Q&A with William P. Lauder

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\"RRWe sat down with William P. Lauder, Chairman of The Estée Lauder Companies, the $10 billion global beauty juggernaut, and talked about the evolving retail landscape, the importance of knowing your consumer and the opportunities and challenges of globalization.

Robin: William, we’re living in what we believe is the biggest transformation of the industry in the history of retailing, and therefore in wholesaling and branding as well. Some CEOs are saying it feels like the Wild West. Others feel like they are living in the chaos of technology that is far ahead of our capabilities to totally understand and use it.

And here is The Estée Lauder Companies, the undisputed leader in their space, right in the middle of it all. You served as CEO from 2004-2009, when you transitioned to your current role as Executive Chairman. During these ten years, the business has nearly doubled. So, I know you’re really smart, but is there also a bit of luck working here as well?

William: When I first joined this company in 1986, I perceived that my mission was to gain the experience to do what we needed to help the company be at the forefront of prestige aspirational beauty around the world. In 1996, more than half of our business was in North America. Now more than half our business is outside of North America. Emerging markets like China and Russia were very important, and we had a low share of market in those countries as well as in Europe, the UK and elsewhere. So, we saw a greater global opportunity where the pie was expanding, as opposed to our huge share of the US pie, which was static.

RR: Was there a consumer learning process as you began to move outside the US?

WL: There are certain markets in the world where it’s a continuous challenge to stay educated about the consumer and what she wants. The Asian consumer is extremely demanding about the quality, brand attributes, textures, feel on the skin, etc. A lot of that has to do with her environment – in much of Asia it’s very cold in the winter and very hot and humid in the summer. The Asian consumer is very focused on skin care, and when she finds what she likes, she sticks with it. Europe is more fragrance. South America is more color and fragrance. North America is more balanced.

RR: What is the distribution structure in those countries?

WL: Continental Europe is very fragmented with different department store shares by country. Spain is the highest, where we have more than 30% distribution in department stores. In Germany it’s about 15%; France, 18%; Italy, 11%. Further east it’s all parfumeries and specialty stores. In the UK we are 74% department stores, 20% specialty, mostly our own brands. Asia is 82%, which is a very high concentration of department stores. Lane Crawford in Hong Kong is very important at about 36% of the affiliate. Sephora in China has 100 or 150 doors, but the local department stores make up the bulk of the business.

RR: Why wouldn’t Nordstrom or Macy’s, for example, be looking at China?

WL: A Chinese company just bought House of Fraser in the UK. They want to exort the nameplate to China. There is no name branding yet of department stores in China so there is a real opportunity for someone to create a domestic Chinese Nordstrom, for example.

RR: Okay, so your global expansion was a big contributor to doubling the business over the last decade. What else?

WL: Retailers were anxious to have our brands, and we would give them all the elements of our brands, including the visual cues, so consumers could make the connection from what they saw in magazine. But then the visual display people would come in and say they like purple this month. So even though our color is white, it’s got to be purple. Or they didn’t like some other aspect of the imagery. They’d say, “It’s your brand but it’s my store.”

The “aha” moment for me was when Ralph Lauren built his store in the Rhinelander mansion. The department stores were up in arms, thinking this small store on 72nd Street was going to cannibalize their business. And then Marvin Traub of Bloomingdale’s went to his friend Ralph and asked him, “May I build a version of the mansion inside my store?” He does, and Bloomingdale’s ends up doing a ton of business.

Another growth insight that took root two decades ago was Origins, which, in the early 90s, was planning to have its own stand-alone retail store group, even though our expertise was in department stores. We figured that if the department stores wanted other brands like Ralph and Chanel, then they’ll want our brand as well because we’ve established the image in our own stores.

Today we have about 90 Origins freestanding stores globally, and total global Origins doors is about 1600, and they are doing great. If we have an Origins counter, or a store within a store, they all do well. We did the first shop in-store with Meier & Frank in the Portland area, which was part of May Company at the time. The store manager realized he had an unused fitting room near the entrance of the store, so he asks, “What if I were to knock down this wall and put an Origins shop right here?” He did and business skyrockets. Then Aveda and M·A·C opened their own stores.

Essentially our vision is that we can define our brands’ images and take them to where the consumer is shopping, as opposed to waiting for our retail partners to take us there. So we can say, “Okay department store, we’ll go with you if we can maintain oversight of the brand imagery, otherwise we can just open our own store in the mall.”

So the transformation was from being retailer-centric to brand-centric.

