Lauder at 75: How Estée Lauder Is Seizing Future Growth Opportunities
The Estée Lauder Cos. may be celebrating its 75th anniversary, but executives are using the opportunity to look forward — far into the future — rather than back.
Coming off a year like no other, both executive chairman William P. Lauder and chief executive officer Fabrizio Freda are laser-focused on positioning the company for the next 75 years — not an easy feat in a landscape that has been fundamentally transformed by a global pandemic that caused seismic shifts in the global sociocultural landscape.
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Many businesses were forced to be reactive rather than proactive, their survival depending on defensively fending off threats rather than finding the opportunity in challenge. Not Lauder.
“Every single time we have been faced with challenging external circumstances, our company has emerged a different, but better company as a result,” said Lauder. “We have taken the challenges put in front of us to examine who we are and what we need to be, so that we can survive and thrive now and in the future.”
Lauder ticks off other disruptive periods when the company was able to seize the moment and create lasting change, like the department store consolidation and bankruptcies of the mid to late ’80s that led the firm to create a brand with its own freestanding stores (Origins) and then jump on the digital bandwagon and create an e-commerce division in the earliest days of the internet back in the ’90s.
“I use the term patient capital — we invest in people, brands and markets over a long period of time,” said Lauder. “That long-term patience has allowed us to identify areas of growth very early on, and we have the patience and the steam to germinate and grow these seeds effectively.”
That philosophy is one reason why, on a recent July afternoon, Freda had booked an hour out of his schedule to meet virtually via Zoom with 170 of the company’s summer interns, thanking them for their commitment to the company, sharing his insights on Lauder’s strategic positioning and dispensing lessons he’s learned along the way (“Beauty is not a zero-sum game. There’s space for many good brands and companies to grow,” Freda told the group. “In the last few years, we’ve been growing market share in a very big way, but we almost never try to take share from others.”)
When the CEO opened the floor to the interns, questions, both personal and professional, started pouring in from the chat.
“If you could go back to your 20-year-old self and tell yourself some advice, what would it be?”
“What strategies do you utilize in order to maintain an acquired brand’s individualism while also ensuring that they align with the company’s values and culture?”
“What is the biggest challenge you’ve had to overcome?”
Freda energetically answered them, going over the time allotted for the session before apologetically heading to his next meeting. While the executive, who was briefly a professor during graduate school at the University of Naples, is known for his love of teaching, his mission on this day went much deeper.
“Young people represent the future of the business,” said Freda. “Celebrating our 75th anniversary now, coming after such a difficult period, is a moment to express gratitude for the past and to create new energy for the future….
“Having gratitude allows us to determine what are the things we need to preserve to create more energy for the future. That is an important concept, because otherwise it is a celebration without meaning,” he continued. “I believe that in this post-COVID moment, it is important to bring this energy together and motivate people, to create a new sense of positive energy for the future. That is my goal.”
For Freda, the keys to business survival include taking that long-term view, the willingness to change when necessary and the insight to know when not to, and the agility to be able to act with speed. “Basing your long-term strategy on the past is becoming less and less relevant, because the amount of change is so high,” he said. “Working on a vision and the ability to anticipate the future by understanding analytics is much more valuable than just basing your future on what happened in the last couple of years. That has been heavily confirmed during the pandemic.”
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Executive group president Jane Hudis was hired by the company right after grad school, to work in the marketing department of Prescriptives, and noted the propensity to evolve has always been a key ethos. “Our company has never been static,” she said. Being a learning organization is part of who we are. We evolve and we transform as we go.”
Under Freda, who became CEO in June 2009, the firm has experienced a period of exceptional growth, and is among the fastest-growing companies globally in the consumer goods and luxury sector. Lauder’s market capitalization grew over 19x, from $6 billion when Freda assumed the role to $115 billion as of June 30, 2021. Net sales have more than doubled, from $7.3 billion in fiscal year 2009 to an estimated $16 billion for fiscal year 2021, as per the company’s public guidance. Total shareholder return during Freda’s tenure is 2,133 percent, compared with 497 percent for the S&P 500 during the same period.
