The Estee Lauder Companies Inc.

founded: 1946 as the estee lauder cosmetic company.

Contact Information:

headquarters: 767 5th ave. new york, ny 10153 fax: (212)572-3941 phone: (212)572-4200

OVERVIEW

The Estee Lauder Companies Inc. is one of the largest cosmetics companies in the world, selling about 700 different skin care, makeup, and fragrance products under brand names that include Aramis, Bobbi Brown essentials, Clinique, Estee Lauder, Origins, and Prescriptives. Until late 1995 the company was the largest privately owned cosmetics company in the United States. By 1997 its products accounted for about 40 percent of all cosmetic sales in U.S. department and specialty stores.

Through the years Estee Lauder grew substantially, expanding its product line by developing its own companies (like Origins Natural Resources Inc. in 1990), acquiring new companies (like Bobbi Brown essentials in 1995), obtaining licensing agreements (like the one it secured with American fashion designer Tommy Hilfiger in 1994), and by entering into joint ventures (such as that with perfumer Herbert Frommen in 1996). By the late 1990s the company was selling its expanded line of products not only throughout the Americas, Europe, Belgium, Canada, Japan, Switzerland, the United Kingdom, Venezuela, and South Africa, but it was entering or making plans to enter new areas like India and China.

COMPANY FINANCES

In 1997 total sales reached $3.38 billion, which was 6 percent higher than the previous year's sales of $3.19 billion. Of that, 39 percent came from sales of skin care products, 37 percent from makeup, and 24 percent from fragrances. Of this, 57 percent of net sales and 53 percent of operating income came from the United States alone. The Europe/Middle East/Africa region represented 27 percent of net sales and 34 percent of operating income. The Asia/Pacific region represented 16 percent of net sales and 13 percent of operating income.

Total revenue for both 1996 and 1997 showed a consistent trend of revenues increasing. For example, 1993 saw sales of $2.45 billion and 1994 sales were $2.58 billion. By 1995 sales jumped to $2.90 billion. Net income also rose steadily during the same period, from $58 million in 1993 to $70 million in 1994, reaching $121 million in 1995, and jumping once again to $160 million in 1996 and $198 million in 1997.

HISTORY

In the 1930s Josephine Esther Mentzer, now known as Estee Lauder, began her career by selling skin care products (an all-purpose face cream and a cleansing oil) that her uncle, John Schotz, originally formulated. Later she packaged these formulations and began selling them. Her line was comprised of six products—three skin care products and three color cosmetics including a face powder, a lipstick called "Just Red," and a turquoise eye shadow. In the mid-1940s, Estee Lauder convinced department store Bonwit Teller to take her products, and she sold them there herself on Saturdays. At that time, a hallmark of success for a cosmetics company in New York was to be carried by Saks Fifth Avenue, then considered the most elegant department store, and shortly after the end of World War II Estee Lauder made her way in.

From the mid-1940s until the mid-1950s Estee Lauder traveled across the United States selling her products. In 1946 she founded her company as the Estee Lauder Cosmetic Company. In the early 1950s she came out with Youth Dew, a product that would catapult her into fame and wealth. Marketed as a bath oil that doubled as a perfume, Youth Dew was an attempt to provide everything the American women wanted in a fragrance: it was bold yet inexpensive—and it was a huge success. Soon, Youth Dew accounted for 80 percent of Estee Lauder's sales at Saks. By 1960 the company passed the $1 billion mark in sales, and Estee Lauder was incorporated.

In the late 1950s and the early 1960s, European skin care products became exceedingly popular in the United States, and cosmetic companies—including Estee Lauder—were quick to capitalize on this. Some companies got into trouble with the U.S. Food and Drug Administration because of their bizarre and sometimes morally questionable ingredients (placental creams briefly gained some popularity at this time) and because of their outlandish claims (for example, Revlon alleged that its Ultima cream would penetrate "into the living cells"), but Estee Lauder was more cautious with the product she brought out at this time, a cream she called Re-Nutriv. As the writer Lee Israel rightly noted, it was "a name that said nothing and everything." The cream was extraordinarily expensive, selling for $115 a pound, which drew attention to, and created publicity for, the product and the company.

In 1964 Estee Lauder introduced a perfume for men called Aramis. The following year, she brought out 21 additional products in the Aramis line. The line was enormously successful. So successful that soon, cosmetics giant Charles Revson of Revlon copied its strategy and the tortoise shell packaging, launching his own rival male fragrance called Braggi. This move, which came at the same time as the demise of Estee Lauder's two other rivals, Helena Rubenstein in 1965 and Elizabeth Arden in 1966, would fuel an already unpleasant competitiveness between Charles Revson and Estee Lauder.

