In Singapore, it is common to see various types of skincare stores targeting consumers at different price point. A serum could easily range from approximately $20 in Watsons, to more than a hundred in Sephora. So what is the reason for such price discrepancy?
Advertisement. That’s the first thing that comes to our mind.
But is that really true? Let us dive deeper into the financial statements of some of these companies to give us more insights.
The two companies that we are looking at are Estee Lauder and L’oreal Group. Both of them are the top players within the beauty industry and at the same time, have subsidiaries that are also within the beauty and cosmetics sector. We did not look at P&G and Unilever Group, as these conglomerates have brands across various sectors and hence their advertisement cost may not be reflective of what they spend marketing their beauty brands.
The following figures are extracted from the 2014 annual report of the individual group.
Cost Of Sales Is About 20% – 30% Of Total Revenue
For example, if the sale price of Estee Lauder Advanced Night Repair Serum is $140, the approximate cost of manufacturing and packaging it would be about $28.
So where did the remaining $112 go? In the company’s pocket? No.
| Estee Lauder ($ millions) | L’oreal (€ millions) | |
| Revenue | 10,968.8 | 22,532.0 |
| Cost of Sales | 2,158.2 | 6,500.7 |
| % of Cost of Sales Compared to Revenue | 19.7% | 28.8% |
Selling Expenses Takes Up The Bulk Of The Revenue.
Selling expenses include expenses like advertising, distribution cost, cost of setting up point of sales and labour cost. From the table below, it can be seen that 50% to 60% of the revenue earned is used to pay for such selling expenses.
In other words, when take the example of our Estee Lauder serum, about $89 goes to marketing related expenditure such as advertisement, rental, provision of samples and the cost of hiring the salesperson whom you are speaking to.
| Estee Lauder ($ millions) | L’oreal (€ millions) | |
| Selling, general and administrative cost | 6,985.9 | 4,821.1 |
| Advertisement | (Group didn’t breakdown, it is under selling expense) | 6558.9 |
| Total Cost | 6,985.9 | 11,380.0 |
| % of Revenue | 63.6% | 50.5% |
They Have To Pay Tax And Interest.
The company does not get to keep the remaining $23 as profit. This amount is also subjected to corporate tax and interest payment. These are their net earnings after that.
| Estee Lauder ($ millions) | L’oreal (€ millions) | |
| Net Earnings | 1,209.1 | 2,765.9 |
| % of The Revenue | 11.0% | 12.2% |
In summary, Estee Lauder gets to keep about $15.40 of the $140 you spent. This gives them a net margin of about 11%. L’oreal have a similar net margin of 12.2% as well.
In the glamourous beauty industry, players face cut-throat competition as consumers are faced with endless numbers of products and choices. Players in this industry spend large amount of marketing dollars to entice consumers and to differentiate themselves from their competitors. Higher-end products also tend to spend the most money on marketing expenses in order to provide a luxurious experience for their customers.
When you are applying your serum tonight, we hope that you will see it in a different light.
Advertiser Message
Get The Latest Bite-sized Investment News, Ideas & Insights
It's free! Don't miss out on the latest financial market movements. FSMOne aims to help investors around the world invest globally and profitably, follow FSMOne’s Telegram for bite-sized finance analyses and exclusive happenings.
