contractor, to bring a touch of cinematic glamour to Indian consumers. Also,
good co-operation experience and rapport with world fashion indicator, eg:
Karl Lagerfeld and Proenza Schouler has benefited the Companies in grabbing
the cosmetic markets.

Threats
1. Aggressive competition from the competitors who targeting the same market
segments. Estée Lauder’s brands face substantial competition in the cosmetics
industry. For example, although its professional makeup brands such as
M.A.C and Bobbi Brown face little competition due to the specialized
clientele that it targets, its all-natural brands face competition from Bare
Escentuals, and its most popular mid-end brands such as Estee Lauder face
competition from the myriad of products of Revlon, Avon, and Elizabeth
Arden. In addition, the cosmetics industry faces challenges from small, private
companies with specialized offerings that can also fight for market share,

2. Changed of spending atmosphere and pattern of the luxury goods’ consumers


in amidst the economic downturn, conspicuously in US and UK, many of
white collar or so called well paid office ladies/ executives have been
retrenched or paid cut thus switched their preferential to middle or low cost
products. As predicted by Bain & Company on the “Luxury Goods
Worldwide Marketing Study, April 209, the luxury goods market is expected
to decrease 10% to total volume of EURO$153 billion compared to 2008’s
EURO$170 billion.

3. Competitive pricing of other similar effect or substitute products, almost 60%


price lower coupled with threats of counterfeit or imitation products. Eg, In
Singapore, OLAY (P&G)-Total Effects 7 in 1 Anti-aging formula (at selling
price of less than USD$30), challenge the consumers to test and check the
product’s contain and effect, which claimed consumer can pay less but get the
same effective result but with lower price (Estée Lauder’s similar products
cost USD$85 and above). In Jun 2008, Estée Lauder has filed a lawsuit
against fragrance maker, Preferred Fragrance for alleged trademarks
infringements, false advertising, diluting trademarks and unfair competition of
its Clinique brand perfume products.

4. Internet security threat on its e-commerce, consumer database and company


website. The ‘hacking’ culture has been split widely coupled with more high
and complicated techniques, computer and internet virus are contagion

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everywhere which will giving great impact to the company on internet and e-
commerce protection and security.

5. Rise in energy and raw material prices worldwide, higher costs of global
information technology systems and infrastructure, and increase cost of new
technique and mode of products testing. The threat is unavoidable and it test
and challenge the management’s efficiency and effectiveness on maximum
usage of the resources.

6. Foreign currency fluctuations affecting the Company’s results of operations


and the value of its foreign assets, the relative prices at which the Company
and its foreign competitors sell products in the same markets and the
Company’s operating and manufacturing costs outside of the US.

7. Consolidations, restructurings, bankruptcies, reorganizations and destocking


in the retail industry causing a decrease in the number of stores that sells the
Companies’ products, eg. During fiscal 2006, Federated Department Stores,
Inc. acquired The May Department Stores Company, resulting in the merger
of their previous two largest customers (collectively “Macy’s, Inc.”-primarily
within North America) resulting shut stores to consolidate after its acquisition
of May Department Stores, leaving it with fewer sales outlets, of which
caused the net sales derived from Macy’s consecutive dropped from 16% in
fiscal 2006 to 12% in fiscal 2008.

8. Interest rates are expected to grow 1.7% annually, which giving impact to the
Companies’ interest expenses resulting from the high liabilities outstanding
which stood at USD$3,331.4 million in fiscal 2008.

9. Changes in the laws, regulations and policies (including the interpretation and
enforcement thereof) that affect, or will affect, the Company’s business,
including those relating to its products, changes in accounting standards, tax
laws and regulations, trade rules and customs regulations, and the outcome
and expense of legal or regulatory proceedings, and any action the Company
may take as a result. Also, some conservative culture or religion issue in
certain countries might give effect on the A&P activities.

10. Public boycott reaction due to political and spokesperson influence. Eg. in
2001, pro-Palestinian took up boycott campaign named: “Estée Slaughter”
due to the pro-Israel activities of Ronald Lauder, Chairman of Clinique Lab.,
and infamous advertisement statement on its official website make by M.A.C
spokesperson, Sandar Bernhard caused the Companies apologized to public
and video was removed from the official site.

