Can Estée Lauder Win Over the Modern Beauty Consumer?

0:07Hello and welcome to The Debrief from the Business of Fashion, where each week we delve into our most popular BOF professional stories with the correspondents who created them. I'm Executive Editor Brian Baskin. And I'm Senior Correspondent Sheena Butler-Young. Simply said, we lost our agility. We did not capitalize on the higher growth opportunities quickly enough in channels, markets, media, and prestige price tiers, nor fuel new consumer acquisition aggressively enough. That's how Estee Lauder's new CEO, Stéphane de la Favre, started his first earnings call, a stark acknowledgement of the challenges the beauty giant faces after years of dominance in the prestige market.

0:55Estee Lauder now finds itself scrambling to regain relevance and return brands such as MAC and Clinique to their former glory. But Estee Lauder isn't alone in these challenges. We're recording on Friday, February 7th, and just yesterday, L 'Oreal and Elf Cosmetics, two brands that have both benefited from and fueled Estee Lauder's decline, also reported fairly dismal results. Today, Elf stock is down more than 25%, and L 'Oreal just announced a minority investment in the French fashion label, Jacques Mousse. Did the bottom just fall out of big beauty? Today, we're breaking it all down with BOF beauty correspondent, Daniela Morissini.

1:29Hi, Daniela. Welcome back to the Debrief podcast. Thank you for having me back. Third time's a charm, I hope. Thank you for joining us, Daniela. Why don't we start with you telling us how bad is it at Estee Lauder? Why would the CEO feel the need to open an earnings call with investors and analysts with something like that? I think a little bit is just scene setting. So Stefan is their brand new CEO. He was just appointed at the end of last year and his appointment was the capstone on a really turbulent time for the company. They were growing very well. They were adding brands. They were growing sales for quite a long time.

2:03And sort of around 2021, 2022, like Sheena says, the bottom just seemed to kind of fall out of it. And they were having issues in a lot of companies were having issues coming out of COVID, but their issues continue to compound. And what's happening, you know, a couple of years after that is the comparison base after some point, you would imagine would become favorable, and then the losses would start to narrow. And that's just not happening. And I think now that he is in place, and he is the new leader, he wants to lay it all on the table and say, this is the mistakes that were made and kind of set the scene for what he wants to do differently and how he wants to try and right size the business.

2:38And as you just kind of alluded to, it wasn't always like this. The brand was founded in the 1940s by Estee and her husband, Joseph in New York. And by the eighties and nineties, it had become recognized as one of the top cosmetic companies in the world. Back then you couldn't walk through a department store without interacting with Estee Lauder in some capacity. And that's probably still true today, But I want to talk about those golden years and what that winning formula was like. Estee Lauder, the woman, was a powerhouse. I think there is an argument. Like, she essentially invented guerrilla marketing.

3:10There's this story. It's potentially apocryphal. I choose to believe it's true that Galerie Lafayette in Paris wouldn't stock her youth do bath oil. So she took it into the store and purposely smashed a bottle on the floor so that people would smell it and be like, what is that wonderful smell? And then that they would want to stock it. So she was a really tenacious, very inspirational woman. And then as time went on, they started to add more premium brands. They didn't buy all of them. They did buy a lot. We'll get to that later. But some of them they created in-house and they did so successfully.

3:38So they created the Clinique line with a Vogue editor at the time, Carol Phillips. And this was really groundbreaking. The idea of dermatologist-backed skincare. They really invented that category a long, long time ago. They absolutely had department stores on lock. They really excelled in that environment. And then as they got into the noughties, they were quick with indie brands. They bought a lot of these sort of hot, trendy social media brands. They were very, very acquisitive and they were riding high for a long time. I think you're starting to touch on what has gone wrong there because all of what you're talking about with them riding high dates back 20, 30, 40 years ago.

