Fabrizio Freda is an avid chess player, but the demands of running the multibillion-dollar EstéeLauder Cos. Inc. business have forced him to abandon his weekly match.
Now, nearly two years into his post as president and chief executive officer at Lauder, Freda is playing the game on a much larger scale as he positions the company to advance against stalwart competitors. In the last year, in particular, Freda has issued a proverbial “checkmate” to the competition, including L’Oréal and Procter & Gamble Co.
The once North American-focused, family-centric public company is increasingly shifting its focus abroad, particularly on Asia, and throwing support behind the biggest, most promising new product concepts. At the same time, Freda has cut costs, put underperforming brands and divisions under the microscope, consolidated Lauder’s global infrastructure and hunted for growth across new markets and categories.
As a result, Lauder’s stock bounded to a high of more than $100 earlier this week, a stellar leap from $33.50 a share when Freda took over as ceo on July 1, 2009.
That surge upward has richly enhanced the stockholders’ wealth — including the Lauder family — and will do the same for Freda. Earlier this year, he inked a new employment contract, effective July 1, that includes stock based rewards of no less than $5 million. As Caris & Co. analyst Linda Bolton Weiser wrote in a research note, “Freda could receive a bonus of 160,000 shares if the stock trades at an average of $150 or higher during the 20 days ending June 30, 2014, which is at least $24 million. If the stock trades at an average below $37.50, Freda will receive no shares. If shares trade around $92.12, Freda will receive about 100,000 shares.” Asked where she thinks Lauder’s stock price will land Weiser said, “Clearly [Lauder] wouldn’t put out that target if it didn’t think it was attainable.” In her view, it also sends a signal to would be suitors: Don’t even think about making a bid for this company for below $150 a share.
Lauder’s sales momentum made a sharp comeback in 2010 with net sales up 6 percent to $7.8 billion compared with the prior year — this after they slid 7 percent in 2009. Lauder is once again on track to end it’s fiscal year, ending June 30, in a much better position than it started. For the first nine months, profits rose 45.2 percent to $659.7 million from $454.4 million a year earlier. Revenues increased 13.3 percent to $6.75 billion from $6 billion.
With Freda’s second anniversary as the ceo of Lauder a scant two weeks away, WWD has compiled a report card — with the help of Wall Street analysts, company executives and Freda’s own self reflection — to grade the impact he has had on the business so far and to discuss how he plans to usher in the next wave of growth.
Many of his accomplishments have come through collaboration. Working in conjunction with executive chairman William Lauder, Freda tapped the talents of the company’s deep pool of veterans and provided an additional layer of direction. Surprisingly, there was relatively little turnover, despite the strains of the recession.
“The key change that I’ve brought to the organization is to unleash its strengths,” said Freda. “It’s very difficult to make a big improvement when you create something from scratch. It’s much easier to be fast in the progress — and frankly we’ve been very fast — when you are unleashing existing strengths in new ways and tailoring them to the world.”
Freda, also a sailing aficionado, continued, “We are putting our boat in the winds of growth. If you are competing for the America’s Cup and have a beautiful, sophisticated boat with a great crew, but there is no wind where you are, then it’s difficult to win the race.…Now, we have a lot of wind in our sails.”
The wind, in Freda’s view, has been kicked up by the recovering U.S. department store channel, growing specialty store business, emerging e-commerce and mobile strategies, and strengthening beauty business in emerging markets, as well as a steadfast focus on innovation, particularly in skin care. For the nine-month period ended March 31, the category accounted for 42 percent of Lauder’s global sales, according to the company.
The company’s new attitude has won accolades from Wall Street analysts, who several years prior had grumbled about what they saw as Lauder’s brand silos and its insular approach to running the business.
“He’s an amazing statesman,” said Deutsche Bank analyst Bill Schmitz. In Schmitz’s view, Freda deftly balances the tactical know-how of a ceo with diplomacy, noting that he has an endearing habit of saying, “This is what I think. What do you think?” Schmitz said, “He plays the game great.”
