IT WAS NOT THE FIRST QUESTION Mira Kulkarni faced, but it was one she partly expected. After some polite banter about India, an introduction to who he was, and how his mother’s fixation with perfection had put their $11 billion (Rs 67,298 crore) company on the global map, Leonard Lauder, chairman emeritus of Estée Lauder Companies, asked, “How do you see your company grow from here?”

“I want to do exactly what you’ve done,” replied Kulkarni. The answer made him smile. Neither discussed business for the rest of the meeting. It was March 2007, and Lauder had just returned from Estée Lauder model Elizabeth Hurley’s wedding to Arun Nayar in Jaipur. He was familiar with Kulkarni’s brand, Forest Essentials. Lynn Forester de Rothschild, who sat on Estée Lauder’s board, had presented him the products earlier and he had done his own research by visiting Forest Essentials’ flagship store in New Delhi’s Khan Market. Lauder had called for the meeting because he was intrigued by the way Forest Essentials was being built. Kulkarni had set up Mountain Valley Springs seven years earlier and sold a range of ayurvedic products for skin and hair care under the Forest Essentials label.

Some weeks later, in early April, when Samrath Bedi, Kulkarni’s son and the firm’s chief operating officer, was in New York, he bumped into Lauder at Del Posto, an Italian restaurant on 10th Avenue. “What are you doing here? Have you come here to see us?” asked Lauder. He then introduced Bedi to his wife (the late Evelyn Lauder who died in 2011) thus: “His is the Indian company I was telling you about.” Bedi (he uses the surname of his father who passed away; Mira married again) explained he was on his way to a cricket match in Barbados. Lauder then asked him if anyone had been in touch after they had met in March. Bedi said no, much to Lauder’s surprise.

A few months later, Estée Lauder’s group president, Phillip Shearer, flew to India to right that. The cosmetics behemoth proposed to acquire 20% in Forest Essentials as part of a private equity deal (the deal value was not disclosed to the media) that would bring Estée Lauder’s technical knowhow, marketing and distribution, and quality control measures to the table.

Typically, Estée Lauder acquires majority stakes or makes outright purchases as it did with natural beauty products manufacturer Aveda (1997), Smashbox Beauty Cosmetics (2010), and fragrance and candle maker Le Labo (2014). The investment in Forest Essentials did not follow that pattern. It was also the company’s first investment in India, or broadly speaking, in an emerging economy.

“We made it [the investment] because there is a certain authority that emerges from India that the Indian consumer perceives is unique. Over time, we believe this market will evolve and begin to have a demand of its own. The consumer may want a brand that she can say is “mine” and not a foreign brand. Finally, you invest in people as much as you invest in a company, and Mira Kulkarni is just that kind of person,” Lauder said in media interviews.

But the minority stake did not make it a lopsided transaction. According to analysts at Kline & Company, a global consultancy, it was a move to spur Estée Lauder’s speciality retail expansion strategy and capture a bigger piece of the then $6.3 billion personal-care market in India.

That was 2008. The two partners are at it again. Estée Lauder is close to signing term sheets to pick up 20% or more equity in Mountain Valley Springs for an undisclosed amount, thus taking its total stake to 40% or thereabouts. The company will buy it from Kulkarni and another stakeholder, Mahesh Patel, a businessman in Papua New Guinea who runs the pharmaceutical chain CPL Group. The deal is expected to be wrapped up in a few months.

Workers making sugar soap by hand.
Workers making sugar soap by hand.

Prior to the first round, Estée Lauder executives also met other Indian players in the beauty and personal-care space, including Shahnaz Husain, Biotique, and Kama Ayurveda. Bedi now feels that based on its steady growth and insights into the market, Forest Essentials was singled out for a second time. The business has recorded a compounded annual growth of 40% over the past three years, and projected revenue for FY15 stands at Rs 150 crore. Being privately held, the management is not too keen to share financials. But back-of-the-envelope calculation shows that its revenue could have been in the range of Rs 25 crore to Rs 30 crore in 2008. That gives a sense of how the business has grown since Estée Lauder first took a stake.

Kulkarni runs 38 exclusive company-owned boutiques in 11 cities, and supplies carefully curated products to 300-plus five-star hotels and spas. The lotions and creams at the Taj hotels are always of neem and aloe vera; the Oberoi features saffron and honey; Hyatt has bitter orange and cinnamon, and the Four Seasons has honey and vanilla. As many as 70 guest suites at the Rashtrapati Bhavan stock her products. And she exports to as many countries with the U.S., Britain, France, Australia, and Japan being the major markets.

