Assessing the Issues Facing the Estée Lauder Cos.

Fabrizio Freda, the longtime chief executive officer of the Estée Lauder Cos., is an avid sailor who has long talked about putting the company in the winds of growth.

For years his dual strategy of riding the wave of the Chinese beauty boom, as well as a focus on hero products, paid off, resulting in a share price jump from $16.75 in 2009 when Freda became CEO to a peak of over $370 in January 2022, giving it a market capitalization of more than $133 billion.

More from WWD

• Natalie Portman on Animal Agriculture, Social Issues; Kevin Germanier Presents Prélude at LVMH

• LVMH, Chanel to Harmonize CSR Reporting at Supplier Level

• Manual Craftsmanship Is More Than Quiet Luxury, Says Brunello Cucinelli

But now Freda finds himself in choppy waters as he navigates the prestige beauty company through a series of tough challenges, including a precipitous decline in the Chinese and travel-retail markets and what industry insiders contend is a dearth of innovation across its portfolio of brands.

The company’s struggles come at a time when beauty overall has largely rebounded from the COVID-19 pandemic. Key rivals like L’Oréal and Coty Inc. have seen their share prices grow around 32 percent and 44 percent, respectively, in the year-to-date.

All this has sent Wall Street into a frenzy, raising questions about Freda’s future with the family-controlled company and sending Lauder’s share price into a tailspin. Since the beginning of the year, shares have tumbled, recently hovering at a six-year low of $104.51. At press time, the share price was $143.03, giving it a market cap of $51.18 billion.

In a bid to demonstrate to the markets it is working on a turnaround, Lauder pledged to drive $800 million to $1 billion of incremental operating profit for 2025 and 2026. But it is unclear when — or even if — the enterprise can return to its previous pace of growth.

“You’ve got to crawl before you walk, as far as building back the trust of shareholders,” said Mark Astrachan, an analyst at Stifel Financial Corp. [They need to show] that they have a real understanding of how to improve things.”

Agenda item number one: China, which the company calls its second home market.

That’s because China, including sales from travel retail there, accounts for 28 percent of total sales year-to-date, up from 24 percent in 2020, 17 percent in fiscal 2019 and 13 percent in fiscal 2018.

In 2021, former group president of international Cedric Prouvé told Beauty Inc, “I remember we went through the first $100 million, $500 million and now today it’s a multibillion-dollar business. China has grown super, super fast.”

The downside to that growth, say industry insiders, is that it came at the expense of a more diversified geographic approach. “Fabrizio’s diversified engines of growth were more of an aspiration than a reality,” said one source. “Really the business was China, China, China.”

One of the biggest issues, sources said, seems to be the company’s reliance on Daigou — the practice of Chinese consumers purchasing products at lower prices overseas and selling them at a discount in China. While exact numbers are not known, analysts say that Lauder was certainly active in this area. When the Chinese government cracked down on Daigou, Lauder was left in a difficult spot.

“They got hooked on Daigou. The issue with these sales is that you’re taking a huge risk on brand equity,” said HSBC analyst Erwan Rambourg.

Lauder is also believed to have a significant backlog of products in the popular Chinese vacation resort of Hainan, no doubt as a result of COVID-19 lockdowns in China, which curtailed travel. Some of those product are now fast approaching their expiration dates, said analysts.

“Some products are being sold at prices as low as half of their regular retail prices, with the added issue of approaching expiration dates,” said Manon Hu, senior partner at Paris-based Luxurynsight, a data intelligence and strategy consulting agency dedicated to the luxury industry. She noted that Chinese consumers, in particular, are very attuned to expiration dates.

Supply chain issues in the region have also hampered sales. A new factory in Japan, which will start producing skin care products next year, should improve conditions, but lead times have been up to six months, meaning that Lauder was hindered when it came to quickly adapting its stock to emerging trends.

“All of a sudden you send a ton of products because you think the market’s going to do pretty well, but the market slows down and now you’re over-inventoried in China,” said Korinne Wolfmeyer, a vice president and senior research analyst covering the beauty and wellness space at Piper Sandler. “Those lead times have caused some challenges.”