An interview in the late 1960s with a renowned New York dermatologist, Dr. Norman Orentreich, appeared in Vogue magazine that would greatly influence the future of skin care claims and would provide inspiration for Estee Lauder's Clinique line of cosmetics. Estee Lauder hired the writer of the article, Vogue managing editor Carol Phillips, to develop and oversee a new cosmetic line catering to the younger, more health- and fitness-conscious woman—an allergy-tested, fragrance-free line with another "name that said nothing and everything": Clinique. When Charles Revson learned that Estee Lauder had put out her Clinique line, he quickly slapped together a hypo-allergenic line of his own (something he claimed he'd had in mind for years), which he called Etherea. The line was a flop, in part because of its careless and hasty development, and in part because of waning department store interest in carrying Revson's lines.

In 1972 Estee's son Leonard Lauder, who had joined the company in 1958, was made president and Estee Lauder remained chief executive officer. Leonard would come to be regarded by many as the reason for the company's great and lasting success. He was tremendously dedicated and hardworking and had an extraordinary business sense; his plans were systematic, long-term, and goal-oriented, and he demonstrated enormous patience in waiting for them to come to fruition. In 1973, Estee's younger son Ronald was made executive vice president of Clinique Laboratories at age 29, and her husband Joseph Lauder oversaw production at the Lauder's plant in Melville, Long Island, as he'd done from early on.

By 1978 Estee Lauder's sales were enormous. Sales of the Estee Lauder line reached about $170 million, Clinique sales were steady at about $80 million, and the Aramis line reached about $40 million with Aramis cologne and aftershave accounting for 50 to 80 percent of men's fragrance sales in some department stores. That same year, Estee Lauder launched two women's perfumes, White Linen and Cinnabar. The latter, originally planned as a toned-down version of Youth Dew, was to be called Soft Youth Dew. But when Yves Saint Laurent hit it big with his wildly successful Opium perfume, introduced in Paris in 1977 and in the United States in the fall of 1978, Estee Lauder quickly changed gears—and product name, packaging, and marketing—to produce Cinnabar. When the product came out (looking a lot like Opium with its box and tasseled bottle) many of the bottles still read "Soft Youth Dew."

In 1979 Estee Lauder launched an upscale, medical-sounding cosmetic line for professional women called Prescriptives. The line did not enjoy an immediate success, however. In 1982 Leonard Lauder was made chief executive officer and Ronald Lauder was named chair of international operations. Estee Lauder maintained her position as chairman of the board and Joseph Lauder continued to oversee company plant operations. In January of the following year, Joseph Lauder collapsed and died. Later in 1983, Ronald Lauder left the company to serve as Deputy Assistant Defense Secretary in the Reagan Administration, and for the first time, Estee Lauder sales reached the $1 billion mark. The only product Estee Lauder launched in 1983 was a night cream called "Night Repair," which the company claimed was the strongest treatment item in its history. The cream, advertised as a "breakthrough" in skin care was phenomenally successful. By 1988 Estee Lauder had captured a third of the prestige cosmetics market in the United States.

FAST FACTS: About The Estee Lauder Companies Inc.

Ownership: The Estee Lauder Companies Inc. has been publicly owned since 1995 and is traded on The New York Stock Exchange.

Officers: Leonard A. Lauder, Chmn. & CEO, 64, $4,453,500; Robert J. Bigler, Sr. VP & CFO, 49; Fred H. Langhammer, Pres. & COO, 53, $3,150,000; Andrew J. Cavanaugh, Sr. VP, Human Resources, 50

Employees: 14,700 (1997)

Principal Subsidiary Companies: The Estee Lauder Companies Inc.'s subsidiaries include Estee Lauder Inc., which is privately owned and whose subsidiaries include: Aramis Inc., Clinique Laboratories, Inc., Estee Lauder International Inc., Estee Lauder U.S.A., and Origins Natural Resources, Inc.

Chief Competitors: As one of the world's leading manufacturers of prestige skin care, makeup, and fragrance products, Estee Lauder's competitors include: Avon; L'Oreal; Chanel; Coty; Helene Curtis; Mary Kay; Revlon; Procter & Gamble; and Unilever.