11. The Companies might become acquisition target of other giant market players.
It was came out in the financial news, some analyst predicted, Estée Lauder
Companies may be possible acquisition target if Procter & Gamble Co. (P&G)

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wants to add more beauty products and increase penetration in emerging


markets of which the emerging markets expected to provide a higher-than-
average normalized growth rate for companies like P&G.

12. Real estate rates which may affect the Company’s ability to increase or
maintain the number of retail locations at which the Company sells its
products and the costs associated with the Company’s other facilities.

CPM – Competitive Profile Matrix


Estée Lauder L’Oreal Revlon
Critical Success Factors Weight Rating Weighted Rating Weighted Rating Weighted
Score Score Score
Market Share 0.17 3 0.51 4 0.68 2 0.34
Management 0.07 4 0.28 3 0.21 2 0.14
Price competitiveness 0.08 4 0.32 4 0.32 3 0.24
Financial Position 0.07 3 0.21 4 0.28 2 0.14
Product Diversity 0.12 3 0.36 4 0.48 2 0.24
Global Expansion 0.16 3 0.48 4 0.64 3 0.48
Customer Service 0.08 4 0.32 3 0.24 3 0.24
Website Design 0.07 4 0.28 3 0.21 2 0.14
Distribution 0.10 3 0.30 4 0.40 3 0.30
Consumer Loyalty 0.08 4 0.32 4 0.32 3 0.24
Total 1.00 3.38 3.76 2.50

External Factor Evaluation (EFE) Matrix


Weighted
Key External Factors Weight Rating Score
Opportunities
1. International expansion. Owned 29 well-known & reputable 0.09 4 0.36
brands easier to expand and exploit internationally
2. Increase of worldwide disposable income, as estimated, 70 0.07 4 0.28
million people reach income level that can purchase cosmetic
3. World aging population will multiple 2.5x in the next 40 years 0.07 4 0.28
4. BRIC has cushioned down the economic softness effect and 0.07 4 0.28
high luxury beauty demand from emerging market
5. Global warming and environment pollution effects, lead to 0.04 4 0.16
more demand on clinical and preventive cosmetics products
6. Men cosmetic market is constantly increase and forecasted 0.05 3 0.15
world growth rate of 2.3% per year between 2005-2010
7. Constantly increasing of online purchase trend, 875 million 0.05 4 0.20
consumers worldwide have made a purchase on the internet
8. Acquisition of local and international cosmetic brands 0.06 3 0.18
9. Opportunities in fashion related industry, Eg: handbags 0.04 1 0.04
10. More high aims luxury stores and presence air ports exist 0.03 3 0.09
11. Growing in global fashion and entertainment industry 0.04 3 0.12
Threats
1. Aggressive competition from the competitors who targeting 0.07 3 0.21
the same market segments

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2. Changed of spending atmosphere and pattern of the luxury 0.05 4 0.20


goods’ consumers in amidst the economic downturn
3. Competitive pricing of other products, almost 60% price 0.05 3 0.15
lower coupled with threats of counterfeit products
4. Internet security threat on its e-commerce, consumer database 0.02 3 0.06
and company website
5. Rise in energy and raw material prices and IT system & 0.04 3 0.12
infrastructure cost, & new product testing technique cost
6. Foreign currency fluctuations impacted USD instability 0.03 2 0.06
7. Consolidations, restructurings, bankruptcies, reorganizations 0.04 3 0.12
and destocking in the retail industry
8. Interest rates are expected to grow 1.7% annually 0.02 2 0.04
9. Restrictive & changes of policies & rules, and religion issues 0.03 1 0.03
10. Boycott & complaint due to political & spokesperson issue 0.01 1 0.01
11. The Companies might become acquisition target of other giant 0.01 1 0.01
market players
12. Real estate rates affected distribution channels’ performance 0.02 3 0.06
TOTAL 1.00 3.21

E. Internal Audit

Strengths
1. Icon of reputable upscale/prestige pricing cosmetic products with quality,
brand imagery, creatively and innovative as the hallmark for more than 60
years. The Companies’ name representing the products’ quality and value.