4:15I mean, when was the last time they really were at the forefront of an emerging beauty trend? This is such an interesting point because I've covered the company for a long time and And they have really been able to do this, right? So Clinique historic, yes, but that is a big moment. Aveda, one of their hair care brands, has been doing scalp scans for at least 10 years. This is now a hot, buzzy trend, right? MAC has one of the first setting sprays that was available to consumers. And this is like a huge Gen Z moment. I think where their core brands like your Clinique's and Le Maire's were perhaps not so much on the innovation front, that was fine because they could afford to buy these new brands that would sort of do it for them.

4:51But as we have seen and we've examined on this show before, a lot of these indie brands, their growth was not sustainable. They were not going to continue to grow and continue to be the hot new thing. And I think that's part of the problem is they spent a lot. I mean, they spent, I think,$1.4 billion on Too Faced, which is like a really Instagram first, buzzy social media brand. And the growth has just slowed. That's interesting because Too Faced is a buzzy or more current brand. And I like how your story mentioned Aveda, which was, I remember doing a scalp scan there in the early aughts. Now that the textured hair care conversation is evolving, they're really not current.

5:25Like a lot of these brands are not up to speed with current trends as Too Faced was, which was an overinvestment. Agreed. And I think this feeds into when you look at the company structure of Lauder. So this is still a family owned company and the Lauder family have about 86 percent of the voting rights. So they exercise a lot of control over the company. If you compare that against Pouge or L 'Oreal or whatever, there's founding families there, but typically they tend to control like 30 % of the voting rights. I think that actually might be different for Pouge. So the Lorde family have been able to really hold on to their beliefs and kind of mold the company in their image.

6:01And a lot of their beliefs are around that beauty is a prestige category and a prestige experience, and that is the way to win. Things around travel retail and the power of sort of luxury and all of those signatures. And that message in the wider beauty consumer base has been sort of diluted a little bit. People are much more open to shopping for products in different ways and from different kinds of founders. And they didn't really let go of their values. And do we feel like the new CEO represents any kind of break from that? I find the contrast with Nike quite interesting because they also brought back a veteran executive who really lived and breathed that brand to lead it.

6:39And that move was celebrated last year, Elliot Hill. I get the sense that there's been more of a mixed reception with this appointment. So yeah, Stefan has been at Estee Lauder for over 13 years. So he has been there for quite a long time, but he's not a lifer by any means. He was previously at L 'Oreal. He has presided over, you know, some of the buzziest brands. He was sort of quite a leader on Dessian, which is the parent company of The Ordinary, which is far and away one of their more successful brands at the moment. I think the expression that comes to mind is that if you use the same bricks, you'll build the same house, right?

7:13And they haven't changed much of their C-suite. There have been a few folks who have stepped down or retired, but they announced a raft of promotions in the last week. And generally, it was essentially promotions, putting people who'd already been in the company into new positions in the company. I think within Lauder, he seems to be really quite well-liked. And I think there is a sense that people are excited for change and that he will bring a fresh agility. The investor community obviously favored an outside hire, but hard to push through a sort of activist motion when you have a family that controls essentially all of the voting rights.

7:43And the other component of Estee Lauder's decline is this big bet on China that they made a few years ago that really seems to have blown up in their face. Tell us about that. Yeah. So like a lot of Western companies, Lauder identified China as a really big growth area. And we've seen this across the luxury fashion sector as well. And so they got to the point where, you know, over 25 % of their sales were coming from China. For L 'Oreal, it was about 20%. Pooj and Coty, it was even less. And for a long time, having a lot of sales through China and specifically through travel retail and this practice known as Daigo, where people basically buy things on the gray market outside of China, where it's cheaper and then bring it back into China for their friends and family at home.

8:25For a long time, this was really working. And it sustained a little bit throughout COVID. And then it really, really sharply fell off. And not only did the China business really, really sharply decline, and we see this across pretty much all beauty companies earnings, they are all seeing real softness there. But when the Chinese market took a really big hit, it exposed just how much they had neglected their home market of the US and just how much market share they had seeded, I think, without anyone really realizing. So the earnings call, Stefan had his first go at kind of laying out some strategy.

