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Lauder’s Take on the Next 5 Years

NEW YORK — When a beauty leader like Leonard Lauder offers advice, a crowd gathers.<br><br>Speaking to a packed room, Lauder, chairman of The Estée Lauder Cos., kicked off the 10th Annual HBA Global Expo this Monday with a keynote speech...

NEW YORK — When a beauty leader like Leonard Lauder offers advice, a crowd gathers.

Speaking to a packed room, Lauder, chairman of The Estée Lauder Cos., kicked off the 10th Annual HBA Global Expo this Monday with a keynote speech entitled “A View From the Top: The Next Five Years.”

Lauder began his view into the future by reminiscing about the past — specifically, about his first job for his mother’s cosmetics business, gathering raw materials during World War II. “That got me very interested in the whole concept of raw materials and where you get them and especially, and here’s the question, what happens to raw material supplies if there’s a war?”

He also reminisced about the group of the midsized cosmetics companies, which have been consolidated over the years — such as Helena Rubinstein, Elizabeth Arden and Charles of the Ritz.

“At that time, each of us had our own turf. We were competing in the U.S. market and the European companies were competing in the European market.” He went on to explain how times have changed — now it is a free for all, with every company in competition with each other in all world markets.

“We are now in a world market, so the name of the new game is globalization. You can’t be a big player today unless you can both buy and sell around the world. So for those of us who are manufacturers in this room, we can’t simply depend on one market to supply us all our components and raw materials. For those of you who are sellers, you can’t simply have one factory selling to one country.”

Lauder noted the rising importance of non-U.S. suppliers in supplying the world markets and highlighted that China and Mexico are becoming more powerful as suppliers. “The risk for those of you that are suppliers,” added Lauder, “is what happens once that product is on the market? Can you be undersold or underpriced by someone who is in Asia or in Mexico? Understand that we are just one player now on a huge global chessboard.”

Lauder declared that the three areas where the major cosmetic companies are located — the U.S., namely New York City, Japan and France — are the three areas of innovation and creativity. “If you can’t succeed in those three markets,” he added, “and aren’t able to compete effectively as a manufacturer and a seller, then you’re marginalized. We have to be strong in those three markets.”

Lauder believes the industry is living in an era where everything is consolidating — manufacturing and distribution — and emphasized the importance of understanding the effects.

He noted that in the early days of Lauder, the goal was to build a company that could be passed on to one’s children; now, he believes, the goal of many entrepreneurs is to quickly build a company that can be sold to a larger entity. “Most independents aren’t independents — they’re just looking to get married,” he said to laughter from the audience.

Lauder informed the audience that consolidation doesn’t just affect finished-goods companies and that there is also a squeeze on distribution. He took Wal-Mart as an example, noting that their everyday-low-price policy often presses upon the suppliers to do so. “And that means even though you may say Wal-Mart has nothing to do with me; it has everything to do with you because there is always a pressure. In Europe, there is a major consolidation going on right now of perfumery chains.” Lauder noted that the consolidation “may not be such good news from time to time. In order for them to finance the purchases of these companies and the high rents, who do they turn to? They turn to the manufacturers and say, ‘Give me a bigger discount.”

“Something that is a little scary,” said Lauder, “is the fact that in order for us to protect a patent, it costs roughly $250,000 per patent to protect and litigate it on a worldwide basis.” He added that his company has a group of people who do nothing but litigate patents. He also worries about the smaller companies being unable to compete and getting left behind, technologically, by larger companies operating on a global scale.

Lauder also had a warning about trade wars and tariff barriers: “During the banana wars, the U.S. put high tariffs on certain products and ingredients coming in from Europe and we import as much as we export, so all of a sudden Chiquita banana and Estée Lauder had a lot in common.” While some punitive tariffs will be placed on items that don’t affect the industry, he added that “there will be other things so that trade wars and trade barriers are a concern.”

In well-developed markets, Lauder noted: “When you have maturing markets, a new competition increases in such a way that it may not just be price competition. The best way to increase your market share is through the word innovation.”

Lauder predicts that “Asia will be the big gun both in the source of the goods for us as well as the greatest growth potential there is in the world. China is coming on-screen in a very big way and stores are being built left and right and it will become everyone’s second-largest market. I want say one thing about innovation, which is you’ve got to be first to market. If you take great risks, you’ll get great rewards.”