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Marketing Strategy of Aveda Corporation

Marketing Strategy of Aveda Corporation

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Marketing Strategy of Aveda Corporation
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Anjali Khurana
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Marketing Strategy of Aveda Corporation - December 11th, 2010

Aveda Corporation is a company headquartered in Blaine, Minnesota, that manufactures skin care, cosmetics, perfume, hair care products, and trains students in cosmetology and esthiology at the Aveda Institutes in Minneapolis, New York City, Washington, DC, Vancouver, Calgary, Toronto and many other cities.

Wholly Owned Subsidiary of Estée Lauder Companies Inc.
Incorporated: 1978
Employees: 500
Sales: $120 million (1996 est.)
SICs: 2844 Perfumes, Cosmetics, & Other Toilet Preparations; 7231 Beauty Shops

Company History:

Aveda Corporation develops and manufactures hair, skin, makeup, perfumes, and lifestyle products from the essential oils of flowers and plants gathered from around the world. Brands such as Shampure, Pure-Fume, and All-Sensitive are sold primarily in professional hair salons and in Aveda Environmental Lifestyle stores which feature a range of products from natural fragrances to clothing. Founder Horst Rechelbacher sold the privately held Minnesota-based company to Estée Lauder Companies Inc. in 1997.

The Salon Years: 1960s-70s

Horst Rechelbacher grew up in Nazi-occupied Austria, where his father worked as a shoemaker and his mother as an herbalist. Poverty brought Rechelbacher's formal education to an end after the fourth grade, but at 14 years of age he apprenticed as a hairdresser. When he was 17 he left Austria and moved on to Rome and London. He worked in some of the best salons, styled hair for magazine photo layouts, and tested products for companies such as L'Oréal. On the European hairdressing circuit, he cultivated his technique and won styling awards.

Rechelbacher went to New York in 1963--he was 22--for his first American hairstyling exhibition. During his hairstyling tours in the United States he became known by his first name, Horst. A 1965 automobile accident in Minneapolis saddled him with thousands of dollars in hospital bills. To pay off his debt, Horst took a job at a top Minneapolis salon, the Golden Door in the Sheraton Ritz. His styling technique and charm quickly earned him regular clients, one of whom loaned him $4,000 to start his own shop. He continued doing weekend hair demonstrations for manufacturers and opened additional shops in the upscale areas of the Twin Cities. Marriage to a Minneapolis woman and the birth of their two children further cemented his ties to the area.

Horst's reputation grew in scope: he became a well-known figure in the local nightclub scene. But burning out from the fast-paced life, Horst turned to meditation and other Eastern philosophies. After hearing the Swami Rama speak at the University of Minnesota, Horst followed him to India and stayed for six months. There Horst studied the use of herbs and other plants to promote health and longevity. When he returned to the United States he began developing products for his salons using the essential oils derived from plants.

New Territory: 1980s

Horst entered another aspect of the haircare business in 1977. He established a cosmetology school to counter the loss of personnel from his shops: people he trained often ended up as competitors.

In 1986, with about 200 students paying $4,500 for a 9-month training program, he expanded the school. Horst spent $2.5 million to renovate a five-story building, a former Masonic temple, complete with stages and auditoriums, into a beauty/fashion/wellness institute. Estimated 1986 sales of Horst & Friends salons and the Horst International Education Center were $5 million. Another $11 million in sales were from Aveda Corporation products which were sold through 41 U.S. distributors.

Aveda Corporation--a name inspired by Horst's India experience--was founded in 1978. Horst had formulated the first product, a clove shampoo, in his kitchen sink. In the early 1980s, about the time other well-known hair stylists were introducing their own haircare products, Horst began marketing his shampoos and conditioners to other salons.

According to a 1991 Corporate Report Minnesota article by Eric J. Wieffering, National Beauty Supply Inc. helped Horst get his products in salons in North Dakota, South Dakota, Iowa, Wisconsin, and Minnesota. By 1988, product sales in the five-state area exceeded $1 million. Horst then instituted an exclusive distribution system. Distributors were expected to carry only Aveda products: an uncommon move in the industry.

Horst distinguished his body-care products from others in two significant ways. First, he popularized the concept of aromatherapy. New scientific evidence increased the credibility of the older theories to which he ascribed that linked the sense of smell to health and well-being. A new line of Aveda products, wrote Bob Ehlert in a 1986 Star Tribune article, "called 'Body Rituals,' are seven different formulas whose very names seem to suggest their applications: Motivation, Attraction, Equipoise, Fulfillment, Creative, Intuition and Bliss." He was also a vocal supporter of environmental causes and incorporated his beliefs into the marketing of his products. "From the beginning, he's been opposed to the use of synthetic, petroleum-based or animal-tested products," wrote Georgann Koelln in a 1990 St. Paul Pioneer Press article.

Like many entrepreneurs, Horst was pushed to hire professional managers to run his growing products company. He brought on former Tonka Toys marketing executive Joseph Garcia as president in 1987. Garcia, according to the Wieffering article, helped the company increase its credit line, thus opening the way for in-house production. But disagreements with Horst, including one regarding Aveda's entry into the makeup and perfume business, led to his departure within a year. Horst's son Peter, a college sophomore at the time, was recruited to replace Garcia as president, but he left the day-to-day management of the business after 18 months.

