Due to two consecutive years of declining performance, Estée Lauder’s sales in the beauty business have been surpassed by Procter & Gamble for the first time.
Looking at the past five years, in 2019, Estée Lauder’s beauty business revenue reached $15.853 billion, while Procter & Gamble recorded $13.401 billion that year, resulting in a gap of $2.452 billion between the two. By 2020, due to the global pandemic’s impact, Estée Lauder’s beauty business sales for that year were $14.19 billion, a year-on-year decrease of 11.72%. In contrast, Procter & Gamble’s beauty business revenue for 2020 was $13.801 billion, an increase of $400 million compared to 2019, with a growth rate of 2.98%. The gap between the two that year was $380 million.
In 2021, Estée Lauder experienced a significant rebound, achieving sales of $17.731 billion, a substantial year-on-year increase of 24.95%. Due to Estée Lauder’s impressive performance, rebounding rapidly within a year and even surpassing pre-pandemic levels in 2019, Estée Lauder’s stock price reached a historic high of $374 in 2021, with a total market value exceeding $130 billion. In contrast, Procter & Gamble’s beauty business sales for 2021 were $14.716 billion, a year-on-year increase of 6.62%. The gap between the two exceeded $3 billion that year.
By 2022, due to the renewed outbreak of the COVID-19 pandemic in China, Estée Lauder’s beauty business sales declined by 7.75% to $16.356 billion, while Procter & Gamble’s sales decreased by less than $1 billion, a decrease of 0.67%, which is less than 1%. The gap between the two in 2022 was $1.745 billion.
In 2023, due to challenges in the global travel retail sector, especially in the duty-free market in Hainan, Estée Lauder’s beauty business sales fell by 7.3% to $15.157 billion. In contrast, Procter & Gamble’s sales increased by 3.89% to $15.186 billion year-on-year. In this scenario, Estée Lauder’s annual beauty business sales were surpassed by Procter & Gamble for the first time.
The travel retail sector is struggling and facing a challenging road to recovery
In several consecutive quarters of financial reports, Estée Lauder has consistently cited one term as a key factor for the decline in performance: travel retail. Travel retail has been one of Estée Lauder’s focal points.
Estée Lauder has maintained a positive stance on travel retail, distinguishing itself among numerous international beauty giants. As early as 1992, the company established an independent travel retail department, which now boasts a 30-year history. Since 2016, the group has emphasized the significant boost that travel retail provides to sales performance for 15 consecutive quarters. The travel retail channel stands out as one of Estée Lauder’s fastest-growing channels.
Over the past few years, the proportion of Estée Lauder’s sales in the travel retail sector has notably increased. In 2009, travel retail accounted for only 6% of Estée Lauder’s annual sales, whereas by the 2021 fiscal year, this figure had surged to a new high of 28%.
During the fiscal years 2020 to 2022, Estée Lauder’s sales in the Chinese travel retail market were $1.031 billion, $2.278 billion, and $2.232 billion, representing 7%, 14%, and 13% of the company’s consolidated net sales, respectively. Moreover, in the fiscal years 2021 and 2022, receivables from Chinese travel retail amounted to $179 million and $399 million, constituting 10% and 24% of the total receivables, respectively. This indicates a growing dependence on the Chinese travel retail market for Estée Lauder.
As reliance on Chinese travel retail deepened, post-pandemic performance pressure forced Estée Lauder to further increase dependence on travel retail in Hainan. However, this exacerbated the imbalance in its revenue structure, leading to a vicious cycle.
In recent years, the outlook for travel retail in China has also been challenging.
According to official data from Hainan Province, the total sales of offshore duty-free shops in Hainan amounted to 48.71 billion yuan in 2022, representing a 19% decrease compared to the same period the previous year. Specifically, data from Haikou Customs indicates that duty-free sales were 34.9 billion yuan, marking a 29.5% decrease year-on-year, with the actual number of duty-free shoppers totaling 4.224 million, a decline of 37.1% compared to the previous year. Both duty-free spending and the number of shoppers have experienced significant declines, imposing a substantial impact on Estée Lauder’s travel retail business, leading to consecutive declines in revenue and net profit over four quarters.
This significant negative impact has persisted into the second quarter of the fiscal year 2024.
The once proud travel retail business has become a major challenge for Estée Lauder’s growth. In the fiscal year 2023, the organic sales for the company’s global travel business declined by 34%. Further exacerbating the situation, in the first quarter of the fiscal year 2024, Estée Lauder’s global travel retail sales plummeted by 51%.
