by Greg Thain
By 1990 Cosmair had a mixed bag of market share positions. In women's fragrances they trailed badly behind five industry leaders. They had less than half the share of Estée Lauder and Revlon. In the men's fragrance category things, were a lot brighter. Thanks mainly to the acquired Armani and Ralph Lauren brand franchises, Cosmair had nearly a quarter of the market and ranked second only to Unilever. In 1991 Cosmair was turning over $1 billion in sales and was the sixth largest marketer of cosmetics in the United States, employing 3,600 people with a company laboratory located in Clark, New Jersey.
In 2003 Cosmair acquired Redken, a hair care company distributed through salons. This helped make Cosmair America’s fourth-largest cosmetics company. Cosmair was now deemed too important to be owned largely by the Liliane Bettencourt family and Nestlé. Nestlé owned about 70 percent; Liliane Bettencourt 26 percent; and L'Oréal only four percent. So the unit was purchased by L’Oréal to be a 100% owned subsidiary.
However, the game changer in the US was the acquisition of the mass-market makeup giant, Maybelline, in 1996. This took L’Oréal into the number two slot in US cosmetics, behind Proctor & Gamble. Maybelline was a major leap both financially ($508 million purchase price) and strategically. Maybelline distributed a range of low priced makeup aimed at teenagers, primarily through drug and discount stores. This was the most downmarket sector L’Oréal had yet been involved with. They were signalling their intent to spread the benefits of their science to all sectors and price points in the market. The experience they would gain with Maybelline in the United States would stand them in good stead as they began to extend into markets where affordability was a huge issue.
In 1994, L’Oréal was one of the first foreign companies to obtain authorisation from the Indian government to establish a 100% owned subsidiary. Until this point, government policy had been that no foreign company could own more than 49% of an Indian-based company. This approach saw many major brands, such as Coca Cola, exit the market altogether. In 1997, L’Oréal China was formed as part of a multi-divisional Asian zone structure. The low-priced Maybelline brand was launched a year later to spearhead their charge.
Back in the US, L’Oréal acquired Soft Sheen (a leader in ethnic hair care) in 1998 and Carson in 2000 (a leading beauty products business aimed at the African American sector). These were combined to give L’Oréal a strong ethnic offering. In the US salon sector, the company transformed its position with the acquisition in 2000 of the sector’s leading brand, Matrix Essentials. It also cemented an upmarket position by acquiring Kiehl’s Since 1851 Inc. Kiehl’s distributed its product through a mix of top end department stores, such as Bergdorf Goodman, Neiman Marcus and Sak’s Fifth Avenue, together with its own flagship stores. The buy gave L’Oréal a taste for owning retail outlets. Across the other side of the world, in 2001 L’Oréal acquired a 35% share of the Japanese firm, Shu Uemura Cosmetics, Inc. The deal included international rights to the brand outside Japan. Early success in extending the brand to new markets prompted L’Oréal to buy the firm outright in 2004.
By 2003 slightly over 50% of L’Oréal sales derived from their Western European heartland; 28% from the US; and 20% from the rest of the world. Of the company’s 50 factories, ten were located in North America, four in South America and eight in Asia. Nearly 50% of the company’s output was manufactured outside of Europe. The company was striving to keep enough flexibility to manufacture locally relevant products and formats for the many different markets. With over 500 brands being distributed through more than 400 subsidiaries in 150 countries, L’Oréal had become a truly global company.
How Are They Structured?
Structure is usually the handmaiden of strategy. L’Oréal has had such a consistent strategy over time has resulted in very little internal disruption due to reorganisations. Also, as the business has endured no crises requiring major downsizings, closures or divestments, its restructuring has been mostly organic and reflected the business’ growing spread and scope.
