What Went Wrong with Estée Lauder?

The Faltering Giant

As Fabrizio Freda, the CEO of Estée Lauder, announces his retirement next year, it's an important moment to reflect on the trajectory of this beauty industry titan. Once at the pinnacle of the global cosmetics market, Estée Lauder has recently presented a disappointing outlook for 2025, underlining a series of challenges that signal deeper systemic issues. This post delves into the missteps and strategic errors that contributed to the decline of this once-thriving giant, exploring the shifts in market dynamics, leadership strategies, and operational hurdles that have shaped its current state.

A Disappointing Forecast

The company has expressed concerns over the continued decline in prestige beauty, particularly in China, where consumer sentiment remains weak. This is significant as China represents a major market for Estée Lauder, accounting for 28% of its total sales to date. The persistent focus on the Chinese market, however, has exposed the company to greater risks, especially with changing consumer dynamics and regulatory crackdowns on practices like Daigou.

Leadership and Strategic Shifts

Under the leadership of CEO Fabrizio Freda since 2009, Estée Lauder saw significant growth, with its share price skyrocketing from $16.75 to over $370 by January 2022, giving it a market capitalization of more than $133 billion. Freda's strategy capitalized on the Chinese beauty boom and focused on 'hero products.' However, the company has been criticized for a lack of innovation and an over-reliance on the Chinese market, which has not rebounded as expected post-pandemic.

Operational Missteps

The company has faced various operational challenges, including supply chain issues and slow response times to market changes. A new factory set to open in Japan aims to alleviate some of these issues, but past decisions have led to significant overstocking, especially in locations like Hainan, exacerbating the problem with products nearing expiration and being sold at heavy discounts.

Brand Image and Equity Challenges

Estée Lauder's heavy reliance on promotions in China has conditioned consumers to wait for discounts, undermining the brand's prestige. Additionally, the exit of key creative personnel over the years has led to a decline in innovation and creativity, which were once hallmarks of the brand under founder Leonard Lauder's philosophy that prized creatives over purely business-oriented strategies. In the U.S., the Estée Lauder brand predominantly attracts an older demographic, as it is more widely distributed in department stores. This demographic skew necessitates a strategic rebalancing to appeal to younger consumers, who are increasingly influential in the beauty market.

Initiatives for Recovery

In an effort to pivot and stimulate growth, Estée Lauder has begun to refocus on the U.S. market, where it sees potential to regain footing. Recognizing the shift in consumer buying habits, the company has embarked on an important strategic shift by embracing online retail giants like Amazon for distribution. Starting with its Clinique brand, which has shown promising early results, Estée Lauder plans to expand its presence on Amazon with additional brands in the coming months. This move is aimed at capturing a broader audience and adapting to the increasing trend of online shopping, which could play a crucial role in revitalizing the company's overall market strategy and performance.

Path to Recovery

For Estée Lauder to regain its former glory, a comprehensive strategy overhaul is necessary. This involves diversifying its market approach, enhancing operational efficiencies, and most importantly, rekindling the innovative spirit that once defined the brand. As the company looks towards appointing a new CEO, the focus should be on these areas to ensure sustainable growth and recovery in a post-pandemic world.