By and  on October 28, 2003

NEW YORK — The Estée Lauder Cos. and Kohl’s Department Stores are building an historic relationship in an effort to broaden their reach in the beauty business.

In a deal that is expected to be announced today, Lauder has formed a strategic alliance with the Menomonee Falls, Wis.-based Kohl’s to create and manage color cosmetics and skin care departments, including fixturing, in Kohl’s stores beginning in fall 2004. To develop this and other projects, Lauder has also created a division called Beauty Bank.

This is the first time Lauder has formed such a relationship with a store, and marks a major move by the beauty company into the moderate beauty market and into creating proprietary brands for a retailer.

Rumors of a possible deal between the two multibillion-dollar companies have been percolating since May, as reported by WWD in a story on Lauder’s profits that ran in these columns on May 1.

In exclusive interviews with WWD, Dan Brestle, the group president of the Estée Lauder Cos. who will oversee this project as well as future ones created by Beauty Bank, and Kevin Mansell, president of Kohl’s, outlined the deal’s objectives.

“Under the terms of this agreement, we will provide exclusive lines and brands for Kohl’s,” said Brestle.

“We’ve looked at this opportunity and for all intents and purposes, it is incremental business for us,” said Mansell. “What we’re able to do with this alliance is answer a need. Beauty is a business that is near and dear to our target consumer’s heart, and there’s clearly a void [at Kohl’s] when it comes to this category. We don’t have to attract a new customer — we already have her. She is a loyal Kohl’s customer already. From a product standpoint, we’re making it convenient for her — we are creating a situation where everything she needs is available at Kohl’s. It is a huge opportunity.”

Mansell called Lauder “an obvious choice” for the alliance. “They’re clearly the preeminent supplier in this classification,” he said. “What they’ve put together for us is second to none.”In the first phase, the Lauder-created departments for Kohl’s will comprise multiple lines in color cosmetics and skin care. “This deal isn’t about us doing, say, one line for Kohl’s,” said Brestle. “It is about becoming the sole provider of branded color cosmetics and skin care for this retailer.” A significant number of individual brands, which will carry varying brand names and be available only at Kohl’s, are currently in development at Lauder. None of Lauder’s current brands will enter the channel, said Brestle. He declined to give further details regarding the Kohl’s collections, as did Mansell.

The first wave of new brands is expected to be launched in fall 2004. While neither Brestle nor Mansell would outline a specific number of sku’s, citing the fact that many are still in development, Brestle did note that it will be “a very significant number of products which will make the statement that both Lauder and Kohl’s are very serious about this project.”

Pricing is expected to come in at a moderate-prestige level — priced higher than traditional mass brands, but lower than many traditional department store brands. That could mean, say, an average price point of $10 to $14 for color cosmetics, although neither Mansell nor Brestle would comment.

Mansell noted “our focus is to reflect what we sell elsewhere in the store. That would be from the upper end of mass pricing to the lower end of prestige pricing.” Brestle added, “the Kohl’s products will be prestige in nature and will be priced accordingly.”

While neither executive would discuss plans for additional categories past the initial rollout, Brestle said, “As the relationship unfolds, we believe there will be opportunities in multiple categories.”

Currently, Kohl’s color cosmetics and skin care businesses are very small, with color cosmetics now only available in gift sets. Kohl’s assortment in other categories — including bath, body and fragrance — is fairly tight as well. Kohl’s current beauty vendors include several Coty brands — including The Healing Garden and Celine Dion fragrances — as well as a body care line, Earth Therapeutics, and a private label line called BodySource. Many Kohl’s departments also feature a very tightly edited lineup of prestige market fragrances such as Calvin Klein’s Obsession, Liz Claiborne’s Curve and Elizabeth Taylor’s Forever Elizabeth.Mansell said that the rollout process would likely prompt a reallocation of space for beauty, but emphasized that the category would continue to be very prominent in every Kohl’s store — although the broader product offering will make it more prominent than it currently is, in many cases. “Beauty will be close to the front door in every store,” he said, as it is now. While the rollout could also prompt a category editing process, Mansell said that, currently, no existing beauty vendors are slated to be eliminated.

Although a final door count for the initial launch has not yet been finalized, the new beauty departments are expected to roll out in 250 to 300 of Kohl’s 542 doors initially, with the remaining doors to follow in a second wave. The process is expected to take about a year. As reported Friday, Kohl’s is currently on an expansion track — it now operates 542 doors in 36 states, with another 95 planned for 2004.

Brestle declined to comment on Lauder’s investment in the project or its projected sales. However, in a conference call Aug. 14 to Wall Street analysts, Fred Langhammer, president and chief executive officer of the Estée Lauder Cos., said that Lauder was investing $15 million in new business development in fiscal 2004, and it is widely thought that the Kohl’s deal is what Langhammer’s comment referred to. It is also thought that the Lauder brands for Kohl’s have the potential of generating well over $100 million in retail sales within two years.

The Lauder division producing these brands, Beauty Bank — which will include an “A-team” of executives including Jane Lauder, Jane Hertzmark and Jim Nevins — is also expected to serve as a think tank of sorts. “Beauty Bank’s job is to develop brands for alternate channels of distribution,” said Brestle. “If someone brings forth an idea that hits a niche we’re not already hitting, we’re certainly open to entertaining those ideas.” Brestle emphasized, however, that “the initial objective of this division is to work with Kohl’s on this project. Our current goal is to develop brands that will appeal to a Kohl’s consumer.”Creating the Beauty Bank required a bifurcation of Lauder’s extensive talent pool, said William Lauder, chief operating officer of the Estée Lauder Cos., who noted that there are certain kinds of executives who are good at creating and nurturing brands, then there are those good at managing established businesses. He said the trick is in freeing the creative minds to work their magic.

Lauder said the Beauty Bank concept grew out of several considerations. One is that opportunities can be found outside traditional market definitions and it was decided that it was more sensible to build brands than to buy them because acquired properties bring their own baggage. And Lauder has plenty of marketing minds on hand.

During the last decade, Lauder’s new brands have all resulted from acquisitions, rather than those that were homegrown. They include Bobbi Brown and La Mer, both acquired in 1995; Aveda and Jane, both acquired in 1997; Stila and Jo Malone, both acquired in 1999; Bumble and bumble, of which a majority share was purchased in 2000; MAC, of which a majority share was purchased in 1994 and the remainder purchased in 1997 and 1998; Darphin, acquired in January; Rodan & Fields, acquired in July, and the beauty license for Michael Kors, acquired from LVMH Moët Hennessy Louis Vuitton in May. In addition, the company has, in the last 10 years, signed licensing agreements with Tommy Hilfiger, Donna Karan and Kate Spade. The last “homegrown” brand for the Estée Lauder Cos. was Origins, formed in 1989 and which began its distribution in 1990.

Kohl’s is a strong example of a new opportunity since it offers a layer of business between Wal-Mart and the department stores, Lauder pointed out.

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