Estée Lauder’s William Lauder: ‘The Consumer Still Wants and Needs to Be Touched’

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To William Lauder, any talk about consumers centers on the word “she.” About 95% of the customers of Estée Lauder — the cosmetics and beauty products giant founded by, and named after, Lauder’s grandmother, are women.

“In my world, women are the dominant decision makers for what we do every day,” Lauder said during a recent Wharton Leadership Lecture.

When Estée Lauder and husband Joseph founded the company in 1946, it grew through the power of touch — Estee’s ability to reach across the counter and, with a dab of lotion or the swipe of a lipstick, connect with the customer. Today, the women served by the company live in 140 different countries. From an initial four products, Estée Lauder has expanded into more than 25 brands, including Clinique, Origins, MAC and Bobbi Brown. The company reported $7.8 billion in sales in 2010, a 6% increase from 2009.

The business has remained family owned and several of Estée Lauder’s children and grandchildren now hold leadership roles. William Lauder served as CEO of Estée Lauder from 2004 until 2009, when, in a relative first for the company, the reins were passed to a non-family member, former Procter & Gamble executive Fabrizio Freda. Lauder remains executive chairman.

Although today’s retail landscape is much different than it was at the time of the company’s founding, with a greater range of choices for consumers and lower barriers to entry for companies, Estée Lauder has remained committed to selling in upscale department stores. Stylists behind the makeup counter add value to purchases by offering personalized advice to the customers.

“Seventy percent of what we sell are products we launched more than three years ago,” Lauder said during his speech. “We’re spending 80% of our time on what’s new today, what’s coming in the next 18 to 24 months, but the consumer is spending seven out of 10 dollars on stuff from three years ago. What’s wrong with that picture? Nothing — she’s buying what we created three years ago again and again and again; she’s buying what works for her.”

In a recent interview with Knowledge@Wharton, Lauder discussed the benefits and challenges of working in a family-owned business, the company’s global growth aspirations and why, in the words of his grandmother, they key to success for Estée Lauder is “getting women to put their hands together.”

An edited version of the transcript appears below.

Knowledge@Wharton: Estée Lauder has always placed a great emphasis on sticking to its core values and keeping the heritage of the brand intact. Tell me a little bit about those core values and how they figure in to both day to day operations, and also decisions to expand and add new brands to your line.

William Lauder: We have a company of over 30,000 employees where we’re selling something every four seconds of every single day, 365 days of the year…. The fact of the matter is there are thousands of decisions being made every single day, and they’re not controlled by some central all-knowing, all-seeing organization…. [Our company is] all about great brands, great people and what is the right thing to do for the consumer to make her happy….

The hierarchy is an inverted pyramid, where the top of our organization [includes] the people who represent our brands to the consumer in stores around the world. They are the most important because they touch the consumer every day. It’s the consumer’s connection with them and with the brands that continues to make us successful.

Knowledge@Wharton: A recent New York Times story about the company mentioned that your grandmother tried to physically touch every consumer that came in, either by dabbing lotion on a her hand or giving a makeover. But there was also a discussion of the new Clinique counters that allow customers to choose products without having to interact with a salesperson. What does that say about how women have changed over the years?

Lauder: Many of the dynamics of how consumers shop today for their beauty products have remained the same for 20, 30, 40 years — and some aspects of their behaviors have changed dramatically. First of all, they have an extraordinary multiplicity of choice [today]. They have many different retail environments to choose from, and many different brands to choose from.

The notion of convenience in shopping and how [consumers] stratify themselves according to shopping patterns has changed over time. For example, in the 1970s, the consumer who shopped in a very upscale, prestigious store like a Neiman Marcus would never consider shopping in a Walmart or in the Walmart of the day. Today, she thinks nothing of driving her Suburban to Neiman Marcus in the morning to buy that very fancy Prada outfit, having lunch with her friends, and then getting in her Suburban, going to Walmart and picking up the toilet paper that she needs because she knows it’s the best value. She doesn’t have a problem with that today. And she doesn’t think that says anything in a negative way about her. In fact, maybe she can even say, “I didn’t even shop Walmart, I shopped Costco.”