RR: Okay, that’s a huge transformation, from retail to brand-centric, the catalyst being your major, and I guess at the time, risky initiative of launching your own Origins branded retail stores. What was your next transformative event?

WL: The Internet in the 1990s became a way for us to communicate with consumers in a massive, yet individual way. As consumers began to connect with the brand, we realized we had to transition from just communicating, to engaging in e-commerce, which we did in 1998. There was a huge outcry because we were selling directly to the consumer. But we were already selling to the consumer through our retail stores.

So retailers finally realized we weren’t taking their business; rather, we were selling to a consumer who was slightly different. We’re 16 years in and online is growing at a multiple of our normal growth rate, although it’s less than 10% of the total business.

The click-thru rate on the store locator is greater than the click-thru rate for the shopping cart. So even though we’re doing a very large direct-to-consumer business, there are many more people visiting the site to find out store locations for sampling.

We are platform-neutral. And in the beauty category, the multi-channel shopper spends four to six times more than the monochannel shopper.

RR: Many of us view what’s going on with the Internet and technology as perhaps driving the biggest transformation in the history of retailing. Where do you stand on that notion?

WL: I would challenge that this is a transformation like never before. If I look back for example at the mid- to late-1980s in the US, over 60% of the department store industry was either in bankruptcy, on its way into bankruptcy, or on its way out of bankruptcy. So we were looking at 60% of our trade in financial flux, and we were saying ‘holy cow, our model is depending on a retail sector that is unstable.’

RR: I would agree, but I will also say that since the late 70s and early 80s, I would attribute the department store’s problems to the robust growth of the specialty store model. Do you think department stores will ultimately become irrelevant?

WL:Someone has been ringing the death knell for the department store for the past 50 years. It is like that scene in Monty Python and the Holy Grail where they’re going around saying “Bring out your dead,” and the guy brings out someone who says “I’m not dead yet.” And the response was, “Well, you will be soon.”

The department store is still very important to our success. They’ve got so many points of distribution that our ability to launch a product or brand is far greater through them than in any other way we can do it. The department store is still important.

RR: Can you give us the big picture of your portfolio of brands?

WL: We currently have 30 brands in our portfolio. Each one has its own lane of expertise. Some of our bigger brands in the skin care and makeup categories include Estée Lauder, Clinique, M·A·C, Bobbi Brown, Smashbox, and Origins. Our fragrance portfolio includes brands like Jo Malone and Tory Burch; and our hair care category includes key brands such as Bumble and bumble and Aveda.

RR: Are they all brand-centric?

WL: Yes, that’s ingrained in our culture. All of these brands have the challenge to make sure they’re relevant to the core mission of their brand. Clinique is “Allergy Tested, 100% Fragrance Free.” It’s different from M·A·C, which is different from Aveda, from Origins, from Jo Malone. Consumers keep coming back because they like the product, and they like what the brand stands for as they look at themselves and say, “I identify with what this brand stands for.”

RR: What about innovation?

WL: If we’re not continuously evolving our brands, and demonstrating to the consumer that we have something new, she will walk away if she believes we cannot meet her needs for innovation.

Innovation – change – must be a constant. You have to disrupt, to actively destroy and rebuild your brand every day or someone else will come along and do it for you.

RR: Is the new Millennial group behaving differently than the older group and shaping a different framework for innovation?

WL: The most important thing is how we connect with all of our consumer segments and understand how they like to use the product, and then to understand where they like to shop and how they like to shop. So we learn how the younger shopping habits differ from the generations before.
And you know, there’s been a curse for many centuries that at some point we wake up and realize we are becoming our parents. So what you see in younger generations today may also evolve.

RR:Amazon is aggressively pursuing fashion. They’re unveiling a prestige beauty destination with Nars, Burberry and L’Occitane. Will you be a participant?

WL: We’re looking at what they’re doing, but right now we’re not making any commitments one way or another.

RR: Will they become a big competitor?

WL: Amazon is a brilliant retailer. The real question is if Amazon is right for the consumer who’s attracted to our brands, do they have the core consumer that we have?

RR: Do you think The Estée Lauder Companies would ever jump outside the beauty business and acquire or joint venture with another company in the prestige business, like Tiffany? Going back to Ted Leavitt’s Marketing Myopia, are you in the prestige business or the beauty business?

WL: We are a pure-play, our success has been in prestige beauty, and our investors like that we are pure-play. We know that consumer well.

RR: In closing, what are the three most important rules of management?

WL: Listen to your consumer. Make sure you have the very best people possible. Be consistent.

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