The [Estee Lauder Companies Inc.] is capitalizing on voracious makeup demand and adapting skin-care innovation away from anti-aging to provide instant benefits in line with younger consumer preferences.

With the Millennial generation square in its sights, the firm also is increasing its focus on digital and social-media outreach and refining its distribution model with a greater freestanding and specialty-store presence, in addition to e-commerce.

Millennials have been at the forefront of Lauder's mind for at least a year now as it works to revitalize key brands and optimize resources for greatest impact ([A#02150518004]).

Company leadership discussed Lauder's evolving strategy and outlook during a May 3 call with analysts to discuss the firm's fiscal 2016 third-quarter results. Sales for the quarter totaled $2.66bn, up 3% compared with the prior-year period, or 6% in constant currency terms.

President and CEO Fabrizio Freda spoke to the current makeup boom, which helped propel Lauder's makeup sales to $1.16bn for the quarter, an increase of 7% on a reported basis or 11% excluding foreign currency effects, generally consistent with the firm's Q2 results in the category Also see "Prestige, Color Cosmetics Shine In Beauty Big-Leaguers' Q2 Earnings" - HBW Insight, 18 February, 2016..

[Coty Inc.] and L'Oreal S.A. similarly have benefited from the trend in recent quarters ([A#02160509005]).

"Lower barrier to entry resulted in more than 250 new niche brands launching around the world last year. And the sheer number of beauty products vying for consumers' attention is vastly increasing," Freda noted.

According to Freda, the makeup surge is a long-term trend that is being driven by multiple factors, including Millennial interests and spending. The demographic is using more makeup than the previous generation, he said, citing increased consumption per individual in all markets, including developed ones.

Millennials also of course are highly tuned in to the digital channel. Online education in the form of product demonstrations, how-to videos and tips from users and influencers is fueling makeup's rise, which Lauder sees as promising because this "historically has been our strength in our business model," the CEO said.

He pointed to MAC Cosmetics' Instagram platform, which features photos submitted by the brand's global makeup artists "illustrating their creativity and talent." The exec noted, "This kind of social-media interaction creates an ongoing dialogue between the brand and its consumers and helps drive sales."

Other initiatives aimed at capturing younger consumers' imaginations and dollars include recent collaborations with Swedish pop star Zara Larsson to promote Clinique Pop Lip Color line extensions, as well as the recent launch of Estee Edit, an 82-SKU makeup and skin-care collection.

The latter, specifically created by Lauder's namesake brand "for the beauty-obsessed, social-media generation," is supported by Instagram engagement and digital video content featuring partners Kendall Jenner and Irene Kim, both known among Millennials for their television and fashion-world exposure and the splashes they've made across social-media channels.

Lauder's social-media communications for Estee Edit encourage consumers to "Wear it. Share it. Own it. Tag it," with the hashtag #beautyattitudes.

The line launched at 320 Sephora stores in the US and Canada earlier this month, as well as Sephora.com, reflecting Lauder's increasing focus on specialty retail and e-commerce to meet Millennials where they play.

Freda offered perspective during the call. "With the convenience of the Internet [and] the expansion of specialty multi-retailers dedicated to beauty, particularly in the US, how consumers shop is changing rapidly and competition has intensified. Lower barrier to entry resulted in more than 250 new niche brands launching around the world last year. And the sheer number of beauty products vying for consumers' attention is vastly increasing."

Regarding Estee Edit, Freda noted that "the Millennial-targeted line generated terrific media attention, and there is a full cadence of strong promotional activities planned throughout the fourth quarter."

In Lauder's March 15 release announcing the launch, Sephora's Artemis Patrick, senior VP of merchandising, embraced Estee Edit as a win for both parties.

"We anticipate that The Estee Edit’s mix of covetable trend-based makeup, instant-gratification skincare products, approachable price point, and millennial muses will receive a very positive reaction from our young and socially engaged consumers," he said.

His statement gets at the new tack Lauder is taking in the skin-care category, moving away from anti-aging to address younger individuals' more immediate concerns.

Instant-Benefit Skin Care

Asked during the call about Lauder's innovation program at present versus five years ago, Freda expressed confidence in the firm's pipeline, calling it "more than sufficient."

At the same time, he noted that the pipeline has changed, with greater investment in makeup to leverage global trends and a modified approach to skin care that deemphasizes anti-aging, catering instead to Millennial priorities.

"We are looking at skin care in a different way, reflecting the new consumer trends and reality," Freda said. "When you take skin care as a whole, there is bigger and faster growth in what I call skin care for immediate benefit, or skincare as a base of makeup."

He offered the example of the Estee Lauder New Dimensions, a "transformative" skin-care range introduced in mid-2015. "It's really about the shaping of the face depending on how a consumer wants," Freda said.

Products in the line – including Shape + Fill Expert Serum, Plump + Fill Expert Lip Treatment, Firm + Fill Eye System and Tighten + Tone Neck/Chest Treatment – are positioned as quick fixes to skin concerns.