Estée Lauder’s second investment is an unabashed endorsement of Kulkarni’s achievements. It also signals a shift in the nature of the engagement, now more strategic (and, therefore, longer term), in line with Smashbox and Le Labo. The deal comes at a time when interest in India has revived and the country is positioning itself as a manufacturing hub. Theoretically, this gives Estée Lauder a better launch pad in the country. Currently, it operates through a Mumbai-based subsidiary, ELCA Cosmetics, and sells its prestige brands, including Clinique, Estée Lauder, Bobbi Brown, and MAC, through exclusive shops and big department stores.

Bedi says Leonard Lauder is always curious about India’s macroeconomic environment and asks questions like “how do you see the policy changing”, or “is there stability expected in the next few years”, or “how is the consumption pattern changing”. For him, it makes sense to get bullish in a market worth around Rs 8,000 crore, according to industry reports, with headroom to grow. Estée Lauder officials were unavailable for comment till the time of going to press.

For Kulkarni, this is a moment of reckoning. With an existing investor upping the stakes, the prospects look brighter, and the partnership will be crucial if Kulkarni looks at extensive global growth. “If you are going into a foreign market, there is no better way to do it than to partner with a global giant like Estée Lauder,” she notes. What that means, sotto voce, is: Expect her to make a bigger global splash. There are also plans to further build on an existing second brand called Inara. As of now, it is an institution-only brand used in business hotels and positioned below Forest Essentials.

8-head stainless steel bottle-filling unit.
8-head stainless steel bottle-filling unit.

Equally, Kulkarni knows she’ll have to confront issues around day-to-day management, ownership, and ultimately, perhaps even control.

An early issue that needed a skilled touch was around Forest Essential’s packaging, a crucial aspect of the beauty business. For Kulkarni, her designs epitomise India—vibrant and rich. But her partners were keen to create a more contemporary and cosmopolitan look. Even Leonard Lauder was wary. “Don’t you think it’s too colourful?” was the common refrain. Kulkarni explained that the packaging reflected warm, bright colours, inspired by images of herbs and flowers in 17th-century art. “It’s typically Indian and if that means it’s colourful, it is so,” Kulkarni pushed back. Finally, she prevailed.

In all this, there is an element of peddling packaged, Indian exotica. Step into a Forest Essentials store, done up in stark colours and bright gold signage, and you get a whiff of most exotic fragrances. Tellingly, there’s nothing in the store’s décor that cues anything organic or sylvan. Her vision statement positions Forest Essentials “to be the global leader in Luxurious Ayurveda, based on traditional Indian formulations for Holistic Beauty”. (See how some words are capped, perhaps to drive the point home.)

As chairman and managing director, Kulkarni still runs the ship. But she also knows she will have to carry her partners. She’s not overly concerned about how things will pan out or who will be at the helm or who will have day-to-day control over the business. “If Sam [Bedi] is good for the business, he should be there when the company grows with Estée Lauder; if he’s not, then he won’t,” she says, adding that she’s okay with the company bringing in new people at the right time. Kulkarni is not saying this as a matter of form. In the past she has fired senior managers because of integrity issues, and she is accustomed to making big changes in business. “It was hard the first time. Then it got easier,” she says. Bedi, on his part, says they haven’t yet discussed how much more of the company they may be willing to offload. The general agreement with Estée Lauder is to take things step by step.

Ipsita Chatterjee, an ayurvedic practitioner and senior manager, training and brand communication, at Forest Essentials, recalls when she first met her soft-spoken boss. “I don’t know what exactly I’d want you to do for me, but I know I want you to join me,” Kulkarni told her. Five years later, Chatterjee knows that her boss largely depends on instinct instead of spreadsheets, takes a personal interest in every employee, and frequently sends out handwritten notes. But don’t mistake that for mildness, she warns.

Those who work with Kulkarni say Forest Essentials is “her baby” and when things are not going the way she wants them, she won’t yell, scream, or fling things. It just feels like somebody has turned the temperature dial down to sub-zero.

The company’s top-selling Advanced Soundarya age-defying facial serum with 24K gold.
The company’s top-selling Advanced Soundarya age-defying facial serum with 24K gold.