2. Owned 29 worldwide well-known and favorable brands of upscale and quality


cosmetic products coupled with strong market penetration over 140 countries
giving the Companies a strong and solid foundation to continue grow and
expand. Those brands are the Companies’ biggest assets and well speak on
behalf of the Companies.

3. Managed to conquer the internet market since 1996, for FY2008 itself, the
online sales soared 40%. Today, the on line sales is the Companies’ fastest
growing channel. The Companies is doing well compared to its competitor, its
on line purchase system policies and transaction security has assured
consumer’s worries.

4. Actively involved in acquisition of other quality and well doing cosmetic


brands and products to further enhance the Companies’ products, brands and
market share. Its recent acquisition of Ojon in July 2007, not only added a
well-known brand under the Companies flag, but also provides an
opportunities to the Companies to have a stronger presence in direct response
TV channel, which the brand markets products primarily through direct
response TV. The 13.3% increased in hair care category, primarily reflected
the inclusion of the Ojon wildcrafted beauty brand.

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5. Sales revenue soared 12.4% amounted to USD$7,910 million and net earning
from continuing operations up 5.8% amounted to USD$473 million in
FY2008. The grew is due to increase of sales revenues in all regions and
product category. Especially sales in Europe, the Middle East and Africa, and
Asia/Pacific area soared 20.6% and 21.3% respectively compared to year
2007. Meanwhile, care products sales volume also rose 15% from last year’s
USD$2,601 to USD$2,996.8.

6. High share dividends growth at 22.42% compare to the industry normal


practice of 12.18% and good return on capital at 16.7% to shareholders.

7. Notable current P/E (as at 22.07.2009) at 18.9% and with highest at 34.1% in
last 5 years. Which industry’s current P/E is average at 15.3% and highest
average is only at 17.3%. However, it is notable that the Companies average
P/E has been deteriorate compared to last five years’ figure.

8. Great leadership and management from the founder till the latest successors.
CEO-William Lauder’s 3 multi principles: 1) Multi-national, 2) Multi-channel
and 3) Multi-brand strategies lead the Companies hit another miles storm and
Fabriozio Freda, the President and COO), who earned two decades of
experiences in global consumer products and luxury goods companies is now
servicing the Companies. Besides, the Companies also has a well top
management successor planning, Eg: William Lauder (CEO) had mapped out
a succession plan that anticipates Fabrizio becoming CEO within two years of
his hire, the plan is ensuring the Companies’ directions and strategies are
constantly and consistently on going.

9. The Companies has embedded the entrepreneurship and friendly work


principles from the founder to the beauty experts. The staffs are work under
high morale spirit who willing to contribute and work hard for the Companies,
by delivering better services to consumers thus sustain and grow the market
shares.

10. Managed to create iconic products’ spokesman via famous and well known
celebrities and models. Eg, Gwyneth Paltrow and Hihary Rhoda are
representing the Companies’ Tom Ford Beauty’s products, with success to
boot up the sales of the respective brand’s products.

11. Pioneer in creating new innovation products coupled with creative marketing
and packaging technique. Although has been classified as the global cosmetic
giant, the Companies consistently design and manufacture new innovative
products, eg: its recent kick off of the industry first breakthrough technology
revolutionized night-time facial skin repair, received warm response from the
public, 250,000 10-day samples of the products has been distributed at all
Estée Lauder department and specialty store nationwide.

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MHM1523 Strategic Management
Individual Assignment- Estée Lauder Companies, Inc

12. Fast and early stepped in to constantly growing market and ability to
understand the needs and aspirations of India and China markets. This
strength has make the expansion on the respective counties without much
barriers, as the local distributors and management can identify and capture the
market demand.

13. Worldwide R&D facilities focused on creating and enhancing the products
that cater to consumers in specific markets and regions, based on their cultural
preferences, skin tones and beauty habits. This is obviously worked in Asian
countries’ markets which are very much different with Americas and
European countries due to the climate, environment and etc vary.