The McKinsey-recommended divisional structure from 1969 was tweaked in 1985 when, following all the acquisitions, the Parfum’s et Beauté division became unwieldy. It was split into three departments: Lancôme/Piaubert (Piaubert would be sold in 1993); Perfumes; and Active Cosmetics (primarily Vichy, finally acquired in 1980 and soon to be joined by the acquisition of La Roche-Posay). This structure had by 2004 morphed into four divisions, which perhaps more understandable:
· Professional Products - Key brands: L’Oréal Professional; Redken; Matrix, distributed through hair salons
· Consumer Products - Key brands: L’Oréal Paris; Garnier; Maybelline; SoftSheen-Carson, distributed through mass-market channels, including hypermarkets, supermarkets and drug stores
· Luxury Products – Key brands: Lancôme; Biotherm; Helena Rubinstein; Giorgio Armani; Ralph Lauren; Cacharel; Kiehl’s Since 1851; Shu Uemura. Perfume, skin care and make-up distributed through specialist channels such as department stores and perfumeries.
· Active Cosmetics – Key brands: Vichy; La Roche-Posey, distributed through pharmacies and dermatologists
The company’s dermatology joint venture with Nestlé was managed independently from these four main groups but benefited from access to the L’Oréal research function (which supports all the divisions). Subsequent acquisitions slotted into whichever division represented its core business until 2006. Then the newly acquired Body Shop was set up as a fifth division, due to its unique distribution arrangement of company-owned and franchised stores. By 2009, Kérastase had been added to Professional Products; Yves Saint Laurent and Diesel to Luxury Products, and Innéov and Skinceuticals to Active Cosmetics.
While product development and branding was mostly the domain of the divisions, sales, distribution, local marketing and some local product development was managed along geographical lines: Western Europe; North America; Rest of World, which subdivided into Asia; Latin America, Eastern Europe and Other.
Perhaps the most significant structural change occurred in 2004. The Gasparal Holding Company, which had been set up to facilitate the selling of family shares to Nestlé, was merged with L’Oréal to create a more normalised shareholding arrangement. Previously, the Gasparal principals held most of the voting rights. Nestlé’s 49% stake in Gasparal became a 26.4% direct holding in L’Oréal, with Liliane Bettencourt, now aged 82, taking 27.5%. As a takeover had been impossible under the previous arrangements, each party agreed not to increase their shareholdings in L’Oréal during the lifetime of Mdme Bettencourt (still a sprightly 90-year-old at the time of writing.) The deal also cancelled a previous arrangement that gave Nestlé first call on any shares Liliane wanted to sell.
What Have They Been Doing Recently?
1995-2003
By 1995 the company had reached an annual turnover of just over 8 billion Euros. This figure had been boosted, significantly, by the 1990 launch of Lancôme’s Trésor, the world’s best-selling perfume. Two other enduring blockbusters came in 1996 with the launch of the Garnier Fructus range of affordable hair products. This took the brand global in the mass-market channels, followed by that of Acqua di Giò, which would become the world’s best-selling men’s fragrance. The same year the company decided to start a process of getting out of everything that did not fit neatly into its structure. It began by merging their 57%-owned Synthélabo pharma unit with Elf Aquitaine’s Sanofi. In 2001, the company also sold its stakes in Lanvin and Marie Claire, buying Revlon’s Colorama make-up brand the same year. In 2003, the company announced its nineteenth consecutive year of double-digit growth in operating profits, on sales of 14.5 billion euros. Little wonder Liliane was now worth $24 billion, second only to Christy Walton as richest woman in the world.
2004
A solid, if unspectacular 3.6% sales increase was primarily driven by a sluggish European market that accounted for half the company’s sales. But L’Oréal was not a company to panic and junk its strategy after a so-so year. The range of 17 brands, most with regi
onal heartlands that had expansion potential, and distribution channels that covered almost the entire market. They provided a good balance of opportunity for growth and security against downturn.
