“Estée Lauder and L’Oréal Face Challenges in the Cosmetic Industry”

"Estée Lauder and L'Oréal Face Challenges in the Cosmetic Industry"

Cosmetic companies, long excited by Chinese consumers’ appetite for luxury goods, now face a challenging market due to economic slowdown, falling real estate prices, and rising youth unemployment in China. This has led consumers to cut back on spending. Major brands like Estée Lauder and L’Oréal report significant declines in sales and stock prices, with forecasts uncertain. The trend shift affects not just China but also the wider cosmetics market in the U.S. and Europe, where demand has also become unpredictable.

For years, managers in the cosmetics industry, much like their counterparts in the watch and jewelry sectors, were enthusiastic about the Chinese market. Chinese consumers increasingly indulged in luxury goods, not just at home but also while traveling around the globe. Rising wages and capital gains from stocks and real estate provided them with confidence, prompting many to purchase high-end skincare products, shampoos, and lipsticks.

Slowdown in Hong Kong and Hainan

Slowdown in Hong Kong and Hainan

However, what was once a thriving market for the industry in China has turned into a landscape fraught with challenges. Weak economic growth, a sharp decline in property prices, and rising youth unemployment have led many Chinese consumers to exercise restraint, often purchasing only the essentials.

The desire to travel among Chinese tourists has also noticeably decreased. This decline is being felt not only by department stores and duty-free shops in Europe and North America but also by businesses in Hong Kong and on the Chinese vacation island of Hainan.

For many years, the American cosmetics giant Estée Lauder benefited from a strong Chinese consumer base. In the most recent third quarter, however, the company reported an 11% decrease in revenue from the Asia-Pacific region, attributing this downturn to the drop in demand in China and Hong Kong.

Estée Lauder Cuts Dividend

Estée Lauder Cuts Dividend

Like many companies heavily reliant on the Chinese market, Estée Lauder is counting on recently announced government measures aimed at stimulating the Chinese economy to restore consumer confidence. However, the management in New York believes any improvement is likely to be a medium to long-term prospect. In the meantime, Estée Lauder has indicated that the company anticipates “further significant declines” in demand for cosmetics in China and in Asian stores catering to travelers.

Due to the substantial uncertainty, the company has opted not to provide guidance for the current fiscal year ending June 2025 and has decided to pay a dividend approximately half the previous amount. These troubling developments triggered a nearly 21% drop in Estée Lauder’s stock price on Thursday, with losses exceeding 50% since the beginning of the year.

While Estée Lauder’s stocks have taken a particularly hard hit, shareholders of most other cosmetics companies have also faced disappointing results this year. The American fragrance manufacturer Coty has seen its value drop by nearly 40%, while Japan’s Shiseido has witnessed a 27% decline. Even market leader L’Oréal has experienced a 21% decrease in its stock price since the start of the year.

L’Oréal Misses Market Expectations

L’Oréal Misses Market Expectations

L’Oréal is widely regarded in the industry for its strong innovation, well-balanced finances, and extensive product portfolio. However, the French giant has also become significantly more dependent on the Chinese market.

As a result of the poor performance in the Chinese market, L’Oréal’s organic growth fell short of market expectations in the third quarter. Estimates from broker Morgan Stanley suggest that last year, L’Oréal generated about one-fifth of its revenue from China.

What’s Next for the Perfume Boom?

What’s Next for the Perfume Boom?

Moreover, the cosmetics industry faces challenges not only from Chinese consumers but also from a tougher market environment in the U.S. and Europe. Following the easing of lockdown restrictions, cosmetics products initially saw high demand, similar to other consumer goods. However, it remains unclear what the new market equilibrium will be following this surge.

Recently, a significant rise in interest in expensive perfumes, particularly among teenagers and young adults, has boosted demand. Nonetheless, Morgan Stanley cautions that this trend might be short-lived, as trends in the cosmetics industry often do not last long.