FMCG

by Greg Thain

  2008

  The key questions for its centenary year were:

  · How well equipped was L’Oréal to cope with the economic crisis

  · How did they respond?

  How well was L’Oréal equipped for the economic downturn? Obviously, a company with a big exposure to luxury products sold in department stores, and professional products sold in higher end hair salons was going to feel the pinch. Indeed, sales in the Professional Products division were flat in Western Europe and down over 6% in the US. The Luxury Products division fell by 2% in Western Europe and over 7% in the US. However, this was not a global economic crisis but a developed markets one. In the Rest of the World region, sales of Professional Products and Luxury Products were up 15% and 12% respectively.

  Even in the developed markets, not all areas of the cosmetics sector were in decline. L’Oréal’s long-term acquisitions and innovation strategies had provided a very large business in the mass market, with affordable, advanced technology make-up products. This proved to be recession resilient. Mass-market make-up sales grew 8% in Western Europe. Money may have been tight but girls were still going out of the house looking their best. Their mothers were not going to let their newly regenerated ageing skins start to sag again. Company skincare sales were up over 9% globally. When it came to acne and rosacea, there was no recession at all. In the Galdera dermatology joint venture with Nestlé, sales were up 7% in Western Europe and 18% in the US. So in both geographic and product sector terms, L’Oréal had been well placed indeed to withstand the full impact of the crisis. Total sales were up 2.8% in the year.

  How did L’Oréal respond to the downturn? While sales increased, operating profits were down year-on-year for the first time in living memory, albeit only by 3.6%. This is attributable to L’Oréal’s response to the crisis. The company, always one for taking the long view, saw the economic crisis as an opportunity to gain advantage over competitors who were more at the mercy of the financial analysts. So advertising and promotional spends were maintained, giving L’Oréal (now the third-largest advertiser in the world) an increased share of voice. The research and development budget was increased by nearly 4% and the department employee count by 6%. The faith was repaid immediately. A 9% increase in the number of patents filed set a new company record of 628. Attention was still paid to costs. Cost of sales and selling, and general and administrative costs came down as part of a policy of “permanent restructuring”.

  It was a good year to make acquisitions. The biggest was the capture of the Yves Saint Laurent Beauté business. In addition to the iconic Yves Saint Laurent brand, the acquisition also brought into L’Oréal the Boucheron, Stella McCartney, Zegna, Roger & Gallet and Oscar de la Renta brands. These were ready for the inevitable upturn in the luxury market once economic conditions improved. The company also strengthened its American route to market with the acquisition of a third salon distributor, Columbia Beauty Supply. While the year had by no means been plain sailing, the company had weathered the storm better than most and was well poised for the upturn.

  2009

  The trouble was, however, that the upturn didn’t come in 2009. A sales decline of 0.4% was hardly catastrophic, especially given a heavy influence by retail inventory reduction on a massive scale. Like-for-like, the cosmetics divisions combined declined by 1.5%. The Body Shop held steady and the Dermatology JV grew by over 10%. Within the cosmetics divisions, the trends of 2008 continued, but the ebbing economic tide had lowered all boats. Consumer Products Division showed a good 3% gain whereas Professional Products (down 3%) and especially Luxury Products (down 9%) suffered. Total L’Oréal perfume sales were down nearly 15% (excluding acquisitions). Regionally, the Western European markets performed worst (down 6%); North America declined 3% and the growth rate in the Rest of World fell back to an 8% increase.

  Action was taken in the poorly performing regions and sectors. For example, the lower-priced Garnier Essentials range, priced at under 5 euros, was extended from its Eastern European markets into Western Europe. This helped the Garnier brand to grow, as did the company’s other low-priced, mass-market brand, Maybelline New York. Even the Luxury Products division had to bow to economic reality: it introduced small format perfume bottles and entry-level-priced skincare products. However, there were green shoots in the luxury area. Kiehl’s was promoted to pillar brand status as its global rollout drove total sales growth, up by 28%. The newly acquired Yves Saint Laurent brand grew by 17% in the US, driven by new product launches. Lancôme gained market share on the back of new products such as Génifique Youth Activator (protected by seven patents). These bolstered its new positioning as the anti-ageing specialist. And three more US distributors were acquired and merged into the company’s SalonCentric distributor brand, which increased market coverage to 80%.

  2009 was notable for L’Oréal making official that its primary goal was to reorient the company decisively towards developing and emerging markets. These “New Markets” now accounted for 33% of group sales, double the level of a decade earlier. They were forecast to exceed 50% within the next ten years. CEO Jean-Paul Agnon set the company the goal of recruiting an extra billion consumers in these markets. This would double the number of men and women using L’Oréal products. As company strategy went forwards, accessibility and affordability would be much more important elements.

