Estee Lauder: Beauty Innovation | In Practise

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Estee Lauder: Beauty Innovation

Former President at Estee Lauder and LVMH Beauty

Why is this interview interesting?

  • How the internet has changed the beauty industry
  • Competitive threats to incumbents from new disruptive brands
  • How incumbent beauty companies can react to competitive threat

Executive Bio

Pamela Baxter

Former President at Estee Lauder and LVMH Beauty

Pamela has over 35 years experience working in the beauty industry at the large brand houses and incubating innovation with small start ups. She started her career at Estee Lauder in 1981 and enjoyed 23 years at the company where she grew to become President of Specialty Group. During her time at Lauder, Pamela negotiated and signed Lauder’s first license agreement in 1994 with Tommy Hilfiger and she led the acquisition of La Mer in 1995 and Jo Malone in 1999. In 2004, Pamela was recruited by Bernard Arnault at LVMH as President / CEO of Beauty Brands where she was responsible for Dior, Guerlain, Givenchy, and Acqua di Parma. Pamela left LVMH in 2016 to start her own beauty incubator which helps bring new beauty products and businesses to life. Read more

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Interview Transcript

Could you provide some background to your experience in the beauty industry.

I have over 35 years of experience in prestige beauty. I have held a senior level president-of-specialty-group position at the Estée Lauder Company and led acquisitions for brands like Jo Malone and La Mer, as well as signing a licensing agreement with Tommy Hilfiger, back in the 90s. This licensing agreement was the first for Lauder. So I have many different experiences, on all sides and all categories. Then, I was recruited by Bernard Arnault in 2004, as he was looking for someone with multi-brand experience, to run all of the LVMH brands in North America. Those brands are a lot of French legacy brands such as Dior, Givenchy Beauty, Guerlain, Acqua di Parma, which is a fragrance house out of Italy. Also, he had just made an acquisition of an American brand called Fresh.

At that time, I was looking to get some experience in fashion and couldn't get anybody even interested in interviewing me, because my entire background is beauty. So we shook hands; I took the LVMH beauty group in North America in 2004. At the end of 2007, I became the first One Dior president, having all of the Dior brands, because Bernardo was trying to unite the beauty side and the fashion side of the Dior business. That was a fascinating experience because Dior, at that time, was 90% the fashion business with 90% retail. So we knew exactly who our consumer was because, we were running a D2C business, through our own retail stores. Dior beauty was all wholesale, over distributed, and needed an overhaul. So, it was an interesting time, but very different from today.

Could you paint a bit of a picture of what the beauty industry was like ten years ago and the key structural changes that you've seen over that decade.

There's been a major upheaval in the last decade. Ten years ago, the department stores were still holding court, and Sephora had started to make inroads. Nevertheless, Sephora weren't able to get any other big legacy brands to sell to them. So they took the indie route. Today, they are the powerhouse, in terms of the makeup category and taking on new and independent beauty brands, from the incubator stage through unicorn type exit. However, ten years ago, the bulk of the business was still controlled by department stores. Media advertising was very traditional; everybody was still using print. Conde Nast and Hearst were the two prominent publishers in the magazines, as well as TV advertising for fragrance.

{audio: 0:04:20} Then, over the last ten years, there has been the onslaught of Instagram, Pinterest, and other social media, as well as influencers who started out with a thousand followers and ended up some of them have one million, two million, even 100 million. Reviews by these influencers became a very crucial ingredient, in terms of how the consumer was choosing for a product but also using influencers’ YouTube channels to learn more about beauty. Therefore, traditional media and traditional department store distribution were both flipped on their heads over the last ten years.

So, the internet revolutionized the CPG story, where big brands, with big advertising budgets distributed by one channel to everybody and then reinforce that through more R&D, thus monetizing more products. The internet leveled the playing field enabled smaller companies to target specific audiences via Instagram and different channels online.

Sure. If we look at the distribution channel with department stores, the brands controlled their image in the department stores because everyone had or were building their mausoleums and controlling beauty advisors. So if you went into a department store to shop at the Dior counter, Chanel counter, or Lauder counter, you were talking directly to a beauty advisor that had been hired and trained by the store. So they were dedicated. The message was being pushed to the consumer. It wasn't like a conversation; it was like, this is what you need, this is what you're going to buy, this is how you're going to buy it, and you're going to buy what I tell you to buy.

That's not the way it is today, at all. Via Instagram and YouTube, the consumer will follow several different influencers and make up her own mind. Thus, you've got to push with the younger consumers saying, I don't need to look perfect, I want to look like me, I want to be accepted for who I am, I don't want to look like the latest celebrity, I want to be authentic and natural, and I want people to accept me for what I look like, no matter what. It’s a big change.

It's interesting how you mentioned that the brands wouldn't sell through Sephora, back in the day.