Stifel Nicolaus analyst Mark Astrachan nodded to Freda’s openness: “He’s done a good job communicating. It helps that you have a great story to tell.” Quickly rattling off Freda’s accomplishments, Astrachan said he has worked to improve profitability of the Aramis and Designer Fragrances business; removed an underperforming brand from stores, namely Prescriptives (which now sells exclusively online), and reemphasized the department store channel with high-touch and high-tech elements at the counter.
“Investors by and large have quite a bit of confidence, due to his ability to execute the changes he set out to,” said Astrachan.
Wall Street wanted an outsider. And Freda proved to be just outsider enough. Freda’s P&G pedigree also won him favor with analysts. He joined Lauder in March 2008 from P&G, where he had most recently served as president of Global Snacks. Freda also brought a sensibility for luxury goods from his time at Gucci SpA.
“When he joined, he had the full support of the Lauders to make changes that hadn’t been possible,” said Connie Maneaty, an analyst at BMO Capital Markets. “As a result of that, the company has beat quarterly estimates every quarter — and not by a little, by a lot. He was able to harness the power of the organization.”
Wall Street’s exuberant embrace of Freda contrasts with its more restrained — at times adversarial — relationship with past ceos at the firm. But, the patriarch of the company and chairman emeritus Leonard Lauder asserted that Freda’s rise to ceo has little to do with appeasing the financial world or nudging Lauder’s stock higher. The search for Freda, as Lauder reminds, was initiated by his predecessor William Lauder, the son of Leonard and grandson of Estée Lauder.
“When William embarked on this search, he was not looking for someone who could deal with Wall Street. He was looking for someone who could join the family and the company and take it to a higher level than it’s ever been.…[Freda] has helped take this wonderful company and make it even greater. And that’s what makes me so happy about him,” said Leonard Lauder.
He continued, “Look around and see how many ceo’s have come into companies where the first thing they do is say, ‘I gotta change everyone.’ Out everyone goes and in comes new people. He embraced our people, recognized their skills, worth, value and institutional memory. We are a very special company. We are not a family-run business but we’re a family in the business.…He’s embraced our strategy, which is staying in prestige and having a very strong luxury component and a very powerful limited distribution. He’s embraced us, and we’ve embraced him.”
When Freda moved to the corner office in mid-2009, the country was in the grip of an unrelenting recession. As it happens, the dismal economic environment gave Freda the backing to make a string of difficult decisions.
William Lauder said both he and Freda had to work to dismantle the status quo. “The challenge that both Fabrizio and I had was to win over those executives who were afraid at any change at all. It was hard work to win over the most hard-willed executives. Not long after he arrived, we dealt with a prolonged recession,” which in Lauder’s view ultimately, “lowered the barriers of resistance to change.”
The pair have a close working relationship and often sit side by side in meetings. “In our case, one plus one equals three. We’re both able to accomplish what we feel is right for the company. We both agree who is going to do what,” said William Lauder, who served as ceo from 2004 to 2009.
Freda’s tenure and the firm are now benefitting from a strong economic tailwind, as the category begins to expand again, pointed out several analysts.
But, Freda remains focused on disciplined spending and wringing out costs. In 2009, he reorganized the company’s brands by channel and consumer segmentation.
The strategy has begun to reap rewards. On the cost savings front, Freda has “massively delivered,” as Astrachan of Stifel Nicolaus put it. Last fiscal year, Lauder achieved cost savings of more than $360 million, and this fiscal year, it anticipates an additional $190 million of savings. The company revised its projected savings over its four-year restructuring strategy, first presented in February 2009, to between $625 million and $675 million, up from Lauder’s original cost-savings goal of $450 million to $550 million.
