Letter #33: Fabrizio Freda

2009 Estee Lauder Shareholder Letter

Hi there! I go by KG, and I love studying the history of business and investing. I’ll be sharing some notes from one Investor/Shareholder letter per weekday (mostly from my compilations) here.

Today’s notes are on Fabrio Freda’s 2009 Estee Lauder Shareholder letter. This was Freda’s first letter as CEO, taking over from Bill Lauder.

You can find this letter in my Fabrizio Freda ft. Bill and Leonard Lauder Compilation under Consumer Operators. This particular essay starts on Page 5.

*Note: Trying out a new format here (for this week) — Letter printed in full (bolded phrases my highlights), and my comments in a separate section. If you like this format, please let me know by dropping me a line via kevin@12mv2.com or commenting below. Otherwise, I’ll be returning to the old format next week.

The Letter

Fiscal 2009 was a time of tremendous transformation for The Estée Lauder Companies. The global economic downturn prompted us to change the way we operate even more quickly, while at the same time we began laying the foundation for the Company’s new four-year strategy.

I am particularly proud of how our talented people successfully managed the business against this challenging backdrop. Despite reduced consumer spending, we were able to gain share in many important countries and channels, thanks to our employees’ hard work and creative efforts.

We also focused on gaining efficiencies and fostering more collaboration across our brands, regions and channels. During the year, we resized the Company to compensate for lower sales and restructured the Company by introducing new processes and leadership teams for improved organizational alignment.

William Lauder and I, together with the Company’s top leadership, spent much of the year developing a strategic plan that we believe will generate sustainable, profitable growth for the long term. The strategy focuses our resources on our most promising opportunities worldwide by brand, category, region and channel.

Our strategy seeks to take the Company to the next level by leveraging our numerous strengths, which include our diverse brand portfolio and our long history of superior creativity and innovation. In addition, we will continue to maximize our selective distribution model and our tremendous global reach and rely on our solid financial underpinnings and our passionate workforce.

We believe an important way to leverage our core strengths is by gaining even greater consumer insights, and we’ve started enhancing this capability throughout our regions. We will use even more consumer understanding and market intelligence to stimulate our creative process across product development, innovation, distribution, packaging and our personalized service model.

Another critical component of our strategy is to better leverage our scale and improve integration. Our new North American affiliate, which launched on July 1, 2009, is a prime example of how we are bringing our brands together to work more effectively with retailers and gain economies of scale.

We are also addressing obstacles that are impeding our growth, including our underperforming brands, which drain resources from our investment priorities. We have begun to make progress in this area and look forward to achieving more in the coming year.

Fiscal 2010 is the first full year of our four-year strategy. We expect to show significant improvement toward our goals and continue building capabilities in many areas. The following are the goals we seek to achieve:

  • Gain share by growing sales at least one percent ahead of global prestige beauty annually

  • Derive more than 60 percent of sales from outside the United States

  • Strive for annual improvement in operating margin, with a goal of 12 to 13 percent by fiscal 2013

  • Create a substantial increase in return on invested capital, reaching 19 to 20 percent by fiscal 2013

  • Reduce inventory days 15 to 20 percent, to 145 to 150 days, by the end of fiscal 2013

I am honored to have been chosen to lead The Estée Lauder Companies as we set forth on this exciting journey. I look forward to a continued strong partnership with William and will rely on his wisdom, deep experience and industry knowledge as we steer the Company toward the bright future that lies ahead.

I am grateful to Leonard Lauder, who has provided me with invaluable guidance and support. He is a true mentor and I will always be grateful that he welcomed me so warmly into The Estée Lauder Companies’ family. Together, William and I will build on Leonard’s high standards and continue the leadership, vision, creativity and energy that distinguishes his long and outstanding tenure.

I am also so proud of our employees for their dedication and hard work in fiscal 2009 and am confident we will make substantial strides in the years ahead. We will emerge from this challenging environment stronger, leaner and better positioned to capture greater share and drive long-term profitable growth.

By imagining the desires and needs of our consumers, integrating the talent of our people and the resources of our brands, and innovating high-quality products and services, we are positioning The Estée Lauder Companies to be a profitable global leader in prestige beauty.