14. The name of Estée Lauder has mean more than just cosmetic but also a social
concern and responsible company, its various social concern activities earned
public’s appreciation, respects and recognition. It’s Breast Cancer Awareness
Campaign since 1992, till October 2008 have distributed more than 80 million
pink ribbons and informational brochures and managed to raise USD$35
million for research and awareness programs, meanwhile M.A.C AIDS Fund
has raised over USD$140 million through sales of the VIVA GLAM lipstick
line and other initiatives. Several of recognition received by the Companies
through out the years, it is kind of intangible goodwill and image for the
Companies instead.

Weaknesses
1. Low R&D expenses compare to other competitors, which only amounted to
USD$80.9 million or approximately 1% of the total sales for FY2008, which
is lower than the other competitors who are usually spend 1.5-3% of the total
safes revenue for R&D expenditure.

2. Low net income growth at 9.19% for last 5 years average compare to the
average industry rate at 11.71%. The net income has been offset by big
portion increase of operational cost and cost of sales. The company’s latest (as
at 31.03.09) YTD to YTD net income has dropped 33.20% and compare to
FY2008’s third quarter, present quarter’s net income has tremendously
decreased 69.80% due to the global economic softness effect and high
operation cost.

3. Current (as at 22.07.2009) net profit margin much lower then the industry
standard of 12.7%, only recorded 4.8%. This reflected the Companies’
operational costs and cost of sales are high.

4. Low inventory return at only 2.2 times while industry practices are 4.8 times.
This is mainly due to the increased of its inventory from some of the shut
down departmental stores and promotional merchandise.

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MHM1523 Strategic Management
Individual Assignment- Estée Lauder Companies, Inc

5. The Companies’ total liabilities are on increase trend, from 2007’s total of
USD$2,905 million to 2008’s USD$3,331 million conspicuously in non
current liabilities. The high liabilities will due to higher interest payable to
financial institution and indirectly lower the net income generation, eg, in year
2008, the total interest expenses rose 72% or USD$27.9 million from 2007’s
USD$38 million.

6. 2008 operation income by region-the Americans has dropped 32% or


USD$108 million reflected although sales in the Americans had rose
USD$150 million to USD$3.71 billion but it was insufficient to cover the
overall operational expenses.

7. Hair care product has generated the less operation income, yet, recorded a
dropped of 73% to USD$11.5 million in 2008 from FY2007’ USD$42.5
million.

8. During the discounting period, the margins on the retailers get squeezed, thus
retailers will demand for bigger discount, thus giving effect to the Companies’
revenues.

9. Almost 40% of the Companies’ sales are contributed from the US market and
Americas luxury market’s is expected to drop 15% in year 2009. For an
established international company it was unfavorable and discourages a single
market contributed more than 30% of the total revenue, which will caused the
dependent. Ideally, the portion shall be in the range of 25-30%.

10. Since the establishment of the Companies, the Estée Lauder concentrated on a
single international image and didn’t have different advertisement campaigns
in each country, although ever one of the Companies’ competitors did. The
image was the same worldwide. This might created a barrier to some
international markets as they might not familiar with the spokesperson and the
some advertisements design and materials might not suitable globally.

Financial Ratio Analysis (As at June 2009)


Growth Rates % Estée Lauder Industry SP-500
Sales (Qtr vs year ago qtr) -9.80 -7.4 -8.9
Net Income (YTD vs YTD) -33.20 -0.30 -7.50
Net Income (Qtr vs year ago qtr) -69.80 -6.30 -44.80
Sales (5-Year Annual Avg.) 9.19 11.71 13.22
Net Income (5-Year Annual Avg.) 9.41 13.48 13.65
Dividends (5-Year Annual Avg.) 22.42 12.18 12.15
Price Ratios
Current P/E Ratio 18.9 15.3 82.8
P/E Ratio 5-Year High 34.1 17.2 13.6
P/E Ratio 5-Year Low 8.6 8.0 2.9
Price/Sales Ratio 0.87 1.87 1.73
Price/Book Value 4.05 6.82 3.41
Price/Cash Flow Ratio 10.8 11.7 11.00

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MHM1523 Strategic Management
Individual Assignment- Estée Lauder Companies, Inc