The strategy was clear:
· Innovations on higher-value products that could later be trickled down the range. L’Oréal’s ReFinish, Kérastase’s Réflection and Innéov Hair Mass, all launched in 2004, were built on breakthroughs from the L’Oréal laboratories that would appear later in other, less expensive brands
· Retail Diversification. The good growth of the Professional Products (up 7.6% like-for-like) and Active Cosmetics (up 165% like-for-like) made up for sluggishness in the main shopping channels. An increase of 70% in the company’s internet sales also helped
· Business Segment Strategy. By covering all ends of the market, shifts in consumer spending patterns between price bands would not derail the company. L’Oréal also began opening its own stores for Lancôme and Biotherm
· US Growth. By targeting the US over a long period of time, with aggressive levels of advertising support and strong acquisitions, L’Oréal was still building sales (up 8.1% like-for-like to break the $4 billion barrier) and share in the largest cosmetics market in the world
· Emerging Markets. The host of subsidiaries ten years earlier in markets such as China, India and Eastern Europe was now starting to pay off. Sales in Asia grew 17% and in Eastern Europe by 29% (Vichy, up 37% in Eastern Europe, had become Russia’s leading skincare brand and was launched in India in the year.) Sales in China almost doubled through organic growth – Lancôme grew by 71% - and two acquisitions: Minnurse, the number three skincare brand, and Yui-Sai, an upmarket department store brand
2005
Given no change to the strategy, trends were pretty much the same, if not a little more pronounced. Overall the sales increase almost doubled to 6.5%, despite Western Europe business still being flat. Sales in North America, powered by the runaway success of Garnier Fructus. It was launched there in 2003, and grew by 8.3% like-for-like. Professional Products and Active Cosmetics continued to grow ahead of company average. The Emerging Markets had some spectacular successes with Russian Federation up 40%, Mexico 13%, Argentina 22% and China 27% (excluding the impact of the previous year’s acquisitions).
2005 was the first year in which two significant shifts in the business crossed key thresholds. Firstly, L’Oréal was no longer a Western European-dominated company. Other regions accounted for over 50% of sales (55% in the second half of the year) and Rest of the World now had more than a quarter of company business. Secondly, L’Oréal was no longer a haircare-dominated company - non-hair-care sales exceeded 50% of the company total for the first time. This was driven largely by skincare sales. These had doubled within five years to account for a quarter of total company sales. However, there was one watchout. Whilst operating profit margins across the product categories were broadly similar, there was no margin impact to the shift towards skincare. Whereas, the geographical shift away from Western Europe did have a margin impact because of the quite substantial differences in profit margins by region (Western Europe 21%, North America 18.3%, Rest of World 13.5%). Improving margins in the growing regions was a company priority.
There was still plenty of mileage in the company’s growth strategy. The R&D labs continued to fuel product innovation with 2,900 research employees investing €496 million to register a staggering 529 patents (70 of them on packaging developments). The innovations that flowed from this torrent of science were not just targeted at existing key categories. L’Oréal was now putting increased emphasis on men. In 1990, 4% of European men used a skincare product. By 2003 that had risen to 20%. In Japan, 30% of men under 30% were skincare users, and over 80% in South Korea. Vichy had been ahead of the game, launching Basic Homme in 1986. Now it was time for the big brands to join in. L’Oréal Men Expert was launched into mass-market channels. The other leg of the growth strategy was to launch more of the seventeen brands into more markets. So while Vichy had already built up 1,300 points of sale in China within a year, the Shu Uemura brand was moving in the opposite direction. It was launched on the US west coast. Matrix was expanding from America into markets such as Brazil, India, China and Eastern Europe.
2006
Jean-Paul Agon, only the fourth L’Oréal CEO in almost a century, announced some tweaks to their strategy, as follows:
· Technological innovation an output of the company’s productive labs would be at the heart of a new direction for growth. Pro-Xylane was a revolutionary anti-ageing compound for mature skin made using green technology. Seniors were a rapidly increasing percentage of the world population (the number over 50 would multiply 2.5 times by 2050). They visited hair salons more frequently than younger people: and they were more than interested in new products such as Age Recharge by Kérastase. Lancôme, Vichy and La Roche-Posay all launched products containing Pro-Xylane. The R&D budget of 533 million euros was being well spent.
