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Lauder: It’s a Shopper’s World

The Internet has given consumers a giant megaphone, and beauty firms can't help but hear shoppers' concerns, uncensored take on products and shopping preferences, William P. Lauder, chief executive officer of the Estée Lauder Cos. Inc., told...

The Internet has given consumers a giant megaphone, and beauty firms can’t help but hear shoppers’ concerns, uncensored take on products and shopping preferences, William P. Lauder, chief executive officer of the Estée Lauder Cos. Inc., told Summit attendees.

“The consumer has become an ever more central and powerful decision marker in our lives as beauty marketers,” said Lauder. He later continued, “We have to live with the fact that the consumer understands a different form of authority and reality than she did 10 years ago,” referencing the shift of influence, in part, from beauty editors to blogs.

Lauder was responding to a question posed by Pete Born, executive editor, beauty for WWD. During the Q & A session, the two sat in armchairs, while Lauder shared his thoughts on the newly empowered beauty shopper, the company’s international focus, the state of U.S. department stores and changes afoot at the beauty firm.

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When asked what avenues beauty marketers should take to get consumers’ attention, Lauder said, “We have to talk to her any way and every way possible. It’s not just through the traditional means we’ve communicated with her in the past, which is traditional print advertising and perfect-bound magazines with many offers on the cover. It’s not just through television. It’s not just through direct mail. It’s through different forms of communication.”

Lauder used commuting media as an example, defining the phrase by global market. For instance, global media in the U.S. is radio, because so many people here drive to and from work. In Japan and Hong Kong it’s mass transit, because that’s the primary mode of transportation there.

He added, “So we’ve got to think first of the consumer. How does she see our brand, how does she want to interact with our brand? And then we’ve got to communicate with her in a manner that makes her comfortable.”

As consumers’ interest in alternative marketing vehicles have grown, so has their collective search for beauty product outside the traditional department store format to specialty stores, single brand boutiques and TV and Internet shopping.

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Lauder poked fun at the notion that department stores are dead by referring a scene from the film “Monty Python and the Holy Grail” in which a towns person is ringing a bell shouting to his neighbors, “Bring out your dead.” As one man is tossed into the cart, he says “I’m not dead yet.” And the bell ringer says, “Well you will be soon,” and proceeds to throw him in with the other dead.

“The fact of the matter is that someone has been ringing the death bell for the department store for the last 50 years and they are hanging around, and they are hanging around in a very viable manner,” said Lauder, acknowledging that the role of department stores has changed.

He noted that in the Seventies, the Estée Lauder Cos. did business with 220 different stores in the U.S. “Today that number is closer to 12. That’s an amazing number when you consider the number of doors we do business in over that same 30-period of time has changed by double.”

He recalled that in the past department stores were essentially one-stop shops for all household needs (save for food), including furniture, kitchen appliances, electronics and toys. The advent of stores like Ethan Allen and Best Buy shifted the focus from department stores in many of those categories. That shift has affected beauty departments as well.

Lauder noted that in the Nineties, 90 percent of the prestige cosmetics business was done in department stores. Today its 70 percent, as shoppers have discovered specialty stores, online retailers and TV shopping channels.

He underscored that department stores still play a vital role for his business. “The simple fact is that when we look at our business, more than 70 percent of our business around the world is still done in major department stores,” said Lauder.

“The authority of what the department store offers for a certain consumer is still extraordinarily strong. But there are some great retail venues and opportunities for us that we see in the prestige beauty arena that are not necessarily in the traditional anchor of the mall,” he added, referring to department stores.

Of course, troubles facing U.S. department stores and a growing legion of penny-pinching, cash-strapped Americans have prompted U.S.-based firms, like the Estée Lauder Cos., to shift their focus abroad.

When asked about the opportunities and challenges that emerging markets, like China, Russia, Brazil and India, bring, Lauder responded, “The fact of the matter is, we look at ourselves as one of the larger American consumer packaged goods companies,” adding that in his view many of the best consumer packaged goods companies generate 60 percent to 80 percent of their sales outside North America. The Estée Lauder Cos. currently does 55 percent of its sales outside North America — leaving plenty of opportunity for it to extend its global reach.

Turning to China, Lauder said many mainland Chinese are traveling to Hong Kong to do their shopping because the Chinese government still has put up a lot of barriers to consumers buying products there. “And everyone is smart, the Internet tells them this is the price you have to pay in China and this is the price you’ll be paying if you travel outside China. That second number is way lower than the first number, so the consumer is moving to buy products where she can get a fair price. Hopefully over time the Chinese government will allow for normalization of prices. I think the opportunity that presents itself in China is even bigger than we already see it.”

He noted that both China and Russia are growing at a breakneck pace, adding that the beauty firm’s key retailers in Russia are opening a new store a week.

“I hope I can sit here five or 10 years from now and talk to you about our having accomplished our goal of doing 70-plus percent of our business outside North America,” Lauder said.

On the home front, there are significant changes happening within the executive ranks at the Estée Lauder Cos., the most notable of which is the arrival of the company’s newly installed president and chief operating officer, Fabrizio Freda. The former president of the Global Snacks Division of Procter & Gamble Co. joined Lauder in March with the understanding that he will move up to chief executive officer within two years.

When asked what he expects Freda to bring to the company, Lauder said, “Basically what I’m hoping he can do is help bring to our company a focus of discipline that comes from the culture of where he was and to draft that discipline and focus and deep understanding and knowledge of the consumer to what is a culture in our company, which is a much more entrepreneurial, intuitively driven business.”

He continued, “I’m very proud to say that the vast majority of sales in our company come from brands that we’ve created ourselves. And for the handful of brands that we have acquired over the years, the vast majority of their sales have come while they have been a part of our company….We feel very proud of saying today we’ve got an almost $8 billion company for which a minimum of 80 percent comes from our own imagination.”

He continued that Freda will help harness that imaginative spirit and allocate in a more disciplined way. Melding Lauder’s entrepreneurial culture with a more discipline approach, in Lauder’s view, will make the company a more formidable competitor in the beauty industry.

“Last year, we launched 4,000 new products around the world. Even for a family of 27 brands that’s a lot. Maybe we can do 3,000 and those 3,000 can be as effective as the 4,000,” he said.

When asked about the succession plan, Lauder said that as Freda becomes better acquainted with the industry and with the company he will assume the role of running the company day to day.

That will allow Lauder to do the things he enjoys most: focus on the broad strategy of the company, capital structure and new brand creation and acquisitions.