For the serum, Lauder promises more defined-looking facial contours in just two weeks, with 85% of users reporting that their skin felt more plumped and refined after a mere three days, according to the brand's website.

The company is promoting the collection with the tagline, "Now look more beautiful from every angle," a prospect that resonates no doubt with the "selfie" generation.

L'Oreal is using similar messaging in the makeup segment for its recently launched Infallible Sculpt contouring palette, said to render users "selfie-ready from every angle" ([A#02160509006]).

Freda also pointed to the firm's fastest-growing skin-care category – masks – as further illustration of consumers' growing interest in immediate effects versus long-term benefits.

"A mask is a product that you use to get immediately, after 10 minutes, the benefit that you are looking for, be it luminosity, moisturization, irritation or brightening, etcetera," the exec observed. "So skin care for immediate benefit, which is closer to makeup in reality … is the fastest-growing trend. And our pipeline in these areas is the strongest it's ever been."

New Estee Lauder Advanced Night Repair Concentrated Recovery PowerFoil Mask was well-received in the third quarter, particularly in Asia, Freda said. The firm's investment in the category is evident, he suggested, in its January 2015 acquisition of the GLAMGLOW brand, which specializes in high-end treatment masks.

The CEO cited Bobbi Brown as a brand in Lauder's portfolio that ties skin care closely to makeup, or as the base for makeup. He further noted that Clinique Pep-Start Eye Cream, promoted as "smoothing the way for makeup," was the No. 1 eye cream in US Sephora locations in February and March.

Overall, the firm "had to adjust our innovation, our technology, our activities and planning for the future to the balance between more drastic anti-aging benefits and more immediate benefits," Freda said, adding: "I feel very strong about our long-term skincare trend. … Again, I see it as a strength that we have the agility to adjust and refocus our investment resources depending on the biggest trends we see."

La Mer and Origins were skin-care growth drivers in the firm's third quarter, along with MAC and Bobbi Brown offerings in the category.

According to the exec, Lauder also has adapted its strategy in the fragrance segment, investing more on luxury artisanal fragrances, "which will allow us, in my opinion, to continue gaining market share in the high-end, profitable fragrance business," he said.

Luxury brands Jo Malone and Tom Ford led Lauder's fragrance business in the third quarter.

Finally, in hair care the firm's innovation pipeline is stronger than ever, particularly in the styling category, Freda asserted.

For the quarter, skin care sales declined 3% but were roughly flat in constant-currency terms at $1.07bn. Fragrance and hair-care sales advanced 5% and 1%, reported, to $275.2m and $127.3m, respectively.

Lauder Leading Beauty Forward

Lauder's Q3 sales in the Americas and the Asia/Pacific region were flat on a reported basis, or up 2% and 5% in constant terms, while its business in Europe, the Middle East & Africa rose 8% reported.

Lower traffic in mid-tier departments stores, coupled with reduced tourism from Brazil and Russia in particular, dragged on the firm's US results, where reported sales inched up in the low single digits, and on MAC's performance in the states specifically, the company noted.

However, Freda characterized the US situation as a "temporary flattening of the retail trend" and stressed that MAC is "doing very, very well internationally," with strong double-digit growth.

Operating income for the quarter decreased less than 1% to $399.2m, Lauder reported, attributing higher costs to Lauder's ongoing efforts to grow its freestanding retail footprint in the EMEA region, where it plans to open a total of 250 MAC, Bobbi Brown and other branded stores in fiscal 2016.

Expenses associated with the project were partially offset by value created by the company's continuing Strategic Modernization Initiative, which is projected to deliver $175m in savings this year, the firm said.

Lauder will reduce its workforce by around 2%, or roughly 900 to 1,200 positions, and incur estimated costs of $600m to $700m in connection with its newly announced Leading Beauty Forward initiative.

During the call, execs also elaborated on Lauder's new Leading Beauty Forward initiative, which will "enhance the company's go-to-market capabilities, reinforce its leadership in global prestige beauty and continue creating sustainable value," according to its Q3 earnings release.

Moves will be made to streamline operations and reduce costs for improved productivity, including the elimination of an estimated 900 to 1,200 positions globally, or about 2% of its current workforce.

The initiative is expected to require $600m to $700m in restructuring costs over the next few years to ultimately yield annual pre-tax savings of $200m to $300m, a portion of which will be reinvested in future activities to drive growth, including innovation, consumer-facing advertising and omnichannel expansion, Lauder indicated.

In a May 3 note, Morningstar analyst Erin Lash stated: "We’ve questioned for some time the degree to which Estee would be able to continue posting meaningful profit improvement, while also maintaining the firepower to fund investments to offset intense competitive headwinds. In that vein, we view this effort as prudent."

Lauder is forecasting 7% to 8% constant-currency sales growth for the full year.

Lauder Tailoring Strategy To Meet Millennials, Makeup Demand

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