· The creation of major products. This wasn’t new either. Jean-Paul just wanted more and bigger ones faster. Not that any CEO would demand fewer, smaller and take as long as you like
· Enhancing the value of the products. Ramping up the technical innovation to get more benefits into more products
· Power brands. See above
· Globalisation of the brands. Geographic expansion saw the opening of subsidiaries in the few remaining new markets such as the Ukraine and Vietnam. Yet the product range still had plenty of mileage: as seen by the launch of Vichy into the US, and Shu Uemura growing by 26% in its US rollout
· Acquisitions. While the company had been a serial acquirer for several decades, the capture of The Body Shop during the year marked a new direction. Opening its first store in India and beginning online shopping in Germany showed the future direction for The Body Shop
Elsewhere, signing licence with Diesel showed L’Oréal was keen to join the industry dogfight for the best names that could be attached to perfumes. In the Active Cosmetics division, the capture of natural, certified organic cosmetics firm Sanflore was a good example of keeping the finger on the pulse of another emerging industry trend.
The sales increase in the year slipped back slightly but as still an above industry average 5.6%. This pushed the company’s global market share up from 15% to 15.6%. The US was the laggard, growing only 2.7% due to a downturn in the Professional Products division. This in turn was due to upheavals in the salon distribution channel (distributors rather than company direct calling were the primary route to market), and L’Oréal deciding to cut back its salon network to the better performers. Europe managed a decent 3.8% growth while the Rest of the World powered on by another 12.7%. This was thanks mostly to Latin America and Eastern Europe, where Biothern was growing at 70% a year in Russia. For the first year, the Rest of the World region was now bigger for L’Oréal than the United States, accounting for over 27% of total sales. More encouraging news was that the operating profit in the Rest of the World increased by a full percentage point. Thanks to a combination of global and local productivity initiatives.
2007
All guns were blazing. L’Oréal sales increased by over 8% to over €17 billion. Every division grew like-for-like by at least 7.5%; business segment perfumes and skincare both grew double digit. Giorgio Armani, Kiehl’s and La Roche-Posay all had standout years. Regionally, both Western Europe and North America grew a respectable 4%. These were markets where the number one focus for growth was skincare for seniors. In this category, the over-50’s already spent more than double than did the under-40s. In a further development to grasp this opportunity, L’Oréal signed an agreement with Light BioScience, inventors of a photo-modulation technology for skin rejuvenation. Energy Cosmetics, as this emerging sector was called, was a new, non-cosmetic approach to helping ageing skin. L’Oréal had to engage, so their research function set up its own instrumental cosmetics development unit.
Elsewhere, the recently slimmed-down US
Professional Products division was strengthened with three acquisitions: the luxury haircare brand PureOlogy and two regional salon distributors, Beauty Alliance and Maly’s West. These added both to the product range and route-to-market capabilities. The Body Shop, run as a separate division, delivered a healthy 5.7% like-for-like growth. It switched focus to more company-owned stores (122 of the 161 opened) in new markets (India now had 20 stores and stores opened for the first time in Poland, Czech Republic and Namibia); and using L’Oréal’s R&D capabilities (the company opened a new organic and natural cosmetics laboratory specifically to service The Body Shop and Sanoflore).
The Rest of the World region, where the total market for cosmetic products was now as large as Western Europe, delivered a whopping 18% growth. This accounted for more than 60% of the L’Oréal’s entire growth. The regional profitability gap problem had not yet been fixed. Yet, for the first time, the company made more operating profit in the Rest of the World region than it did in North America. The high-growth emerging markets of Brazil, Russia, India, Mexico and China had long been identified by L’Oréal. Russia delivered the highest absolute sales growth of any country and Brazil and China were already top five world markets for cosmetics. L’Oréal increased a focus on what it called the Next 12, where it was mostly well established and where tremendous growth rates were displayed. These countries were: Argentina (sales up 37%); Columbia (27%); Czech Republic; Dubai; Indonesia (21%); Philippines; Poland (16%); South Africa; Thailand (22%); Turkey; Ukraine (already the third-largest Eastern European subsidiary, after only three years in existence); and Vietnam, where a subsidiary was established.