KEYNOTE: LEONARD LAUDER

Byline: Pete Born

In delivering the opening speech at the Summit, Leonard Lauder, chairman and chief executive officer of Estee Lauder Cos., underscored the historic nature of the meeting while conveying his sense of the business in all its sweep and resonance.
Lauder, who noted that his association with the company founded by his parents goes back to 1946, outlined what he sees as critical problems — at least in the prestige market — and then made some predictions by peering into the next millennium.
He pointed out some possible hot spots in the 21st century — a revived makeup business and a booming skin care market among them — and ended with more than one optimistic chord:
“All these great opportunities will require new ideas, new leadership skills and lots of energy. This is an industry that has all three of those [qualities], and let’s go do it.”
“I’m enormously optimistic because there is a lot of light at the end of the tunnel,” he continued, adding that department stores will soon move to correct some shortcomings. “Retailers are focusing on service, entertainment, new ideas, balanced programs, second-tier line development. Look for some exciting developments from all the retail partners that you know for the next 12 to 24 months.”
But before ending the speech with a buoyant look at the industry’s future, Lauder was critical of a number of current business practices, particularly those by retailers.
Lauder sheathed his points in humor. “When I was a young kid,” he recalled, “my father used to take me out for lunch every Sunday. I didn’t know any better, and I would order the most expensive things on the menu. My father would laugh and say, ‘You eat like a buyer.”‘
While noting the pressures caused by store consolidation and criticizing retailers for taking unfair advantage of vendors with unauthorized deductions, or chargebacks, he said:
“I can just see — almost — the future, with all the department store consolidation,” he told the executives gathered under the night sky of the Sonoran desert. “You call up a buyer’s office and you get voice mail: ‘If you want to speak to the Lauder and Clinique buyer, press one; if you want to speak to the Lancome buyer, press two; all others, press three. If you are calling regarding an unauthorized deduction on your invoice, you have reached a non-working number.”‘
After the laughter subsided, Lauder turned serious.
“We are in an industry that has changed dramatically and will continue to change. Companies have disappeared from the landscape,” he added, citing vanished stores like Frost Bros. in San Antonio and I. Magnin in San Francisco.
“There are fewer and fewer cosmetics companies today,” Lauder continued, citing his company’s acquisition of Bobbi Brown and partial control of MAC, L’Oreal’s purchase of Maybelline and Jade and previous purchases by Procter & Gamble and Unilever.
He paused, then said: “I do have a question as to whether the companies like Unilever and Procter & Gamble will have the patience to stick to this industry the way we have and the way some of the other companies have.”
“Even more interesting has been the entry of LVMH into the retailing scenario,” he added, referring to LVMH Moet Hennessy Louis Vuitton’s acquisition of a majority of both DFS Group and the Sephora perfumery chain.
“Will this trigger a rush to vertical integration?” he asked, noting that he has no answer. “There’s a power struggle, especially in Europe, between the retailers, who are consolidating more and more, and the manufacturers, who are always trying to control the consumer and are trying not to be under the thumb of an increasingly dominant and smaller number of retailers.”
Along with this pushing and shoving for power is what Lauder called “a mass-class blurring.” He asked, “How far apart today are the prices of a Revlon lipstick from that, say, of an Estee Lauder, Clinique or Origins lipstick? Where do the newly energized Sears and Penney’s — which is very interested in cosmetics — where do they fit into this new equation? There used to be just department stores here and everyone else there.”
Lauder then moved deeper into the mass market.
“When you see the top 10 list of top 10 fragrances in Wal-Mart,” he said, “look at the number of so-called prestige fragrances that are in that top 10 list and you say again, where does the prestige line end and where does the so-called mass line end?”
This brought up an issue seldom discussed by manufacturers in a public forum. “Diversion, which many people had winked at for so many years, has legitimatized the mass retailer and made them one-stop-shopping retail cosmetics outlets,” Lauder charged. “So that diversion, in a way, made a whole new retail industry legitimate.”
Lauder also took the department stores to task for producing stores with a boring sameness. “Who can tell one department store cosmetics department from another,” he asked. “Who can tell one department store fashion department from another?
“Everyone moans and groans and wrings their hands about Toys ‘R’ Us and this store and that store. Department stores are category killers [in cosmetics], and they don’t know what they have.”
He pointed to Lauder’s major retail account in Australia, Myer/Grace Bros., which decided to move cosmetics to the second or third floor “to make a fashion statement.”
“But they own the cosmetics business in Australia,” Lauder said. “They don’t know what they’ve got.”
Turning his attention to niche marketing, Lauder asserted, “New ideas and new lines have always been the yeast that helps the industry rise.”
He noted, however, that “it’s almost impossible for any small cosmetics company to make it in the American department store arena without first establishing themselves in specialty stores. Department stores are good when it comes to brand presentation, but they don’t have the patience to understand brand building. At the rate we’re going with three major specialty stores left in America, what is going to happen to the small, second-tier lines if they don’t get the nurturing that they really need?”
He remembered that the Estee Lauder brand had the good fortune of being nurtured by independent specialty stores, and it was years before it entered department stores. “It was a terrible problem for us when we first entered the department stores,” he said. “If it wasn’t for the strength of Estee Lauder, Clinique never would have been able to make it.”
