Estée Lauder’s CEO on Stay­ing Rel­e­vant

Large, es­tab­lished cor­po­ra­tions of­ten have trou­ble stay­ing rel­e­vant over time. Not so for Estée Lauder. CEO Fabrizio Freda ex­plains.

Rotman Management Magazine - - FRONT PAGE - In­ter­view by Karen Chris­tensen

When you joined the Estée Lauder Com­pa­nies, its mar­ket cap was $6 bil­lion; to­day, it is $35 bil­lion. How did you ac­com­plish this feat?

First of all, it was a team ef­fort. When I ar­rived in 2009, Wil­liam Lauder said to me, “Don’t give me any so­lu­tions right away; just lis­ten, un­der­stand — and then cre­ate.” The fact is, he set me up for suc­cess. He de­signed this cor­po­ra­tion so that each of our brands is run in­de­pen­dently, with each brand pres­i­dent re­spon­si­ble for his or her brand, P&L and strat­egy. We don’t have a cen­tral CMO mak­ing de­ci­sions for mul­ti­ple brands, and in my view, that kind of fo­cus pro­vides a com­pet­i­tive ad­van­tage.

Pres­tige beauty — and our com­pany, in par­tic­u­lar — is closely con­nected to fash­ion and the arts. I rec­og­nized right away that there were a lot of re­ally creative peo­ple here. I quickly de­cided that I would fo­cus on their strengths and lever­age their cre­ativ­ity.

Early on, I felt we needed to di­ver­sify our rev­enue and cre­ate mul­ti­ple new ‘en­gines of growth’, mean­ing di­ver­si­fi­ca­tion in brands, cat­e­gories, ge­ogra­phies and chan­nels. I asked our lead­ers to think about the typ­i­cal con­sumer’s bath­room and makeup bag, and what prod­ucts were in there. The fact is, pres­tige beauty con­sumers no longer buy a whole regime and stick to it for­ever; in the beauty busi­ness — even if con­sumers love your prod­uct — try­ing new things is part of the fun. Peo­ple might be loyal to a few core brands, but to­day’s con­sumer has, on av­er­age, 12 to 15 beauty prod­ucts in her life at any one time. Strate­gi­cally, I knew that if we had a port­fo­lio of mul­ti­ple brand offerings, there was a good chance that one-third to half of those prod­ucts could be our brands.

Geo­graph­i­cally, you also di­ver­si­fied and fo­cused on places that most com­pa­nies were ig­nor­ing, like East­ern Europe, Latin Amer­ica and Turkey. Why did you choose this ap­proach?

A key as­pect of our strat­egy has been to fo­cus on ‘the trav­el­ling con­sumer’. We stud­ied where peo­ple were go­ing, why they were go­ing there, and how they were spend­ing their money. We found, for ex­am­ple, that the Chi­nese trav­el­ling con­sumer wants to go to Paris to buy her lux­ury hand­bag as a sta­tus sym­bol; so, we en­sured that some of the same beauty prod­ucts she would see at home were avail­able in Parisian stores and air­port re­tail

stores. The re­sults have been im­pres­sive. We have also tar­geted Brazil­ian tourists, who of­ten travel to Mi­ami and New York. Brazil­ians love colour in their cos­met­ics, so they are huge fans of M∙A∙C Cos­met­ics. At our Times Square M∙A∙C store, they make up over half of the sales vol­ume. This strat­egy has been one of our en­gines of growth.

We also fo­cus on in­no­vat­ing for our most dis­cern­ing cus­tomers, be­cause when you do that, there are of­ten rip­ple ef­fects. For ex­am­ple, in Rus­sia, one of the most im­por­tant things to a fe­male beauty con­sumer is her eye­lashes. If you want to win the hearts of the Rus­sian con­sumer, you must of­fer a black mas­cara that thick­ens and length­ens lashes so that they stand out as the most prom­i­nent fea­ture. So, we cre­ated a mas­cara that ac­com­plished all of that. Of course, Rus­sian con­sumers aren’t the only ones who want a great mas­cara — so we lever­aged that in­no­va­tion and sold it around the world.

We were also pi­o­neers in on­line beauty. Un­der Wil­liam Lauder’s lead­er­ship — and ahead of the in­dus­try curve — the com­pany launched its first e-com­merce sites for Clin­ique and Bobbi Brown in 1996, and Wil­liam cre­ated the ELC On­line di­vi­sion for all of our brands in 1999. Be­cause his ideas were so fu­ture-ori­ented, he en­coun­tered some ini­tial re­sis­tance. The gen­eral feed­back went along the lines of: ‘Women want to smell fra­grances in the air and have their make-up done by pro­fes­sion­als; they don’t want to buy it on­line!’ When I joined, I rec­og­nized that we were at the fore­front of beauty e-com­merce, but we needed to roll it out glob­ally. To­day, on­line is our fastest grow­ing chan­nel: E-com­merce and mo­bile com­merce gen­er­ate sales of more than $1 bil­lion a year and are grow­ing 25 per cent, with strong gains across brand, re­tailer and third-party sites.