Profit Margins
Gross Margin 74.6 49.8 38.2
Pre-Tax Margin 7.4 17.2 11.8
Net Profit Margin 4.8 12.7 8.2
5Yr Gross Margin (5-Year Avg.) 74.5 52.2 38.6
5Yr PreTax Margin (5-Year Avg.) 10.1 16.7 16.6
5Yr Net Profit Margin (5-Year Avg.) 6.2 11.7 11.5
Financial Condition
Debt/Equity Ratio 0.94 1.17 1.10
Current Ratio 2.0 1.0 1.4
Quick Ratio 1.4 0.6 1.1
Interest Coverage 9.1 14.0 -16.3
Leverage Ratio 3.1 3.3 3.6
Book Value/Share 8.4 15.38 18.34
Investment Returns %
Return On Equity 22.2 35.9 20.4
Return On Assets 7.2 10.2 6.9
Return On Capital 10.5 14.1 9.5
Return On Equity (5-Year Avg.) 26.1 38.9 19.9
Return On Assets (5-Year Avg.) 10.6 10.3 8.2
Return On Capital (5-Year Avg.) 16.7 14.7 11.1
Management Efficiency
Income/Employee 11,378 68,464 72,037
Revenue/Employee 239,159 509,590 939,742
Receivable Turnover 7.1 11.7 14.7
Inventory Turnover 2.2 4.8 10.5
Asset Turnover 1.5 0.9 0.9
Source: www.moneycentral.msn.com (retrieved on: 22.07.2009, amounts are in U.S. Dollar)

Date Avg. P/E Price/Sales Price/Book Net Profit Margin (%)


06/08 18.30 1.16 5.48 6.0
06/07 19.80 1.34 7.38 6.4
06/06 24.80 1.30 5.05 5.0
06/05 24.20 1.42 5.09 6.5
06/04 24.30 1.97 6.40 6.6

Date Book Value/ Share Debt/Equity ROE (%) ROA (%) Interest Coverage
06/08 $8.48 0.72 28.7 9.5 NA
06/07 $6.17 0.91 37.4 10.9 NA
06/06 $7.66 0.32 20.0 8.6 NA
06/05 $7.68 0.42 24.2 10.5 NA
06/04 $7.62 0.31 21.8 10.2 NA
Source: www.moneycentral.msn.com (retrieved on: 22.07.2009, amounts are in U.S. Dollar)

Net Worth Analysis (As At June 2008 in millions-U.S. Dollar)


1. Stockholders’ Equity + Goodwill = USD$1,653 million + USD$900.8 million 2,554
2. Net income x 5 = USD$473.8 million x 5 2,369
3. Share price = USD$44.10/EPS USD$2.40 =USD$18.38 x Net Income 473.8 million= 8,708
4. Number of Shares Outstanding x Share Price = 258.8 million x USD$44.10 = 11,413
Method Average USD$6,261

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MHM1523 Strategic Management
Individual Assignment- Estée Lauder Companies, Inc

