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World consumer goods: Key player - L'Oreal(IndustryWire Via Thomson Dialog NewsEdge) FROM THE ECONOMIST INTELLIGENCE UNIT L'OrealYear endedYear endedYear endedYear ended31-Dec-0631-Dec-0531-Dec-0431-Dec-03Euro (m)Gross revenue/sales15,79014,53313,64114,029Operating/trading income2,4802,2754,8171,819Net income2,0611,9723,9701,492Shareholders' equity14,62214,65611,8248,124Long-term debt1,892428713759Market capitalisation45,97438,93435,64842,222Employees (number)60,85152,40352,08150,500Ratios (%)Operating profit margin15.715.735.313.0Return on equity14.113.533.618.4Debt to equity12.92.96.09.3Source: Company reports, Financial TimesOverview The worlds largest cosmetics and beauty company with 19 global brands, LOreals roots go back a century when French chemist Eugene Schueller came up with an innovative hair dye called Aureole. The product was a hit with the hairdressers of gay Paris and so in 1909 Schueller got serious, registering his operation as the Societe Francaise de Teintures Inoffensives pour Cheveux (Safe Hair Dye Company of France), the business which would later become LOreal. Still based near Paris, LOreals activities today range from hair colour and care products to skin care, sun protection, make-up and perfumes. The company also has interests in dermatology and pharmaceuticals and, reflecting its historical focus on the science of beauty, is holder of the most nanotechnology patents in the United States. Organic growth has been complemented by a savvy M&A strategy. In March 2006, UK-based ethical trader The Body Shop was purchased for 652m, joining big names like Ralph Lauren and Helena Rubinstein in the LOreal suite. LOreal is listed on Euronext in Paris, where 42.2% of its shares are traded, but more than a quarter of its shares and voting rights are still owned by the family of the founders daughter, Liliane Bettencourt, one of the worlds richest people. Swiss food giant Nestle owns a similar stake. Today the company boasts operations in more than 130 countries, including R&D centres in France, the United States, Japan and China and manufacturing centres in more than 40 countries. Its total headcount exceeds 60,000 (25% in France) and includes no fewer than 2,000 chemists. Revenues in 2006 were 15.8bn. Market position LOreal breaks its operations into four divisions, each boasting market leaders and household names. Brands are categorised by their target markets: professional products (including L'Oreal Professionel, Kerastase and Redken), consumer products (including L'Oreal, Garnier and Maybelline New York), luxury products (Lancome, Guy Laroche and Giorgio Armani Parfums and Cosmetics) and active cosmetics (La Roche-Posay). LOreal maintains a glamorous image despite its use of myriad distribution channels, from hair salons and perfumeries to supermarkets, health and beauty palours, pharmacies and direct mail. In 2006, the breakdown of cosmetics sales by division saw 52.6% of revenues drawn from consumer products, 25.1% from luxury products, 14.2% from professional products, and 7.5% from active cosmetics. By product segment, the companys sales were led by skincare (25.6%), followed by haircare (24.2%), makeup (20.8%), hair colourant (16.2%), perfume (10.5%) and other items (2.7%). LOreal is experiencing a gradual shift in its fortunes by geographic zone. In 2006, 46.6% of cosmetic sales were derived from western Europe, 26.3% from North America, and 27.1% from the rest of the world, which has accounted for an increasingly large share of the pie of late. In a global cosmetics and grooming market valued at more than $230bn, LOreals traditional rivals include cosmetic companies such as Estee Lauder and Elizabeth Arden, as well as conglomerates like Germanys Beiersdorf, which owns the Nivea, Juvena and Eucerin brands. The past few years have seen broad-based consumer goods giants Procter & Gamble and Unilever encroach further onto the beauty patch as well; when P&G acquired Gillette in the autumn of 2005, some $20bn worth of that companys sales suddenly were in competition with LOreal. Corporate strategy In an industry where image is just about everything, LOreal makes much of the marriage between science and marketing. As a general rule, about 3% of revenues are channelled into R&D while 30% is spent on promotion, which has become increasingly celebrity driven. Indeed, LOreal kick-started the trend of employing famous actresses as spokesmodels, in place of of run-of-the-mill supermodels, hiring the likes of Andie McDowell, Diane Keaton, Scarlett Johansson and Eva Langoria. LOreals advertising campaigns famously include the catchphrase, Because youre worth it, or a variation thereof. Close-ups of glossy hair and lips are typically accompanied by computer-generated images of the various products at work. In addition to its obvious desire to maintain its seemingly unassailable position at home in Europe, LOreal is keen to consolidate and extend its position in the competitive North American market. In April 2007 the French company acquired Beauty Alliance, a beauty hair care provider in the US, and followed that up with the purchase of Malys West, the countrys third largest beauty salon distributor, a move that grants access to some 30,000 hair salons in the western states. Assuming regulatory and legal clearance, these acquisitions are expected to have a positive effect on LOreals finances in 2008. In China, where the beauty industry will be worth $13bn by 2009, according to Euromonitor, LOreal translates its name as Oulayia (elegance from Europe) and currently adapts about 30% of its products to the market. To gauge the tastes of local women, LOreal reportedly conducts 35,000 consumer interviews each year. Aside from building on its own brands and subsidiaries, LOreal has pursued lucrative stakes in related sectors. The company holds 10.41% of shares in Sanofi-Aventis, the third largest pharmaceutical company in the world (and Europes largest). Indeed, LOreal began to act on its pharmaceutical ambitions as far back as 1973 when it bought Synthelabo, which merged with Sanofi in 1999, and then Aventis in 2004. LOreal has also undertaken a joint venture with Nestle on Laboratoires Inneov, which seeks to forge new markets in the field of nutritional cosmetics, and Galderma, which focuses on dermatology. Strategic risks/opportunities LOreal fiercely defends its place in an intensely competitive marketplace, where major multinationals and niche players jostle for consumer loyalty. What the company cannot avoid is growing scepticism about the collective claims made by the purveyors of beauty, as reflected in recent actions by advertising regulators. In May 2007, for instance, LOreal was among a group of cosmetic manufacturers ordered by Australias Therapeutic Goods Administration to withdraw advertising regarding the wrinkle removal capabilities of their products. The following July, the UKs Advertising Standards Authority ruled that a television commercial featuring the Spanish movie star Penelope Cruz exaggerated the effects of a mascara product. Few could have taken seriously the line, Imagine, lashes that could reach for the stars, but the ASA found that the mascara did not actually give women 60% longer lashes. Even so, pushing the boundaries of believability is familiar territory for cosmetics companies; of greater concern to LOreals image makers is a recent court ruling of racism in hiring procedures in the companys Garnier subsidiary. In July 2007, Garnier was fined EUR 30,000 after being found guilty of racial bias against applicants of North African ancestry in 2000. The sum is paltry, but the allegations are mortifying to a parent company that has been tarred by its links with fascist collaborators during and in the wake of World War II. All this will probably matter little in the emerging markets where LOreals real growth opportunities lie, and which will be crucial if LOreal is to maintain the top line double digit growth to which its shareholders have grown accustomed. The companys second quarter results, published in July 2007, showed sales growth of just 3.2% in the mature European and North American markets offset by stellar results in eastern Europe and Russia, where sales were up 35.1% on the same quarter a year earlier. Many millions of women in these emerging markets and more than a few men now have the cash to prove that they are worth it too. LOreal 41, rue Martre 92117 Clichy cedex France Tel: + 33 (0)1 47 56 40 24 Website: www.loreal.com SOURCE: Industry Briefing Copyright 2007 Economist Intelligence Unit |