Of course, change never stops, so we are now ac­tively piv­ot­ing our dis­tri­bu­tion to the fastest-grow­ing chan­nels world­wide, to reach con­sumers where they are shop­ping to­day. For ex­am­ple, Ulta is a spe­cial­ity multi-re­tailer in the U.S., and for the first time ever, M∙A∙C prod­ucts are be­ing sold there. ‘Spe­cialty-multi’ is one of the chan­nels favoured by younger cus­tomers, and we are reach­ing these new con­sumers and sourc­ing from mass beauty by in­tro­duc­ing more of our pres­tige brands with the ap­pro­pri­ate re­tail­ers to cap­ture more of this im­por­tant de­mo­graphic. We de­sign prod­ucts, pack­ag­ing, vis­ual mer­chan­dis­ing and ed­u­ca­tion in unique ways to help young con­sumers nav­i­gate these lo­ca­tions.

We fo­cus on in­no­vat­ing for our most dis­cern­ing cus­tomers, be­cause when you do that, there are rip­ple ef­fects.

In sum­mary, our suc­cess is pow­ered by a strat­egy that is rooted in mul­ti­ple en­gines of growth across all as­pects of our busi­ness — brands, cat­e­gories, ge­ogra­phies and chan­nels. We are not over-reliant on any one cat­e­gory, chan­nel or coun­try, which has pro­tected us from re­gional eco­nomic slow­downs and po­lit­i­cal strife.

Tell us about your grow­ing fo­cus on Mil­len­nial con­sumers.

In past gen­er­a­tions, younger con­sumers learned about beauty prod­ucts from their moth­ers, who would take them to the near­est depart­ment store to in­vest in their first skin­care regime. But to­day, the con­sump­tive pat­terns of Mil­len­ni­als are hav­ing an in­flu­ence on all gen­er­a­tions’ buy­ing habits.

As con­sumers em­braced shop­ping on­line, their ac­tiv­ity moved from com­put­ers to tablets to smart­phones. Mil­len­ni­als be­gan to spend a lot of time watch­ing beauty tu­to­ri­als on YouTube, so by the time they ar­rived at a store, they knew what they wanted. This changed the way we thought about mar­ket­ing: In­stead of lis­ten­ing ex­clu­sively to pop­u­lar mag­a­zines, Mil­len­nial con­sumers them­selves were look­ing to be the in­flu­encers for their peers. We had come to a place where the fu­ture could not be in­formed by the past, and we re­al­ized that to thrive in this en­vi­ron­ment, we would have to learn from con­sumers and give them a ‘share of voice’.

About three-and-a-half years ago, we formed a group of high-po­ten­tial Mil­len­nial em­ploy­ees and paired them up with our ex­ec­u­tive team. One by one, these Mil­len­ni­als took ex­ec­u­tives shop­ping. Many of our ex­ec­u­tives were not as savvy as they are to­day with so­cial me­dia, and this ex­pe­ri­ence al­lowed them to see first-hand how this im­por­tant de­mo­graphic uses so­cial me­dia, and how smart­phones im­pact a typ­i­cal shop­ping ex­cur­sion.

It was clear to me that we needed to make this ‘re­verse men­tor­ing’ sce­nario per­ma­nent, so we set up our first Mil­len­nial Ad­vi­sory Board. Right now, Clin­ique has a col­lab­o­ra­tion with de­signer Jonathan Adler, and be­fore the col­lec­tion was launched, we put it in front of the Clin­ique Mil­len­nial Ad­vi­sory Board and said, ‘Would you buy this?’ They loved it! To­day, we have 40 Mil­len­nial Ad­vi­sory Boards across the globe. Most of our brands and re­gions have them, and some of our dif­fer­ent func­tions. We’re about to set one up for pack­ag­ing, be­cause that can be such a key part of what makes for an ‘In­sta­gram­able’ mo­ment.

