The Predicament of Beauty Giant Estee Lauder

Estée Lauder is in a dilemma.

American beauty giant Estée Lauder has recently announced that Stéphane de La Faverie will succeed Fabrizio Freda as CEO, who announced his retirement in August this year. This appointment will take effect on January 1 next year, and he will also serve as the group's president, leading the struggling beauty giant to revive sales.

At the same time, third-generation heirs of the Estée Lauder family, Jane Lauder and William Lauder, will exit the group's operations, marking the first time in 75 years since Estée Lauder's establishment that family members will not participate in daily operations and management.

William Lauder will resign as the company's executive chairman and will retain a board seat after the company's upcoming annual shareholder meeting. Founder’s granddaughter Jane Lauder will also resign from her position as Chief Data Officer and will focus on her role on the board in the future.

The departure of William Lauder and Fabrizio Freda will be the first phase of the power transition at Estée Lauder.

Over the past year, due to increasing performance pressure, 90-year-old honorary chairman Leonard Lauder and some board members expressed dissatisfaction with CEO Fabrizio Freda, considering replacing this executive who was hired externally by William Lauder, but William Lauder defended Fabrizio Freda.

The market believes that the operational philosophy differences between 90-year-old honorary chairman Leonard Lauder and his eldest son William Lauder are one of the obstacles hindering Estée Lauder's performance growth. In August this year, under public pressure, Fabrizio Freda announced his retirement after 16 years of service, and his supporter William Lauder also subsequently lost power.

During the selection process for the new CEO, market insiders pointed out that Jane Lauder and Stéphane de La Faverie were both considered potential candidates for CEO.

Last year, Estée Lauder launched a profit recovery and growth plan, and Jane Lauder and Stéphane de La Faverie were jointly appointed as the executive leaders of the plan, which was seen as a test for both candidates.

The latest appointment shows that Stéphane de La Faverie has emerged victorious.

Before joining Estée Lauder in 2011, Stéphane de La Faverie worked for L'Oréal for nearly 10 years, where he was credited with leading the core brand Estée Lauder and playing a key role in the fragrance business, a new growth point in the beauty industry Estée Lauder Companies stated that Stéphane de La Faverie successfully grasped the growth gene of the Estée Lauder brand, attracting different consumer groups from mature to "Generation Z" through a series of initiatives such as star products, a digital-first strategy, data-driven marketing, new technology development, and high-growth channels, making Estée Lauder a top brand in the minds of Chinese consumers.

In addition, during a historically low period for the traditional high-end skincare and beauty market, Stéphane de La Faverie played a crucial role in the key development phase of the category while the group strengthened its fragrance segment.

In September 2022, Estée Lauder Group divided its brand portfolio into two major brand clusters, with the cluster led by Stéphane de La Faverie encompassing Estée Lauder and the group's current important fragrance brands, including Jo Malone, Le Labo, KILIAN, and Frederic Malle.

Fragrance, as a new growth point, is also closely related to the Chinese market. Over the past decade, international beauty giants first felt pressure from competition with domestic beauty brands and then missed the trend of effective skincare in the Chinese skincare market due to slow innovation. To reaffirm their market position, both Estée Lauder and L'Oréal have not dared to slack off in the new growth point of the Chinese fragrance economy.

By 2030, China is expected to become the second-largest fragrance market in the world. Frederic Malle, KILIAN, and Le Labo entered the mainland Chinese market in 2020 and 2023, respectively. Facing a group of consumers who are beginning to form fragrance usage habits, international beauty giants are targeting the growth opportunities of global niche fragrance brands, which is also seen as a key lever for Estée Lauder to turn around its performance.

Stéphane de La Faverie secured the new CEO position with his deep understanding of brand business, key categories, and global markets, especially the Chinese market.

In contrast, his rival Jane Lauder has more advantages in brand image, marketing, and digitalization. The brands she oversaw include Clinique, Origins, and Darphin, but Clinique's recent weak performance has left Jane Lauder lacking effective competitive leverage. Additionally, Jane Lauder is less familiar with the Chinese market compared to Stéphane de La Faverie.

From the perspective of the new CEO selection, Estée Lauder Group continues to bet on brand business and the Chinese market, focusing on improving and transforming the company's fundamentals. Stéphane de La Faverie will face a giant ship with all departments declining, aiming to prove to investors that the transformation is underway.

According to the latest performance data recently released by Estée Lauder, the group's revenue in the first fiscal quarter fell by 4% to $3.36 billion, with organic revenue down 5%, mainly affected by the sluggish Chinese market and declining demand across Asia, resulting in a net loss of $156 million, compared to a net profit of approximately $36 million in the same period last year Estée Lauder unexpectedly withdrew its full-year earnings guidance for fiscal year 2025, only providing guidance for the second fiscal quarter, expecting organic revenue to decline by 8% to 6%, primarily affected by the uncertainties faced by the new CEO and the continued weak demand in the Chinese market. The group also stated that it would adjust its dividend payout ratio to enhance financial flexibility.

Taking a pragmatic approach may, to some extent, soothe the market; however, the complete withdrawal of family members from daily management raises greater panic in the market regarding what this means for a family-centric American company.

Estée Lauder Companies was founded by Mrs. Estée Lauder in 1946. The founder, Estée Lauder, who came from a poor Jewish family, gained fame early on through her excellent sales skills and unique understanding of beauty. In 1958, her 25-year-old son Leonard Lauder joined the company and took over management from his mother in 1982, serving as CEO.

It is believed that Estée Lauder's ability to grow from a family business with annual sales of only $800,000 in 1958 to a global beauty giant with over $10 billion in sales is mainly due to the international expansion and multi-brand strategy led by the second-generation family member Leonard Lauder, who began developing and acquiring new brands in 1964.