Entrepreneurial Spirit Continues: 1990s

The innovative Horst continued to expand the range of his business. The New York Madison Avenue salon, wrote Connie Nelson in an August 1989 Star Tribune article, "will be converted to an 'esthetique,' selling more than 75 original perfumes that can be used to custom scent Aveda products." A state-of-the-art spa in Osceola, Wisconsin, a farming community of 2,000 people about 45 miles northeast of the Twin Cities, opened in 1990. Horst renovated an early 20th century, prairie-style mansion on an 80-acre estate on the St. Croix River and equipped it with a hair and makeup salon, workout rooms, an Aveda Esthetique, and offered services such as body massage, hydrotherapy or water jet massage, and self-improvement seminars. All the meals were made from organically grown food.

Horst was ahead of the pack in the early 1980s when he began marketing the environmental aspects of his products&mdash+ant-based formulas and recycled packaging--but competition had grown. More and more companies in the beauty care industry were touting their own use of natural ingredients and ban on animal testing of their products. Body Shop International PLC of the United Kingdom was opening stores in the United States, and Estée Lauder Inc. had begun offering a natural product line.

The giant companies, such as Estée Lauder with $1.4 billion in sales and the Revlon Group with $2.7 billion in sales, distributed their products by way of drug and department stores. Aveda, which sold its products only in salons, was considered part of the professional market. Redken Laboratories Inc. was the leader with sales of $130 million followed by John Paul Mitchell Systems, which had sales of $100 million. Horst felt that Aveda's rapid growth--beauty product revenues had been increasing by about 40 percent a year--could push sales to the $1 billion mark by 1995.

But detractors said Aveda produced too many different products for a company of its size. The sheer number and variety would tax both the production and distribution systems. John Paul Mitchell Systems--a company begun by another well-known stylist--had limited itself to haircare products and racked up twice the revenues of Aveda. In 1991, Aveda was bringing in about $50 million in revenues, but 85 to 90 percent of all profits were derived from ten haircare products.

Aveda headquarters and manufacturing operations moved to a facility in Blaine, Minnesota, just north of the Twin Cities, in 1991. The Aveda Institute continued to operate out of the Minneapolis site, which housed the well-known school, a salon, an Esthetique, and an organic restaurant. The five Horst Salons were sold to David Wagner, president and chief executive office of Horst Salons Inc., in 1992. The upscale salons, which had been operated as a separate entity from Aveda Corporation, brought in about $7 million a year in revenue.

In line with the company's commitment to all things environmental, Horst planned to begin selling organically grown coffee and tea, as well as dish, laundry, and house cleansers. And daughter Nicole Rechelbacher introduced a line of clothes made from recycled materials. But Aveda's high-profile environmental activities also drew criticism from some local activists.

Aveda Corporation revenues were an estimated $70 million in 1994. Sales had been expanded to 25,000 salons worldwide: 1,600 were concept salons selling only Aveda products. Fifty-six Aveda Environmental Lifestyle stores--the Esthetique concept--sold a broad range of Aveda products.

In mid-1996, Horst told his employees he would be stepping back from the daily operations of the company. Based on his previous unwillingness to let go of control of the company he was greeted with some skepticism by outsiders. "But some observers say there's more reason to take Rechelbacher at face value this time around. While the company continues to expand its product lines and stores, it may have grown as far as Rechelbacher, an Austrian-born former hairdresser, can take it, they suggest," wrote Peter Kafka in a July 1996 Minneapolis/St. Paul CityBusiness article.

New Look for the Future

At year-end 1997, Horst sold Aveda Corporation to Estée Lauder for $300 million in cash--Horst and his children were sole owners. While publicly held, Estée Lauder, with $3.4 billion in sales, was nearly 80 percent owned by the Lauder family. The idea for the deal was sparked earlier in the year when Horst met CEO Leonard Lauder and his wife at the Aveda spa. Estée Lauder, which claimed almost 45 percent of the U.S. department store prestige cosmetics, skin care, and fragrance market, had been in an expansion mode since the latter half of 1995.

The Aveda purchase moved the giant manufacturer into the rapidly growing professional salon segment of the $15 billion haircare market. Sassaby Inc. and its Jane line brought on board earlier in the year gave Estée Lauder entry into the mass market segment, and the addition of a licensing deal with Donna Karan advanced the cosmetic and fragrance areas.

The Aveda purchase included the Blaine manufacturing plant and Aveda Institute. The corporate headquarters would remain in Minnesota with Horst as chairman of the new Estée Lauder business unit. Horst had rejected an earlier offer from L'Oréal which included only the businesses. According to a November 1997 Star Tribune article by Susan Feyder, the sale to Estée Lauder gave Horst the access to greater resources and the opportunity to continue what he enjoyed most: developing products.

A November 1997 Women's Wear Daily article by Soren Larson said the industry estimated Aveda would produce wholesale volume of between $175 million and $200 million for 1997. And Lauder said, "The company is profitable; it's actually very profitable." He also praised the company for its tight distribution system and trademark protection. Aveda's growth rate, which had been 20 percent compounded over the past five years, was expected to improve as Estée Lauder expanded international sales. About half of Estée Lauder's sales came from overseas markets compared with only eight percent for Aveda.
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