FMCG
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Soon after returning to the corporate trenches in 1919, revenues ran at 300,000 francs a month. This was largely profit, and Eugène was finding it so easy he got bored. He bankrolled and then principle shareholder of a maker of celluloid combs, before starting another company to enter a bigger celluloid market: movie and still photographic films. He bought out the Lumière film production company. Eugène also dabbled in companies making Bakelite, cellulose acetate and artificial silk. Even as late as 1954 he was still finding time, alongside building L’Oréal, to run a soap company, a paint factory and a magazine.
How Did They Evolve?
By 1920 L’Oréal employed three chemists who, in 1925, came up with his first real blockbuster product, L’Oréal d’Or. This was a hair dye that added golden highlights, which made dyed blonde hair seem natural. However, his business was made by a sea change in women’s hairstyles - the Hollywood star-inspired craze for the bob. At first Eugène was appalled by this development. He reasoned that the longer women’s hair, the more hair dye they would use. Thus bobs were a disaster. However, the bob required frequent cutting, which drove a massive increase in the number of ladies hair salons. In America they quadrupled during the 1920s. In addition, the bob exposed hair roots a lot more than the previous long styles, so women who dyed their hair needed to touch up the roots much more frequently. Frequent dying was bad for hair, so Eugène immediately set his business to work on devising a ground-breaking bleach. It appeared on the market in 1929 as L’Oréal Blanc. Far from being a disaster, the bob was a goldmine for L’Oréal.
The rise of the perm was another threat. Perms did not accept hair dyes that did not penetrate the hair, as was the then practice. L’Oréal responded in 1929 with what would become a trademark, the patent-protected product. They filed a patent for paradiamines, which formed the basis of fast-penetrating hair colours. The company launched Imédia as a perm-friendly dye. This was an immediate runaway success, popular with hairdressers and clients alike. However, the big worry was that the key ingredient, paraphenylenediamine, was an allergen. Eugène worried tremendously that allergic reactions could kill his business. His products to date had been noted for not causing reactions, so Imédia was launched with a warning advising users to conduct a skin test first. Then, should the worst happen, Imédia advised of the antidote, a rinse of a brine/oxygenated water mix. As it turned out, the demand for perm-friendly dyes far outweighed any consumer worries about a slim chance of a bit of temporary itching. Company revenues in the year exceeded a million francs a month.
The mid-1930s saw the emergence of other strands of the L’Oréal business model that live on to this day. In 1934, the company launched Dop, the first mass market shampoo. For the first but far from last time, L’Oréal would make its science available at affordable prices to as wide a market as possible. A second strand was the importance of keeping the corporate finger on the pulse of consumers’ lifestyles: then having products to match new trends and behaviours. When the Front Populaire won the 1936 French elections, L’Oréal was ahead of the game. When Front Populaire enacted a promise to introduce the first paid holiday for French workers, L’Oréal developed and launched Ambre Solaire sun protection oil. By now the company was employing 300 salesmen and was by far the country’s most successful hair and skin-care company.
The Second World War did not stop the company’s progress, at least on the technical side. In 1942 Eugène developed a mixing tower that embodied a new saponification process. This greatly enhanced the manufacture of soap, and the technology became the industry standard. The company’s success during the war became a major problem afterwards. Eugène was branded a collaborator with the Nazi occupiers. It is certainly true that access to raw materials during the war depended entirely on a good relationship with firstly the French Vichy government and then the Nazis. Once the tide of war swung in the Allies favour, Eugène switched horses, but too late to save him from much post-war negative press and vilification.