Ev­ery re­gional pres­i­dent and their lead­er­ship team is now part­nered up with a Mil­len­nial re­verse men­tor, and they go on ex­pe­ri­en­tial re­tail ex­cur­sions at least twice per year to stay cur­rent. Our lead Mil­len­nial is my per­sonal men­tor, and she pre­pares a bi-monthly report on the most com­pelling re­tail, so­cial me­dia and ex­pe­ri­en­tial re­tail ac­tiv­i­ties across the fash­ion and beauty in­dus­tries. Our re­verse men­tors have their own on­line brain­storm­ing por­tal, called Dreamspace, where they post ev­ery­thing they feel is com­pelling and share why they like it. We se­lect the ‘best of the best’ and send out a bi-monthly news­flash to all of our prac­ti­tion­ers in the con­sumer-en­gage­ment space and to our ex­ec­u­tive lead­er­ship team. Our Mil­len­ni­als are truly in­flu­enc­ing and ed­u­cat­ing us; it’s been in­cred­i­bly valu­able.

How do you se­lect these young men­tors and Ad­vi­sory Board mem­bers?

All of our re­verse men­tors and Mil­len­nial Ad­vi­sory Board mem­bers are em­ploy­ees of our com­pany, so they know about the pro­gram and they usu­ally raise their hand to be­come part of it. They rec­og­nize that it re­quires a real com­mit­ment on their part, be­cause this is all done on top of their day-to-day job. But three ben­e­fits come from it: First, their par­tic­i­pa­tion in the pro­gram gets noted in their an­nual per­for­mance re­view, where it is made clear that they are ‘lead­ing and in­no­vat­ing from their chair’. Sec­ond, it hones their lead­er­ship skills, be­cause in or­der to be a men­tor to an ex­ec­u­tive, you have to have emo­tional in­tel­li­gence and a knowl­edge base to present your­self in an in­flu­en­tial way. Last but not least, it in­creases em­ployee en­gage­ment, be­cause Mil­len­nial em­ploy­ees are con­nected in a com­mu­nity glob­ally re­lated to some­thing that they’re all pas­sion­ate about — and that they know is spon­sored by the CEO. It’s been a great re­ten­tion strat­egy for our high-po­ten­tial em­ploy­ees.

You have called your­self a ‘struc­tured creative’. What does that mean?

When I joined Estée Lauder, I wanted to de­fine what lead­er­ship means at this com­pany, so I wrote down what I be­lieved to be the nine most im­por­tant lead­er­ship com­pe­ten­cies, and cat­e­go­rized them un­der three head­ings: lead­ing your­self, lead­ing oth­ers and lead­ing the or­ga­ni­za­tion. One of those com­pe­ten­cies is ‘fos­ter­ing and lead­ing cre­ativ­ity and in­no­va­tion’.

I had stud­ied some in­ter­est­ing re­search show­ing that there are two types of em­ploy­ees: ‘struc­tured’ cre­atives and ‘blue-sky’ cre­atives. There is even a rank­ing scale, so you can see where you fall on the spec­trum. Struc­tured cre­atives (like me) take ex­ist­ing knowl­edge and con­nect the dots in new ways to come up with some­thing new; while blue-sky cre­atives come up with brand new ideas and then have to fig­ure out how to make them come to life. Given that ev­ery­one falls some­where on this spec­trum, I re­ally be­lieve in fos­ter­ing cre­ativ­ity from ev­ery sin­gle chair in our or­ga­ni­za­tion.

We make this hap­pen by pro­mot­ing a ‘test and learn’ men­tal­ity. If some­one has an idea, they are en­cour­aged to build a busi­ness case, test it, learn from it and share the learn­ings. Some­times they will only learn what doesn’t work; but more of­ten than not, they find the ker­nel of a great idea.

I vis­ited the Rot­man School of Man­age­ment last year and saw a pre­sen­ta­tion by Mark Le­ung [di­rec­tor of Rot­man De­sign­works] and Sarah Ka­plan [Pro­fes­sor of Strate­gic Man­age­ment] that re­ally im­pressed me. We had hired one of your 2016 grad­u­ates, Kaylee Stewart, who spent half of her time at Rot­man in our de­sign lab with Mark Pol­son, our Vice Pres­i­dent, Global Learn­ing & Devel­op­ment. In ad­di­tion to her day job in so­cial me­dia, Kaylee and our Cana­dian GM will be rolling out our first de­sign think­ing test-and-learn ap­proach to our Cana­dian af­fil­i­ates, as we con­tinue to em­bed this ap­proach through­out the or­ga­ni­za­tion.

You have spo­ken of the im­por­tance of be­ing mind­ful about the ‘roots’ and ‘an­chors’ in an or­ga­ni­za­tion. Please ex­plain.

The art of lead­ing change is about two things: Know­ing what needs to be pre­served (the ‘roots’) and what needs to be changed (the ‘an­chors’ that are weigh­ing you down). When I first joined Estée Lauder, I asked my­self, ‘What do I need to pre­serve and what do I need to change?’ As in­di­cated, I re­al­ized that I needed to ac­cel­er­ate and fully lever­age the creative strengths of the tal­ent that was al­ready here.