The native of Italy, who speaks three languages —Italian, French and English — also has a sense of humor, particularly when it comes to his grammar, said John Demsey, a group president at the firm. Demsey said, “For the first year and a half, he would say the phrase ‘moose on the table.’” No one knew what the phrase meant, and no one dared to ask until one day when Demsey did. He quickly realized Freda had meant, “the elephant in the room.” Today, Freda has both a plush elephant and a plush moose in his office, a gift from employees gently poking fun at the twist of words. On the flip side, Demsey credits Freda with taking some of the emotion out the conversation to help brands “realize their full potential.”
“He’s established a common language and strategic platform, and at the same time fostered creativity and growth while sheltering the company through the biggest economic crisis that any of us have ever witnessed during our lifetimes,” said Demsey.Freda’s years at P&G fostered a keen focus on understanding consumer insights and, as Demsey put it, “a rigorous methodology for measuring performance.” He saw an opportunity to tinker with and perhaps improve the traditional prestige beauty model. His approach gives select products the big-bang marketing treatment with the aim of drawing new customers to the beauty counter. Freda explained, “Let’s take the example of Clinique Even Better [Clinical Dark Spot Corrector], which is one big initiative that appeals to a large number of consumers and is strongly supported by advertising. In this case, it was print, TV and digital all combined. This creates a lot of new traffic into our doors of people who maybe before were shopping in different channels. Or who were not shopping the Clinique brand. They are brought in via a big idea that’s well advertised. Then at our counter, [the consultant] is able sell her not only the [advertised] product but a regimen.”
He continued, “With the pull-push model, we are making the prestige cosmetics business model more efficient than it used to be. Because with this model some investment in pull advertising generates extra sales, extra loyalty and more brand equity thanks to the high-touch service in store. One without the other was not optimizing [the opportunity]. Only advertising — without the service in store — has certain limits. Only service in store — without pull — has the limit of not creating enough traffic. We are reshaping the model to optimize it, and create a competitive advantage in the prestige industry.”
When speaking about the business, Freda frequently weaves in talk of emerging markets as he is bent on moving the company beyond its North American perspective.
Cedric Prouvé, group president of international, recalled, “The first sentence he said to me when I met him was, ‘Doyou have a strategy?’ The second sentence was, ‘Can I travel with you internationally?’”
“He has incredible stamina. He’s completely switched on the whole time,” said Prouvé, who noted that said when he assumed his current post nearly nine years ago, international sales accounted for about 40 percent of the company’s sales. Today, they account for more than 60 percent. And the plan is to grow them further. “He is very structured in his management style. We do not leave the room until an agreement has been reached on a particular topic,” said Prouvé.
Explaining Lauder’s international approach Freda said, “The way we look at it is in three layers: markets which are now already big opportunities, like China and Russia; the markets which are upcoming, like Brazil and Turkey, and the markets that are at the beginning of the journey, like India and Vietnam.” He said Lauder is “seeding” the later two markets because at present its business is relatively small there.
India, for its part, lands in Lauder’s third tier given “the prestige cosmetics market is still relatively small and because of the lack of infrastructure make the development of the luxury part of the business pretty slow.”
When asked if the company has its sights on acquiring a skin care company in China, as rumored, he said, “There is definitely truth that our M&A strategy makes us focused on Asia as a market…and definitely in our acquisition priority a company with a strong skin care business would make a lot of sense. We are have officially communicated in our strategy that skin care and Asia are areas of interest.”
Freda dismissed the notion that the company would have to consider selling off some brands — say in hair care — to make a sizable acquisition. “We can acquire companies if we decide based on our strong cash capabilities. There is no link between our ability to make acquisitions and our portfolio strategy.”
Now, analysts say Freda needs to look at where he can take price increases — much like Avon Products Inc. has done by introducing an innovation-driven, premium price tier (albeit in the mass market) — and continue to direct its focus aboard while improving performance in North America. But where future growth is concerned Lauder, like all beauty firms, is at the mercy of the consumer. One analyst said, “A lot of it has to do with the category. A lot of it is out of his control.” Maybe so, but stockholders are enjoying the white peaks that Freda’s winds of growth have brought.
Maneaty said, “Shareholders are happier now than when the company went public. It’s been a very happy ride for the last two years.”
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