While COVID-19 and the global wave of lockdowns negatively impacted Lauder, as it did most companies, Tracey Travis, executive vice president and chief financial officer, noted that the enterprise effectively navigated the rough terrain. “Between our cost management programs and transformation initiatives, recognizing we have built in the capacity to continuously transform as the environment transforms, allows us to stay one step ahead of the changes that are happening in the beauty environment externally,” she said. “We have the agility to invest and the will to change — and that is important. Otherwise, in a very fast-paced environment, you get left behind.”
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Despite the onerous conditions of 2020 and the uneven pace of recovery around the world, Freda is bullish about the continued opportunity for the beauty category. “The future is really bright — for the industry and for the Estée Lauder Cos.,” he said. “There will be a continuous acceleration of the positive things, the things that are working today, as well as so many new drivers, which will either come back or have been accelerated because of what happened.”
In terms of categories, Freda said makeup is coming back and that high-end and artisanal fragrances are “booming” around the world. E-commerce, now an established habit for older consumers as well as younger, will continue its acceleration, and men are starting to become more interested in self care, as well, leading to growth in the global grooming market.
Geographically, China remains a huge opportunity. Skin care is already a well-established category, with brands like Estée Lauder and La Mer as market leaders, and makeup and hair care are steadily increasing, Freda said. But it’s the sheer size of the consumer base that gets the executive most excited, noting that 300 million people are expected to enter the middle class in China in the next several years, versus 30 million in Europe or America. “The growth of the middle class is extraordinary,” he said, “and their interest in high-quality products is also extraordinary.”
The pace of infrastructure development also bodes well for the company’s continued growth. Currently, out of Lauder’s portfolio of 25 brands, the Estée Lauder brand is the most distributed in China in just over 130 cities. Yet there are over 600 cities where products are sold to online, meaning that as brick-and-mortar distribution expands, so, too, will the business.
“Going from 130 cities to many more will take years and bring years of growth,” said Freda. “This consumer, in that time, will have the opportunity to buy online, and that will also bring growth. China is a unique market.”
Other areas of Asia, too, are buoyant said Travis, who noted that some emerging markets are starting to show signs of potential despite the adverse impact of the pandemic. “We’re quite excited about the momentum of the business in Southeast Asia, particularly Thailand and Malaysia,” she said. “In EMEA, India and Russia, the Middle East and Israel are more sizable emerging markets where we’ve seen strong momentum. In Latin America, we’re still optimistic about Mexico and Brazil. There are a number of countries we’re quite excited about contributing a disproportionate amount from a growth rate standpoint.”
Travel retail, one of the most buoyant segments pre-pandemic, is not expected to regain its global mojo until the middle of next year. While the market in China, particularly Hainan, has been very robust, international travel is still quite constrained, and not expected to recover before the middle of 2022 soonest.
The idea of change permeates every aspect of the company, including the brand landscape. From the very earliest days, Leonard A. Lauder had the vision of creating a multibranded firm that would encompass a wide spectrum of distribution channels, demographics and categories.
Currently, the portfolio numbers 25 brands: There are the global powerhouses Estée Lauder and Clinique, launched 75 and 53 years ago respectively; there are brands born in-house like Origins and Tom Ford Beauty which have become billion-dollar brands, and there are brands that have been acquired, like MAC and Jo Malone London, which started small and have since exploded. There are leaders in the luxe niche fragrance segment like Frédéric Malle, Le Labo and By Kilian; the darlings of the indie scene including Too Faced, Bobbi Brown, Smashbox and Glamglow, as well as La Mer, the skin care heavyweight, and Aveda, the hair care company that is a leader in sustainability and natural formulations.
