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Pandemic impacts on Estée Lauder and the cosmetics industry at large

Stream | February 01, 2022

Estée Lauder has been a stalwart of the cosmetics industry since it was founded in 1946. Like the rest of its industry, however, its traditional business model was upended with the onset of the COVID-19 pandemic. Department stores and other retail locations were shut down and consumer demand for cosmetics took a nosedive as people began to work and live from home.

McKinsey reports that in 2020, overall beauty product sales dropped more than 25% compared to 2019, with a whopping 50% year over year drop in peak sales.

Even as the world began to slowly recover, the cosmetics industry saw changes in consumer behavior likely to continue long after the pandemic, most notably an increased demand for wellness products (like skincare) and a significant increase in ecommerce activity. Therefore, just like Victoria’s Secret, Estée Lauder also needs to be on the lookout for opportunities to increase market share by taking advantage of their brand value and long history.

In this interview, a former Estée Lauder supply chain exec shares insight on how the brand has been specifically impacted by the pandemic and its long-term strategies for the future.

Quick Takeaways

  • Estée Lauder’s interconnected global production facilities have led to increased supply chain challenges as products are slow to cross borders.
  • The pandemic has forced cosmetics companies to find new ways for consumers to choose and test their products.
  • E-commerce has significantly increased across the industry during the pandemic.
  • Estée Lauder has aggressively handled competition from startups by acquiring them.

Estée Lauder’s complex supply chain presents challenges

Supply chain challenges have swept the world in recent months. It’s a problem that’s especially challenging for Estée Lauder, according to this expert, due to the spread-out nature of their production facilities — located in the United States, Belgium, Canada, China, and Switzerland, to name a few. Long lead times for one product or product component moving from one place to another can have major impacts on production timing and cause significant delays.

Another issue top of mind at Estée Lauder is the widespread labor shortages. The cosmetics industry still relies heavily on manual assembly lines to manufacture their products. Pandemic safety precautions coupled with factors like an increased shift toward remote jobs and government-issued financial support allowing people to stay at home for longer have made it difficult to maintain labor workers at high-volume and for long periods of time.

“Labor is definitely an issue, both at the manufacturing facilities and then also at retail facilities as well too. There’s been a struggle. There are also indications that heading into holidays, that some companies are paying high bonuses, sign-on bonuses for part-time people to get holiday help in. Yes, it’s definitely an issue widespread, not only in Lauder, but in all companies.”

Pandemic forces new business models for cosmetics and skincare sales

Like many other industries, the rise of e-commerce was already showing its effects on the way cosmetics brands were selling to consumers. Estée Lauder was no exception.

“. . . a big part of our business was in department stores. Over the past couple of years, we saw that department stores were dwindling as consumers were doing more online shopping, they were doing more shopping as they were doing traveling and duty-free shops . . . [Duty free was] a big piece of our business as well because they spend a lot of money buying our products and our high-end skincare products.”

When the pandemic hit, however, online demand went into overdrive. An arm of cosmetics’ brands business operations that was steadily growing had to now be scaled up much more quickly than ever anticipated.

Compounding these challenges was a total halt on the ways consumers typically selected and tried out new cosmetics products, for instance, a shade of foundation or lipstick.

“ . . . you would previously have all of those [products] out on display for the consumer. A woman would come up to the counter. She would look at these different shades. She would pick it. She would have a beauty agent, a consultant, give her recommendation on that stuff. That has all gone by the wayside because testers now, they’re saying, ‘Hey, listen. You cannot actually display testers. You can’t use those.’ . . . It did have an impact. You had to come up with new tester displays. You had to come up with dummy end things or color codes and do the best you can, but really the biggest shift was towards the online business.”

Uncertainty surrounds industry’s future post-pandemic

It’s clear from this expert’s summary of the current state of the cosmetics industry that big changes have happened and aren’t done playing out just yet.

“Over the last year and a half, think about it, people are on Zoom calls, people wearing masks, they weren’t wearing lipsticks. Lipstick got hit very hard. Expert: Also, on top of that, the competition came out. Multiple brands came out. Startup companies came out. They were sold. They were divested. They were acquired by other companies. People like the Kardashians came up with products and entertainers came up with these skincare products and makeup products, etc. Before you know it then, the market got saturated or flooded with a lot of inflow of different things.”

This is compounded by the uncertainty that surrounds consumer behavior as the world continues to return to normalcy. Will consumers revert back to visiting the store to choose their makeup products? Will there be an influx of demand as people return to work and need to replenish products they haven’t used in years? And even if people do go to department stores, will they be willing to test products the way they did before?

This could have larger implications for traditional SKU-based product lines.

“Previously, people would put [products] on their hands, they would put it on, and then sanitize it and do different products, but same thing with foundations. Foundations are also heavily focused on number SKU-intensive items, from shaded items, for different skin tones, skin colors. Maybe they don’t need as many as they had before. I don’t know what that means from a company like a Lauder or L’Oréal, any other company that has a lot of SKU-intensive items. Maybe they have less SKUs, but overall, their sales could still continue to grow. They have less inventory because they have healthier productivity on those SKUs, or maybe they actually pare back on the SKUs . . . I don’t really know how that’s going to play out.”

The future for Estée Lauder

So what’s next for Estée Lauder? This expert gave some interesting firsthand detail about how the company is handling increasing competition from smaller, newer startup brands. The short of it? They’re buying and eliminating them.

“Estée Lauder, they acquired a company Becca years ago. I was involved in helping them liquidate some of that inventory and some of their sales. The company, they just dissolved it. They don’t really talk about it. It’s just a little [line item] on the back of an annual report that they got rid of those businesses . . . Lauder does a great job of making things look great to everyone. I think it’s probably one of the best companies, I think, who could ever pull that off, but I think that there’s inherently some risk in everything.”

Despite the aggressive — and so far, effective — strategy, this expert doesn’t believe it’s necessarily a sure-thing solution. Estée Lauder is the “800 pound gorilla,” but it doesn’t mean they’re unbeatable.

Going forward, they’ll need to pay close attention to changing and more complex consumer preferences around beauty and skincare. In particular, increased demand for organic, health-conscious, and environmentally-friendly products are areas not traditionally emphasized by larger brands and definitely better served by newer ones. The key for Estée Lauder and its peers will be to continue to leverage their big-brand advantage while staying in touch with quickly evolving consumer trends.

Access the full transcript for even more insights

Want to dive deeper into what’s next for Estée Lauder and the industry as a whole? Access the full transcript for this interview to learn more about:

  • Implications of China’s economic health on Estée Lauder and the beauty industry
  • The increasing importance of skincare products for cosmetics companies
  • Science and technologies behind skincare and cosmetics product development
  • How marketing has changed in the industry post-pandemic onset

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