That’s just an example. As for our products themselves, we realize the consumer comes in very informed. She thinks she knows what she wants, but the expertise that somebody gets in the store — that hasn’t changed. The authority of that expert in the store — the Estée Lauder make-up artist, the Clinique consultant, the MAC make-up artist — this really hasn’t changed.

That human touch was so important and [was] one of the key core principles around which our company was founded. This hasn’t changed. The fact of the matter is the consumer still wants and needs to be touched. [The customer appreciates] the expertise that she gets in helping to find the right product and she puts that into the value calculation she makes when [deciding on] a purchase. That’s a very important element of her behavior. Convenience is another issue. The notion of convenience has changed and not just because of what the Internet offers. [Online shopping] really doesn’t represent a meaningful [part] of her consumption in our category. It doesn’t represent a big, meaningful [portion of the overall market] for most retail — except for books and music and a few other categories where you can actually buy the equivalent online without having to go to a store.

[But in the case of beauty products,] consumers still want to see it, touch it, feel it, smell it. Technology does not allow that to be replaced, so she’s still willing to go to a store. The other thing is the notion of what shopping is about — that’s a behavioral pattern that hasn’t really changed. It’s still as much about entertainment as it is about an act of consumption. Many people can entertain themselves happily at home with different electronic gadgets. But many still want to get out and about and be in a social environment. They still like to shop in an environment like that. And then you add the interaction with an expert with whom they can talk. That behavior has only evolved a little bit, not a lot. We in the cosmetics business, for example, thrive on the fact that so many of our consumers, once they find the product that they love and they like, want to come back and buy it again and again.

[Customers] want something new, but they also want the products that they like not to change, so they can use them again and again. The number one consumer feedback we get is “Bring [a certain item] back” when we’ve discontinued a product….

Knowledge@Wharton: In the Times story, you were quoted as saying that working for a family business means every member of the Board has your home phone number. They know where you live. What are some of the challenges and also the benefits of working for a company that, I would say at this point, is probably like another member of your family?

Lauder: There’s two definitions of “family.” There’s family that’s blood. And then there’s family that is everybody who belongs to the organization regardless of blood, who are also family in a way. You want to treat everybody the same in that respect. But you also want to treat them with respect and professionalism, which is such an important part of what we do. Our competitive advantage as a family company really is, and has been since our founding, the innovation and patience that has allowed us to maintain our leadership in our industry. Because of our patience in nurturing and developing new brands, nurturing and developing people, we’ve created an environment where we are the place to come for innovation. We’re the most innovative marketers. We’re the most innovative brand builders. We’re the most innovative on a retail basis. We have a passion for innovation and we have baked that into how we look at executives and their skill sets, but also how we succeed with the consumer….

We also have the patience to nurture new brands and new ideas, perhaps longer than companies that don’t have the same ownership structure.

Knowledge@Wharton: Conversely, what are some of the challenges of a family owned business?

Lauder: Many of the challenges of a family owned business are the same no matter what kind of business you’re in. You have family members who may have certain emotional opinions and biases, which may or may not be best based on rational thought. Sometimes those emotions are legitimate, and sometimes perhaps they’re based on ideas that did work at one point but perhaps are not as relevant today. In other words, [older family members might say,] “When I was your age, I did this or that.” The ability to say, “Gee, you know, I’m not so certain that might work right now,” isn’t so easy. That is the other side of what I talked about before, which was that we are very innovative and we have innovation as a part of what we do. But occasionally there are stakeholders who perhaps have the same last name as I do, who have a stake in the way it was, not necessarily the way it will be. It takes extra convincing for them to get there. That’s one of the issues.

At the end of the day, I’d say we have more advantages than we have disadvantages. Even for our professional managers, there are those who, from a personality basis, fit within our organization and the psychological profile that it takes to be successful within our organization, and they’re really good. There are others who come along and who aren’t as successful, perhaps because they aren’t as comfortable in the family style environment. Perhaps they don’t have the same collaborative approach to what they do. But that’s [true in] almost any organization anywhere, regardless of the ownership structure.

You have great personality fits, where people succeed because they fit within the organization well and they contribute so well with their peers. And you have others who aren’t as successful because they don’t fit within the psychological profile of the organization.