In 1989, after losing a bid to become mayor of New York City, Ronald Lauder returned to the company. The following year, Robin Burns, former president of Unilever's Calvin Klein Cosmetics Corporation, was hired to head Estee Lauder's domestic branch, Estee Lauder U.S.A. Burns, who had played key roles in the successful introductions of Obsession and Eternity perfumes, began her tenure with an attempt to update and re-vamp the image of several Estee Lauder fragrances, overseeing advertisements featuring the model Paulina Porizkova who had represented the entire Estee Lauder line since 1988.

Also in 1990 the company formed a new subsidiary, Origins Natural Resources Inc., targeting young, environmentally conscious consumers. Origins products were packaged in recycled paper, no animal products were used in the cosmetics, and color cosmetic shades appeared in natural tones. In 1991 Prescriptives introduced its All Skins makeup for women of different ethnic backgrounds and within two years, the product was attracting almost 4,000 new customers monthly. By 1992 Prescriptives was bringing in an annual $70 million in sales.

In 1995 Leonard Lauder became chairman of the company. Estee Lauder was now chairwoman emeritus of her company, earning $3.82 million in 1995, making her the fifth highest-paid woman in corporate America that year. On November 17, 1995, The Estee Lauder Companies Inc. went public, selling 13 percent of its stock and thereby raising an estimated $365 million. Early in 1997, Leonard and Ronald Lauder sold an additional 7.2 million shares, leaving the Lauder family with about 78 percent of outstanding shares and 95.9 percent of the combined voting power.

The late 1990s brought new challenges for The Estee Lauder Companies by way of the courtroom. Estee Lauder won a judgment against Gap Inc. for its use of "100%" in its "100% Body Care" toiletry products in 1996, alleging that consumers might confuse Gap's line with its own new "100% Time Release" line. A federal appeals court, however, overturned the ruling in early 1997. In the meantime, a former Estee Lauder employee filed a multimillion-dollar lawsuit against the company claiming racial discrimination and retaliatory discharge. In a separate, unrelated case, another person still employed by the company filed a $2 million sexual harassment suit against the company and one of its top executives.

STRATEGY

Estee Lauder was herself a brilliant marketer of cosmetics, early on handing out free samples and later introducing the "gift with purchase" strategy. But Estee Lauder didn't just sell cosmetics, she sold a look, a dream. One advertising strategy for doing this involved the use of same elegant model in distinct posh settings to personify the company over a period of time.

The first woman to embody the "Estee Lauder look" was Chicago housewife Phyllis Connors; but it was Karen Graham, who began her 15-year tenure with Estee Lauder in 1971, who was perhaps the most successful of the Lauder models. Graham was beautiful, lean, refined, seemingly wealthy, and seemingly at home in elegant surroundings—a full-bodied personification of Estee Lauder's vision of "the good life" for women. Karen Graham became so identified with the company that people often thought she was Estee Lauder herself. In 1988 the company chose Paulina Porizkova with her friendlier face and, therefore, presumably broader consumer appeal. Model Elizabeth Hurley took over the role in the early 1990s.

CHRONOLOGY: Key Dates for The Estee LauderCompanies Inc.

1944:

Estee Lauder begins selling her own cosmetics from behind the counter in various New York department stores

1946:

Estee and husband Joseph found the Estee Lauder Cosmetic Company

1948:

The first department store account is established with Saks Fifth Avenue

1953:

Estee Lauder launches the first dual bath oil and perfume called Youth Dew

1960:

The Neiman Marcus award for Distinguished Service in the Field of Fashion is presented to Estee Lauder

1968:

Estee Lauder launches Clinique Laboratories, Inc.

1979:

Estee Lauder products become available in Moscow, Leningrad, and Kiev, Russia

1989:

The Beauty Boutique is opened in Budapest, Hungary; the first freestanding perfume store in Moscow is opened

1994:

The American Society of Perfumers offers Estee Lauder their first Living Legend Award

1995:

Estee Lauder goes public selling 13 percent of its stock

1996:

Estee Lauder joins with European fragrance designer Herbert Fromman to start Palladio Fragrances International

INFLUENCES

The Estee Lauder Companies' marked success owes much to its ability to respond to the changing social climate. When European skin care and beauty products came into vogue in the United States, Estee Lauder responded with her Re-Nutriv cream, which was extremely successful. Another enormous influence on the young Estee Lauder company in the late 1960s was the new emphasis placed on health and science. It came by way of Vogue magazine's famous interview with New York skin specialist Dr. Norman Orentreich, which had him stating that skin care would provide a template for the basic three-product line of Clinique skin care products.