They wouldn't. When Sephora first entered the North American market, the big brands were all scared to death of the department stores. Thus, they didn't accept the Sephora distribution channel, fearing that the department stores would cut their space and location or cut off their demonstration dollars and not go 50/50 with them anymore on staffing. So the department stores were in control and the brands were all wary of upsetting them. They ended up with a lot of younger, more independent brands that hadn't become big legacy brands with these big volumes and large allocations of space and location to put in jeopardy by trying a new way of selling. Additionally, the big legacy brand wanted to control the sale, while Sephora was saying, we're going to have cast members that you can come in and train, but they're going to sell everything. So that took the control away from the brands, and the big brands didn't like having the control taken away from them.

In terms of the structure of the value chain, you mentioned that, previously, it was, pretty much, brand, department store, consumer, whereas now we have the brands and many different smaller brands that are now getting direct DTC distribution via online. Also, there are new incubators popping up. How do you view the major changes in the value chain for beauty today?

The value chain has shifted dramatically. The department stores are all anchored in malls, which are experiencing traffic flight. So traffic in the malls is down considerably. Therefore, the traffic in the department stores is down considerably, and beauty is an impulse item that depends on traffic, which comes through those malls and stores. Sephora's largest stores are in cities, like downtown San Francisco or New York City, which makes up almost 25% of the total North American Sephora sales. It’s a walk-in walk-out. Ulta was not a prestige player, 10 years ago. They were mostly mass; they had prestige fragrances, but they didn’t have a prestige cosmetic line. So it was mass cosmetics, prestige fragrances, and then services. But they built 10,000 square foot stores in malls where you could drive up, park, and have the convenience of being able to walk in and walk out, without going to a mall.

{audio: 0:11:08} Over the last five or six years, they've been very aggressively going after prestige brands, allowing the prestige brands to have little mini boutiques inside their stores and to staff those mini boutiques. They have a different philosophy around building their prestige side of their floor, and they're becoming a major contender. So the consumer and the way the consumer interacts with the brands have changed through social media and influencers where they can buy their products, either D2C or through a Sephora or an Ulta, that has very convenient ways of shopping. Everything has changed in the last ten years dramatically, even more dramatically in the last four or five, because of the social media flash influencer model and not having to have big advertising budgets or big capex budgets to build big counters and department stores.

Do you think the retailers are really innovating, as well, now because they can be closer to the customer and allow these new indie brands and startup brands to actually get scale or encourage innovation on their end?

Absolutely. Sephora has its own accelerator program. They were, to my knowledge, the first to start a beauty-only accelerator. It began in 2015, with eight in the cohort. This accelerator started, from their point of view, as a corporate social responsibility program. They hired a young lady from Google that was in social responsibility to establish this program. It was not meant to be a commercial program, but to give back. They were looking at the fact that most of their employees are female, and most of their consumers are female. So how can we, as a beauty retailer, give back to that community? They saw that there were a lot of female entrepreneurs that were struggling to get up and running. Thus, they started the Sephora Accelerate. Sephora Stem is the name of the umbrella and Sephora Accelerate is in this particular program.

They run a boot camp every April, where they choose candidates out of hundreds. The criteria are based on: Is this a product that fills a need, that has white space? Is it a tech app or something that we think is going to enhance the consumer experience? Is it a service that we think is going to enhance the consumer experience? Sephora starts with the boot camp for a week in San Francisco, exposing them to Sephora marketing: the sales team, the supply chain, the operations team, and every facet of the business. They then pair the candidates up with a mentor from Sephora, who help them hone their pitch. They do a pitch day, usually about three months later, allowing them to come back to San Francisco and pitch the local San Francisco VCs. Now there's a lot of private equity guys to fly in for this, to see who is in the cohort and what kind of ideas are coming out of there. They also have a $250,000 fund that they set up through a bank in San Francisco that the entrepreneurs can take loans from. It's kind of all-encompassing and it's now global. It used to be just North America, but they currently take candidates globally.

Going back to the point of the internet changing the game, you can now target a specific audience and gather data directly from your customers. The contract manufacturing capacity and quality has also increased over the last decade. You can now get a design of a product, get a product shipped to your customer quickly, and iterate on that product when you gather feedback quickly. Is this kind of a new phenomenon, where you have these incubators and vast innovation in beauty, or it has always been the case?

No, it hasn't always been. To my knowledge, the Sephora Accelerate program was really the first beauty specific accelerator. Currently, Stanford Graduate School has one. VMG, the private equity group started one, and they're the ones that took on Drunk Elephant early on and really helped build that business. VMG supports the brands that they take on with brand-building, marketing, finance, operations. They built an in-house team and also HR, to help them source when they get to a certain level, to source some top talent and the resources in order to be able to hire that top talent. VMG is really the only equity group, that I know of, that’s doing that, but now all of the big companies have jumped on board. L’Oréal started the Founders Factory in 2016, Unilever started their incubator in 2018, and LVMH and Estée Lauder both started theirs in late 2018 and early 2019. So now, all the big legacy brands are jumping on the bandwagon, in terms of doing these incubators as well.

Who do you see is innovating the best, in terms of the incumbents.

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Estee Lauder: Beauty Innovation

October 30, 2019

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