By this time, another enduring feature of the L’Oréal way was seeded. Firstly André Bettencourt, in 1938, and then François Dalle, in 1941, joined the business. André would marry Eugène’s daughter in 1950 and François would go on to succeed Eugène as CEO. There has been only four in the entire company history. Keeping it in the family – both personal and corporate – became a key part of L’Oréal’s future success. L’Oréal was also more than ready for the consumer boom of the 1950s. By that time they had more than a hundred chemists and had produced both the first lightening tint (Imélda D, in 1951) and the first colouring shampoo (Colorette, in 1955). The latter was in response to the fashion for more subtlety in hair colouring. In 1954 the company advanced its research capabilities in skin care when they signed technical agreements with Vichy, who were leaders in the field. Vichy’s founder, a cosmetologist named Georges Guerin, had discovered the skin healing qualities of Vichy Thermal Spa Water in 1931. He used Vichy Thermal Spa Water to treat a skin wound while staying at the famous spa; and subsequently developed a range of skin products all containing the magic elixir.
In 1957, Eugène Schuller passed away after an immensely busy and productive working life, and the stage was set for 39-year-old new boss, François Dalle, to put in place the final pieces of the jigsaw.
How Did They Build the Modern Business?
Three major changes in François’ first four years at the helm reoriented the company. Firstly, in 1957, L’Oréal’s hair care products, previously only available at hair salons, were launched onto the consumer market. This dynamic, expanding the science from specialist areas into the mass market, would henceforth be a core part of the company strategy. Secondly, François took the science to a new level by establishing a fundamental research unit. This did not focus on developing products, rather on developing a greater understanding of how skin and hair actually function. This unit, which could manufacture its own molecules, became the company’s seedbed. It informed eventual commodities by increasing their efficacy in unique and patent-protected ways. His third move was to focus the company on what it did best – hair and skin care – by selling off the soap business.
After going public on the Paris Stock exchange in 1963 (Eugène’s daughter and son-in-law, Liliane and André Bettencourt, retained a majority stake), the company had the financial resources to put in place the next leg of the strategy. While L’Oréal was a successful business, the brand itself, like all good brands, occupied something of a niche. With their research capabilities in basic skin and hair physiology and function, the expertise could be used to enhance any hair and skin brands. It now made complete sense for the company to acquire strong cosmetic brands because it could do a better job developing brands than previous owners. They had superior science capabilities. The L’Oréal laboratories would become the invisible powerhouse behind some of the best-known names in the industry.
The first such major acquisition was of Lancôme in 1964, taking the company into the upscale perfume and make-up sectors in nearly a hundred countries. This was followed a year later by Laboratoires Garnier, a manufacturer of hair care products made with organic ingredients. Acquisitions were not the only growth strategy. In 1964 L’Oréal launched the Kérastase brand, which was a cross between a hair treatment and a spa experience. Distribution was limited to the upper end of hair salons, so staff could be trained to deliver the brand mission of high performance, personalised hair care via an in-salon consultation and ritual treatment. Another brand, Biotherm, was acquired in 1970. That was developed after its founder visited a spa and had the idea of incorporating thermal plankton into skin creams. L’Oréal was now employing 500 scientists, a number that would rise 50% in the next four years. By then it had acquired the mass-market Gemey brand of makeup.
A visit from McKinsey in 1969 resulted in the now sprawling company adopting a divisional structure. The next major change which was to have long lasting ramifications came in 1974. The Bettencourts, fearing that the socialist government might nationalise the
company, sold just under half of Liliane’s stock to the Swiss food giant, Nestlé. A new French holding company, Gesparal, was formed, owned 51% by Liliane and 49% by Nestlé. This took ownership of her entire L’Oréal stockholding in exchange for about 3% of Nestlé’s stock. Clearly, Nestlé could not bring much expertise to such a specialised and scientifically oriented company. But it turned out to be a marriage made in heaven. For Nestlé, it was an excellent investment into a category that was growing faster and had higher profit margins than most of their core businesses. For L’Oréal, it provided a strong immunity against hostile takeover should the family ever decide to bale out. It also protected the company from the short-term demands of the stock market, enabling them to take a longer-term perspective to business strategy than their main competitors.