In 1979 this same scientific emphasis would help inspire the Prescriptives line, whose products were supposedly even more cutting edge and high-tech—and were certainly more costly—than the products in the Clinique line. In the early 1990s, after extensive marketing research, the company started its Origins Natural Resources Inc. in response to the consumer's growing concern about the environment. The products were sold in packages made of recycled materials and printed with the words "Origins Commitment: Preservation of earth, animal and environment."

CURRENT TRENDS

In the mid-1990s Estee Lauder began a new trend toward what might be called "external expansion": acquiring new companies, obtaining licensing agreements, and entering into joint ventures to produce new products. For example, in 1995 Estee Lauder acquired a majority interest (51 percent) in the Canadian cosmetic company M.A.C. Two years later, it increased its majority ownership position to 70 percent. Similarly, in October 1995, Estee Lauder purchased another popular skin care and color cosmetic company, Bobbi Brown essentials, which had a distinct customer profile from that of M.A.C. Both companies went on to enjoy considerable success. In 1994, Estee Lauder obtained a licensing agreement with American fashion designer Tommy Hilfiger to market Tommy perfume. Two years later, the company began to discuss a licensing deal to produce men's and women's fragrances for Milan-based fashion house Prada.

During this time Estee Lauder entered into a joint venture with Herbert Frommen, the highly respected former president of the fragrance company Lancaster, to develop and market fragrances primarily for the European market. The joint venture was called Palladio Fragrances International, and in the fall of 1996, it launched its first fragrance, Kiton, for the upscale Italian men's label of the same name.

PRODUCTS

A key Lauder strategy has been the continuous introduction of new products. Each year, about a third of the company's sales volume has come from products introduced within the previous three years. In the 1990s, successful new products included Prescriptives' All Skins makeup; Clinique's Moisture On-Call, Long Last Soft Shine Lipstick, and Stay the Day Eyeshadow; Estee Lauder's Fruition Extra, Thigh-Zone Body Streamlining Complex, Indelible Lipstick, and Double Wear Stay-in-Place Makeup, along with Estee Lauder's Pleasures fragrance. By the late 1990s, Estee Lauder's fragrance line had expanded to over a dozen distinct scents, still including Estee Lauder's own original Youth Dew, as intense and persistent as when it first appeared four decades earlier. Early in 1996 The Estee Lauder Companies purchased a single-item skin care line called "Creme de la Mer" from Max Hubner. In the summer of 1997 it launched its Pleasures fragrance for men.

Throughout the 1990s, demand continued to be strong for established products like Clinique's Dramatically Different Moisturizing Lotion, Prescriptives' Virtual Skin, Estee Lauder's Advanced Night Repair, and classic Estee Lauder fragrances like Beautiful and White Linen.

GLOBAL PRESENCE

By the end of the 1990s about half of The Estee Lauder Companies' sales came from outside of the United States. Its products accounted for about 20 percent of the $15 billion in prestige cosmetic sales worldwide, and the company was committed to continued international expansion. During the first half of the 1990s international net sales increased at a compound annual rate of 8.8 percent. In its 1996 fiscal year, the company launched Clinique in Russia, with a free-standing store in Moscow and Budapest. Estee Lauder also opened in locations in Poland, Hungary, and the Czech Republic. In its 1997 fiscal year Estee Lauder began selling in Romania and planned to continue expanding into Bulgaria and Latvia, as well. The Estee Lauder Companies had been represented in Asia since the late 1960s, first entering Japan in 1968, South Korea in 1988, and China via Shanghai in 1993.

By the end of the decade, the company had a truly global presence, selling its products throughout North and South America, Europe, eastern Europe, Russia, several Baltic states, Africa, the Middle East, China, and the Asia/Pacific region including Korea, Singapore, Japan, New Zealand, Australia, Malaysia, and Thailand. Furthermore, it was focusing on new territory, considering moving into Serbia and Slovenia and expanding into the potentially enormous markets of Brazil and India.

SOURCES OF INFORMATION

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For an annual report:

telephone: (800)308-2334 or write: investors relation dept., the estee lauder companies inc., 767 5th ave., new york, ny 10153

For additional industry research:

investigate companies by their standard industrial classification codes, also known as sics. estee lauder's primary sics are:

2844 toilet preparations

6719 holding companies, nec