767 Fifth Avenue
Tastes and styles are evolving on a world scale, greatly influenced by what is happening in America. Improving global economies are making available and affordable products once reserved for a privileged few. The baby boom has come roaring into middle age with money to spend and a determination to fight the effects of growing older. U.S. teenagers have exploded into a major demographic group with a reported $122 billion in spending power. Growing, shifting populations are creating exciting new marketing opportunities.
It really is a new world of opportunity. And the best news for us and for our stockholders is that Estée Lauder has spent the past 50 years preparing for it. We haven't built just a business, we've built a family of businesses. It's a carefully constructed portfolio that gives us balance--in the brands we own, in the markets where we do business and in the diversity a global company needs to protect itself from the ebb and flow of world economies. this balance gives us competitive strength and consumer appeal.
Founded in 1946 by Estée Lauder and her husband Joseph, The Estée Lauder Companies Inc. is one of the leading makers and marketers of upscale cosmetics, fragrances, and hair care products in the world. In the U.S. prestige cosmetics category, Estée Lauder Companies has a market share of about 46 percent. The company's main brands-in order of their introduction or acquisition--include the original Estée Lauder line, including skin treatment, makeup, and fragrances; Aramis, a group of men's toiletries (1964); Clinique, a hypoallergenic line (1968); Prescriptives, an upscale line aimed at the urban, multiethnic crowd (1979); Origins, a botanical treatment line designed to appeal to the environmentally conscious consumer (1990); MAC, a professional makeup artist line of cosmetics and makeup products (1994); Bobbi Brown essentials, a professional beauty line (1995); Tommy Hilfiger fragrances, grooming products, and cosmetics (1995); jane, a cosmetics line aimed at young consumers (1997); Aveda, a "new age" cosmetics and hair and skin care line (1997); and Donna Karan fragrances and cosmetics (1997). Estée Lauder products are sold in more than 100 countries, with 61 percent of net sales originated in the Americas; 27 percent in Europe, the Middle East, and Africa; and 12 percent in the Asia-Pacific region. The Lauder family owns almost 65 percent of the company's common stock and more than 93 percent of the voting stock.
1920s--50s: Development of an Entrepreneur
Estée Lauder was born Josephine Esther Mentzer in Corona, Queens, New York, in 1908, the ninth child of Rose and Max Mentzer, who had emigrated from Hungary to the United States. Regarding her interest in cosmetics, which originated in childhood, Lauder reportedly recalled: "I loved to make everyone up.... I was always interested in people being beautiful ... [people] who look like they have a cared-for face."
Lauder was first inspired to enter the business of cosmetics when her uncle, John Schotz, a chemist from Hungary, established New Way Laboratories in Brooklyn in 1924. Her uncle's products included a Six-in-One Cold Cream, Dr. Schotz Viennese Cream, and several perfumes. Lauder got her start by selling these products in New York City and then, from 1939 to 1942, in Miami Beach as well.
In 1944 Lauder began working in various New York salons and smaller department stores, selling her own product line from behind a counter. Of that original line, three skin creams were her uncle's creations. Lauder also sold a face powder, an eye shadow, and a lipstick called Just Red. Soon the entrepreneur was spending Saturdays selling her products on the floor in Bonwit Teller department store on Fifth Avenue. Lauder's next goal was to get her items into Saks Fifth Avenue. She convinced the Saks buyer that there was a demand for her products after a successful lecture and demonstration at the Waldorf Astoria that prompted customers to line up outside for more product information. One unique aspect of Lauder's products would remain a classic Estée Lauder approach over the years; the fledgling cosmetics dynamo was selling lipsticks in upscale metal cases at a time, just after World War II, when most lipsticks were packaged in plastic.
The year Estée Lauder got started, women's cosmetics was a $7 million business in the United States. The Saks connection helped Lauder achieve a reputation that would allow her to sell her products nationally. Beginning in the late 1940s, Estée Lauder traveled the country, making personal appearances in specialty and department stores and training staff in proper sales techniques. She made impressions on influential people early on, securing a spot in I. Magnin's of San Francisco, a store well-respected in the retail trade. I. Magnin's carried Lauder's products exclusively in the San Francisco area until the late 1970s. During these early years, Lauder met buyers all over the country and others in the business who would later help her achieve success.
Against the advice of their lawyer, Lauder and her husband entered full-scale into an industry known for extreme market swings and short-lived endeavors. Joseph Lauder worked every day at the small space they had rented, while their oldest son, Leonard, made deliveries to Saks and other stores on his bicycle.