In 1995, to alleviate the financial difficulties brought about by extensive acquisitions, Estée Lauder began seeking help from the capital markets. In 1996, Estée Lauder was listed on the New York Stock Exchange. Through equity structure design, the Lauder family continued to maintain control of the company, currently holding about 38% of common stock and approximately 86% of voting rights.

However, beyond equity and voting rights, the family's ability to maintain control over the company for more than seventy years has primarily benefited from the deep involvement of family members in the company's specific operations and management.

William Lauder, son of Leonard Lauder, followed in his father's career path, joining the Clinique brand under the Estée Lauder Group in 1986 at the age of 26, and took over as CEO from professional manager Fred H. Langhammer, whom Leonard Lauder had recruited, in 2004. That same year, Mrs. Estée Lauder passed away, and at that time, the Estée Lauder Group's annual revenue had reached $5.7 billion.

During William Lauder's tenure as CEO, he faced a complex situation.

His father, Leonard Lauder, as the soul of the company and honorary chairman, continued to exert influence over the company, while his uncle Ronald Lauder and his two daughters, third-generation heirs Jane Lauder and Aerin Lauder, all held executive positions in the company. His grandmother's youngest son, Gary Lauder, also held a seat on the board William Lauder realized that even though his family business had grown into a global giant, decision-making was still constrained by the complex relationships of a few people in the company, especially family members, which made him feel powerless as the leader. He further recognized the necessity of finding external managers as intermediaries.

In 2009, William Lauder brought in Procter & Gamble veteran Fabrizio Freda to serve as CEO of Estée Lauder until this August.

Unlike the professional manager Fred H. Langhammer that Leonard Lauder had previously hired, Fabrizio Freda, appointed by William Lauder, held significant power.

Fabrizio Freda was one of the highest-paid CEOs in the beauty and fashion industry for a long time, with an annual salary exceeding $20 million, five times the average salary of executives in the beauty industry, despite 70% of institutional shareholders voting against his compensation plan.

Fabrizio Freda's ability to remain in office for 16 years indirectly proves his personal strength and the support he received from William Lauder.

Although Fabrizio Freda's reputation suffered during the performance crisis of the past three years, Estée Lauder, under his leadership, achieved significant growth in performance before the pandemic, driven by the consumption upgrade in the Chinese market, the popularity of high-end beauty products, and the stimulation of live e-commerce, with revenue approaching $15 billion in 2019.

Fabrizio Freda once stated that the strong growth of Estée Lauder Group's performance was mainly benefited from continuous creativity, digital marketing advertising, and the Tmall platform. As Chinese consumers increasingly preferred to purchase cosmetics on their mobile devices, over half of Estée Lauder Group's sales in the Chinese market came from mobile, with Tmall contributing the most.

Looking back now, Estée Lauder under Fabrizio Freda seized the opportunities brought by technology and demographics in the Chinese market, meeting consumers' demand for high-end products at specific stages. However, as Chinese consumers rapidly matured and entered a more segmented and rational cognitive phase, Estée Lauder's products and brand stories failed to keep up.

Long-term reliance on high-growth channels such as e-commerce and travel retail led Estée Lauder Group to overlook product innovation, with star products like the little brown bottle lacking necessary iterations. Today's Chinese consumers are beginning to seek skincare efficacy more purposefully, rather than blindly chasing high-end products, while the popularity of medical beauty methods continues to erode consumers' investment in high-end skincare products.

In the face of the crisis, the continuously rising prices of Estée Lauder misjudged consumer psychology, and the expected phenomenon of "the more it rises, the more it sells" did not occur. As e-commerce channels driven by promotional events like Double Eleven slowed down, Estée Lauder overly relied on travel retail channels represented by Hainan duty-free, which caused profound damage to the brand's high-end image and pricing system Although Fabrizio Freda is also a veteran in the beauty industry, he clearly has not focused much energy on the products and the business itself. Similar to the issues faced by another sports giant, Nike, during its recent CEO transition, the former CEO John Donahoe spent a lot of effort on DTC channel reform and improving company efficiency, but neglected the consumer goods company's mission of creating new demand through product innovation.

The consumer goods industry trains people to instinctively respond to market changes at all times. When Nike mistakenly believed that its product foundation was solid enough to enter a modernization phase, it turned out that this industry has never had such a phase; there is only the need to remain vigilant every day.

The same applies to Estée Lauder. Mrs. Estée Lauder's initial uncompromising pursuit of product quality and excellence endowed its core brand with high-end genes. Seventy years later, as Estée Lauder Companies has penetrated global markets, the group still needs to return to its understanding of beauty, which requires sufficient insight and focus.

For complex giants, achieving this turnaround is not easy. William Lauder and Jane Lauder of the Lauder family each took a step back and exerted influence through the board, seemingly calming internal conflicts, but this means that the agency conflict will always exist beneath the surface, and agency conflicts have always been a reason for slowing down large companies.

It is unclear whose idea it was to select Stéphane de La Faverie—whether it was William Lauder's B plan or Leonard Lauder's initiative. Who will he speak for, and how will he complete the daunting transformation task within the complex family relationship network to meet shareholder expectations remains a mystery.

Dissociating from the family business legacy is a double-edged sword for Estée Lauder. In the last century, Leonard Lauder, as the soul and chief mentor of the group, maximized the family spirit, developing Estée Lauder into a distinctive enterprise, but in the 21st century, this has become a constraint that the third generation of the family most wishes to break.

The struggling Estée Lauder also faces many uncertainties. After the earnings release, the group's stock price plummeted 20% to $68 yesterday, down 50% since the beginning of this year, with a market value of approximately $24.7 billion