8:58What did we learn around like performance and cuts in the plans to get this back on track? I mean, I think there's a lot of expectation that maybe this is too big of a company to truly pivot. What is he saying? So he's saying quite a lot of things. They've laid out this new plan called Beauty Reimagined. The thing that people have really hooked on is the fact that they're going to extend the amount of job cuts. So previously, they said they were going to do about 3 ,000. That could go all the way up to 7 ,000. They're now saying over the course of about a year. They are looking at finding incremental savings.

9:27They're talking a lot about optimizing their supply chain and the pace of innovation. But the main thing that struck me on the earnings call is how much they were trying to reassure folks that they really are investing in their core brands and that they are not simply going to strip everything down to the bare bones in order to try and drive profitable growth in the next quarter. They are taking a longer term view. So they talked about tripling the pace of innovation. That would be a lot more launches across all of their brands, really heavily investing in their marketing. And I think if you go on their website, there's a video you can watch where they talk about the beauty reimagined plan and everything they're going to do.

10:02And something that they say, or Stefan says, is that he says, we need to be obsessed with our consumer. To me, the subtext of that is we're going to do some things that maybe we haven't done before and maybe we don't really want to do. And one of those is in the last six months or so, they started selling on Amazon. And I think previously to them, this was unthinkable. Amazon is not a luxury beauty environment. I think that's what they would have felt. But now they are going to do it. You say 7 ,000 job cuts potentially. Is that coming through divesting brands, you think? Is there any hint around that?

10:34So they've been on the earnings, of course, this was something that came up and they gave us sort of an answer saying that they are always undertaking strategic portfolio reviews. You know, they're constantly looking at strengths and weaknesses. I've heard that one before. You know, there's a few thoughts around this. You know, the hair care division is the one that is most visibly struggling. It's lost money, I think, for about the last five years. And those brands are not growing especially well. Then there's another school of thought that, you know, some of the smaller makeup brands like Smashbox, which has already greatly reduced its presence in quite a lot of countries, or Too Faced or Becca, which they actually took an impairment on in 2021.

11:09but I think they still technically own, you know, a private equity buyer might want to buy the three of those together. There's even a school of thought that if they want to do something really big, they could sell off MAC Cosmetics because even though it's such a well-recognized brand, and I think it is over a billion dollars in sales, they have a lot of stores, which is quite margin dilutive. And there's so much competition in cosmetics. And MAC could still thrive under a new or independent private equity or something like that. But for what it's worth, I personally don't think they will sell off MAC.

11:39It's just it's one of the many theories I've heard bandied around. And I think there is an understanding that they might want to keep the hair care brands because then that allows them to not just be a skin and cosmetics and fragrance pure player. I think they would definitely hang on to all their fragrance brands because fragrance is such a buoyant category. And they do actually have some very popular fragrance brands. And so another thing that was announced this week as part of their new beauty reimagined plan is they have simplified their corporate structure. And previously, it was a little bit confusing in terms of which brands were grouped together and why, but they've simplified that.

12:09They've created more of a skincare brand cluster, a makeup brand cluster. And they've also really simplified the geographic way that they're dividing up the markets and who's overseeing them. And I think that could lead to greater agility and better sort of more targeted marketing for each region. So it sounds like they're talking a lot about innovation, but I'm not hearing a lot of real, it doesn't sound like they're shaking things up all that much from the sound of it here. Yeah, I think that your kind of analysis is how a lot of people seem to feel. I think what is different is if they genuinely do commit to fresh innovation on the products.