One technique that Estée Lauder pioneered, now standard in the cosmetics industry, was the gift-with-purchase offer. Lauder first began offering free sample items with any purchase to bring the customer back for more. Later, free products were made available to customers who made purchases of a specified minimum dollar amount. Lauder's gift-with-purchase offer gained her a loyal following and helped establish her business. Over the years, however, this practice would lead to markedly low profit margins in the cosmetic industry as a whole and at Lauder's company in particular.
The 1953 Debut of Youth Dew
Early in the 1950s, with $50,000 saved from business profits, Lauder began looking for an advertising representative. After learning that the amount was hardly enough to finance a full-scale campaign, she chose to begin advertising with the help of Saks Fifth Avenue's direct-mail program. The company's advertising budget would soon grow considerably, with the introduction of a new product.
Lauder reunited in the early 1950s with a fragrance executive she had met a decade earlier in order to develop a perfume. Following the examples of Helena Rubenstein and Elizabeth Arden, who had both made their starts in skin care and then moved on to fragrances, Lauder developed a bath oil with a fragrance that lasted for 24 hours. She called the bath oil Youth Dew and introduced it in 1953 at $8.50 a bottle.
With Youth Dew Estée Lauder became an overnight success. "Middle America went bananas for it," stated former employee Andy Lucarelli, as quoted in Estée Lauder: Beyond the Magic. Youth Dew sales reached an unprecedented volume of 5,000 units a week in the mid-1950s. Furthermore, sales of skin care products increased due to the popularity of Youth Dew. Thirty years later, the fragrance still had sales of $30 million worldwide.
In 1958, 24-year-old Leonard Lauder joined the company. That year he married Evelyn Hausner, a Vienna-born schoolteacher who would later rise in the company and eventually take over for Estée Lauder herself, making appearances as company spokesperson.
In the early 1960s, Estée Lauder joined Rubenstein, Arden, Revlon, and Cosmetiques in the race to develop a skin care cream like the European products that were becoming popular during this time. Estée Lauder's Re-Nutriv--a careful blend of 25 ingredients--was introduced in a well-orchestrated marketing program typical of most Estée Lauder ventures. Advertisers were careful not to make specific claims regarding the product's ability to revitalize skin or eliminate wrinkles, as such claims could get a cosmetics company into regulatory trouble. A full-page Harper's Bazaar ad simply read: "What makes a cream worth $115.00?" The expensive product generated lots of free press for the company.
Estée Lauder Inc. developed an identifiable image in the 1960s. Since the company could not afford color ads, they used black-and-white photos instead. Moreover, in 1971, model Karen Graham began portraying the serene, elegant "Estée Lauder look," a role she would fulfill for 15 years. Graham's identification with Estée Lauder was so successful, many people thought she was Estée Lauder herself.
Through the early 1960s, company sales climbed to $14 million. Lauder had by then gathered a small, talented staff that included Ida Steward, from Bristol-Myers; June Leaman, from Bergdorf Goodman; and Ira Levy, a recent graduate of UCLA--all of whom would remain with the company for decades.
Aramis and Clinique Debut in the 1960s
In 1964 the company introduced Aramis, a trendsetting male fragrance blended from citrus, herbs, and spice to evoke a woodsy scent. Estée Lauder soon met with increased competition, particularly from Revlon, which began to market its own fragrance for men, known as Braggi. Following the deaths of cosmetic leaders Helena Rubenstein and Elizabeth Arden (in 1965 and 1966, respectively), competition heated up between Revlon and Estée Lauder.
The introduction of the Clinique line in 1968 firmly established Estée Lauder's success in the cosmetics industry. Clinique's first national exposure had come via an interview between Vogue veteran Carol Phillips and dermatologist Norman Orentreich entitled "Can Great Skin Be Created?" The article, published in the August 15, 1967, edition of Vogue, elicited outstanding reader response. Soon thereafter Phillips accepted an offer from Leonard Lauder to join the company and lead the development of the new Clinique line. From the development stage to full-scale introduction, Clinique was designed to be more than just an allergy-tested line of products. Rather, it cultivated an image as a well researched and medically sound line of products produced in laboratories. The first 20 salespeople were given the title of "consultants"; they were rigorously trained and outfitted with white lab coats. Sales counters were brightly lit, products were packaged in clinical light green boxes, and a chart allowed customers to determine which Clinique products fit their particular skin type. As stated in the September 26, 1983, Business Week, "Clinique helped fuel a tenfold expansion of the big cosmetics company."
