Estee Lauder sees luxury and men key to re-igniting sales

NEW YORK - Estee Lauder Cos Inc is counting on a new fragrance from luxury Italian fashion house Ermenegildo Zegna to help it tap into the industry's most promising markets - the very high-end and men.

Sales at Estee Lauder's fragrance business - about one-eighth of overall revenue - are still below pre-recession levels and were flat in the quarter ended Sept. 30 excluding the impact of currency. That compares with growth of 7 percent and 6 percent for skin care products and makeup, its two biggest divisions, over the same period.

So the company is looking to win market share in the so-called "prestige" market for fragrances - such as those made by French luxury group LVMH and L'Oreal - that are sold at department and specialty stores instead of drug stores and discount chains.

"Having a strong foothold in the most stable category is for us essential," Veronique Gabai-Pinksy, a global brand president at Estee Lauder who oversees designer fragrances, told Reuters on Tuesday.

Designer fragrances account for two-thirds of industry sales and sell more reliably than those tied to celebrities. And the very high end fragrances make up only about 7 percent of industry sales, but Gabai-Pinsky called them "a pocket of high growth."

The Zegna fragrance, "Essenze," retails for $195 for a 4.2 fluid-ounce bottle and follows the launch last year of a fragrance with designer Tory Burch. Estee Lauder's new women's fragrance, for Italy's Marni, will be introduced in the spring of 2013.

It is also a coup for Lauder, which replaces market leader L'Oreal as Zegna's fragrance partner with this deal.

Estee Lauder, which only makes "prestige" fragrances, produces some of the best selling fragrances and its partners include Coach Inc, Michael Kors Holdings Ltd and Tom Ford.

Still, its share of the global prestige fragrance market fell to 8.3 percent in 2011 from 9.8 percent in 2006, according to Euromonitor International, in the face of stiff competition. Over the same period, L'Oreal saw its market share rise to 14.3 percent from 13.1 percent, while LVHM's share rose to 13.8 percent from 12.6 percent.

Estee Lauder said in a regulatory filing last month that it continues "to expect challenges in the category due to competitive dynamics."

With Zegna, which caters to males only, Estee Lauder is making a forceful play for men in the pure luxury fragrance market, where growth is outpacing women's.

"There is definitely a lot more opportunity on the men's side," NPD Group analyst Karen Grant said.

The popularity of Zegna as a premium Western fashion brand among China's rising middle class can also help stoke interest in fragrances in a market where shoppers are still far more interested in makeup and skin products.

For Zegna, this fragrance could be followed by others.

"I see a good expansion of the line," said CEO Gildo Zegna.

Following previews at two Zegna stores in the United States this week, "Essenze" will be rolled out to more Zegna stores in April.(Reporting by Phil Wahba. Editing by Andre Grenon)