What are the pros and cons of work­ing for a fam­ily-owned firm?

I feel hon­oured to be work­ing with such an amaz­ing fam­ily. In my ca­reer, I’ve had the ex­pe­ri­ence of work­ing for a num­ber of

blue-chip com­pa­nies, and I be­lieve, frankly, that fam­ily busi­nesses are the best. They bring an au­then­tic­ity that can’t be matched, and they are in­vested in the fu­ture.

Wil­liam Lauder broke the mould for the pres­tige in­dus­try in so many ways. In ad­di­tion to be­ing one of the first in our in­dus­try on the e-com­merce wave, in the 1990s, he re­al­ized that we needed to go into emerg­ing mar­kets — at a time when there weren’t many pres­tige beauty play­ers there. He also rec­og­nized, early on, that we needed to ex­press our brands in new store for­mats. When he cre­ated Ori­gins, he launched it with a free­stand­ing store model — at a time when there was no such thing in pres­tige beauty. When I came in, I was amazed — and I re­al­ized that my chal­lenge was to take it all even fur­ther. Of course, our founder, Estée Lauder her­self, was an en­tre­pre­neur as well as her son, our Chair­man Emer­i­tus, Leonard Lauder.

Wil­liam likes to say, ‘Yes, we have to make our quar­terly numbers; and yes, we have to de­liver a profit in our top line growth. But we will never make a short-term de­ci­sion detri­men­tal to the long-term in or­der to de­liver for the quar­ter’. That’s the best part of work­ing for a fam­ily-owned firm: We make de­ci­sions with the long-term view in mind. Wil­liam speaks about ‘pa­tient cap­i­tal’, mean­ing cap­i­tal that is in it for the long-term. A good part of our suc­cess to­day re­flects my team’s abil­ity to fully lever­age the in­no­va­tive ac­tions and in­vest­ments that Wil­liam had the fore­sight to make.

Man­ag­ing that del­i­cate bal­ance with an­a­lysts is an art and a sci­ence, and as a re­sult, it’s a chal­lenge. But I also view it as a pro, be­cause it forces us to be ag­ile and to pivot some­times. When some­thing hap­pens in the world, we have to think about, ‘What levers can we pull?’ Volatil­ity and uncer­tainty have in­creased ex­po­nen­tially. It could be a change in con­sumer mind­sets, a ter­ror­ist at­tack or a nat­u­ral dis­as­ter; these things can hap­pen at any mo­ment, so it’s im­por­tant to know how to pivot and where to move your re­sources.

I need to re­it­er­ate that, in join­ing this com­pany, I was dealt a great hand: the best peo­ple, ter­rific brands, a his­tory of cre­ativ­ity and in­no­va­tion — and a great part­ner, in Wil­liam. To­gether, we faced one of the most daunt­ing re­ces­sions this world has ever seen and by part­ner­ing to lead change, we came out on top.

You be­lieve the big­gest risk for to­day’s lead­ers is not chang­ing fast enough. How do you ap­proach this chal­lenge?

Like so many, our in­dus­try is chang­ing pro­foundly, and that process will only con­tinue. We aren’t sim­ply mov­ing from Point A to Point B. Change is fluid, like the cur­rents of the ocean. As the speed of change con­tin­ues to in­crease, what helps a lot is hav­ing an en­tre­pre­neur­ial mind­set — both in our big­ger brands, as well as in our smaller brands, like BECCA, which we re­cently ac­quired. When­ever we make an ac­qui­si­tion, we ask our­selves, ‘What can we learn from this com­pany that might ap­ply to all of our brands?’ For in­stance, with Too Faced and BECCA, we learned a lot from their amaz­ing abil­ity to lever­age in­flu­encers and so­cial me­dia tac­tics, and we have the abil­ity to ap­ply these best prac­tices com­pany wide.

Lastly, as an or­ga­ni­za­tion, you al­ways need to have a learn­ing men­tal­ity. With tech­nol­ogy, re­tail mod­els, so­cial me­dia and an­a­lyt­ics, we are go­ing through a trans­for­ma­tional mo­ment right now. But the key ideas — qual­ity prod­ucts, cre­ativ­ity, valu­ing sus­tain­abil­ity and re­spect for in­di­vid­u­als — those things are never go­ing to change.

Fabrizio Freda is Pres­i­dent and Chief Ex­ec­u­tive Of­fi­cer of The Estée Lauder Com­pa­nies, based in New York City. He pre­vi­ously held ex­ec­u­tive po­si­tions at Proc­ter & Gam­ble and Guc­cio Gucci S.P.A.

‘Struc­tured cre­atives’ take ex­ist­ing knowl­edge and con­nect the dots in new ways; while ‘blue-sky cre­atives’ come up with brand new ideas.

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