Estée Lauder on Thursday announced a two-year post-pandemic "Business Acceleration Program" in conjunction with its fourth quarter earnings, which includes reducing its physical footprint and shifting priorities online. The company aims to close 10% to 15% of its standalone stores globally as part of the effort, according to a company press release.
The beauty giant will be reevaluating its role in department stores as well, closing "certain less productive department store counters" and investing savings from those and its own store closings into digital initiatives. The company hopes to save $300 million to $400 million annually from the efforts.
As part of the plan, the beauty retailer will cut about 3% of its global workforce, or around 1,500 to 2,000 positions. The layoffs are mostly related to sales employees and "related support staff" in some of the regions impacted most by the plan.
Estée Lauder is banking on a digital future as the pandemic pushes customers to turn ever more toward e-commerce.
The beauty giant's plan removes the company further from brick and mortar, and accelerates investment in its digital business, something the company was expecting to happen in the long term. The entrance of COVID-19 made the need for changes more immediate, and Tracey Travis, executive vice president and CFO of Estée Lauder, said on a conference call with analysts that those adjustments were necessary to "operate more effectively in the post-COVID reality," according to a Seeking Alpha transcript.
"The pandemic has rapidly accelerated macro trends in global prestige beauty that were expected over a longer time horizon," the company said. "These trends include shifts in where consumers shop, what they value, why they purchase the Company's products, and how they engage with the Company's brands in an increasingly digital and omnichannel world."
Indeed, Travis noted that the online business in North America was up almost 70% in the quarter, and represented about 60% of the sales in that region. North America is also the target for the store closings, along with Europe, Travis added.
While the store closings and layoffs are aimed at restructuring Estée Lauder for a more digital future, the beauty giant's plans will also have a direct impact on one of the most troubled sectors of retail: department stores. Beauty has long been a key piece of department stores' offerings, and often a highly successful one. In recent years — long before the pandemic hit — department stores were investing further in their beauty spaces, updating them for a more modern and experiential world. For some, like J.C. Penney, beauty spaces were critical to foot traffic, and therefore success.
In May, J.C. Penney went to court with its long-time beauty partner, Sephora, over alleged threats by the beauty retailer to end their partnership. At the time, Credit Suisse analyst Michael Binetti said that Sephora's shop-in-shops had the highest productivity of J.C. Penney's stores and would be a "big negative" for the department store if the two dropped their partnership.
J.C. Penney has since filed for bankruptcy with plans to cut down its store footprint, but a repaired relationship with Sephora (which was reaffirmed through a joint press release stating that the legal dispute was resolved) might be key to bringing in customers once they reopen. Estée Lauder's move away from unproductive department stores further signals that the sector is facing a pivotal moment for figuring out its place in the retail landscape.