Lauder launched Clinique in September 1968, and within six months, Charles Revson at Revlon had produced Etherea. “50 percent of the department stores that we were selling at that time said, ‘OK, here’s the next new line,’ and they moved Clinique or they tried to move Clinique off its counters to try to put Etherea there,” Lauder said.
“The specialty stores hung in there,” he continued. “They said, ‘Well, we’re supporting [Clinique]. We launched it, and we’ll stick with it. The department stores are our hope, and they have to have patience, because if you don’t have a large company, like ourselves — L’Oreal protected Lancome for years until they were able to stand on their own two feet — you can’t have a second-tier line make it.”
This is still true, he stated. After Lauder acquired Bobbi Brown in November 1995, he said, “One of the first things we had to do was to get the few department store customers that they had to pay their bills.”
Lauder offered a solution.
“My suggestion is that there be a department store nursery that nurtures and grows small lines,” he said. “That means: Pay your bills.”
Another tendency that troubles him is the use of the term ROI, or return on investment. “A great business word,” he said, “but unhelpful when used incorrectly.”
For department stores, it has meant tossing out categories — for example, food, Santa Claus, Christmas windows, fashion shows, cooking classes and furniture model rooms.
“Where’s the entertainment that brings us to the stores,” he demanded. “Have any of you ever visited a Warner Bros. or Disney Store? Well, that’s entertainment.”
This also applies to a lack of excitement inside a department store. “A Nordstrom piano doesn’t take up much room. It’s a small idea, but it’s a genius idea. But Harrods, by the way, went one step further.” The store got a player piano, making a musician unnecessary.
“Ever see one of those in an American store?” he asked rhetorically. “There ain’t none.”
He also raised the question of balanced inventories and what effect new computer-controlled inventory systems will have on in-store assortments.
“How about the slow-selling shades of lipstick that EDI replenishment is eliminating,” Lauder asked. “Will the consumer get the selection opportunities that she expects?”
While preparing his speech, Lauder said, it occurred to him that there is a great disparity between the thinking of retailers and the thinking of consumers on the topic of service in department stores.
Referring to a WWD department store survey that asked executives and consumers the same questions, he noted that when asked why consumers avoid department stores, 17 percent of the department store executives said “unhelpful salespeople.” But 79 percent of the consumers said “unhelpful salespeople.”
“The question is,” Lauder said, “are we dealing with a case of the emperor’s new clothes here? When you have such a disparity between what you envision as your problem versus what the consumer envisions what the problem is, then perhaps there is something to be concerned about.”
Lauder then turned to the future and some predictions:
Channel Jumping. “Look for more cosmetics lines to jump into multiple channels and retailers to widen their price assortment.
It’s already happening in the U.K. Both Clarins and Aveda sell to both beauty salons and department stores. In France, Biotherm, which is owned by L’Oreal and had been exclusively in pharmacies, has jumped into perfumeries. Avon is starting to open up freestanding stores in places where they need the exposure. At the same time, those stores — the superperfumeries in France and Germany — instead of only selling a narrow selection of high-priced products, they are now selling a far broader selection of every price product.”
Trans-national Retailing. “The pan-European strategy of the Douglas perfumeries will continue while others follow suit. [The British-based] Boots, for example, has expanded into the Netherlands and to Thailand. [The Paris-based] Sephora, which is now under LVMH ownership, will move into Asia and will probably move into other places. Look for dramatic expansion there. Assuming, if they move into the U.S., that will be a great challenge, if they can’t get the lines.”
Retail Consolidation. “It ain’t over yet. Not only in the U.S., but in Japan, Germany and France.” Lauder added that in Europe, “the long, slow and eventual demise of the small, independent perfumery” will result in them going “the same way that my beloved Frost Bros. and I. Magnin went.”
“However, also in Europe, look for a revival of the department stores. Many of the chains have new management.” One firm he mentioned was Au Printemps in France. Another was KaDeWe in Germany.
The Asian Century. “Just as the 20th century was the American century, so will the 21st century be the Asian century. There’s a wave of Asian consumers entering the middle class, and that wave is enormous and they will dominate this business in the next 10 to 15 years.”
Makeup Artist Legitimization. “Everyone says it’s a fad, it’s a fringe, it’s a this, it’s a that. The same words that were being used about Estee Lauder and that were being used about Clinique, are now being used about the makeup artist lines. Don’t brush them off. They will grow into a great force in the cosmetics industry.”
Self-Service. “Look for more assisted self-service and assisted sell in department stores. If it works for books, why not cosmetics?”
Revitalized Makeup. “Between 1997 and the year 2005, there will be 13 percent more 13-to-24-year-olds, the children of the baby boom generation. And this is a great makeup opportunity.”
Value Pricing. “As the powerful mass lines have traded up they have created a vacuum underneath them that some people here in the room are trying to fill, and that vacuum will be filled.
Soaring Skin Care. “Again, from 1997 to 2005, there will be 9 percent more 38-to-49-year-old people and 35 percent more 50-to-64-year-olds. As the baby boomers start getting their first lines, [treatment] will be good business.”

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