By 1968, sales for privately owned Estée Lauder, at $40 million, financed a move to new corporate headquarters in the General Motors building in 1969. The company was also able to support the Clinique venture, which lost approximately $3 million over the first seven years. Such patient financing became a trademark of Estée Lauder launches. By 1975 the Clinique line had become profitable, prompting competition from Revlon. Through a hasty and ultimately unsuccessful introduction of a product line designed to compete with Clinique, Revlon's Charles Revson made an important discovery. Estée Lauder held a significant influence over department store buyers, who generated customer loyalty through the exclusive sale of her products. Revlon products, on the other hand, were available at lower price discount centers and inspired no such loyalty.
After 12 years with the company, the founders' oldest son Leonard was named president of Estée Lauder Inc. in 1972. Leonard Lauder focused on maintaining good relations with store buyers. His methods ensured a systematic, goal-oriented method of selling company merchandise, coordinating the advertising levels for various product lines and the quality and quantity of store space to be devoted to those Lauder products. Estée Lauder, board chairman, spent mornings working at home and afternoons at the office in the General Motors building. Joseph Lauder oversaw production at the Melville, Long Island, plant.
New Approaches and Scents in the 1970s
The challenge faced by Estée Lauder in the 1970s was to increase its overall presence while building on its respectable reputation. The company's private, family-controlled ownership gave it the flexibility to respond rapidly, when necessary, to industry trends and competition. Through the 1970s, such quick maneuvering was necessary as the company faced increased competition in the fragrance industry. Revlon scored a huge success with the mass-marketed fragrance "Charlie" in 1973, as did Yves Saint Laurent's "Opium," launched in Paris in 1977 and brought to the United States the following year.
During this time, Lauder had been working on a subtler version of its original Youth Dew fragrance. Noting the success of Opium, Lauder launched both Soft Youth Dew and a spicier oriental version called Cinnabar in the fall of 1978. Due to the simultaneous introduction of the closely related products, some questions concerning the company's marketing plans were raised. Both retail buyers and consumers were confused over whether Cinnabar was a version of Youth Dew or a new product. Ronald Lauder commented, as quoted in the September 15, 1978, Women's Wear Daily, that the company would continue to market both fragrances and would "probably decide after Christmas which way to go." While the marketing approach was muddled, the privately owned company proved that it could react quickly in an aggressive market.
A new skin care line in the style of an upscale Clinique was introduced in 1979. The Prescriptives line was promoted as even more high-tech, with one-hour makeup and fashion consultations included as part of the program. When Prescriptives met with a lukewarm reception, the company regrouped to revise the approach. Estée Lauder's other divisions were challenged as well, as competition extended to the relatively slow market for men's fragrances.
In 1978, sales of the Estée Lauder line were approximately $170 million. Clinique sales stood at $80 million, and the Aramis line, which had developed into over 40 products, had estimated sales of $40 million. Men's products, though the lowest in revenue, were growing at a rate of 18 percent a year. Several men's fragrances were launched in lower-priced markets. With the widely successful 1978 debut of Ralph Lauren's Polo, Estée Lauder was prompted to consider launching a new men's product. JHL, named after Joseph Lauder, was introduced in 1982 and, like other Lauder products, was marketed as a more expensive and upscale fragrance. Sales clerks requested business cards from customers in order to send them free samples, and an elegant counter display was developed for promotional items.
In executive changes in 1982 Leonard Lauder, president of the company, was also named CEO. Ronald Lauder, another son of the founders and executive vice-president, became chairman of international operations; the division comprised half the company's sales volume, though less of it profits. The changes did not affect Estée Lauder's active chairmanship or Joseph Lauder's management of the company plants.
The Premier Cosmetics Company of the 1980s
By 1983, Estée Lauder had reached a billion dollars in sales and was recognized as the premier cosmetics company. The company underwent several more executive changes. Ronald Lauder left active management to join the Reagan administration as Deputy Assistant Defense Secretary. Joseph Lauder died in January 1983. The family bought Mr. Lauder's stock for $28 million, at a price the IRS would later charge was undervalued, leaving the company liable for $42.7 million in taxes. The Lauders' lawyer countered that shareholder agreements from 1974 and 1976 controlled the price of the shares, since the stock of the family-owned company could not be sold.