Knowledge@Wharton: In 2009, you decided to step down as CEO of Estée Lauder and now you serve as executive chairman. The company brought in a non-family member, former Procter & Gamble executive Fabrizio Freda, to serve as CEO. Tell me about some of the reasons why you made that decision. How has that changed your role?

Lauder: Being a CEO of a public company today … is not quite what it’s all cracked up to be. And it can be a sentence — if you’re the CEO of a family company, if you’re not careful, it can be a life sentence. The fact of the matter is that it’s very hard work. It’s a great deal of time. It takes a great deal of energy…. I did not have a chief operating officer with whom I was working. So I was, if you will, doing a great deal myself….

When I looked at the roster of the most senior executives I had within my organization, I said, “Okay, fine, whom do I have who can be a long-term partner, a business operating partner with me to run this company?” As I asked that question I also said, “Let me take a survey of the outside to see if there are any executives who are perhaps not a part of our industry, not a part of our company, who might be able to add something different to the collective thought and wisdom of the way our company runs.”

When I started to look outside, I found Fabrizio Freda, who is now our CEO. He was someone who was thinking along the lines of what I was thinking, but at the same time brought a very different perspective, a very different background. And I thought, “You know what, he’s going to add a spice and a way of looking at [Estée Lauder] that’s going to add more to what our company can do…. From the day I walked in as CEO, I said I will only be here as long as I can be as effective as or more effective than anyone else who can do this job. When I found Fabrizio … we got along great. [I said] “I think this is a partnership that can work. He can add a lot to our company, and our company can be a better company for what he can add. And he can help preserve what’s the best about what we do and then add some thoughts and disciplines to the way we do things to make it better.”

After a year and half, I said, “You know what, this is perfect. Tag — you’re it! You’re now CEO.” How does that change my life? I’m spending more time on those things that I really like to do. I’m spending much more time on the strategy — the broad strategies of the company — and much more time in development of our emerging markets. I’m spending more time traveling, working on brand development, working on market development, working on strategic acquisitions. And I’m also working a great deal, unfortunately, on government relations. Why is that? There is an increasing regulatory environment around the world, predominately but not exclusively, in Asia and Europe, as well as in North America. I find I’m actually pretty good at that piece.

That allows Fabrizio to keep doing what he’s really good at, and I can focus more on what I think I’m pretty good at. It seems to work very well for both of us and our company is performing better as a result. I still spend a great deal of time working not just with Fabrizio, but with a lot of members of his team. I’ve still got some executives who report directly to me in certain key roles because it’s both an expertise I have, and it’s the right allocation of responsibilities between the two of us.

What it effectively does, from a leadership perspective, is give us a strength in [the company's] leadership of both a strong partnership as well as a very balanced approach as to who leads which efforts effectively. There are certain things that Fabrizio is expert at, and to which I say, “Go. Wonderful. Do this really well.” There are certain things [where I have more expertise] that he may be focusing in on, but we talk together about it and then he goes and does it. Or he may say, “Look, this is something I’m working on; I’d really love your assistance.” Either I say, “Go do it” and he does it, or he … tosses it in my lap and I go do it. We really are very comfortable. We both have enough of an ego, but there’s no ego in the sense of saying, “We want to get it accomplished.” We’re both very results oriented.

Knowledge@Wharton: In what countries or what regions is Estée Lauder looking to expand or create a new presence? How do you adapt to going into global markets, to different markets other than the U.S. and Europe?

Lauder: We’ve been a global company for 30, 40 plus years. We first expanded outside of the United States to the U.K. I think in 1960. Today, we’re doing 63% to 65% of our global business outside of North America. That’s growing much more rapidly than inside of North America for a number of reasons. Number one, it’s a less developed market, so the markets are growing faster. Number two, our share isn’t as strong as it is in North America, so therefore we have more share to gain. And number three, for the vast majority of the last 10 plus years, the dollar’s been very weak. The dollar’s weakness actually helps us as we translate our results back into dollars.

That combination of effects says we need to be continually investing more. We were in Europe very early on in the process, but most of our key competitors are European or Asian based. We don’t have as many American competitors in the prestige cosmetics base. They’re predominantly European, some Asian. But we’ve been early investors in a number of different markets in the world.

