The Journal. - The Family Drama Inside Estée Lauder

Episode Date: November 28, 2023

Shares of Estée Lauder, the beauty giant, have plunged about 50% this year. And the members of the Lauder family are at odds about what to do. WSJ's Emily Glazer reports on the company's business mistakes and its rumblings of succession. Further Listening: - The World’s Richest Person Is Planning for Succession  Further Reading: - The Estée Lauder Family Built a Beauty Empire. A Succession Rift Threatens It  - Estée Lauder Stock Plunges After Another Profit Warning  - Estée Lauder’s Big Bet on China Is Looking Not So Pretty  Learn more about your ad choices. Visit megaphone.fm/adchoices

Do you want to just start out by introducing yourself? Sure. I am Emily Glazer, and I write about billionaires and power and influence for The Wall Street Journal. Are you a billionaire? Ha! Does it take one to know one? One day, Ryan. Maybe after this podcast goes viral. You and me both. Recently, Emily's been paying particularly close attention to a few

specific billionaires, the Lauders, the super wealthy family that owns a luxury cosmetic giant, Estee Lauder. Where does the Lauder family fall in the landscape of billionaires? So the Lauder family comprises of many billionaires. Let's start there. You know, oftentimes in family dynasties, there's like maybe one or two. With the Lauders, there are many. But these billionaires have been losing billions lately. Their company is struggling, and the family is fighting internally.

This year, Estee Lauder's stock has plummeted by about 50%. That's pretty massive. That has erased about $45 billion in the company's market cap or the market value. It's erased about $15 billion of the family's wealth. So it's not looking too great for them. Jeez, that is a lot of money. Yes. And the Estee Lauder family is known for wanting to keep their troubles their own business. They are desperate for this to not come out in the public view. And our article is the first time that this type of drama, this level, the specificity is coming out. And I know from reporting it, people are not happy. Welcome to The Journal, our show about money, business, and power.

I'm Ryan Knudsen. It's Tuesday, November 28th. Coming up on the show, the family drama inside Estee Lauder. At Air Miles, we help you collect more moments. So instead of scrolling through photos of friends on social media, you can spend more time dinnering with them. How's that spicy enchilada? Very flavorful. Scrolling through photos of friends on social media, you can spend more time dinnering with them. How's that spicy enchilada? Very flavorful.

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and more than a dozen others. Estee Lauder the company was founded in the 1940s by Estee Lauder the woman. founded in the 1940s by Estee Lauder The Woman. She was born Josephine Esther Menser in 1908. And she first started making skin creams and learned about that from her uncle. She'd do this in her kitchen and she'd give women facials in a Miami hotel where she and her family would sometimes stay. And also, she pioneered this idea of free samples. Who doesn't love a free sample?

The business was hugely successful. Women loved her face cream, which she called Jars of Hope. And family has been a key part of the business since the beginning. Estee ran the company with her husband, Joseph, and she also involved one of her sons, Leonard, from a young age. Here's Leonard in an interview a few years ago. I remember sitting in my high chair and in the kitchen, and I would see her mixing the creams on the stove.

He'd be with her on sales calls at salons. She even took him to dinner with the company accountant and lawyer in 1946 on the night that she and her husband Joseph decided to launch Estee Lauder Cosmetics. He was just a teenager then. But this whole idea that work and family are intertwined is at the crux of this company and at the crux of the family. As a kid, Leonard was even on the payroll. We had a little tiny factory, and I would go there after school for 25 cents an hour, and I'd work. Why did she want it to be such a family affair?

I think it's, in many ways, all they ever knew. It's just what they did, and it's what Leonard knew growing up. He's talked about it a lot, you know, whether he was in the kitchen or as a sales clerk or collecting bills, you know, that was one of all these early jobs he did at a really young age. And a lot of what they talk about is how that became instilled as part of the culture. When Leonard once asked if he resented his mother working, he told the Wall Street Journal, not at all. Work was love. Leonard became president in the 1970s and CEO in 1982. And he grew his mom's company aggressively. Leonard, a big part of his legacy is that he

bought up a number of really successful brands. MAC is one of them. And La Mer, which is the ultra luxury $300 pot of skin cream. And he also added Aveda. So they have a number of different brands that they've either built in-house or acquired over the years. So it's not just Estee Lauder, the company. It's also all the brands that fall under it as well. And a lot of people would also say the company's been really successful because of their kind of obsession with what's referred to as brand equity. You know, this idea of

the value of the brands and being very true to them and sticking with that. very true to them and sticking with that. Leonard is a legend in the cosmetics world. He's the one who thought lipstick should have an angled tip, which pretty much all lipsticks do now. Everyone had a standard bullet-shaped lipstick. So I took a Gillette blue blade, sliced it so that it would fit the woman's lips. Leonard took the company public on the stock market in 1995 and kept growing the business. He also expanded into China.