12:44And one thing they've also talked about doing is they have really changed their corporate structure and they've got rid of a lot of the silos. So if you take Procter & Gamble as an example, about 10 years ago, they had a very messy corporate structure with two kind of conflicting layers. There was like a global team and then a category team. And it wasn't clear who had the final say-so on different products and different launches. And historically, Lauder have had a similarly kind of we're going to group brands by price point or by who's based in which part of the US, you know, the West Coast brands versus this or that.

13:17They are now devolving more power more geographically. And they have simplified the management structure because a big part of the reason that they have lost market share in places like the US is because they've lost agility. So you look at the Tom Ford brand, for example. I mean, I can remember within the last 10 years, this was a really aspirational luxury makeup brand that people really wanted to buy. It was very desirable. I'm not sure when they last put out a big launch. I certainly didn't hear about it. They've had organic viral moments on TikTok and they've not capitalized on them. And I can't help but feel that that could be because they're lacking some internal agility.

13:51I have to give that Nike hedging statement where when we say a brand or a big conglomerate is struggling. We're talking about Estee Lauder, which has a$24 billion market cap. And it's obviously there's some areas of strength. I wanted to talk about some of the areas where they are strong. I think fragrance is one you mentioned that they will not probably get rid of because there is a lot of strength there. And then MAC, they're doing interesting campaigns. They're trying some things and they're not exactly flailing. Yeah. And the brands that they have launched onto Amazon, for example, I think are performing really well.

14:20Clinique in particular. Clinique obviously was the original dermatologist brand and they stopped showing it at some of the dermatology trade shows. They've taken it back to those trade shows. They're investing quite a lot in kind of really re-upping those credentials. The Ordinary, as we discussed, is a really, really successful brand. They're launching that into some new markets. They're trying to bring out some of the other brands that are under the Deciem umbrella. And I think also, you know, Mac, for example, and Le Mans, like these are really well-loved brands that do have great name recognition and people know them.

14:50So it's not that they've completely fallen off the face of the earth. It's more that the competition has really increased. And speaking of market cap, I mean, yeah, they have a$24 billion market cap. That was$80 billion two years ago. I mean, they used to be kind of, if not neck and neck with L 'Oreal, they were basically in the same league as them. And if you're going purely by how investors are valuing that company, they're no longer considered a beauty giant at that global level. I think they could be there again someday, but I think that's quite a worrying sign when a company has fallen that far, at least in the market.

15:24We'll be back with more of the debrief right after this.

15:31Okay, we've beaten up on Estee Lauder enough. Let's talk about their competitors who aren't looking so hot this week themselves. I think L 'Oreal, I mean, to me, that feels like a very typical, like they've had a good run and they're having a bit of a slowdown. I don't see a huge crisis there. We should talk about those acquisitions. But first, I want to hear what is going on with Elf, because for the whole time that BOF has been covering beauty since 2018, the story has been Elf on this relentless rise and a lot of it coming at the expense of Estee Lauder. And now it suddenly seems like they hit this brick wall yesterday.

16:07Yeah. So I think what is interesting, because you mentioned BOF, we've been covering this brand since 2018. They were actually in huge decline then. They were not a successful company. Oh, that's right. That's right. Yeah. They had way too many products. They were not sort of like doing market research to make sure the products were like a really good fit for the market. And then they had this incredible comeback kind of by almost becoming an entertainment company, right? Like these big splashy ads and everything. They had all these stores. They closed them down. They invested more in wholesale.

16:36But they have found themselves in a little bit of a difficult spot right now. And this is partly to do with the tariff situation. So they source a lot of their product from China. They were hit with tariffs under the last Trump administration and they were able to they did some price increases. I mean, a lot of their products are under 10, 15 dollars. Right. So a dollar price increase is not making a huge difference to the end consumer. They shared some of the cost of those tariffs with their suppliers and so on and so forth. And they have started to diversify their production away from China exclusively and also increase their global business.