Just as Estée Lauder reached a billion dollars in sales, its closest rival, Revlon--which had watched the Lauder empire grow from infancy--experienced a first-ever drop in sales, to $1.2 billion. While still formidable, Revlon no longer had the guidance of its leader, Charles Revson, who died in 1975.
Unlike Revlon, which touted its large number of product introductions, Estée Lauder took a more careful approach. Clinique added only 12 new products since its inception, most of which were still being sold after 15 years. Estée Lauder's sole product launch in 1983, Night Repair, reportedly had years of research and development invested in it. Night Repair advertising copy claimed that the product was "a biological breakthrough" which "uses the night, the time your body is resting, to help speed up the natural repair of cells damaged during the day." Dr. Norman Orentreich, the dermatologist consulted in the groundbreaking 1967 Vogue interview preceding the introduction of Clinique, offered a different view. As quoted in the September 1984 issue of Drug & Cosmetic, Orentreich stated, "there is no topical preparation affecting the outermost layer of the stratum corneum that the FDA will allow [one] to call a cosmetic that will work." Such objections did not impair sales; in fact, Night Repair went on to become a top seller in the Estée Lauder line.
The company's increasing investment in laboratory research and development proved successful, as indicated by the sales of the Clinique line and Night Repair. As reported in the September 26, 1983, Business Week, Leonard Lauder stated that "growth in 1983 R & D expenditures will be twice the company's sales increase."
In 1990, in a widely reported company change, Robin Burns was brought in to replace Robert J. Barnes as chief executive of the domestic division. Barnes, who held the position for 26 years, remained with the company as a consultant for the international division. Robin Burns started her career as a fabric buyer for Bloomingdale's at age 21 in 1974, joining the staff at Calvin Klein Cosmetics Corporation in 1983. Burns was instrumental to the introduction of the fragrances Obsession and Eternity during her seven-year tenure, turning the $6 million company into a $200 million success story. Leonard Lauder was quoted in the January 12, 1990, Women's Wear Daily as commenting that "Calvin told me, 'No matter what you've heard about her, she's ten times better'."
Officially taking over the domestic division in May 1990, Burns revived the image of several Estée Lauder fragrances by the end of the year. Hoping to make the company's flagship Estée Lauder line more accessible by implementing changes in its advertising, Burns oversaw production of ads that featured Paulina Porizkova (the model representing the company's entire line starting in 1988), suggesting that a friendlier, less remote countenance would have a wider appeal for consumers. Furthermore, Burns opted to give the company's White Linen scent its own representative, model Paul Devicq.
Similarly, the Aramis line was reinvigorated with a campaign designed to reach a younger male audience. Ad spending was increased by 40 percent, and print ads, traditionally placed in the magazines Fortune and Esquire, were moved instead to Rolling Stone, Cosmopolitan, and Gentlemen's Quarterly. Television spots were switched from news programs such as 60 Minutes to comedy programs such as In Living Color, which attracted young people.
The Prescriptives line was expanded in the 1990s with the introduction of All Skins, makeup formulated for working women of different ethnic backgrounds. Nearly all cosmetics companies at the time had been criticized for ignoring large segments of the population for too long. By mid-1992 All Skins was attracting 3,800 new customers a month.
In 1990 the company formed a new corporate division, Origins Natural Resources Inc., which catered to public concern for the environment. Recycled paper was used for product packaging and company correspondence, makeup shades emphasized natural skin tones, and animal products such as lanolin and petroleum-based active ingredients were not used in the makeup formulations. Origins was also offered via freestanding boutiques in Cambridge, Massachusetts, and Soho, Manhattan, which proved to be the new division's top-selling locations.
William Lauder, grandson of the founders, headed the Origins division. In a July 13, 1990, article in Women's Wear Daily, he summarized the contemporary Estée Lauder mission: "We are trying to rewrite the book on how a cosmetics company operates and thinks in the 21st century." The company's new approach included gearing more merchandise toward consumers of all economic backgrounds and a commitment to communicating with a growing international audience in addition to a wider variety of American consumers.
