Estee Lauder's bet on Puig is bold fragrance play in a volatile world

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By Juveria Tabassum and Aishwarya Venugopal Estee Lauder's NYSE:EL potential combination with Puig Brands BME:PUIG would put it in a direct fight with sector leader L'Oreal's premium fragrances, but could complicate the U.S. company's turnaround plans just as the Iran war clouds the outlook for travel retail.Estee and Madrid-listed Puig disclosed on Monday merger talks that would create a luxury beauty giant with a combined market capitalisation of around $40 billion and bring together brands such as Tom Ford, Carolina Herrera, Rabanne and Clinique.The talks come about two months after Estee's CEO Stephane de La Faverie expanded a significant turnaround push to staunch three years of annual sales declines and a contracting market share. "A takeover of Puig is an interesting proposition, but history suggests that bolting two companies together is not a guaranteed recipe for success," said Dan Coatsworth, head of markets at AJ Bell, citing differences in culture as an example.He and others also saw execution risks."We see challenges from the deal size and its potential to distract Estee's management amid a turnaround ... We doubt that management can execute this plan efficiently while integrating Puig," Morningstar analyst Dan Su said. BIG FRAGRANCE BET, BIGGER EXECUTION RISKDe La Faverie's turnaround plan, which he has said will require more investment in stores, includes closing underperforming cosmetics outlets such as M.A.C and Origins while seeking to boost sales of perfumes in airports. A takeover of Puig would lift its global market share in the coveted premium fragrance category to 15% from 6%, second only to L'Oreal's 16%, Morningstar analysts noted.In the United States, prestige fragrance grew 5% by value last year and ended the year as the second‑largest category in prestige retail, data from Circana showed.But Estee Lauder's big bet on high-end scents comes as the Middle East conflict disrupts air journeys and muddies prospects for travel retail, including at airports. Independent players such as France-based Parfums de Marly and Serge Lutens and newer brands such as Nishane and Xerjoff, as well as celebrity‑backed labels present another challenge."The deal would further tilt (Estee's) portfolio toward fragrance, where growth has been strong, but competition from indie brands is intensifying, L'Oreal is stepping up its efforts and category momen...

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