17:09So it's not all being made in China, shipped to the US. But what they signaled this morning was that there has just been some softened demand, you know, even for mass cosmetics in the US, and that they might not be able to keep growing at the absolute sort of rocket ship levels that they have been in the last four to five years. Okay, so let's talk about the other big news of the week, which was those two very interesting investments that L 'Oreal made. I mean, they've never been shy about investing in other companies and even buying brands a lot like Estee Lauder. but these two at this particular moment seemed quite interesting.

17:43Tell us what they did and why it matters. Yeah, two really interesting moves that they made this week. So one of them is in Amouage, which is a luxury Omani fragrance house. And then the other one, of course, being in Jacquemus and they've invested in the overall business. So the fashion house with a view that they then can produce a beauty line under the Jacquemus name. They have been fairly acquisitive in recent years. They did pay$2 billion for ASAP a couple of years ago. So nothing quite, you know, a full buyout since then. But on their earnings call this morning, their chief financial officer, there was a wonderful moment where he described the business as being in conquest mode and on the offensive and said that there are plenty of acquisitions that are being worked and looked at and that they have plenty of white space, but they don't have to do anything if they don't want to.

18:26They will choose the companies that will fit within their strategic vision. So yeah, L 'Oreal, much like L 'Oreal, has been adding lots of brands in the last few years. I think the most noticeable one would have been ASOP, which they purchased a couple of years ago, because I believe it was the most they'd ever spent on a single brand. And that was north of$2 billion. They've also, through their new business development, like they have a corporate venture capital on, they're able to write some smaller checks. So like this morning, they announced that they've made a minority investment in Amouage, which is an Omani sort of luxury fragrance house.

18:57They also add licenses. So Estee Lauder has done this historically as well. I mean, at one point, they even had a Donald Trump perfume. And they also said they've added beauty licenses from, you know, Prada, Mimu, Valentino. And these are really, really successful franchises for them. These sort of beauty, the fashion house licenses continue to grow for them. I think some of the more successful acquisitions they've made would have been, for example, CeraVe. This has been such a powerful brand for them. It was really quite small when they bought it, they paid a really big multiple to acquire it.

19:28And that became a billion dollar brand, I think last year. So that is an example of a brand that they made a bet on that they really invested in and they timed well. And it's been a huge success. The success has started to cool somewhat. I think it's, you know, perhaps it's unreasonable to expect the brand to continue to grow at that same rate forever, but that has been a real success story for them. I have to say this playbook sounds very similar. It sounds like what Estee Lauder was doing about 30 years ago. Yeah, but L 'Oreal's bets actually work, seems to be the difference here. But how long does it work if it's the same?

20:01Are they investing in the right brands in a way that Estee Lauder didn't? Is it timing? Is it what they're putting into the brand once they acquire it? Because it's a very similar playbook, but it's working for one large conglomerate and not the other right now. L 'Oreal is cooling a little bit. Is it on the same trajectory? Yeah, I think all of the above, right? I think, bear in mind, L 'Oreal have previously acquired brands and had to shutter them. Not every single brand they have acquired has been a huge success. So for example, they had these brands called Declior and Sanoflore, and they were both sort of like quite natural, essential oil-inspired skincare brands.

20:35Those have both gone. They realized, you know, the trend was trending towards dermatological beauty and CeraVe and SkinCeuticals, which they also own, were just going to be much bigger brands than that. I think also because L 'Oreal has always had a variety of price points, you know, you can get something from Garnier for less than$10 or something from Helena Rubinstein for several hundred, right? So they've not been so restricted in terms of we're only going to invest in brands in a certain price bracket. So I think that's probably some of it as well. And also the scale of L 'Oreal, it's hard to comprehend just how big this company is.

21:08I mean, I think it's$185 billion market cap. It's a much bigger company with much more touch points and places and channels that people can experience the brands. So back to Estee Lauder. So, you know, they have some positive things in their direction right now. A new CEO for all intents and purposes has a fair shot at right-sizing this company. What is your overall assessment of Estee Lauder at this current moment and where can they go from here? Yeah, I think when Estee started to have some difficulties a couple of years ago, I was really, really bullish about the overall value of the brands and the prestige and the name recognition that they have.

