By and  on July 18, 2008

The Estée Lauder Cos. has gained its first firm foothold in the booming beauty market of India by acquiring a minority stake in Forest Essentials, a fledgling ayurvedic skin, body and hair care manufacturer based in Nida, a suburb of Delhi.

Forest Essentials, which manufactures its products in the heart of the Himalaya Mountains, was founded in 2000 by Mira Kulkarni, who is the chief executive officer. The product range has grown beyond 100 stockkeeping units, which are now retailed in seven Forest Essentials freestanding stores, along with hotels and spas. Two more freestanding stores are expected to open soon, with plans for six more by yearend and a total of 35 by the end of 2010.

The acquisition of a minority share in what could be construed as a small firm still in the startup stage might seem like a modest move, but it fits into a very large ambition pursued by Lauder, a longtime market leader now undergoing something of a sea change.

Lauder has increasingly worked to shift its focus abroad. In the last year, ceo William P. Lauder has frequently stressed international is becoming a larger portion of the firm's business and one that offers a more meaningful return on investment. Following the company's earnings call in May, Lauder told WWD, "We will overallocate resources to these faster-growing markets."

Later that month, Lauder noted, "The fact of the matter is, we look at ourselves as one of the larger American consumer packaged goods companies," adding that in his view many of the best consumer packaged goods companies generate 60 to 80 percent of their sales outside North America. Lauder currently does 55 percent of its sales outside North America. The ceo declared, "I hope I can sit here five or 10 years from now and talk to you about our having accomplished our goal of doing 70-plus percent of our business outside North America."

This diversification drive has dovetailed with the arrival of Fabrizio Freda as Lauder's new president and chief operating officer, who is expected to move up to ceo. After a recent meeting between Freda and security analysts, Wachovia Capital Markets analyst Jason Gere wrote, "Opportunities still exist for the company, with a focus on building dominant market shares in key regions."

Indeed, throughout the Lauder organization, India is viewed as a ripe opportunity. A MAC Cosmetics store was opened in Mumbai in July 2005 and a freestanding Estée Lauder unit opened there recently. In addition, Clinique, Tommy Hilfiger, Donna Karan and Aramis have also entered the market.

During an interview this week, Daniel Rachmanis, senior vice president of business development in the international division, noted that the consuming class of India numbers 500 million people. According to the company, the total Indian beauty market totals $455 million, with prestige and luxury segments amounting to $65 million, growing at 25 percent a year. Cedric Prouvé, the Lauder group president in charge of international, acknowledged that there is an option to buy a majority stake in the future, but for now, "we are eager to learn more about the Indian market." In reaction to the deal, Lauder stated that the acquisition "gives us a stronger presence in the rapidly expanding prestige beauty business in India." He added, "We have seen how more and more consumers around the world are interested in beauty products with natural heritage."

Prouvé pointed out that India is rich in consumers, but historically finding enough upscale distribution could be a problem and proper branding is a challenge.

This deal seems free of those problems. Forest Essentials is merchandised in contemporary-styled 300- to 700-square-foot stores in upscale malls, such as the Select Citywalk Mall in Delhi, where MAC and Clinique have stores.

The Forest Essentials brand is rooted in ayurvedic principles of natural purity. Although the offices are located on the outskirts of Delhi, the factory is in a remote village in the Himalaya Mountains, seven hours away by train or bus. Speaking by phone from India, Kulkarni explained how the products "are made by hand in an old-fashioned way. We use local labor in factories in the village, while trying to keep it modern and very definitely traditional," with typical fragrances like sandalwood, rose and jasmine. The brand's persona is meant to be "completely Indian, but we have the feel of a contemporary store."The ayurvedic regimen, an ancient Hindu science of health and medicine, is "a way of life, involving seasonal foods and herbs picked at different times." Above all, "everything should be fresh," she said, adding that while preservatives must be used for viability, "all of the ingredients are purely natural, most of them organically grown."

The brand was positioned to stand apart from other ayurvedic lines, she said, based on a feeling of luxury, accessibility and user-friendliness.

The top-selling items are Rose Crystal Salt Body Polisher, priced at $25; a hand Pounded Organic Fruit Scrub, priced at $15, and Soundarya Facial Age Defying Serum, $35. Another top seller, Jasmine and Mogra Hand & Body Lotion, is $15. Rachmanis noted that the pricing is 75 percent above the average Indian mass brand, but 30 percent below the imported labels with their high import duties. Body care generates 58 percent of sales, skin care 38 percent and hair care the remaining 4 percent. Lauder declined to break out volume totals or the acquisition cost.

According to executives, the deal was spearheaded by William Lauder and his father, Leonard Lauder, the chairman. Kulkarni said she had resisted advances by other companies, but her attitude shifted in March 2007 after meeting Leonard Lauder, who was returning from Liz Hurley's wedding in Bombay. She was struck by "the instant rapport. He is totally in synch," she continued. "He knew exactly what I wanted to say before I said it." Kulkarni decided, "It would be a good thing to be part of the company, because it's not just commercially large, but has a lot of soul."

Kulkarni said she prizes Lauder's expertise in luxury brand-building and recognizes that "being part of the Estée Lauder group would give us a lot of leverage outside of India," which is a consideration for the future.

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