"I'm just a humble brand keeper," William P. Lauder, president and chief executive officer of the Estée Lauder Cos., declared in his keynote speech. The simple opening phrase was a response to the assertion of Limited Brands chairman and ceo Leslie H. Wexner a day earlier that he was "just a humble shopkeeper."
Lauder continued that, as chief of the Estée Lauder Cos., he is also a brand buyer and a brand creator. Throughout his talk, he weaved in the obligation of brands to elicit an emotional response, and he challenged his industry peers to view their brands through the lens of the consumer.
"Most of us in this room feel passionately about our brands," he said. "The challenge we have is getting our consumer passionate about our brands."
Lauder talked of the "chicken-and-egg syndrome" between the brand and the store, and of the arm-wrestling that too often determines what brands go in which stores. He noted that the representation of a brand in a great retailer is important for success, but that the passion a brand exudes to the consumer is paramount. "A great retailer wants our brands primarily because of the connection our brands have with the consumer," declared Lauder. "Our challenge is to stand up, take a look at our brand and experience it from the consumer's side. At the end of the day, what makes great brands is the image and the passion that those brands generate in the consumer through her emotion."
But it takes an objective eye to ensure that the consumer will see the creativity in the company's product concept. Borrowing from Billy Crystal's classic character Fernando Llamas from "Saturday Night Live," Lauder said the temptation is to look at a project and say, "You look marvelous, you're such a wonderful lipstick." He cautioned that consumers, bombarded with new products, don't always share the marketer's love affair with the lipstick.
In an industry that offers consumers the same product, such as a lipstick, for a range of between $2 and $32, Lauder commented that prestige companies win by offering a "wonderful experience" of full service in a high-end store. He noted that the company found that, when it raised Crème de la Mer's luxury price point to $190 from $150, demand for the skin cream actually increased at Saks Fifth Avenue."It doesn't make sense," he said. Trying to untangle the consumer's logic, Lauder added that there are price bands within the mass and prestige markets where the shopper feels comfortable. "If the price is too low for what they are getting, they say, ‘Something must be wrong.' If it's too high, they say, ‘Well, it's just not worth it.' We're in a business that reinforces a consumer's wants, not needs."
Lauder's primary retail channel — department stores — also caters to wants, not needs, requiring brands and retailers to work together to foster a luxury experience that the consumer will seek out.
However, one department store business teetering on the edge of commodity is fragrance, warned Lauder.
In the fragrance industry, "we've commoditized our brands, because we've let them out everywhere," he said. "And what do we all wring our hands about? Surprise, surprise: Fragrance over the last five years has been the most challenging segment of our business."
Likening the fragrance industry to the movie business, Lauder commented: "We spend a lot of time and a lot of money developing a great new fragrance, we put it out there. If it's successful in the first weekend, like the movie business, it's a success. If it's not, we have to say, ‘All right,' and go on to the next."
Too often, beauty firms use the mass market as a secondary sales solution, and have trained the consumer that, if she waits, she can find it for less at Wal-Mart or Target, noted Lauder. For beauty firms trying to retain a scent's prestige positioning by selling it exclusively through specialty retailers, such as Neiman Marcus, they hit a sales ceiling of $10 million. "The problem is, the development cost was $12 million," said Lauder. "That's not an economic model for success."
He continued, speaking of the process: "That's not a formula for success in our business, certainly, but we are all guilty of it. I think it was Sigmund Freud who said, ‘The definition of insanity is trying the same thing again and again and expecting a different result.' The question is, how can we break that cycle?"He noted that the Estée Lauder Cos. dared to do things differently with the Sean John scent, which is currently the number-one-selling men's fragrance.
Shifting to the evolving retail landscape, Lauder put the recent consolidation trend in context by taking a look at past decades: "In 1970, the Estée Lauder Cos., which at the time was three brands — Estée Lauder, Clinique and Aramis — did business with 202 different retail nameplates. In 1990, it was 170. In 2006, it's 17." The number of nameplates may have decreased, but Lauder said the amount of business and the door count have both grown dramatically.
Choosing to look at the rampant retail consolidation as "the glass half full," Lauder commented that Federated Department Stores' acquisition of May Co. will result in a national department store chain for the first time in U.S. history. Federated's national reach — under the Macy's banner — will allow companies like the Estée Lauder Cos. to launch a product to every region of the country in one fell swoop.
"We'll have one retailer, Macy's, with a presence in 49 of the 50 states, as well as Puerto Rico," he said. But he acknowledged that the Federated-May merger will cause some disruption and "discomfort."
Addressing the mass market manufacturers in the audience, he said: "For those of you used to dealing with Wal-Mart and Target, I'm sure we have a lot to learn from you in dealing with one retailer whose notion of compromise is to do it their way."
Responding to a question from the audience about emerging retail opportunities arising from J.C. Penney's deal with Sephora, the executive said that, over the last 10 to 15 years, the shift from traditional retail to alternative formats has been enormous, estimating a share loss of roughly 15 to 20 percent. Referring to Sephora's partnership with Penney's, Lauder commented: "Strategically, it's a good idea. Now it's a question of, how do you pull it off? Is J.C. Penney going to be able to pull the Sephora customer into their stores? That's the big question. It's certainly a challenge. But if they can pull it off, they'll be quite successful."He also noted that the two retail concepts have different brand imagery, and that it may be difficult to adapt Sephora's 5,000-square-foot concept into a 1,500-square-foot space in Penney's.
Europe, Lauder pointed out, is experiencing similar consolidation and disruption, with A.S. Watson acquiring France's Marionnaud and "Sephora continuing to gobble up smaller retailers."
Seeking opportunities abroad, Lauder said: "I think China is a home run for many of us, if we play it smart." Lauder noted that, while a majority of the 1.5 billion Chinese population earns a mere $120 a month, the other 10 percent earns multiples of that $120, which translates into 150 million people, or the population of France, Italy and Germany combined.
"I think that, when we gather here, or someplace else, in two years' time, China will have surpassed the size of the French economy. In 10 years' time it will have surpassed every other economy in the world, perhaps with the exception of the United States and Japan."
The key to unlocking an emerging market such as China, noted Lauder, is to make brands relevant to a new group of consumers with different perspectives and viewpoints.
Regardless of the country or territory, Lauder said, "the consumer has all of the power."
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