Internal Factor Evaluation (IFE) Matrix


Weighted
Key Internal Factors Weight Rating Score
Strengths
1. Icon of reputable upscale cosmetic products with quality, 0.10 4 0.40
brand imagery, creatively & innovative for more than 60years
2. Owned 29 worldwide well-known brands of cosmetic 0.10 4 0.40
products coupled with market penetration over 140 countries
3. Managed to conquer the internet market since 1996 & for 0.04 3 0.12
FY2008, the online sales soared 40%
4. Actively involved in acquisition activities 0.05 3 0.15
5. Sales revenue soared 12.4% & net earning rose 5.8% in 2008 0.04 4 0.16
6. Share dividends growth at 22.4% & return on capital at 16.7% 0.03 3 0.09
7. High current P/E ratio for at 18.9% 0.03 4 0.12
8. Great leadership and management & well successors planning 0.05 3 0.15
9. Talented staffs embedded with entrepreneurship 0.05 4 0.20
10. Iconic products’ spokesman via famous celebrities & models 0.04 3 0.12
11. Pioneer in creating new innovation products coupled with 0.06 4 0.24
creative marketing and packaging technique.
12. Fast and early stepped into India & China, able to understand 0.04 3 0.12
the needs and aspirations
13. Worldwide R&D facilities creating products that cater to 0.03 3 0.09
consumers in specific markets and regions
14. EL has mean more than just a cosmetic company 0.04 4 0.16
Weaknesses
1. Low R&D expenses, only approximately 1% of the total sales 0.05 2 0.10
2. Low net income growth at 9.19% for last 5 years average 0.03 2 0.06
3. Net profit margin only recorded 4.8% 0.03 2 0.06
4. Low inventory return at only 2.2 times 0.04 2 0.08
5. Total liabilities increase to USD$3,331 million 0.03 1 0.03
6. Americas’ operation income has dropped 32% or USD$108 0.03 2 0.06
million although sales in rose USD$150 million
7. Hair care product’s operating income dropped 73% to 0.03 1 0.03
USD$11.5 million
8. During discounting time, retailers will ask for higher discount 0.01 2 0.02
9. Almost 40% of total sales are from the US market 0.03 2 0.06
10. Concentrated on a single international image 0.02 2 0.04
TOTAL 1.00 3.06

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MHM1523 Strategic Management
Individual Assignment- Estée Lauder Companies, Inc

F. SWOT Matrix Strategies

SO Strategies
1. Continue to create innovative and quality cosmetic products, and distribute or
sales via the effective marketing way (S1, S2, S3, S10, S11, O3, O5, O6, O7,
O9)
2. Further consolidate and conquer the existing oversea markets, conspicuously
in BRIC, Middle East and Europe, and exploit other new potential markets
(S2, S5, S9, S12, S13, O1, O2, O4, O9, O11)
3. Enhance existing internet markets’ sales and gain public confidence on the
safety of internet transaction (S2, S3, 02, 07)
4. Worldwide R&D center playing important role on the success of the
Companies’ products to match the local markets need and aspiration (S4, S13,
O1, O3, O5, O9, O12)
5. Ongoing social concern activities will up lifted the Companies image which
directly giving the extensive promotion to the Companies (S1, S8, S14, O1,
O10,)

WO Strategies
1. Increase the R&D expenditure (W1, O3, O5, O6, O9)
2. Reduce the expenses in Cost of Sales and Operating Cost, conspicuously in
America’s markets, eg: purchase through internet, production based on
demand (W2, W3, W4, W5, W6, W7, W9, O1, O2, O7, O9)

ST Strategies
1. Continue products revolution and enhancement and diversification without
compromise the quality, packaging, innovative, creativity and unique (S1, S2,
S11, S13, T1, T2, T3)
2. Continue to expand international business into new countries and localities
(S1, S2, S9, S12, T1, T2)
3. Experience and actively involved in acquisition (S2, S4, T1, T3, T7, T9, T12)
4. Stability and consistency of the management team and talented staffs ensuring
the Companies objectives and policies are in line and moving forward (S5, S6,
S7, S8, S9, S14, T3, T4, T5, T9, T10)

WT Strategies
1. Effort to reduce the Companies’ liabilities, conspicuously the long term
liabilities, thus the interest expenses will reduce accordingly (W2, W5, T5,
T8)
2. To reduce the operational cost and effectively resources usage in the cost
rising environment (W2, W3, W4, W6, W7, T3, T5)
3. Less depending on US & UK markets’ sales, thus the business will not too
depending on particular locality (W6, W9, T2, T7)

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MHM1523 Strategic Management
Individual Assignment- Estée Lauder Companies, Inc

G. SPACE Matrix

FS
Conservative Aggressive
6

CA IS
-6 -5 -4 -3 -2 -1 1 2 3 4 5 6
-1

-2

-3

-4

-5

-6
Defensive Competitive
ES

Financial Strength (FS) Environmental Stability (ES)


Return on Assets (ROA) 5 Rate of Inflation -2
Leverage 5 Technological Changes -2
Net Income 5 Price Elasticity of Demand -2
Income/Employee 2 Competitive Pressure -5
Revenue/Employee 3 Barriers to Entry into Market -3