THE FIRST PUSH to scale up Forest Essentials came shortly after Kulkarni raised capital from Estée Lauder. The money was largely used to set up a state-of-the-art factory with automated production and an R&D lab in Haridwar. The factory features processes and quality standards followed at Estée Lauder. It operates under sterile conditions, uses pharma-grade steel for its machinery, and all equipment, including filling and labelling lines, are built to exacting specifications. In-process quality control measures meet EU standards while an in-house lab monitors ingredient and product quality. Of an overall headcount of 370 spread across factories, stores and offices, Forest Essentials has a dedicated R&D team of eight, including botanists, chemists, and ayurvedic doctors. They study classic formulations of ancient India and craft the ingredients in a modern, scientific environment using natural products like plants, herbs, and flowers.

Amalgamating the best practices of traditional ayurveda with latest technology is a good business move but Indian firms still largely deviate from global trends, says Vivek Sahni, co-founder of Kama Ayurveda. Set up in 2001, Kama is funded by sugar industrialist Rajshree Pathy (ranked 42 last year).

Unlike many other global markets, India is still fragrance-focussed, points out Sahni. “In more advanced markets, say, Japan, manufacturers are moving away from scents, and most products don’t smell very strong.” Estée Lauder’s Clinique line is nearly fragrance-free. German player Dr. Hauschka Skin Care also uses minimal fragrance. In contrast, London-based Molton Brown is heavily scented. That doesn’t mean one is better than the other. But for Forest Essentials, it could mean a total overhaul instead of just a product tweak, if it plans to get into large-scale production to cater to Western markets.

Moreover, the future could be all about solution-driven beauty products—the kind of specialisation skin-care companies like Manosque-based L’Occitane are doing. Every product of L’Occitane aims to restore wellness or fix problems, be it ageing or environmental damage, explains Gilles Moutounet, India head of the French company. Does he see ayurveda as competition? (After all, Indian firm Kama also terms its products as “remedial”.) According to him, anything driven by nature will have more appeal for most consumers. But it becomes more expensive and one is restricted to selling to a narrower audience.

Forest Essentials’ pharma-grade, fully automated manufacturing line.
Forest Essentials’ pharma-grade, fully automated manufacturing line.

Moutounet brings up Shahnaz Husain to clarify his point. “She’s selling to millions and has gone mass market. That works in this country where you have a billion people. But it also makes those consumers want to trade up when they can afford the next best thing, which works out for the brands positioned higher.”
Such arguments don’t distract Kulkarni. “Right now, the route we are taking is India first. We are strengthening our position in the domestic market before venturing outside.”

Husain, the undisputed leader in India’s “natural” beauty products segment, agrees with Kulkarni. “There’s always been this perception that the West is the best when it comes to cosmetics. But if you see how things are moving, you will find the West now looks at the East, because their stuff is full of chemicals.”

BORN IN MUMBAI, Kulkarni went to school at Tara Hall in Shimla and then attended Stella Maris College in Chennai where she studied the arts. Once, on a visit to the U.S. where Bedi was in college, she visited a Mormon expo in upstate New York and watched how they made their own soap. “I thought it’s not that difficult to make quality products here—it just depends on what ingredients you put,” reflects Kulkarni.

When she came back, Kulkarni got involved in a co-operative movement in Rishikesh (Uttarakhand) that focussed on procuring and marketing handmade products. By then she was trying to understand how ayurvedic soap could be made, and realised that Rishikesh could be an ideal location to get started. It is an ayurvedic and wellness hub, home to hundreds of ayurvedic doctors and dotted with tiny pharmacies selling homemade soaps, oils, lotions, creams, and much more. What intrigued Kulkarni most was the fact that these local products were made au naturel. Hand-poured lotions and ingredients were mixed in earthen containers and no chemicals or preservatives were added.

But she soon realised the downside as local people could only sell their produce to low and middle-income consumers. That meant extremely low prices—Rs 10 or
Rs 12 for a bar of soap.

Local vendors told Kulkarni they could make better (read purer) stuff, but buyers wouldn’t be willing to pay more. She thought they would, and started business for the first time by commissioning a batch of honey soap. The locals used parts of a honeycomb and also squeezed in fresh honey, along with essential oils. On her part, Kulkarni cut it up, packaged each bar in brown tissue paper with a fancy ribbon around it, and sold around 50 of them to her friends. Her sample soap got an overwhelming response that boosted her confidence. So she put in some money of her own—around Rs 1 lakh—to start a small factory on land she owned. Fortuitously, she owned some 10 acres of land in the hill city, jointly acquired by L.M. Thapar (Thapar business family patriarch who passed away in 2007) and her father, Chander Prakash, from the Maharaja of Tehri Garhwal. (Thapar and her father had gone to school together.) She also began building a small network of suppliers around the factory.

