The Estée Lauder Companies (EL)
One could argue that a company that spends more on marketing and promoting its products than on manufacturing them does so because they are not truly necessary to customers. One could think that such is the case for beauty companies – but quite the opposite, in fact. People developed an interest in skincare even before Cleopatra bathed in donkey milk for its moisturizing properties. Both men and women in ancient Egypt used deodorants and lotions, or put on makeup daily, but the fascination with improving appearance and protecting the skin already existed in prehistoric times. Back then, red minerals such as ochre mixed with animal fats were used as some sort of ancient sunscreen. It is also known that the Greeks used scented oils and ointments to care for their skin, while the Romans used powders and creams for facial cleansing or as makeup.
The beauty industry, which slowly became democratized throughout history, reached its peak in the 20th century, when the big-name companies we all know today were founded. The industry expanded rapidly during that period thanks to the development of new products and companies’ efforts to promote their technological advances. The 1920s were a time of revolution and female liberation, and hair dyes and makeup entered the daily lives of North American women, who looked up to Hollywood actresses as a source of inspiration.
Over the centuries, people have used very diverse products and techniques, but the goal has always remained the same: we seek to improve our appearance and protect our skin. The history of cosmetics is rich and varied, and The Estée Lauder Companies (Esteé Lauder from now on) represents an important part of it.
Both L'Oréal, which has traditionally focused more on dye and other hair products, and Estée Lauder, specialized in makeup and skincare, spent more than $15 billion in 2022 in marketing their products (more than 10 times the amount spent on R&D). This figure is especially shocking because 20% of the products sold every year are new releases. If people really have such a pressing need to take care of their appearance and their skin, why do these two companies spend so much on advertising? There are two main reasons: 1) profitability is driven by brand and product loyalty, and 2) the beauty industry is one of the most competitive in the world. While both gross margins and returns on capital are high, competition is fierce. As a result of the combination of very attractive growth prospects and low barriers to entry (even if barriers to success are high), competition has intensified more in the last two decades than in the last century.
After Estée Lauder's stock reached a 5-year low, many investors wondered if recent issues are only temporary or if there is something more behind this crisis. Fabrizio Freda, who has led the company for more than a decade, seems to be in the crosshairs of some investors, after acknowledging several supply chain management mistakes. Some acquisitions have not gone as expected, which does not help, either. The man that turned Estée Lauder into one of the most relevant beauty brands in the world has no clear successor to take the company to the next level, so any member of the Lauder family – they own 86% of the voting power — could take over due to the lack of candidates. This is worrying, since many family-owned businesses fail to make it after the third generation. This seems like a good time to dive deep into the beauty industry, its risks and prospects and specifically about the past, present and future of Estée Lauder.