Business News

At Estée Lauder, a Brand Is Developed Just for China

Natasha Singer

How does an American-based company make deeper inroads in China after it has already introduced some of its popular, long-established brands?

People walk in front of an Estee Lauder advertisement at a metro station in Shanghai, China.
Bloomberg | Getty Images

Many multinational companies simply create a new product or two specifically for the Chinese market. But the Estée LauderCompanies , which already sells 12 of its 28 cosmetics brands in China, is taking that concept further: adding an entirely new brand.

Next month, the cosmetics company, known as the maker of popular brands like Estée Lauder, Clinique and Bobbi Brown, plans to introduce a hybrid East-meets-West beauty line called Osiao (pronounced O-Shao).

The new skin care brand caters to the tastes of consumers in Asia, using the full research and development capabilities of the Lauder company. Osiao’s specialized formulas, for example, contain Chinese plants like ginseng. To communicate the brand’s imported status to consumers, the product names on the bottles are labeled in English. In short, the hybrid brand is a modern mash-up of traditional Chinese medicine and the American science of marketing.

“It will be a brand with a unique position, a brand that will give consumers a sense of being local, of being really dedicated to them,” Fabrizio Freda, the chief executive of the Estée Lauder Companies, said in an interview this month. “Our ambition is for this to be one of the big brands in our Asia portfolio.”

Developed at a company research institute in Shanghai and manufactured in Japan, the cosmetics line is aimed initially at customers in China and is scheduled to go on sale first in select specialty stores in Hong Kong. Osiao is the first beauty brand created under the leadership of Mr. Freda, a former Procter & Gamble executive who joined the Lauder company as president in 2008 and became chief executive the following year. Osiao is part of Mr. Freda’s long-term plan to focus the company’s resources on markets with the greatest growth potential. But persuading Chinese consumers to buy into a wholly new brand created for them by an American company could be much more difficult for Lauder than simply introducing its global best sellers to the Asian market, industry analysts said.

“This is going to be an interesting experiment,” said Oru Mohiuddin, a senior personal care company analyst at Euromonitor International, a market research firm. “There could be a question of brand credibility.”

Mr. Freda, however, emphasized Osiao’s local connections. Company researchers in China spent several years extensively studying different types of Asian skin, he said, and the company tested the Osiao products on several thousand women in Hong Kong and mainland China, as well as Japan and Korea.

“If you do this from the U.S. with people that are not local, that would be a risk,” Mr. Freda said. “But we are doing this with our local people and they do understand what they are doing because it is their culture.”

If Osiao proves popular in China, he added, the company could market it elsewhere in Asia.

The company has a long history of pioneering in emerging markets. In the 1980s, Estée Lauder cosmetics and perfumes were sold in the Soviet Union. In the 1990s, when Leonard A. Lauder, the son of Estée Lauder, oversaw the company, it made deeper inroads in Russia and other parts of Eastern Europe. More recently, under William P. Lauder, the grandson of Estée and the company’s executive chairman, it expanded operations in India, Vietnam and China.

“It’s a part of our DNA,” William Lauder said.

Now Asia is one of the company’s fastest-growth regions. In its 2012 fiscal year, out of net sales of $9.71 billion, for the first time the company reported sales in the Asia-Pacific region of more than $2 billion. China itself represents the company’s third-biggest market — after the United States and Britain — accounting for about $500 million in annual sales.

Mr. Freda recently declared that he intended to make China the company’s “second home market.” To do that, the company created an internal group called “China 2020” whose job is to make sure that the company has the same level of management, local customer intelligence and operations in China as it does in the United States.

The company’s brands like Estée Lauder, Origins and MAC are sold in 58 cities across China. Mr. Freda said the company planned to take those brands into many other cities. Osiao, positioned as a luxury brand with facial serums that cost about $211, is also part of that expansion plan.

“They are making a big investment in China,” said Connie Maneaty, an analyst with BMO Capital Markets. “It gives you a sense of how meaningful China will be for them not just in the near term, but in the next 20 to 30 years.”

In fact, the company was so intent on developing an Asia-oriented brand that it kept Osiao under wraps — from both employees and competitors — for more than four years. IdeaBank, the Estée Lauder Companies’ in-house innovation unit, worked on the new line using a secret code name: “Project Flow.” The code name was a nod to the Chinese idea of ‘Qi,’ a mystical force that is sometimes translated as “energy flow.” Employees say they shredded Project Flow documents every night before they left the office.

Executives initially decided to dedicate the new brand to skin care — rather than perfumes, say, or color cosmetics like lipstick — because market research indicated that skin treatments were the most important category to Asian consumers. The company’s research institute in China identified further trends that helped influence the brand concept.

After women in focus groups reported that the qualities they prized most in skin were clarity and luminosity, for example, the company decided to market Osiao as a brand that could “help renew skin’s youthful radiance.” In a nod to consumers who said they believed in the power of medicinal plants, the company developed formulas with ingredients like the Asiatic Pennywort herb and ganoderma, a type of mushroom.

The brand’s in-store counters are designed to emulate traditional apothecaries, with wooden drawers and cabinets. To further that theme, first-time customers will be invited to sit down with a skin care adviser who will take them through a questionnaire and observation process that echoes the diagnostic techniques used by practitioners of traditional Chinese medicine. Afterward, the advisers will give clients suggested skin care regimens customized for their own skin type.

Even the brand name is intended to seem vaguely familiar to Asian audiences. Company executives said they deliberately chose “Osiao,” as the brand name because it begins and ends with the letter “O,” a symmetry intended to convey a sense of harmony and balanced skin. (Although the executives did not know it when they chose the brand name, Osiao is a village in the Philippines). The cosmetics executives also liked that the word Osiao contained five letters — a lucky number in China, they said.

Whether such calculated Orientalist touches will truly appeal to beauty consumers in China — or merely seem like pandering — remains to be seen. After all, Osiao will be competing for customers not only with European brands like Lancôme, but also with native Asian brands, like Aupres, a skin care line for the Chinese market from Shiseido.

“We made a lot of effort to understand the consumer from her point of view, not from an American point of view,” said Veronique Gabai-Pinsky, the global brand president of the unit responsible for Osiao. “Hopefully all of our research will translate into marketplace success.”

Even so, Mr. Freda insists on live market testing, which is why the company is giving Osiao a slow rollout. The company plans to introduce the brand in October in two Lane Crawford stores in Hong Kong, as well as on Hong Kong flights by Cathay Pacific.

“We will use this experience to fine-tune the brand,” Mr. Freda said. “Then we will be ready for launch in mainland China in a couple of years and then Japan.”

Industry analysts said they also expected Osiao to appeal to Asian consumers who travel abroad and shop in duty free outlets.

“I suppose the worst-case scenario is that it’s a niche brand,” said Ms. Maneaty of BMO Capital. “The best case is that it becomes significant and expands throughout Asia over time.”