This goes back to the question you asked about the advantages of a family controlled company. We’ve got a great deal of patience when it comes to investment and markets. We started investing in China 12 or 14 years ago. We made some very conscious decisions about six or seven years ago that we were going to ramp up our investments in China and we were going to change from a management perspective how we made those investments or how we treated those investments, to make sure that no short-term decision making got in the way of the long-term goal of having a leadership position in prestige cosmetics in China, as an example. We’re continuing to invest in India; it’s small now, but it’s growing. We’re investing in Russia and it’s growing very rapidly now and getting to significant size. We’re looking very seriously at Latin America. We have a presence in Latin America, but it’s small and it’s growing. Perhaps the next frontier is Africa, which is obviously growing very rapidly in population, and there seems to be a growing middle class.

We’d like to see how the retail networks develop in those markets where there is some growing middle class. The key characteristic [for a new market for Estée Lauder] is a stronger emerging middle class with disposable income, which they want to spend on themselves. We’ve been investing in the Middle East for a number of years quite successfully and will continue to do so.

There are lots of regions in the world that still offer us great opportunity, as well as our established markets where we look and say, “Well, how can we model those [new] markets against our more well-established markets and where can each of our brands go and develop their share to a level that we think matches the opportunity in the marketplace.

We continually find ways to invest in those opportunities where there are competitive advantages. And sometimes we pull back and say, “You know what? We’re not going to invest as much here because the investment’s not giving us the return we need.” That’s a very important element of what we do.

Knowledge@Wharton: How does the company adapt its marketing to attract a global audience? Is it one size fits all, or do you have to really specialize to fit the customer in different areas?

Lauder: The concept of global imagery for brands is very important. It’s a consistency of imagery, but not a slavish consistency of image to the point where all of a sudden, perhaps it looks the same around the world but isn’t as relevant in many places. How we customize the relevance is extremely important for the success of any of our marketing programs.

I’ll give you a great example. This was a number of years ago, but to me it’s a great example. We had a product where the key prop, for want of a better word, in the advertising shot was a birthday candle…. The notion was that you’re going to stop seeing the signs of aging, so you’re going to stop seeing the signs of what more and more birthday candles may mean. We liked the photograph. It was a beautiful photograph by a well-known photographer and it really looked great. We were showing the picture to our Asian brand managers for this one brand, and I noticed that when we showed it to them, they were very silent. Their silence was very loud. In many Asian cultures there’s a belief that one shouldn’t be confrontational. So instead of like their European counterparts saying, “I hate it, I don’t like it. And this is what you’re wrong about,” they were just quiet. They weren’t nodding saying, “Yes, I love it.” They weren’t clapping. They were just quiet.

To me it was a very loud silence. I said, “Guys, what’s up?” And finally one of the bolder ones said … it was a white birthday candle. They said, “Well, you know, in Asia, we only burn candles like this when somebody dies.” It was a revelation to us. [We said,] “What kind of candles do you have on a birthday cake or to celebrate somebody’s birthday?” They said, “It’s a red and white or a pink and white candle. Same style. But all white is when somebody dies; with a stripe in it is for a birthday.” Easy to fix, but that’s a cultural relevance piece. In other words, so there’s a consistency of the image, you just change the one thing that all of sudden says the wrong thing to the consumer. The most classic case is the Chevy Nova marketed in Latin America. In Spanish “nova” means “no go.”

Knowledge@Wharton: One final question — can you share with us a favorite beauty tip of your grandmother’s?

Lauder: My grandmother was famous for so many expressions. She said, “Everybody’s beautiful.” And she said, “Every woman is beautiful; just some are lazier than others in how they work on their beauty.”

One of my favorite expressions of hers is, “We have to get women to put their hands together. In this hand, she has her pocketbook and [her other hand] is her free hand. We need her to stick her free hand into her pocketbook, pull out her credit card and say, “I’ll take it.’” Because at the end of the day, the efforts we make to create the product we want is all about the customer saying, “I want it, I need it, I’ll use it and I’ll come back again.”

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