Despite these issues, industry watchers contend that Estée Lauder and La Mer, the two brands understood to be involved in Daigou, are still seen as desirable by consumers and the company needs to rebuild brand equity through reinvestments.

“We’re hopeful that the bulk of the savings program doesn’t go to margin. We’re hoping that it’s reinvested to regain share, to nurture and protect brand equity,” said Rambourg.

The company will have its work cut out for itself to do that. While it was an early player in China, the landscape has changed dramatically as a result of COVID-19, particularly in the skin care category.

“The market is not an easy win for beauty brands,” said Hu. “On one hand, Chinese consumers, influenced by the past three years, have become more discerning, considering factors like product efficacy, pricing, brand reputation, packaging design and celebrity endorsements.

“On the other hand,” she continued, “the competition between domestic and international brands has heated up, resulting in a significantly higher brand turnover rate compared to other industries.”

Competition is increasingly coming from China’s C-beauty market, with players edging into the prestige sector, which has long been dominated by global giants.

“There’s been a lot of innovation with local brands in China,” said Wolfmeyer. “If consumers can get a high-quality product that’s local, they’re probably going to choose that over this expensive American brand.”

According to a recent Bank of America note, Estée Lauder was the top skin care brand by gross merchandise value at Tmall during Singles Day 2021, but fell to second place in 2022 and came in fourth in 2023. Meanwhile, Chinese brand Proya jumped from fifth place in 2022 to the top slot this year, with sales increasing around 40 percent year-over-year. In fifth place was another local brand, Winona.

In color cosmetics, MAC slid from third in 2022 to seventh in 2023. Estée Lauder dropped from fifth to sixth.

Equally as worrying, Jefferies analyst Ashley Helgans said, is that the company had to get very promotional to clear out excess inventory. “It’s almost conditioned the consumer in China to only buy Estée Lauder brands when they’re on promotions because they assume at some point they will be on promotion.”

Looking forward, Lauder is hoping that its China Innovation Labs, which opened in Shanghai in 2022, will better position it to capture growth and accelerate locally relevant innovation in key categories.

It’s also bullish on fragrance, still an emerging category in mainland China but one where the company is well positioned with brands like Tom Ford, Jo Malone, Editions de Parfum Frédéric Malle and Le Labo. It also revealed that its New Incubation Ventures fund made a minority investment in the Chinese fragrance brand, Melt Season.

But it’s not just Asia that is the issue for Lauder. There is also weakness at home.

TD Cowen reported that while sales in the Americas grew 6 percent in the first quarter, it does not believe Lauder is in a strong position to gain share in the region due to its lack of appeal to younger consumers as the competition from emerging smaller brands continues to intensify.

Its Beauty Survey, published in November, found that the Estée Lauder brand skews higher with older women in the U.S. as it is more distributed in department stores compared with other countries where Lauder’s brands are popular among younger consumers.

“We see opportunities to recapture share in the U.S. market,” said TD Cowen analyst Oliver Chen. “This highlights the need for higher brand control through greater investments in digital and direct-to-consumer investments. We would like to see Lauder focus on their key U.S. brands such as The Ordinary, MAC and Clinique by leaning into innovation to drive higher mind and wallet share.”

It added that Lauder needs to infuse into all brands Gen Z-relevant qualities such as sustainability, transparency and authenticity.

This stems back to issues of innovation and creativity, with multiple sources telling Beauty Inc that part of the problem is that many of the top creative people at the company have left over the last five years — including former group president John Demsey in 2022, former senior vice president of global product development Anne Carullo in 2018, former MAC creative director James Gager in 2017 and former senior vice president of global product development Jennifer Balbier in 2020. Founders like Jerrod Blandino and Jeremy Johnson of Too Faced and Bobbi Brown have also exited, only to later launch brands in the sector that have gone on to commercial success.

“Leonard Lauder prized creative people over business people. They have all gone now,” said one industry source.

Lauder said innovation represented more than 25 percent of sales in fiscal-year 2023 and there are pockets of success in the business. The Ordinary, which Freda called a “standout” during the group’s first-quarter earnings, launched Soothing & Barrier Support Serum, $17, which attracted new customers to the brand and helped the parent company return to growth in the U.S. during the quarter.