Financial Strength (FS) Average 4.0 Environmental Stability (ES) Average -2.8

Competitive Advantage (CA) Industry Strength (IS)


Market Share -2 Growth Potential 5
Product Quality -1 Financial Stability 5
Customer Loyalty -2 Ease of Entry into Market 5
Technological know-how -2 Resource Utilization 3
Control over Suppliers and Distributors -2 Profit Potential 5
Competitive Advantage (CA) Average -1.8 Industry Strength (IS) Average 4.6

x-axis: -1.8 + 4.6 = 2.8


y-axis: 4.0 + -2.8 = 1.2

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MHM1523 Strategic Management
Individual Assignment- Estée Lauder Companies, Inc

 According to the SPACE matrix model and based on the scores, Estée Lauder’s
directional vector is located in the aggressive quadrant of the matrix

 Indicated the Companies is in excellent position to use its internal strengths to


take advantage of external opportunities, overcome internal weaknesses and avoid
external threat

 Therefore, market penetration, market development, product development,


backward integration, forward integration, horizontal integration, diversification,
or a combination strategy can be feasible, depending on the specific
circumstances that faced by the Companies

 This is absolutely in line and supported by the earlier SWOT Matrix Strategy’s
recommendations in Section F.

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MHM1523 Strategic Management
Individual Assignment- Estée Lauder Companies, Inc

H. Grand Strategy Matrix

Rapid Market Growth

Quadrant II Quadrant I

Weak Strong
Competitive Competitive
Position Position

Quadrant III Quadrant IV

Slow Market Growth

 Estée Lauder Companies’ directional vector is located in Quadrant 1 of the Grand Strategy
Matrix, which technically recognized as an excellent strategic position.

 The position also reflected the Companies afford to take advantage of external opportunities
in several areas and the Companies shall continued concentration on current markets (market
penetration and market development), products development, backward integration, forward
integration, horizontal integration, diversification, or a combination strategy can be feasible,
depending on the specific circumstances that face the Companies.

 This is also in line with earlier strategies proposed in section F: SWOT Matrix Strategies
and section G: SPACE Matrix.

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MHM1523 Strategic Management
Individual Assignment- Estée Lauder Companies, Inc

I. The Internal-External (IE) Matrix


The IFE Total Weighted Score

Strong Average Weak


3.0 to 4.0 2.0 to 2.99 1.0 to 1.99
High I II III
3.0 to 3.99

Estée Lauder

Medium IV V VI
The EFE Total 2.0 to 2.99
Weighted Score

Low VII VIII IX


1.0 to 1.99

Grow and Build


Revenue % Profit % EFE IFE
Segments USD$ Revenue USD$ Profit Scores Scores
1. Skin Care 2,996.8 37.9 405.6 50.0
2. Makeup 3,000.4 37.9 359.4 44.3
3. Fragrance 1,432.0 18.1 36.2 4.5 3.21 3.06
4. Hair Care 427.1 5.4 11.5 1.4
5. Others 54.5 0.7 -1.6 -0.2
6. Special charges related to cost initiative - - -0.4 -0.0
TOTAL 7,910.8 100 810.7 100

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MHM1523 Strategic Management
Individual Assignment- Estée Lauder Companies, Inc

 Based on the EFE and IFE’s total weighted scores, Estée Lauder’s directional
vector is located into cells I

 which can be described as grow and build direction

 Intensive (market penetration, market development, and product development) or


integrative (backward integration, forward integration, and horizontal integration)
strategies can be most appropriate for the Companies.

 Again, this is in line and matched with earlier 3 matrix or techniques

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MHM1523 Strategic Management
Individual Assignment- Estée Lauder Companies, Inc

J. Recommendations
Above 4 techniques/ matrix indicated market penetration, market development,
product development, backward integration, forward integration, horizontal
integration, diversification, or a combination strategy are the most appropriate
strategies for the company, thus following recommendations are convincingly
proposed:

1. Continue to expand, focus and exploit the market of BRIC, Middle East, Europe,
Africa and South East Asia which the economic growing is prolonged and will led
and changed the spending power and pattern from middle range to high middle
and high aim products. Population trends on the mentioned location are constantly
increase, huge market opportunities are available.