21:46I can remember as a child and as a young teenager, Clinique in particular, I remember they had this ad campaign that was shot by the photographer Richard Pierce for the Chubby Sticks. And if you're not familiar with that, I would encourage you to go and look up those images because they really are incredible. And those images have stayed with me for what, 15, 20 years? I just felt that they were sort of not too big to fail, but the roots were too deep and that there was still this innovation thing. I think as time has gone on, it's just got harder and harder because the competition, especially in the US in their domestic market, has really, really ramped up.

22:19And they don't seem able to accurately forecast what's going to happen next. They completely withdrew their fiscal guidance at the end of last year when they had their earnings last week. They gave an outlook for the following quarter, which was predicting more declines. And some analysts think that even that is a touch conservative. So it's just such a difficult climate for them because really, they need to be able to buy brands to grow. This is historically how they have grown. And they can't do that right now. And it's really hard to convince people something that's been around for a long time is actually cool.

22:49Again, they're making a big effort with Mac and I'll be interested to see how that shakes out for them. I do think that's a point in their credit, though, that they haven't gone out and overpaid on some hot brand. And I mean, you can just totally see a company like this doing that and buying something that's just like a, you know, a flash in the pan and spending $2 billion on it and having nothing to show for it. Well, I mean, there is an argument to say that they kind of did that. You know, we mentioned Becker earlier. They paid a pretty penny for that brand and they had to shutter it. They launched the Estee Edit and this was meant to be the millennial version of the Estee Lauder core brand.

23:23Kendall Jenner was the face. I remember going to the launch in Selfridges, it was very fuzzy. I don't think that lasted three years. I think there's an argument to say, actually, they've kind of had enough missteps on the incubation acquisition front. You try to say something nice and then this is where it gets I was just thinking that I was, and by the way, Clinique is a good, I think a good prism for Estee Lauder and sort of where they are now. I remember in high school, every single girl's prom makeup was the Clinique like starter pack. Like you had to have the foundation, you had to have the powder and the whole thing.

23:53And none of my friends use it now. It's just not in the conversation. So, I mean, is it gone from the conversation forever? I don't know. But it is a powerful testament for where the company has been, where it can go, unfortunately. or maybe, or maybe fortunately, you never know. Yeah. I mean, think about the Clinique even better dark spot eye cream. Do you remember this? It was one of the first products I saw that was in this style of packaging where it had this metallic tips. It was like you put it under your eye and it was cooling. It was like a new kind of applicator. I think they can still deliver on innovation.

24:24I think that there are folks within the company who probably are like tromping at the bit to push through their big ideas. And perhaps that wasn't possible under the old leadership and perhaps it will be under the new leadership. But I agree with you, you You know, like there is something that feels a touch dated about some of the brands and figuring out how to modernize that whilst not alienating the people who. I mean, my mom has been buying Estee Lauder Double Wear Foundation for as long as I've been alive. And anytime they have an earnings, she will text me and say, can you tell them to not get rid of it?

24:52And I think she thinks that I have a direct line to Stefan. I don't. Stefan, if you're listening, please keep Double Wear for my mom. I love that. And that's a great and positive note, I think, to end on. Daniela, thank you so much for joining us today. Thank you so much for having me. Please be sure to check out Daniela's articles, Estee Lauder Company's Makeover Begins, and Estee Lauder Knows How to Cut Costs. Can it also rebuild growth? At businessoffashion.com. These and other stories are available to BOF professional subscribers only, and you can find the links in the episode notes. You've been listening to The Debrief, produced by Olivia Davies, mixed and mastered by Eric Rhea.

25:28I'm Sheena Butler-Young. We'll be back next week with a new episode. Thanks so much for joining us and be sure to follow us wherever you get your podcasts.