S.A. Lauder was one of the first companies to go into China decades ago. They were very, very early movers. So they were able to get a number of consumers there. And he built it into a public global empire. Even though Estée died 20 years ago, the company has preserved her office. It's kept it in pristine condition on one of the upper floors of their building

on 59th Street and Fifth Avenue in Manhattan, just down the hall from her son Leonard and her grandson William's offices. I mean, there's essentially a shrine for her on what would arguably be the most important floor of their office building, right? I mean, I've been a number of these big company offices before, and the executive floor is like prime real estate. Her office still has this like blue flowered wallpaper, this huge pouch that wraps around part of the wall of the room, silk tasseled curtains, these ornate chairs that I think look like, you know, a Louis XVI kind of situation. So this is just like ingrained in the company culture and their brand and who they are.

The Lauder family built the business, but can the Lauder family turn it around? That's after the break. Picture this. You finally get to the party and it's the usual drinks and small talk. See you next time. of your own night. Unapologetically full-flavored cocktails with a 13% punch. Seagram 13. Dare to make your own luck. Must be legal drinking age. Please enjoy responsibly. Available at the LCBO.

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Together, the Lauders control more than 80% of the voting power. Emily rattled off some of the family members and their stakes. All right, we've got Leonard Lauder, whose just his Estee Lauder company stake alone is $10.2 billion. His son, Williams, got a stake worth $1.1 billion. We've got Ronald Lauder, who is Leonard's brother with a $600 million stake. Jane Lauder, who is Ronald's younger daughter, $2.8 billion stake. Erin Lauder, which is the older daughter of Ronald, $800 million stake. Almost all of these Lauders have worked at the company in some capacity.

Jane is an executive vice president, and Aaron is a style and image director. Leonard, who's now 90, is chairman emeritus and still attends board meetings. But as anyone who's watched the show Succession knows, it's the CEO job that matters most. William, Leonard's son and Estee's grandson, took over the CEO role in 2004. But unlike Estee and Leonard, William didn't seem to like it so much. William told the Journal, quote, So it sounds like being CEO was not really his thing. He didn't do it as long as his dad did. So take that what you will. And he's been pretty candid. William served as CEO from 2004 to 2009. He then became executive chairman of the

board and an outsider was brought in to take over the CEO role, Fabrizio Freida. And at first, things went really well for Freida. He took over as CEO and Estee Lauder's stock went from under $20 around July 2009 to above $300 in 2021. So under his tenure, which has been roughly 15 years as CEO, tenure, which has been roughly 15 years as CEO, he's enormously grown Estee Lauder. And he has been known for some incredible moves. He's had more than a dozen acquisitions or licenses. He's diversified their business lines. And Estee Lauder's total return, including dividends, was about 780%. And that's compared to 550% for the S&P 500. They've done well under his tenure. The big problem is they're really not doing well right now. Recently, Estee Lauder's sales have fallen significantly, especially in China, and the company struggled to keep up with

newer beauty brands that primarily sell online. On top of that, the company struggled to keep up with newer beauty brands that primarily sell online. On top of that, the company recently invested around a billion dollars in a new factory in Japan that's capable of producing way more products than people are currently buying. They have this really tricky problem right now, which is that they have all this unsold inventory. It's piling up and they need to move that inventory out in order to even bring new products in. Fabrizio Freyda, Estee Lauder's CEO, has said he expects the company's results will improve next year. He's also told investors that Asian inventories will be more in line with demand by March. Are other makeup companies also struggling right now?