MAC skin care sales grew by double digits globally, owing to the launch of the Hyper Real product franchise in the third quarter of fiscal 2023, while makeup sales also increased, reflecting the launches of Studio Radiance Foundation and Locked Kiss Ink 24HR Lipcolour.

But there are troubles in Lauder’s portfolio of 23 brands. Sources said the so-called California brands, consisting of Glamglow, Smashbox and Too Faced, which was purchased in 2016 for $1.45 billion, are potential divestments, as well as the hair care brands Aveda and Bumble and bumble.

The downside of selling such brands, however, is it would reduce Lauder’s footprint in specialty retailers like Sephora and Ulta Beauty, now the dominant channel in prestige beauty in the U.S.

While some sources said this wouldn’t happen under Leondard Lauder’s watch (the 90-year-old just retired from the board ), others said it could as long as it didn’t involve the brands he cares most about: Clinique, Estée Lauder, MAC and Tom Ford.

Lauder emphasized in a statement that “there are no plans to sell or close any of our brands as part of the profit recovery program.”

However, analysts have noted that Smashbox and Glamglow have reduced headcount.

“Does that mean they’re going to wind down these other brands? I don’t know,” Wolfmeyer said. “But it’s very clear that they’re shifting their focus.”

Meanwhile, the spotlight glares on Freda, with speculation over his future rampant inside and outside of the company. According to SEC filings, his service period ends on June 30, 2024, and incentivization on June 30, 2025.

In an internal memo obtained by WWD in May, the family and board of directors expressed support for Freda. That backing remains strong. “The board of directors has confidence in Fabrizio and strongly supports his profit recovery plan,” said board member Charlene Barshefsky, on behalf of the entire board, in a statement to WWD this week. “The company is implementing the appropriate actions to address near-term performance and drive future growth.”

The Lauder family also remains firm in its support. “On behalf of the Lauder Family, we have a deep commitment to, passion for and responsibility to the legacy and future of this company,” said William P. Lauder this week. “We have full confidence in Fabrizio’s leadership and believe in his strategic vision and steadfast focus on the future.”

But many on Wall Street are advocating for change — both on and off the record. “There is an unwritten seven-year rule, whereby even if a management member is doing well for a while, it is a good idea to refresh teams, undo previous habits and adopt new ones,” said Rambourg in a note.

“It is quite feasible that CEO Fabrizio Freda could oversee the next phase at ELC,” he continued. “However, given he has run the company for more than 14 years…we think key shareholders, including the family, are more likely to want to write the next chapter with a remodeled team.”

While many analysts, including Rambourg, are advocating for an external candidate, there is much speculation around internal options. Executive group president Stéphane de La Faverie; Jane Lauder, executive vice president, enterprise marketing and chief data officer, and chief financial officer Tracey T. Travis are said to be contenders.

A spokesperson for the company said an external ceo search has not been initiated “as the Board and the Lauder Family are confident in Fabrizio’s leadership.”

Whoever it is, the family would need to agree on a successor as it has a 35 percent stake, including supervoting shares. 

An alternative option, said multiple sources, would be to add a chief operating role to the C-suite and put in place a more gradual succession plan.

Beyond management changes, the troubles have brought into question Lauder’s future on the public markets, including a possible delisting of the company, although this is seen as unlikely.

Other scenarios involve M&A, with L’Oréal and LVMH Moët Hennessy Louis Vuitton being put in the mix, although either could spark antitrust concerns.

There’s also the possibility that an activist investor could get involved. In May, reports swirled that Nelson Peltz was considering making Lauder his next play.

“We think it would be a positive should an activist get involved,” said Astrachan, “in that it could serve as a wake-up call to both the family and the board that the company could and should be run better.

“[Lauder] is a good business,” he continued, “with a great collection of brands, and recent underperformance presents an opportunity for improvement.”

Additional reporting by Denni Hu

Best of WWD

• Year in Review: Beauty M&A Recap 2021

• Beiersdorf to Acquire Chantecaille

• One Year Post-Acquisition, Seed Phytonutrients Plots Phase Two