While L’Oréal continued to make smaller cosmetics acquisitions in the 1970s, it was unable to fully avoid the craze at the time for diversification. In 1973 they took a majority stake in the pharmaceutical company, Synthélabo, and in 1979 bought another pharma company, Metabio-Joullie. They merged the two a year later. Also in the late 1970s, echoing Eugène’s earlier policy of buying into magazines used to promote his products; L’Oréal bought substantial strakes in both Marie Claire and Interedi-Cosmopolitan. In one of the new divisions recommended by McKinsey, Parfums et Beauté International, company expertise was applied to Cacharel, a company in which L’Oréal had invested. They developed the first perfume to be launched by Cacharel. L’Oréal soon took control of the perfume arm of Cacharel and Anaïs Anaïs, which was designed to be the first perfume bought by or for teenage girls. This initiative, well away from Lancôme territory, became the world’s best-selling perfume and one of the most influential in the history of the category.
1981 saw another significant advance on the scientific side. They opened a new, state-of-the-art dermatological research facility, Laboratoires Dermatalogiques Galderma. This was another tangible benefit from their Nestlé shareholder, a 50:50 joint venture between the two companies. It would become the world’s number one dermatology company, generating substantial profits for both parties.
The next main developments illustrated the now unique nature of the company. For the Ambre Solaire brand the company patented an ultra-powerful, anti-UVA ingredient, Mexoril SX. This kept abreast of the changing nature of the sun cream market - away from bronzing to protection. On the skin care side, the launch of L’Oréal Plénitude was a hugely successful example of their strategy: to trickle down scientific advancements from high-end expensive products into mass-market affordable offerings. In 1986 the cycle continued, as the high-end Lancôme brand launched the market’s first anti-ageing cream, Niosôme.
Much of the 1980s was spent in the pursuit of one of the world’s stellar cosmetics brands that had fallen on hard times. L’Oréal was convinced it could revive Helena Rubinstein whilst benefiting from its attractive stable of brands. Helena Rubinstein, along with Estée Lauder, was one of the Grande Dames who dominated the early cosmetics industry. She had barely arrived in Australia, with hardly a penny to her name, when she started a cosmetics business in 1902. Helena Rubinstein had picked the perfect place. Australia was swimming in the main ingredient of hand cream, lanolin, thanks to the country’s 75 million sheep. It was produced as an oil from their fleeces.
By 1908 her success there prompted Helena Rubinstein to move to London and in 1915 she had opened up in New York City. There she was not shy in promoting herself as ‘the accepted advisor in beauty matters to Royalty, Aristocracy and the great Artistes of Europe’. American women lapped it up and she had soon more outlets in America than there were Ford dealerships. Helena Rubinstein scored a notable feat in 1928, suggesting we could have done with having Helena around in the financial crash of 2007. She took Lehman Brothers to the cleaners by selling them her business for $7.3 million prior to the Wall Street crash: then bought it back a few years later for $1.5 million. Lehman’s hilariously denounced her finesse as ‘financially illiterate’.
As the American and then global cosmetics businesses boomed, so did Helena Rubinstein. The US arm of her company grossed $22 million a year, but her death in 1965 at the age of 92 marked a turning point for the company. Her children had inherited neither the business expertise nor chutzpah of their dynamic mother. By 1972 they had had enough and sold out to Colgate-Palmolive for $146 million. Colgate’s stewardship was a classic example of the difficulties mass-market companies of the time had in managing upmarket brand franchises. Business went from bad to worse and the company was on the market again by the end of the 1970s. , L’Oréal was sniffing around, but missed out as Helena Rubinstein Inc. was offloaded for a seventh of the purchase price to a private owner. L’Oreal got their first piece of Helena Rubinstein in 1983 when they bought the company’s Japanese and South American business units, and a year later they bought 45% of the main business. It was only in 1988 that L’Oréal gained full control of the brand and business they had long coveted.