I would say the situation at Estee Lauder is actually not emblematic of the beauty industry. Their competitors are faring much better. We've got the luxury conglomerate LVMH. They own Sephora. They have, you know, big brands that they're behind, like Dior Fragrances and Rihanna's Fenty Beauty. And we've got the French giant L'Oreal,

whose shares are up about 30% this year. So it's not like this is a problem with the makeup industry. Like this is an Estee Lauder problem. Yes. Now there's a schism inside the family over how to turn things around, especially between Leonard and his son, William. It's never simple when

there's a father-son dynamic. And it's even more challenging when they're board members on a publicly traded company and don't agree with each other about the leadership of that company. We've got Leonard Lauder, the patriarch, on one side, and some board members where our sources say they are dissatisfied with Fabrizio and his strategy right now and thinking about succession. They think enough is enough. The stock has tumbled 50% this year. The family's wealth in terms of Estee Lauder's stock is down $15 billion. The market cap is down $45 billion. When is there time for a change? On the other side is William,

who has been one of the most ardent supporters of Fabrizio. In May, William wrote a memo to employees expressing the board's support for Fabrizio's continued leadership. And Fabrizio and William are the ones that are typically sitting at the head of the table in the boardroom. And there are some board members

that also agree with William. They want Fabrizio to lead this turnaround plan and have him execute on his strategy. The board of directors, William on behalf of the family, and Leonard individually, all issued statements saying they support Fabrizio Freyda. But it's not just the CEO role that they're arguing over.

There's this view from Leonard Lauder that department stores are king. He truly believes that in order to maintain the brand equity and not to devalue these brands, they need to be sold in places like Saks Fifth Avenue, like Neiman Marcus, Nordstrom. And that would be part of the fights in the boardroom where Leonard was all about these department stores and Fabrizio, the CEO, and William were saying,

no, that's not true. You have to be on Amazon. You need to be in Target. You need to be in Target. You need to be in Ulta. And for years and still currently, Leonard had this view that that was kind of low class for Estee Lauder. This was a big problem. And it was something that continued to be an issue in the boardroom. And it also did impact their sales in North America and their strategy. So what has Fabrizio Freyda said

about the company's performance? He said, you know, he really isn't pleased with their position. He said he knows he needs to bring back market share. He's asked his investors for patience and told them that he's trying to address this strategy and better connect with customers. But I'll tell you, Ryan,

a lot of folks don't have patience right now, and that's part of the problem that the board and the family members are facing right now. Meanwhile, sources say a former board member is advising the company on CEO succession, and there's at least one family member eyeing the CEO role. We also have, let's just add to this, on the other side of the family wing, Leonard Lauder's niece, Jane Lauder, has been buying up her shares of the company

and is an internal candidate on the shortlist to be CEO. So we've got Jane over here doing her thing. Jane joined the company in 1996, and now she's a senior executive there. She currently has a 6% ownership stake, which is larger than her cousin William, the former CEO and current executive chairman. So there's a real power struggle going on. Yeah, I mean, this is not your average CEO succession, Ryan. This is some layered, complex family business drama. Is all this infighting making it difficult for Estee Lauder, the company, to turn itself around? I do think Estee Lauder is facing a reckoning over what kind of company they want to be

and who they want to lead it and what types of roles the family members have on the board and who gets to ultimately call the shots. Because it's not like one member of the family owns enough shares to be in total control. It's not like Mark Zuckerberg and Facebook. Or Elon Musk and SpaceX. Correct.

This family, the ownership is, 35% of the ownership is spread among all these family members. So there are alliances, there's voting, there's a lot of Game of Thrones or Big Brother survivor going on behind the scenes where alliances may form that might actually result in a different outcome. Absolutely. And is there going to be a moment when a decision is made? That's always a big question. It's something I focus on a lot as a reporter. If we're trying to figure out when there's a change of control, usually there are turning points. And what I will say is that often companies say, we have no plans to change the CEO. We have full support. However, from working on this type of

reporting for years, I will tell you, companies and boards and people fully support their CEOs until they don't. Until there's a problem that's so bad that in a day, in a weekend, someone could be out. And that's just how business works. The difference is that with the CEO of Estee Lauder, the company, you are not just running the company, you're also managing the family. And that is a really tricky role to fill. That's all for today, Tuesday, November 28th. The Journal is a co-production of Spotify and The Wall Street Journal. Additional reporting in this episode by Sabela Ojea. Thanks for listening. See you tomorrow.