By and  on November 9, 2007

In a seismic cultural shift, the Estée Lauder Cos. Inc. has reached outside its world of prestige beauty to recruit Fabrizio Freda, until recently president of the Global Snacks division of Procter & Gamble Co., as the beauty group's next president and chief operating officer, with plans to promote him to chief executive officer within 24 months.

William P. Lauder, now the firm's president and ceo, said in an interview Thursday that "my obligation for the next number of months is to prepare the way for Fabrizio to be successful as our next ceo."

When the board approves Freda, 50, as ceo, it also will tackle the question of whether Lauder, 46, will become chairman. His father, Leonard A. Lauder, is currently chairman.

Freda's appointment will take effect March 3, at which time Lauder will give up the title of president.

The company has been expected for some time to name a successor to Dan Brestle, who has been chief operating officer since Jan. 1, 2005, and, at age 62, had been thought to be in line for retirement. He will become vice chairman and president of Estée Lauder Cos., North America.

No other changes are expected, a spokeswoman said, meaning the other top executives will remain in place.

At a time when pressure is mounting on the beauty group because of consolidation in its key U.S. department store channel, Lauder indicated he recruited Freda to inject a fresh viewpoint into the company, plus a renewal of disciplined thinking and analytical judgment. "I love the way he thinks," Lauder said, referring to the way Freda approaches opportunities and analytical questions. His combination of intellectual approach as well as emotional understanding "will allow him to be successful in our company," he said.

Lauder added that Freda's background with P&G, where he is now based in Rome, provides a European sense of global branding. Since Lauder is a company rooted in global branding from an American vantage, the new combination will provide a synergy "that will work well," Lauder said. Freda also will bring with him the rigorous approach and depth of experience at P&G.Asked why he felt it was necessary to recruit outside the company, since the beauty firm has a dugout full of group and division presidents, Lauder acknowledged his array of talent and leadership, noting that, in the luxury beauty business, his top executives average 25 years of experience each. "It brings a great deal of experience," he said, adding there is also a danger of "not seeing other opportunities. What Fabrizio brings is another flavor to our stew."

Freda also brings a disciplined brand-building approach that will match up with Lauder's more emotion-oriented technique of brand creation. "We will get the best of both cultures," the company president said.

In a letter to employees dated today, Lauder described Freda as "a highly talented and gifted executive with extensive experience in the consumer products industry. He has a strategic focus, a passion for innovation and a financially disciplined approach. He is a true internationalist with extensive experience in Western Europe, Asia and Latin America. He leads people with a warm, personal style."

Freda joined P&G in 1982 and spent a decade in the health and beauty care division. Lauder pointed out that his new chief operating officer has luxury goods credentials in that he directed marketing and strategic planning at Gucci SpA from 1986 to 1988.

Careful not to overwhelm his new executive, Lauder said Freda first will embark on a global orientation tour of the prestige beauty leader, then begin his immersion into management. He will be in charge of all operational functions, research and development, including packaging design. Group president Patrick Bousquet-Chavanne will now report to Freda, instead of Lauder, meaning the new boss also will have oversight of Bobbi Brown, La Mer, Jo Malone, Darphin and the Aramis and designer fragrances division. International, led by group president Cedric Prouvé, will report to Freda, as will Lynn Greene, global president of Clinique. Group president Phillip Shearer will no longer have responsibility for Clinique. Instead, he will pick up responsibility for strategic planning, while retaining responsibility for Aveda, Origins, Bumble and bumble, Ojon, the corporate online business and new business development.

Brestle will continue to have direct oversight of the global divisions led by group president John Demsey, including the Lauder flagship division, MAC Cosmetics, Prescriptives, Tom Ford Beauty and Sean John. Jane Hertzmark Hudis, president of Beauty Bank, also will report to Lauder.The ceo said he has given Brestle a special role to oversee the North American market while it continues to experience tough conditions. The new role for Brestle will place one top executive over all the different retail businesses that Lauder pursues in the U.S. and Canada, the same structure it has in every other country outside the U.S. Because North America still comprises 47 percent of the company's $7 billion in volume, the different brand presidents have dealt with the stores. Now Brestle will oversee the effort. Lauder said he has given him "a mandate to lead our North American business in a more cohesive way."

Asked if Freda's appointment is part of a broader cultural change within the company, Lauder said: "Tremendous challenges have been posed during the last decade of retail consolidation with a changing landscape in prestige." He called for a more "holistic" approach. "We need to look at the market in a more cohesive manner," Lauder said. He implied that the corporation has grown into a complex jumble of strategies, pointing out that, when Lauder went public in 1995, five brands generated about $2 billion in volume, and today there are 28 brands generating $7 billion in revenues.

