2024 JANUARY ISSUE
CASE STUDY
THE STORY OF ESTÉE LAUDER
Written by : Andrew Sia
Share this article !
From the Desk of the Publisher
Estee Lauder, an American woman, who cofounded Estee Lauder, Inc., a globally famous fragrance and cosmetic companies. As a child, she learned business lessons from her father’s hardware store for assertive selling, perfectionism, promotion of quality products and most important, the attention to a woman’s outward appearance.
Estee Lauder is using fashion influencers as the brand’s spokesperson. With names like Fei Fei, Kendall Jenner, Joan Smalls, Yang Mi, Hilary Rhoda and Misty Copeland are appearing in social media.
Estée Lauder is a story that you can trace back to the beginning of last century and the brand has been in existence for almost 80 years. It is a very admirable piece of business and if there can be more innovations, the brand can be taken to its next level very easily.
This writeup is to inspire the entrepreneurs and for those who are in the business to think outside the box. There are a lot of opportunities out there.
The company’s namesake was one of the country’s most famous women entrepreneurs. Estée Lauder, born Josephine Esther Mentzer in 1908 learned to make skin cream from her uncle in the kitchen. Her uncle was a European skin specialist who seek for shelter at the outbreak of the World War One. She became an apprentice and learned to work with natural ingredients and started to sell them on her own in the 1930s and 1940s.
After her marriage, she changed the name to Lauder and through divorce and remarry, the couple founded Estée Lauder, Inc., in 1946. At the same time, Estée Lauder brought in her son, Leonard, at a young age and it was at a dinner with the company’s accountant and lawyer in 1946, she decided to launch Estée Lauder Cosmetics. There first products were skin treatments, a rouge and a makeup base. They started without a lot of money that they could spent on advertising, they spent money of free sampling at fashion shows and mailing.
From a company with five employees and a gross sales of $850,000 in 1958, they grew to a company of 1,000 people and generated a sales venue of $100 million in sales in 1973. In the 1960s, Estée Lauder began their selling in cosmetics and fragrances in the 1960s.
The company maintained a policy of emphasizing skin care and skin protection while selling its products only through department and specialty stores.
Over the years it added the Youth-Dew fragrance and bath oil in 1953; Aramis men’s products in 1964; Clinique allergy-tested cosmetics in 1968; Prescriptives cosmetics in 1979; Origins natural cosmetics in 1990. In the 1990s through early 2000, the company acquired beauty-related companies, like Bobbi Brown Essentials, Aveda, Make-Up Art Cosmetics (M-A-C), Darphin, and Ojon. It also entered into licensing agreements with fashion designers like Tom Ford.
By the early 21st century, the products or prestige skincare, makeup, fragrance and hair care were sold in more than 140 countries and net sales reached $8 billion annually.
Estée Lauder started as a family business and it is now in its third generation. The Lauders are known for their philanthropy and they supported New York’s cultural institutions. Estée Lauder as the person funded the construction of three adventure playgrounds in New York City’s Central Park. In 1978, Estée Lauder was honored by the French government for her contributions to restoring the Palace de Versailles. In 2013, her son Leonard Lauder donated $1 billion of cubist artwork to the Metropolitan Museum of Art. The Whitney Museum of American Art has a building named after him.
His brother, Ronald Lauder, has been an advocate for returning art stolen by the Nazis to their original owners. He was ambassador to Austria under Ronald Reagan and co-founder of the Neue Galerie of German and Austrian art on the Upper East of New York.
The Lauder family is talking about the succession plan given that its family members are still holding nearly 35% of the shares, including the super voting shares that collectively give them control of more than 80% of the voting power. Also in the agreement, the two brothers, Leonard and Ronald, each get to fill two seats on the board which currently has 15 members. Leonard is still the chairman emeritus, and his younger son, Gary is joining the board.
It was in 1970s, Estée Lauder handed over the top job to Leonard, she stayed involved until her death in 2004. Leonard expanded the business by adding MAC and Aveda and took the company public in 1995.
William Lauder, the son of Leonard, took over the CEO in 2004, before the company brought over Freda, an outsider, to run the business. William remained as the CEO from 2004 to 2009. Fabrizio Freda came from Procter & Gamble for spend twenty years there running its snacks business. Freda ran the company for 15 years as the first CEO who didn’t come from the family or rise through the company. He became the CEO in July 2009.
This year has been a terrible year for Estée Lauder as its shares have plunged about 50%, wiping out $45 billion in market value. Its China market is not performing. Competitors are doing better, take for instance the French L’Oréal, whose shares are up 30% this year. This has made the family divided about what to do.