In January 1992 Daniel J. Brestle, the president of Prescriptives who had brought that division from a shaky start to $70 million in sales, was named president of Clinique Laboratories USA. The founders' two sons, Leonard and Ronald, continued to play active roles in the executive lineup. Leonard remained president and CEO of Estée Lauder Inc., while Ronald continued as chairperson of both the international and Clinique divisions. Evelyn Lauder, Leonard's wife, oversaw new product development as senior corporate vice-president. By 1992 Evelyn Lauder had gradually taken on Estée's role as company spokesperson as the founder made fewer appearances. Commenting on Estée Lauder's success in the industry in the July 13, 1990, Women's Wear Daily, Leonard Lauder summarized the Estée Lauder philosophy: "We think in decades. Our competitors think in quarters."
New Ventures and Going Public in the 1990s
In 1993 the company entered into its first licensing venture, signing an exclusive global licensing deal with fashion designer Tommy Hilfiger. Two years later, Estée Lauder's Aramis subsidiary launched the Tommy fragrance for men, which it followed up with Tommy Girl, for women, and Hilfiger Athletics, for men.
In February 1995 Estée Lauder acquired a majority interest in Make-up Art Cosmetics Ltd. (MAC), maker of designer cosmetics aimed at professional makeup artists and fashion-conscious consumers; by 1998 the company had gained full control. Estée Lauder also acquired Bobbi Brown essentials, a professional beauty line developed by famous makeup artist Bobbi Brown. During this time Estée Lauder also hired a new spokesmodel, actress Elizabeth Hurley, who helped make Pleasures a top-selling fragrance after its debut in 1995.
By late 1995 Estée Lauder herself had stepped aside as chairperson, taking the honorary title of founding chair. Leonard Lauder assumed the chairmanship in addition to his duties as CEO, while COO Fred H. Langhammer added the title of president. Ronald Lauder continued as chairman of Clinique and the international operations.
In part as an estate planning measure and a method for some Lauder family members to cash out portions of their company stakes, The Estée Lauder Companies Inc. went public in November 1995, raising more than $450 million through the IPO. Secondary offerings over the next few years lowered the Lauder family's stake in the company to about 65 percent of the common stock and 93 percent of the voting stock. Some of the maneuvers by members of the Lauder family in connection with these offerings proved controversial, particularly a capital gains tax-deferral method used in the 1995 IPO which lawmakers outlawed in 1997.
For the fiscal year ending in June 1996 Estée Lauder posted profits of $160.4 million on sales of $3.19 billion, healthy increases over the previous year's figures of $121.2 million and $2.9 billion. Profits and sales increased again in fiscal 1997, reaching $197.6 million and $3.38 billion, respectively. In late 1997 the company returned to the acquisition arena, snapping up Sassaby Inc. and Aveda Corporation. The purchase of Sassaby brought to Estée Lauder the jane brand of color cosmetics, a trendy brand aimed at young consumers 13 to 18 years old. Unlike Estée Lauder's typically high-priced products sold primarily in department stores, the jane line consisted of mass-market items sold in drugstores, supermarkets, and discounters, such as Wal-Mart--and thereby represented a new marketing channel for the company.
Aveda, purchased for $300 million, was a "new age" brand, consisting of a line of shampoos, cosmetics, and other beauty products positioned within the trendy aromatherapy area. This acquisition marked a major move by Estée Lauder into the hair care segment, where it had only a minor presence through its Origins line. It also represented another new distribution channel, as 85 percent of Aveda's sales came from hair salons. In October 1997 Estée Lauder struck another licensing deal, this time signing an exclusive worldwide agreement with Donna Karan International Inc. to develop a line of fragrances and cosmetic products under the Donna Karan New York and DKNY trademarks.
Prior to the 1997 acquisitions, it had appeared that Estée Lauder was in danger of losing market share because of its near-exclusive focus on the department store channel--a channel that was seeing increasing numbers of customers defect to mass marketers and other outlets. But as with its acquisition of such popular brands as MAC and Bobbi Brown essentials, the company appeared to be shedding its conservative ways in gaining entrée into the mass market and hair salon channels. To support its brands, Estée Lauder continued to spend massive sums on advertising and promotion, $1.03 billion in fiscal 1998 alone, a figure representing more than 28 percent of sales. It also seemed certain that the company would continue to seek out strategic acquisition targets, such as Stila Cosmetics, Inc., a fast-growing upscale cosmetics company, the acquisition of which was proposed in 1999.
Principal Subsidiaries: Aramis Inc.; Clinique Laboratories, Inc.; Estée Lauder Inc.; Estée Lauder International, Inc.; Estée Lauder Cosmetics Ltd. (Canada).