For the last decade, luxury goods houses, particularly in Europe, have recruited managers out of P&G and Unilever to bring a sober, no-nonsense laser-like drive to the management of fashion and beauty brands. While the results from the entire luxury sector could be construed as mixed, Lauder seems to be taking a page from the highly successful playbook of PPR which recruited Robert Polet, then president of Unilever's $7.8 billion ice cream and frozen food division, to succeed the dynamic and departing Domenico De Sole and Tom Ford.

Asked why he took the highly unusual step of announcing that Freda was destined for the ceo job in two years, Lauder said companies sometimes set up horse races between rival executives and they often spend too much time jousting for advantage over one another. "I wanted to eliminate the speculation and competition," he said. "Let's focus on the future and get everybody ready for that."

And, while Lauder is talking about relinquishing the ceo perch, he clearly plans on remaining in the center of the action. He voiced the hope of finding the same spark that illuminated the highly creative teamwork of his father and Fred Langhammer for 15 years up until 2004. "It would be my goal that Fabrizio and I create a similar partnership to what Fred and my father had. That partnership worked well."For his part, Freda said in a statement, "The Estée Lauder Cos. has extraordinary brands and terrific opportunities around the world. I am delighted to partner with William Lauder. Together, we will build upon the growth prospects and maintain the sterling values for which this company is so well respected."

On the other hand, the mere fact that an ex-P&G executive has been picked to take the reins at Lauder is almost certain to reignite industry speculation about the possibility of Freda's alma mater one day acquiring the prestige cosmetics leader.

Lauder promptly drove a stake through the heart of that theory. "The single biggest asset of mine and my family is our connection with this company. It's our identification and we will be involved in the future of this company, not only financially, but emotionally."

In terms of stock ownership, the future seems clear. According to the company's most recent proxy statement filed with the Securities and Exchange Commission last month, Leonard A. Lauder; his brother, Ronald S. Lauder; William's brother, Gary M. Lauder, and William collectively own about 13 percent of the class A common stock and about 78 percent of the class B stock, which gives them 70 percent of the voting power. The 13 percent class A common stock is worth about $530 million. The company's market capitalization is about $7.9 billion, and the firm has an enterprise value of close to $10 billion, according to Yahoo Finance. In 2004, the Lauders had more than 80 percent of the voting power, and owned more than 50 percent of the class A common shares.

In recent months, Wall Street analysts have applauded Estée Lauder's push into international markets, but many remained concerned about the health of its core brands, namely Clinique and the Estée Lauder brand, particularly given the weakness in the U.S. department store channel.

For instance, last month in a research note, Morgan Stanley analyst William Pecoriello stated that, despite reinvestments in the flagship brand and easy comparisons with last year, the Estée Lauder brand's U.S. retail sales had declined 10 percent.

At an analysts' meeting earlier this year, Lauder said Clinique and Estée Lauder account for about 60 percent of the firm's overall net sales. The beauty firm has worked to untether itself from the department store channel, to some extent, by opening additional standalone MAC Cosmetics boutiques; launching its makeup artist brand, Bobbi Brown, on QVC and in the chain Bluemercury, and rolling out Clinique to all Sephora doors and to Shoppers Drug Mart in Canada.But some analysts questioned whether those efforts are aggressive enough to move the needle. In an Oct. 26 research report, Bear Stearns analyst Justin Hott wrote, "Even though we like that Estée [Lauder] is exploring other distribution channels in the U.S., we worry that these are not big enough to offset their heavy exposure to department stores, which remain in decline."

In a report issued this fall, Credit Suisse analyst Filippe Goossens stated that department stores account for about 70 percent of the beauty firm's domestic business, down from 90 percent a decade ago. He wrote, "We would like to see Estée Lauder step up its initiatives to continue to reduce its dependence on the North American department store channel, particularly given the weak macroeconomic outlook for the country."

This past year, Lauder has loudly trumpeted the firm's international growth, and on several occasions publicly chided analysts for looking at the business through a provincial lens.

After its latest quarterly earnings call on Oct. 25, Lauder told WWD, "International is becoming a larger portion of our business that offers a more meaningful return on investment." He later added, "Business outside North America is very strong and growing in high-single digits....Some analysts can't see beyond the U.S. They only look at NPD data."

Currently about 53 percent of the beauty firm's sales come from international markets, with expectation of the international share hitting 55 percent by the end of the year. According to Credit Suisse's Goossens, over the next five years Lauder plans to grow its international business to 60 to 70 percent of total sales. Goossens wrote, "The higher end of the range appears to be realistic only with a major international acquisition."

The company — which reported that sales gained 7.3 percent to $1.71 billion for the first quarter ended Sept 30. — has forecast second-quarter sales growth of 10 to 12 percent.

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