L’Oréal’s rise had been almost seamless. The year it finally bought Helena Rubinstein, L’Oréal became the largest cosmetics company in the world. It was making a profit of over a billion francs a year and made Madame Liliane, the largest individual shareholder, the richest woman in France. Capital magazine calculated her fortune was growing at the staggering rate of 85 million francs a day. But that was just the start. 1988 also marked a 42-year-old, Welsh-born L’Oréal lifer, Lindsay Owen-Jones becoming the company’s third CEO. Owen-Jones’ governance would make Liliane the richest woman in the world.
Owen-Jones’ main thrust in his early years as CEO would be to make the company truly global. This was a process that had started almost immediately after the birth of the company. It would pitch them into direct competition with the packaged goods goliaths, Proctor & Gamble and Unilever.
How International Are They?
As with most Continental European-based companies, international expansion began early, and into adjacent countries. By 1912, L’Oréal was selling its products in Holland, Italy and as far away as Austria. In 1922 the company had opened an agency in Berlin but failed to prosper under its German manageress. She refused to open her accounts books for inspection and was eventually fired to make way for a more trustworthy French L’Oréal employee. Company subsidiaries were established in Italy, Belgium and Denmark during 1936/1937 as business had outgrown the existing distributor arrangements. The latter were used to spread the company name farther afield, and reached the UK, Algeria and even Argentina by the end of the Second World War.
The big international market to crack was the United States. In 1953, using a complex ownership arrangement that was part L’Oréal and part family, a company called Cosmair was established as the sole US licensee for L’Oréal products. The first manager was a long-time employee selected primarily for being half-American. He was not up to the difficult task of penetrating the scale,geographic spread and complexities of the American skin and hair care industries. They were then a niche market. Most of the action was in mainstream cosmetics, a market that grew at 10% a year throughout the 1950s and 1960s.
When Dalle took over as CEO one of his first tasks was to boot out Eugéne’s crony and install his own man to run Cosmair. His choice, Jacques Corrèze, was not universally popular, having served a five-year post-war prison term for wartime collaborationist activities. However, he was a better businessman than he had been a patriot. He slowly began to gain distribution for a select few L’Oréal products, in the face of ferocious competition from the American giants of Estée Launder, Helena Rubinstein and the brash Revlon. So difficult was progress that, when Helena Rubinstein died in 1965, Cosmair had only 20 employees and the business was restricted to hair-care products, which were distributed into salons.
Elsewhere, the company was busily gaining a foothold in countries far and wide; Uruguay, Peru, Algeria, Mexico, Canada, Japan, Australia, New Zealand and Hong Kong being added to the list by the mid-1970s. So strongly was the business
growing in South America, it set up a multi-division structure there to manage an increasingly complex set of markets. In 1976, the company gained a toehold into the Soviet Union by, first, signing a technical assistance agreement, then setting up a joint venture, Soreal, with the Soviet chemical company, Mosbytchim.
Meanwhile in the US, the Bettencourt-Nestlé share deal meant that Nestlé was now a part owner of Cosmair. It was run successfully during the 1980s by future CEO, Lindsay Owen-Jones. Cosmair had gained a foothold for their L’Oréal, Lancôme, Cacharel and Guy Laroche brands in department stores. With the addition of their salon business, L’Oréal was generating an annual turnover of about $350 million. The size of Cosmair’s business doubled in 1984 when, with help from Nestlé, the unit acquired Warner Cosmetics from Warner Communications. This brought into the group a number of strong brands such as Ralph Lauren, Polo and Gloria Vanderbilt. Cosmair’s turnover was almost doubled.
In 1985, Biotherm was launched into the US market to add further impetus. Progress was mixed, not least in profits as the company spent 35% of sales on marketing, a full ten points above the industry average. The 1989 launch of Plénitude, with a $35 million advertising blitz, also did little for the bottom line. The long-drawn-out acquisition of Helena Rubinstein, with its hugely successful Giorgio Armani men’s fragrance brand, gave Cosmair another step change in the size of its US and indeed global operation. The company was now the largest cosmetics firm in the world.