  There were two new strategic changes to facilitate this shift. First, a further ramping up of R&D capabilities and investment, particularly in areas such as stem cell research. Secondly, a transformation of company culture and structures to increase flexibility. An early example of the benefits of increased flexibility came with a new eyelash product, the Innovative Renewal Lash Serum. The R&D function had managed to decode the life cycle mechanisms of eye lashes. Biological and physical knowledge from the Hair care team was combined with similar contributions from the make-up team to come up with a new hair care product, which would be used in a make-up setting.

  2010

  As most of the world’s economies began a recovery, how well was the new strategy working? Very well it seemed. Sales were up a very impressive 11.6% to just under 20 billion euros. The company’s global retail monitoring calculated theirs at $24 billion, well ahead of the cosmetics businesses of Proctor & Gamble ($18.6 billion), Unilever ($15.4 billion) and the more specialised Estée Lauder ($7.4 billion). In the company’s drive to recruit a billion new consumers, there was good news. New Markets were now snapping at the heels of the still-becalmed Western Europe region for the title of largest-in-sales. Even better news was that the company’s efficiency measures had driven the operating profit margin in New Markets up to 16.9%. This was ahead of North America. Shifting the sales mix to New Markets now would be largely profit neutral, which was good to know in the year China became the company’s third-largest market. The company consolidated its three Asian research centres into a new Asian division of R&D to increase the focus on products relevant for Asian skin and hair needs.

  The two divisions that had suffered most in the economic crisis had both returned to growth. Professional Products grew by 4%, having added 35,000 salons around the world as customers. Key to the turnaround had been Matrix, pushing its features of easy-to-use products at accessible prices. The brand was up over 18% in New Markets, where it reached well over 60,000 salons. Luxury Products did even better, growing by 7%, due to the growth of Génifique, Kiehl’s, Yves Saint Laurent and Lancôme. Kiehl’s had now opened 760 sales outlets in 38 countries. It eschewed advertising to focus on product sampling, and doubled sales in three years and grew 66% in the Asia Pacific region in the year.

  The heavy lifting of recruiting the extra billion fell to the Consumer Products division, up 5.5% in total and double that in New Markets. But some of the billion had to be found in the old markets, especially at the younger end of the market. Brands like Maybelline were spearheading the drive, with a wide range of affordable yet scientifically advanced innovations. The progress was exempli
fied by Falsies Mascara, which became the best-selling mascara in North America and Western Europe within a year of being launched. This helped drive the total brand, already the world’s best-selling make-up brand, up by 13%.

  The Body Shop was beginning to look like one of the company’s less inspired moves. Like-for-like sales were still in the doldrums, declining by 1%: it was still in the midst of a strategic reorganisation begun the year before. Growth of 31% in E-commerce sales for the division was the one glimmer of light. Elsewhere: Galderma grew another 16%; L’Oréal’s first factory in Russia opened its doors, to service the countries of the old Soviet Union; and the Essie nail care brand was purchased by the North American unit.

  2011

  A milestone was reached. Sales breached the $20 billion euros barrier, having grown 5%. Sales in New Markets (up nearly 10%) came within 20 million euros of overtaking Western Europe (sales flat again) as the company’s largest region. If Eastern Europe hadn’t caught a cold, by declining 3% in dismal economic conditions, it would have happened this year rather than next. In the worldwide cosmetics market, New Markets (excluding Japan) accounted for a staggering 87% of worldwide market growth.

  The other news was the return from hibernation of the luxury products consumer. This market sector grew by 7.7%. L’Oréal inched further ahead, growing by 8.2% like-for-like. This was the best-performing of the cosmetics divisions and only just behind the ever-buoyant Dermatology JV. Key to the growth, as ever, was breakthrough innovation. Lancôme Visionnaire became the first ever-fundamental skin corrector on the market, ring-fenced by twenty patents. Other luxury successes were the continued expansion of Kiehl’s, the extension of the Giorgio Armani brand into female perfume with Acqua di Gioia, and the launch of Loverdose by Diesel. The unit also acquired Clarisonic, the market leader in sonic skincare technology.

  The Body Shop finally showed like-for-like growth, moving ahead just over 4%. This was on the back of its 16 online stores and an L’Oréal-driven push to get the brand into travel retail in 44 markets. The High Street part of The Body Shop was still going nowhere fast. The R&D and cost legs of the strategy powered on. R&D spend went up 8% and the annual patent count rose above 600 for the third year in a row. On the cost side, the company strategy, of having production units as close to markets as economically feasible, meant there were now 41 plants. These were well positioned to service the market growth. Productivity per employee had increased by17% since 2009 and the company was paying no more for its ingredients than it had been in 2008.