Chief Financial Officer Tracey Travis highlighted that the drivers of growth in Asian travel retail could transform.
“We’re not counting on travel retail to recover to previous levels,” said Tracey Travis in Q1 earnings call. “If it does, that’s great. But our recovery plan and some of the growth plans we have for the market and the brand don’t rely on that to get back to our previous profitability.”
According to Tracey Travis, it seems that senior executives at Estée Lauder may now hold a less optimistic view regarding the revival of travel retail. Freda emphasized, “We made progress in the first half across several strategic priorities, including reducing inventory in the trade of Asia travel retail, improving working capital, realizing higher levels of net pricing, and managing expenses with discipline.”
In the second quarter, Estée Lauder experienced a partial recovery in travel retail. The company stated that the primary focus for the latter half of the fiscal year 2024 is to reduce inventory and restore travel retail.
Estée Lauder has revealed an extension of its Profit Recovery Plan for the fiscal years 2025 and 2026, incorporating a new restructuring program. This expanded initiative aims to enhance profitability, boost sales growth, and improve operational speed and agility. The restructuring program is set to commence in the third quarter of fiscal year 2024, with anticipated completion of specific initiatives by the conclusion of fiscal year 2026.
As part of the restructuring program, the company currently anticipates a net decrease in its workforce, ranging from approximately 3-5% of the positions held as of June 30, 2023. This reduction considers the elimination of certain roles, as well as the retraining and redeployment of specific employees in designated areas.
The construction of the supply chain in the Asia-Pacific region is progressing slowly
Perhaps travel retail is the direct cause of Estée Lauder’s declining performance, but issues in its supply chain may be the fundamental reason.
Looking at the distribution and production center layout over the past five fiscal years, Estée Lauder appears relatively conservative in supply chain development. In the 2018 fiscal year, Estée Lauder had a total of 7 production centers globally, with none in the Asia-Pacific region. There were 15 distribution centers, including 6 in the Americas, 7 in Europe, the Middle East, and Africa, and 2 in the Asia-Pacific region. By the 2023 fiscal year, the global production centers had even decreased by one, and there were still no new production centers in the Asia-Pacific region. However, Estée Lauder heavily relies on the Asia-Pacific region, especially the Chinese market. In the past five years, the number of distribution centers has only increased by one.
Estée Lauder’s relatively slow supply chain transformation left it unprepared for the tumultuous situation caused by the earlier 2022 pandemic in China and subsequent market reopenings. Its Asia-focused travel retail business experienced a significant decline, constituting nearly one-third of its recent fiscal year revenue.
Despite Estée Lauder’s plans to establish new factories in Asia to address this imbalance, the slow construction pace cannot keep up with the market reopening earlier this year in China. Consequently, due to supply chain delays, Estée Lauder had to ship products to Chinese duty-free shops and other retailers at least six months in advance. The rising sea freight prices also increased Estée Lauder’s costs. However, the slow pace of Estée Lauder’s recovery led to excess inventory in travel retail stores and insufficient demand.
Estée Lauder’s CEO stated in 2023 June that the length of the supply chain is one factor contributing to the travel retail inventory issue, and they are working to address it. However, resolving this issue will take time to be tested.
Estée Lauder is changing its supply chain management. On September 11th, the company officially announced the appointment of Quentin Roach as the Senior Vice President and Chief Procurement Officer. Roach is set to report to Roberto Canevari, the Executive Vice President of Global Supply Chain, and has become a part of the company’s global supply chain leadership team. His responsibilities include overseeing Estée Lauder’s crucial supplier relationships, emphasizing the optimization of the entire supplier network to foster innovation and growth. Additionally, Roach will supervise the procurement of third-party manufacturing and collaborate closely with the global manufacturing team to integrate external and internal networks into a unified manufacturing ecosystem.
Estée Lauder has expressed its commitment to fully support the growth of its business in China, including the enhancement of its distribution network, the establishment of an innovation research and development center in China, and the construction of new manufacturing facilities. This underscores Estée Lauder’s emphasis on developing a robust local supply chain in China.
Amid the current economic uncertainty, Estée Lauder’s missteps in product and supply chain management have reduced their margin for error in adapting to market changes. Faced with internal management instability and external pressures such as the encroachment of L’Oréal into the U.S. domestic market and significant declines in the Chinese duty-free business, Estée Lauder appears somewhat challenged. However, as a long-established multinational enterprise, it is believed that Estée Lauder can overcome these challenges; it is just a matter of time. Nevertheless, in the face of L’Oréal’s rapid advancements, Estée Lauder must adapt swiftly.