Importantly, this will continue to be a workplace where people can aspire to greater levels of personal development and achievement and where everyone will play a pivotal role in taking our Company to even greater heights of success, for the benefit of stockholders and employees alike.

Some Thoughts

  • Global downturns are the best are spurring innovation — both technologically, financially, and operationally. Companies have no choice — adapt or die.

  • Steve Jurvetson often says that recessions are the best time to start businesses — recessions are also great times for strong companies to increase their moats

  • Gaining market share thanks to creative and hardworking employees is a great acknowledge of their employees, but really doesn’t tell us anything

  • Collaboration between brands, regions, and channels is interesting — you see European and Asian conglomerates and investors doing this often, but US conglomerates/Investors rarely do. Tencent is a shining example of “internal” cross-pollination

  • Would love to learn more specifics about the resizing and restructuring

    • Does “resize” just mean we laid off a bunch of people? (Quite an optimistic framing if you ask me)

    • Very interested in what “new processes” they implemented

    • I’ve always found restructuring in a downturn interesting — you lay off a bunch of people, but also bring in a bunch of people? New management, new teams, etc? Feels a little scapegoat-y doesn’t it? Maybe fresh talent is good, but time/resources required for training/getting up to speed isn’t 0. Also feels like they’re just bringing in more people who end up as middle management (for the record, this is in general, not Estee Lauder specifically)

  • Love the focus on “sustainable, profitable growth for the long term”

    • Nowadays, especially in Silicon Valley, people are focused on Profits and Growth. No one really care about the keywords “sustainable” and “long term”

  • Wish they broke down what they meant by “focus on resources on our most promising opportunities” — this reads to me like “we’ll invest better,” which is easy to say but hard to implement

    • *Just kidding they lay it out starting in next paragraph lol — albeit very vaguely

  • Core competency: “T-Shaped Branding” — Diverse brand portfolio and long history of creativity (Diverse = wide and is the top/horizontal part of the T, long history = deep and is the vertical part of the T)

    • Branding, Branding Branding. Lots of brands, history of brands

    • But wait, so is branding a moat? (only a question you’d ask in SV — remember when “Brandless” was the next best thing? Although ironically the “Brandless” brand was brandless — and that didn’t do too hot"


    • More info on customers

    • More info across supply chain/distribution

  • How do you reconcile creativity and information collection? If you’re collecting extreme amounts of information from your customers in order to “personalize” things for them, at what point are you no longer being creative?

    • See HBO’s Talking Funny — Ricky Gervais says that he doesn’t care what other people think. He just does his set however he wants, and somehow there’s enough people in each city that like it. He doesn’t “change” his set to please other people (although this get some pushback from the other comedians)

  • Apart from branding, other critical aspect is operations — leverage scale and improve integration

  • Why do companies only wait until downturns to cut underperforming divisions? Is it in hopes that that division will strike magic? (Unless it’s something like Xerox PARC, I highly doubt it.) Reminds me of a story Carl Icahn told about a company that had a huge building in New York filled with people who did nothing.

  • I love that he lays out the important goals and KPIs for their 4 year plan:

    • Grow sales faster than competitors and market (in the process taking more market share)

    • More sales outside of the US than inside (diversify brand/geographic portfolio — competency #1) and be truly international

    • Improve operating margins to 12/13% (If you’re interested, they blew this out of the water — they hit 15% in 2013)

    • Increase ROIC (be more capital efficient) — I’m not gonna both calculating this since inevitably everyone calculates this differently (speaking of which — how do you calculate this? Comment below)

    • Reduce inventory days (be more operationally efficient)

  • Acknowledge his two mentors and friends (always always show appreciation for those that helped you along your journey — trust me, it makes a difference)

    • Always do your best — but when you take over someone’s legacy, it’s even more important to do so (yes yes, it doesn’t make perfect sense, but think of this as a Yogi-ism of sorts)

  • Three Foundations:

    • 1) Understand your customers

    • 2) Operate efficiently

    • 3) Continue to innovate

  • Most importantly, make your company a place where people want to work, where they can grow both their personal life and their career, and everyone can contribute (I’d say “make sure they have skin in the game” but as we know from those “rest and vest” people in SV, just because you have skin in the game doesn’t mean you always can or feel like you can contribute")


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