In front of the public, the family wants to keep the disagreement out from the public view. They brought their discontent on the current CEO, Fabrizio Freda. William Lauder, the current executive chairman and other directors still want to keep Freda on the helm to execute the turnaround plan which included to clear out the unsold inventory and improve the profit. Jane Lauder, an heir from the other side of the family wanted to shortlist of internal CEO contenders. The board members are divided over the finding of the turnaround person.
Father of William Lauder, Leonard felt confident that with the skills of William and Fabrizio Freda would take the company towards the future.
For the Lauder family, collectively their fortune evaporated by around $15 billion this year. The family consist of a group of parents, children, uncles, aunts and cousins, came from a matriarch who worked through the group and built a commercial empire and been able to socialize their way to the upper crust of the New York society with philanthropic and artistic patronage.
We have to understand that the decline with the department stores like Macy’s and Nordstrom and the rising of retailers like Sephora, Target and Amazon, but Leonard Lauder is hesitated to go there. But the recent move of the company to sell its products in Ulta Beauty shops inside Targets and on Amazon.com which he believed are bad decisions. But William and Freda believed that if they were to compete in North America they need to move mainstream like Clinique and the others are doing by gearing toward the mass outlets in order to become effectively competitive.
Getting them agreed about the succession plan is important as with their ownership of 35% they have more than 80% voting power.
Freda told the investors that the company will expect to improve the result in 2024 and the inventories in Asia will be in line by the end of March quarter.
Estée Lauder have previous success in China and can be found at luxury department stores. It was one of those first companies to enter the Asian market. But they would have to fight in a market which was lockdown for three years under the zero-COVID policy, with its economy still struggling and high youth unemployment. The market has been taken over by local Chinese brands which have gained market share. The market has been complaining that Estée Lauder is lack of innovation and slow in reacting to the market trend.
But the company still mentioned that it is expecting China to be a key driver of its long-term growth. Estée Lauder is investing a new lab in China and a new manufacturing plant in Japan. Actually the lab was an investment of $1 billion five years ago to serve the Chinese market. It was meant for manufacture 300 millions of skin-care products a year but for 2024 it was adjusted to produce only some tens of millions because of the low demand. In September the company posted a 20% drop in skin-care products.
Other big cosmetic companies also reported the same, like P&G’s skincare brand SK-II, the Tokyo based Shiseido, both have posted sales decline in China.
We have to mention that since Fabrizio Freda became CEO in July 2009, Estée Lauder stock surged from under $20 to above $300 in 2021. Recently it rumbled down to below $125 and during Freda’s tenure Estée Lauder’s total return, was about 780% compare with L’Oréal’s 900% and S&P 500 index’s 550%.
Estée Lauder has been criticized for not being advanced and faced the lack of true innovation. It has also to balance from being a public company with family dynamics.
Finally, I would like to come and share with you the SWOT analysis done by a company known as Pestle Analysis and I think that this can be useful for anyone who wants to be an entrepreneur. The story of Estée Lauder can be taken as a case study.
Without the slightest doubt, Estée Lauder is rated highly for those who are using cosmetic products. It is the quality and the way the company pamper its customers that has made the brand unique.
In 2022, Estée Lauder had a revenue of $17.7 billion with its presence in 150 countries. It is operating 1,600 stores all over the world. It is a very big task to manage a total workforce of 63,000 in total.
We can move into its SWOT analysis as the following:
Strength
1.1 Without any question, it has a strong brand recognition;
1.2 Its international presence in 150 countries with 1,600 stores is envious;
Weaknesses
2.1 Hugh workforce of 63,000 but if you divided it with 1,600 POS, it is around 40 workers per location. But that number should also include those working in the manufacturing facilities and the management;
2.2 Controversies is something that we can’t avoid especially in today’s world;
2.3 Low R&D expenses, and earlier on we mentioned that it is not being advanced and faced the lack of true innovation.
Opportunities
3.1 Increase the R&D expenditure and hire more talents;
3.2 Expand operations in developing economies such as the Middle East and Southeast Asian markets;
3.3 Mergers and acquisitions which are always the tools use for business expanding.
4.Threats
4.1 Tough competition is something that no one can avoid especially under today’s business climate;
4.2 High global inflation especially during this time of high interest rate;
4.3 Counterfeit products as the copycat is lurking from behind.
Having said all these, Estée Lauder is still one of the most renowned cosmetic brands out there operating across the globe. In our lingerie field, we have seen almost all the designers have brought out their cosmetic and beauty products. It is like a most natural extension of our business as after all, it has been our goal to make our customers feel confident and allow their beauty to come from within.
Let’s look for innovation and make our women proud and elegant again!