Estée Lauder Companies' Makeover Begins

A slimmed-down Estée Lauder awaits.

On Monday, Bloomberg reported that the company had appointed the advisory firm Evercore to help it refine its more than 20-strong brand assortment, which includes household names like MAC Cosmetics, Jo Malone London, Clinique and La Mer. The news sent the company’s stock price up 5 percent. The company declined to comment.

Estée Lauder Companies as we know it today was largely built through mergers and acquisitions, whether it was Bobbi Brown or Bumble and Bumble, or indie brands acquired in the aughts, often for enormous sums (the company spent $1.4 billion on cosmetics maker Too Faced, for instance).

Enough of those bets paid off so that in the 2010s, the company’s portfolio was trendsetting, desirable and crucially, growing. But as social media began to change the beauty landscape, and speciality retailers overtook department stores, Estée Lauder Companies started to lose ground. Growth increasingly came from China, and when that country’s economy failed to bounce back from the pandemic, the extent of Lauder’s problems became clear.

Estée Lauder Companies has replaced much of its executive leadership, including installing a new chief executive, Stéphane de La Faverie, in October. It’s also begun cost-cutting measures, proposed job cuts and reorganised its structure.

Until now, brand divestments have been tabled, and any external calls for change are somewhat muffled: the founding Lauder family owns around 86 percent of the voting rights, making it harder for an activist investor to force through change. But in the face of such dire straits, and a wider cooling in the market, the decision looms larger.

Weighing Options

Many analysts pointed to hair care as the likeliest unit to be put up for sale, with Barclays estimating those brands could collectively fetch around $1.3 billion to $2 billion. Flagship brands Aveda and Bumble and Bumble grew around 2 percent over the last ten years, and the unit lost money for each of the last five years.

Both brands rely on salons for sales, which suffered during the pandemic and from the rise of new rivals, including Olaplex and K18, that redirected consumer attention onto a new category of hair products known as bond builders. In a research note, Barclays analyst Lauren Lieberman said the brands may be “better suited under different ownership or discontinued.”

The brands also missed other opportunities.

It’s estimated that by 2030, more than 40 percent of the world will have curly hair as populations mix, and brands specifically designed for curly hair, offering heatless styles or tapping into a trend known as the “skinification” of hair which saw a new focus on scalp care have skyrocketed in popularity. Aveda, a brand which has long championed both concerns, has not been a meaningful part of that social conversation.

While skincare remains a hot category overall, some smaller brands could also be divested. The likes of Origins and Darphin are both estimated to be below $500 million in sales, and Lieberman said they could perhaps benefit from a reboot – potentially under new management – with a heightened focus on naturality, organic ingredients or transparency.

Shoppers are largely more interested in skincare brands with white coat credentials — L’Oréal offloaded the last of its natural skincare brands, Decléor and Sanoflore in 2023, choosing to focus on dermatological brands like Cerave and Skinceuticals instead. Estée Lauder Companies needs no reminding of the importance of clinical claims: the company has made a big push to re-up Clinique’s dermatological credentials with new scientific studies and appearances at medical trade shows.

Cosmetics are another area where the portfolio could use some trimming. According to Euromonitor, the brands Too Faced, Becca and Smashbox combined are less than 5 percent of Estée Lauder’s overall sales. They could be attractive to a prospective buyer as a package deal, said Filippo Falorni, a director at the investment bank Citi. Shiseido conducted a deal like this in 2017, selling Laura Mercier, Buxom and Bare Minerals to the private equity firm Advent International.

If Estée Lauder Companies wants to make a bigger sale, Falorni said MAC Cosmetics was a good candidate.

“It’s gone through a lot of challenges,” he said, adding that the brand has many freestanding stores which are expensive to operate but could hold value to a private equity buyer.

“[The brand] hasn’t worked in a long time, it has a lot of fixed costs associated with it, and it’s margin dilutive,” said Falorni.

All of its cosmetics brands are competing in an increasingly crowded pool against upstarts like Milk Makeup, Saie, Kosas and Westman Atelier, but MAC Cosmetics does still have name recognition, an estimated over $1 billion in annual revenue and is taking steps to regain traction with younger shoppers. In 2024, it unveiled an edgier new image on social media, including attention-grabbing stunts like sending the fashion influencer and actress Julia Fox onto the New York subway naked. It’s also refocused attention onto its long-standing philanthropic efforts.

Sticking Around

Estée Lauder has been clear where it is choosing to invest. Flagship brands like its namesake line and the likes of Clinique and La Mer each generate more than a $1 billion in annual revenues, per investment bank Canaccord, and are already undergoing rejuvenation campaigns and fresh innovations.

Fragrance brands are also unlikely to be cut, given the category’s strong performance in recent years. Its bigger, better-known skincare brands tend to have higher margins, and are more likely to stick around.

“Fragrance is out of the picture [for cuts],” said Falorni, highlighting that Estée Lauder Companies splurged to acquire the entirety of the Tom Ford business for $2.3 billion in 2023, partly to keep its lucrative fragrance license.

The company has pledged to make “night time” an ownable area for its skincare brands, a savvy move given how well-established products like the Advanced Night Repair franchise under the Estée Lauder brand, and how much of its current mix currently favours skincare — more than half its sales come from the category.

It’s also the unit that contains most of Estée Lauder Companies’ biggest bright spots. The Ordinary’s budget approach to skincare continues to resonate with consumers, and the company is building out the output from that brand’s parent, Deciem, to include more high-tech brands.

“Cutting some margin dilutive brands will mean it has more resources to reinvest in [its] core businesses, which is skincare and fragrances as a growth area,” said Falorni.

What Comes Next

Once any divestitures are complete, the company could be in an acquisitive mood again. There’s certainly no shortage of small to medium size brands looking for new owners. Through its venture capital arm, New Incubation Ventures, the company is able to write smaller cheques and build budding relationships with nascent brands. Its acquisition of Deciem started with a small minority stake and later staircased to full buyout, an approach also favoured by the company’s investors.

The process of evaluating its assortment and individual brand sales and relevance should serve as a prescient reminder to Estée Lauder Companies' new leadership about taking its eye off the prize: its brands rarely lack a point of view, strong innovation or expert authority.

The breakout success of historic franchises proves the company can not only spot a trend, but also create it: Clinique’s Chubby Stick range is arguably a predecessor to many multi-use, stick format cosmetics that have become de rigueur, MAC Cosmetics made one of the first makeup setting sprays popular with consumers, a category which is now a Gen-Z must-have, and Aveda salons have offered scalp scans for around a decade, while other brands have just started to add scalp care products.

Estée Lauder Companies need a fresh start. What they take into that new era will be just as important as what they leave behind.

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