The Inside Story of Estée Lauder’s Billion-Dollar Success

(Bloomberg) -- In the midst of taking Estée Lauder public in 1995, Leonard Lauder, the company’s then-chairman and chief executive officer, fielded a question from an investment banker during the roadshow. “If your products are so good,” the banker asked Lauder, then in his 60s, “why do you have so many lines on your face?”

Fortunately, Lauder writes in his new book The Company I Keep: My Life In Beauty (Harper Collins, Nov. 17; $32.50), “my wrinkles didn’t deter investors.” His comeback came in the stock’s debut. It opened at $26 a share and climbed to $34.50 in its first day of trading.

Lauder hasn’t quite written an autobiography; there isn’t much discussion of his personal life, friends, travels, or lifestyle. Most of the names you’ll find in the book are hardworking employees whom Lauder singles out for praise, various industry competitors, and luminaries with whom Lauder has collaborated in various industries.

Aside from his mother, father, first wife Evelyn, and second wife Judy, even Lauder’s relatives don’t get much print. Of his younger son Gary, who chose not to join the family business, Lauder writes that “Gary has a dedicated sense of philanthropy and doing his own thing” and leaves it at that.

But Lauder’s niceness, sphinx-like as it might read, doesn’t detract from one of the most dazzling corporate success stories in the history of the United States.

In that respect, My Life In Beauty is basically a business book. It details how Lauder’s mother Estée (actually, Josephine, until she changed her name to match her company’s) started a cosmetics company with nothing but chutzpah and a “Super Rich All-Purpose Creme,” and how Lauder then built it into a roughly $89 billion company with 25 brands and approximately 1,600 freestanding retail stores in around 150 countries. 

Start at the Top

When Estée Lauder started out, the American cosmetics industry was dominated by Elizabeth Arden, Helena Rubinstein, Charles of the Ritz, and Revlon.

Estée managed to succeed in an already crowded field, Lauder writes, by combining a personal touch (literally—her signature move was to massage the lotion onto women’s faces) with a strategy to side-step, rather than confront, her larger competitors.

“My mother was determined to carve out her own niche and create a unique power base,” he writes. The niche she chose was luxury, and the power base would be select specialty stores such as Detroit’s Himelhoch’s department store, Sakowitz & Co. in Houston, and eventually, Saks Fifth Avenue in New York.

“Their customers had the means to buy premium-priced products,” Lauder explains, and “the stores provided a sophisticated setting that would immediately burnish my mother’s brand.” 

It’s a strategy the company turned into a mantra: “Launch at the top, and stay at the top,” Lauder writes.

“If you launch at the top of the market, you have two ways to go: up or down,” he continues. “If you launch into the heart of the market, there’s always someone who will sell a similar product cheaper than you, and you have no way to go but down in what becomes a race to the bottom.”

The General Motors of Cosmetics

Lauder officially joined the company in 1958 after attending the Wharton School, followed by a stint in the Navy, and was named president in 1972. (His mother kept the title of chief executive officer.) 

While his father managed operations and his mother served as the face of the company, Lauder began to map out a business plan that mirrored what was then the largest company in the world. “My dream was to make Estée Lauder the General Motors of the beauty business,” he writes, “with multiple brands, multiple product lines, and multinational distribution.”

He conceived and launched Clinique in 1968, a skin-care line that capitalized on the era’s nascent appreciation for “hypoallergenic” skin care and beauty “regimens,” rather than “products.”

“The Estée Lauder brand had an aura of glamour; it embodied aspiration,” Lauder writes. “Clinique was more democratic; it was less about aspiration and more about everyday pragmatism.”

Several more brands followed, including Prescriptives (1979) and Origins (1990). Starting in the mid 1990s, Lauder began to acquire outside brands, including Mac Cosmetics, Bobbi Brown, Aveda, and La Mer.

The strategy paid off.

In 1946, the company’s first official year in business, annual revenue stood at $50,000. By 1960, annual sales were “just a shade over $1.75 million,” Lauder writes. By 1970, the figure hit $50 million. By 1975, annual sales surpassed $200 million, and in 1986 topped $1 billion. By the mid-1990s they’d doubled, Lauder writes, to $2 billion; by the late 1990s they’d doubled again, to more than $4 billion.

Today, annual sales are roughly $14.3 billion.

“Everyone imagines that I was heir to a great family fortune,” Lauder writes. “They forget that I had to build the fortune first.”

Going Public

So, why take his wildly successful company public? Lauder notes the obvious: “to make a lot of money.” But he also suggests that the move was a form of succession planning.

“Money has the potential to divide families and cause lasting rancor, resentment, and bitterness,” he writes. “Going public took the issue of money off the table.”

(Left unmentioned was the fact that the initial public offering was structured to allow Lauder’s brother and mother to dodge a potential capital gains tax of $95 million, which led to a revision in Federal tax law; the Lauders subsequently paid a reported $40 million in taxes for the maneuver.)

Lauder had been wealthy for decades; now, with an estimated net worth of $24.6 billion, he’s become one of the richest people in the world. Understandably, when he stepped away from the company, he stepped up charitable giving.

The closing section of Lauder’s book is dedicated to his family’s philanthropy, including Wharton’s Lauder Institute of Management & International Studies, the Breast Cancer Research Foundation, Memorial Sloan Kettering hospital’s Evelyn H. Lauder Breast Center, the Alzheimer’s Drug Discovery Foundation, the Whitney Museum’s Leonard A. Lauder Building (Lauder says he didn’t know they were going to name it after him, “and I’m not being modest”), the Leonard A. Lauder Research Center for Modern Art at New York’s Metropolitan Museum of Art, and the $1 billion Leonard A. Lauder Cubist collection, which he pledged to the Met in 2013.

Still, Lauder can’t help bring it back to his business.

In a final list of “leadership lessons,” he includes such entries as “Cut your losses” and “It’s my neck,” but the fourth, “Never make an important decision without a woman at the table,” rings as the most heartfelt.

“Growing up with a mother like Estée Lauder,” he writes, “how could I not respect and seek out smart, tough women?”

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