Soon after, friend Kiran Nadar came up with the name. When Nadar suggested it, Kulkarni picked up a piece of paper, sketched a mango tree, and ran the name Forest Essentials around it. The logo and the brand were thus born.

The first commercial contract came from Hyatt Regency (Delhi) in 2001. Three years later, she launched her flagship store in Khan Market and gradually increased the company’s presence. Every year she would launch just two or three stores.

Forest Essentials could have grown faster if Kulkarni agreed to sell her goods in multi-brand shops and adopted the franchise-partner model like Husain did. But she refused. The lone exception is Sephora, the cosmetics retail chain owned by LVMH Moët Hennessy Louis Vuitton.

“I didn’t want my products to jostle for space like so many others do in pharmacy and grocery stores,” says Kulkarni. “Once you get past a certain bend, the business comes to you. The challenge is in knowing when to say ‘no’, and then saying it.” For example, distributors from West Asia wanted to take Forest Essentials abroad, and it would have meant growing sales exponentially. But tempting as it was, Kulkarni declined the offer.

She is especially concerned about the purity of the ingredients as this can make or mar the business. All the herbs used at Forest Essentials are locally grown while other ingredients are sourced from reliable suppliers across the country. There is a shop in Rishikesh that sells organic ghee and Kulkarni has signed it up. As most oils sold in the market are not pure, Kulkarni decided against wholesale buying and set up a factory in Lodsi (also in Uttarakhand) for sesame, almond, and mustard oil extraction, using a cold press in the old-fashioned way. “Even today we don’t buy oil from anyone,” she affirms. But the challenge is in getting enough of these quality ingredients to keep production going.

Kulkarni doesn’t like the word “premium”, but it’s clear that her products are not crafted for mass markets. From the start, the company’s uniqueness lay in procuring and producing best-quality natural ingredients. In a fiercely competitive market, the first question a buyer asks is: What is this company selling and how is it different from others? But maintaining an impeccable quality standard means the costs go up. “Think of it as a recipe book with a set of ingredients,” says Kulkarni. “What you spend solely depends on how much of what you use. So, if I use expensive materials like kokum butter or almond oil, they will push the prices up.”

Forest Essentials charges Rs 375 for a bar of soap while a gold-infused facial cream can cost Rs 3,800. Understandably, the margins in skin-care products, such as cream, scrub, peel, and brightener, are higher. Skin-care products have the biggest margin at 44.2%, followed by body-care (29.75%), hair-care (14.3%), and wellness products (11.75%). Kulkarni has also added a product range for men, including aftershave, facial scrub, moisturiser, and shaving cream, which contributes 5% to retail sales.

Does the upmarket pricing hinder the company’s growth in a cost-conscious domestic market? Not really, if you take a look at its competition. While Kama Ayurveda has a similar price range, Husain’s products, which are all over the map, start from Rs 145 and can go up to Rs 8,000 for pearl-based creams. However, Biotique, which caters to mass markets, offers an affordable product bouquet between Rs 65 and Rs 1,500.

Biotique, an early player, started by selling products to hotels and resorts before targeting the bottom of the pyramid through external distributors and retailing through pharmacies, mom-and-pop stores, and its own boutiques. Eventually, its products were pushed to the bottom of the price pyramid and many five-star hotels no longer stock its goods.

First-mover Husain did it differently. She became her own brand ambassador and single-handedly drove the promotion and marketing of her herbal and ayurvedic products. She built a network of hundreds of “schools” across the country where she trained beauticians. Most of the professionals who got through these courses work across some 500-plus salons and were quite familiar with her products by the time they started their career. Husain sells through franchisees and foreign distributors who even stack her products at Selfridges in London.

Yet, as Husain points out, when you have hefty Western corporations with deep pockets pushing millions of dollars into endorsements that promise elixirs of youth in slick packaging, can an Indian brand compete and sell the legacy of an ancient civilisation in a jar? With a strategic tie-up with Estée Lauder, that may be exactly what Kulkarni is leading up to.

Follow us on Facebook, Twitter & YouTube to never miss an update from Fortune India. To buy a copy, visit Amazon.