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February 9, 2009 4:46 PM

Beauty

Interpreting the Lauder Plan

Through much of its 64 years, the Estée Lauder Cos. Inc. has meant many things to a wide swath of the American beauty world. First, it was seen as the chief definer and main architect of the modern prestige business...

Through much of its 64 years, the Estée Lauder Cos. Inc. has meant many things to a wide swath of the American beauty world.

First, it was seen as the chief definer and main architect of the modern prestige business in the U.S. But many executives also viewed Lauder as more of a family operation than a corporation.

The Lauders always referred to their family ties, and that bond was continually strengthened by the maestro himself, Leonard Lauder, who presided over industry events in New York as the patriarchal leader. He was so widely admired that many of the creative types in the industry felt they only could work for him.

This filial warmth has been gradually cooling since 1995, when Lauder acquired the cold shackles of public ownership. It became clear on Feb. 5 how much Wall Street has changed the world and how much that world has been scorched by the financial firestorm that now rages over much of the globe.

The company, led by Leonard's son William as chief executive officer and Fabrizio Freda as president and chief operating officer, unveiled a four-year restructuring plan designed to eliminate redundancies and outmoded notions and wring out costs to the tune of $450 million to $550 million. The human cost was the elimination of 2,000 jobs, 6 percent of the workforce, over two years. This was a cold shower at a company where employment was often equated with longevity. Then, when someone did leave, the exit was usually handled with humanity and deftness.

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During a luncheon in the early '90s, Leonard Lauder gave a speech about how to navigate the difficulties in firing people. He took the approach that it was his fault for hiring the person in the first place for what obviously was the wrong job. That way, he explained, they left with their dignity intact.

Another cultural trait that was pushed aside by the recent news was the long-practiced dictum of encouraging the company's now 29 brands to carve out their own identities and destinies on the selling floor, even to the point of rivalry. Now there'll be no fractious family. "The hallmark of this strategy is that we will more actively encourage collaboration among the brands up front and coordinate among the brands to make sure their messaging is unique and relevant to their particular consumer base," said William Lauder.

Much of the belt tightening is aimed at shrinking the cost structure and improving the operating margin to 12 or 13 percent. Productivity will be boosted under the plan, and underperforming brands jettisoned. But both Freda and Lauder took pains to point out that innovation will continue to be prized at Lauder and product creativity will not be squelched, as Lauder continues in its leadership role as a specialist in prestige beauty. Freda's mantra is "imagine, integrate, innovate."

All this was met with a degree of skepticism on Wall Street, particularly over an ambitious cost savings in an organization that historically has not been driven to achieve productivity.

But despite the raging recession and the cannibalistic destocking being practiced by major retailers, the heart of Lauder still beats. Only a matter of hours after the restructuring plan was unveiled with its shroud of seriousness, the MAC Cosmetics division was throwing a typically boisterous press party downtown to launch its Hello Kitty color cosmetics line. A huge warehouse room was filled with tall feline mannequins, interspersed with living models wearing outfits specially created by 30 designers.

John Demsey, a group president of Lauder who is in charge MAC, was savoring the irony: "I love the idea that this world icon that we are using to sell lipstick, doesn't have a mouth."

Beauty is a fantasy, and none of it exists without a good story.
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