The most recent editions are Dr. Jart +, in which Lauder invested in 2015 and acquired in 2019 and Deciem, in which the company took a minority stake in 2017 and assumed majority ownership of this year. Both have become important contributors to the portfolio, Travis said, adding over $500 million in sales to date.
“We have a strong track record of developing and scaling brands. Our model is about scaling brands around the world,” said Freda. “Our strength is the ability to develop each brand while keeping each one very different, one from the other.”
Most recently, Lauder has started participating in more early-stage investments, leading $3 million in seed funding raised by the men’s grooming brand, Faculty, for example.
“With all of the innovation that is happening across the globe, we see the opportunity to invest in smaller brands that may not be as proven yet,” said Travis.
“We want to incubate brands with the best founders around the world,” said Freda. “We’re looking in China, India, the U.S., everywhere. The combination of our ability to develop and scale our own brands combined with a more traditional M&A strategy combined with more incubation capabilities in the early stages makes our portfolio and portfolio management better, balanced and stronger than it’s ever been.”
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John Demsey, executive group president, has overseen many of the acquisitions, including the very first, MAC Cosmetics. Created in Canada in 1984, MAC was acquired by Lauder in 1994. Since then, sales have TKTKTK. Demsey notes that incoming brands have had a far greater impact on Lauder than just adding to the bottom line.
“The company has fundamentally changed and transformed itself on each and every activity, in terms of the learnings and business savvy,” he said. “Our ability to do that, to use these strategic acquisitions and additions in terms of changing the mindset of the company and learning how to do things in new and exciting ways is unique. It’s a very special recipe.”
Across all brands, large or small, hero products have become key drivers, often garnering repeat purchase rates of 35 to 50 percent. The company has a disproportionate number of such products. “They absolutely can be created,” said Hudis. “How do they get created? That’s the secret sauce. But they have to be incredible formulas where consumers can see a perceptible difference, and that difference is so obvious that it creates its own appetite for more of the same.”
Lauder has become adept at identifying the prevailing sociocultural forces that impact innovation, whether from a product development or marketing point of view, a tenet that goes back to the days of Estée Lauder herself.
Courtesy of Este?e Lauder
“The family always understood the importance of culture in terms of what it represented in the aspiration of people,” said Demsey. “If you want to be in it to win it, you need to understand where the eyeballs are and where the influence is.
“While all of this disruption and the changing way we consume media or learn about things is a bit scary for those of us who are used to the old paradigm, it is also really liberating and exciting if you look at the world of possibility in terms of how to connect and find and see and learn things,” he continued.
Indeed, Hudis noted that perhaps one of the most fundamental changes at the company has been in how brands talk to consumers. “We are not just a product company,” she said. “We are a media company, too, with creativity at the core.”
Coming out of the pandemic, both executives believe that lasting changes in consumer behavior — the acceleration of digital, the rise of self care, the appetite for beauty — have created new dynamics that will continue to propel the business forward.
“Beauty and the desire for continuous self improvement is a universal aspiration that stands the test of time,” said Demsey. “As the world starts to emerge, I don’t think that we forget what just happened. Values and principals matter even more and the qualities of your personal relationship, how you feel about your employer, your job, your relationships — there’s been a reprioritizing of what’s important.
“The thing about the new world order is it gives you an opportunity to reconsider things in a different way,” he continued. “I see the sparks of incredible creativity and the desire to put it out there in a profound way. I believe our company attracts people who love the pursuit of doing that, who love creativity and have that passion for work.”
And in the end, it’s the people who will ensure the Estée Lauder Cos. not just survives — but thrives — for another 75 years and counting. “Our most important value is we are consumer-centric, but COVID has taught us that we are not just consumer-centric, we are people-centric,” said Freda. “We have seen the human being behind our consumer. We have seen the talent behind our employees, the courage behind our shareholders. It is about seeing the people, not just the business. That for me is the center of the celebration and why I believe the future can be as bright, if not more so, than our brilliant past.”
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