2. Study and research the possibility of the opportunities in the mass market, which
presently have been conquered by P&G, Unilever & Colgate-Palmolive, with out
compromised the Companies’ existing portfolio. Eg: the Beauty Bank and
Clinique. Also, to consider the business opportunities in other areas of luxury
goods, eg: leather goods, clothing and jewelry, as the Companies is well
experienced and penetration of upscale products market pattern and marketing,
furthermore, the huge network distribution channel and the well know icon name
will be an invaluable advantage for the Companies.

3. Intense competition is the major threat for Estée Lauder. Therefore, it needs to be
aware of what the competitors are doing, and respond accordingly to retain its
market share.

4. Continue to nurture the traditional department store channel by creating


innovative programs designed to bring consumers to the counters, as globally,
department stores still account for more than 50% of the Companies net sales.

5. Continue to make progress on its’ Strategic Modernization Initiative (SMI). By


uniting the Companies’ global organization with common systems, functions and
practices, SMI will help maximize efficiency, unlock shared innovation and
enable superior quality and customer service.

6. Identifying the underperforming brands and products, then plan for effective
improvement plan and effort to reduce the inventory turn over days.

7. Reduce and control the Companies high liabilities condition, especially the long
term liabilities.

8. Belt-tightening plan in order to further cut down the Companies’ operational cost,
eg: hiring freeze, reduction on travel and entertainment.

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MHM1523 Strategic Management
Individual Assignment- Estée Lauder Companies, Inc

K. Conclusions
Although the Companies has been established for more than 60 years, penetrated
140 counties, sales reached an all-time record of nearly USD$8 billion and
earned the world recognize on the brands, products, management and many other
areas, but the Companies never seen to be satisfied. Estée Lauder Companies still
aggressive expand and explore new market and opportunities either in local or
internationally. The brands portfolio will continue to expand via own R&D results
or via acquisition of other brands and products.

Although the Companies is principally managed and owned by the Lauder’s


family, but the Companies has never taking out any prevention or restriction for
talented people to join and contribute, however, their talents and contributions
been appreciate and acknowledged, thus better opportunities and challenge
awaiting for them.

Besides, making better return to the shareholders, the Companies also taking care
for its stakeholders and social concerned by providing best working opportunities
and working place for staffs, provide better shopping experience and environment
to the customers and actively participate in public welfare and concern activities.

In amidst of the world uncertainty economic climate, the Companies has to apply
the precaution steps in order to further sustain and enhance the Companies
position and competitive advantages.

------ End ------


Read more details at:

http://dspace.hh.se/dspace/bitstream/2082/1157/1/chareyron.pdf
http://librapport.org/getpdf.php?get=558&id=17&pagename=FILE:download/document%20view
- 06/03/07
http://www.wikinvest.com/stock/Estee_Lauder_Companies_(EL)
http://www.chinadaily.com.cn/bw/2009-01/12/content_7386322.htm
http://www.researchandmarkets.com/reports/613730/
http://strategis.ic.gc.ca/eic/site/imr-ri.nsf/eng/gr109991.html
http://news.moneycentral.msn.com/ticker/article.aspx?Feed=AP&Date=20090713&ID=1013980
8&Symbol=EL
http://www.thebudgetfashionista.com/archive/estee-lauder-products-shrink-in-size-and-price/
http://moneycentral.msn.com/investor/invsub/results/hilite.asp?Symbol=EL
http://www.cosmeticsdesign.com/Financial/Estee-Lauder-files-suit-over-fragrance-imitations
http://www.encyclopedia.com/doc/1G1-177912313.html
http://www.bloomberg.com/apps/news?pid=20601205&sid=a6iK65fz7qNA&refer=consumer
http://www.ft.com/cms/s/0/0fd83402-770d-11de-b23c-00144feabdc0,dwp_uuid=70662e7c-3027-
11da-ba9f-00000e2511c8.html?nclick_check=1
http://www.wikinvest.com/stock/Estee_Lauder_Companies_(EL)
http://www.fxstreet.com/fundamental/economic-indicators/gdp-observatory/2009-04-17.html

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