  What is Their DNA?

  L’Oréal is a classic case. Competitors can easily predict what the company will do, but it is extremely difficult to pre-empt them, copy them or stop them doing it. They have built a unique business model with a well-entrenched company culture.

  Science

  It would not be too much of an exaggeration to describe L’Oréal as a science company with cosmetics factories attached. From the day Eugène Schuller pondered the challenge of conjuring a safe and effective hair dye, L’Oréal has been first and foremost a science company. If Eugène had been approached by a laundress rather than a hairdresser, L’Oréal would probably be giving Proctor & Gamble and Unilever a spanking in detergents rather than cosmetics. Their superior research function has enabled them to grow and develop virtually every brand they have acquired. This includes some apparently tired and past it at the time of purchase. The strategy of cascading scientific benefits down the range to the cheapest products gives them advantage in all parts of the market. Not only do they have better science, they apply it more widely.

  Commitment to the centrality of core research into skin and hair has been passionate, prolonged and ongoing. The result is that L’Oréal is unbeatable at their business. No competitor could hope to catch them up and match the annual investment. Their extension into electronic and light technologies is also a guarantee that they will not be outflanked by new technologies. By focusing their research into skin and hair, rather than any specific production technologies, their research has always been solution neutral.

  Taking the Long View

  Two factors have combined to enable L’Oréal to work on longer timescales than the norm for global consumer packaged goods businesses: consistency of management and of ownership. For a company this size to have only had four CEOs in over a century is remarkable. Those four men have had over 150 years of L’Oréal service between them. Not one itinerant, heroic CEO or Chainsaw Al in sight, to change things around just to show they are there. The course originally steered by Eugène Schuller has been maintained, with appropriate touches on the tiller and updates to reflect a changing world. The commitment and determination to crack the US market in the mid-late 1900s has merely been pivoted towards the new markets.

  The share structure of L’Oréal has played a key role in giving the company license to invest early in areas where making a return seems a long way off. The majority of shares are held by two entities, both of which have powerful reasons not to rock the boat, or allow the curse of the predatory, activist shareholder to strike the business. Thus, L’Oréal has been able to invest so much in core research not geared towards any white spaces in the market. They have been able to invest in country- and regional-specific operational set-ups long before sales justified such investment. As a result, they have built up an infrastructure in their New Markets region, which is more than capable of winning L’Oréal their extra billion consumers in the next decade.

  Summary

  L’Oréal is an exceptional company that has performed exceptional feats with little external fuss or bother. The combination of their scientific capabilities, acquisition strategy and regional expansion has led to consistent success over a long period of time. The only real question looking forwards is what will happen to the ownership structure. Liliane Bettencourt has become unimaginably wealthy by simply letting her father’s chosen successors do what they are paid to do. She has little need to sell up. She presumably also has powerful emotional reasons to keep things at L’Oréal pretty much as her father would have approved. However, she will not live forever and the commitment of the next generation to the firm, while often stated, has yet to be tested for real.

  Nestlé’s motivations are perhaps more hard headed. The returns they have gained on their original investment have far exceeded the return should they have invested the same capital in some part of their own vast empire. The cosmetics market over a long period of time has been faster growing and more profitable than virtually any other consumer goods market. The two companies also have an extremely close relationship, not only in their two joint venture companies but also in sharing main board directors. Would Nestlé like to buy L’Oréal outright? At the Nestlé 2011 Annual General Meeting, company chairman Peter Brabeck-Letmathe said the issue would be decided in 2014. Then restrictions on either Nestlé or the Bettencourt family selling to outside parties are lifted. Another option to an outright purchase might be for Nestlé and the Bettencourts to take the company private, with Nestlé buying out the independent shareholders.

  2014 will be an interesting year for L’Oréal.

  Mars

  Where Did It Come From?

  Mars Inc. is a $33 billion plus business and the world’s biggest confectionary company. It owes in existence to a family fight, an everyday event in the tempestuous relationship between a somewhat feckless penny candy seller, Frank Mars, and his irascible, driven and decidedly un-feckless son Forrest.

  Franklin Clarence Mars, a childhood victim of a relatively mild bout of polio, spent most of his childhood confined to his parents’ house in Hancock, Minnesota, where his mother, in a quest to keep him entertained, taught him everything she knew about making candy. Once Frank had mastered her repertoire, he experimented on his own concoctions and by 1902 was running a wholesale candy firm selling low-quality penny candy in the Minneapolis/St Paul’s area. The same year he married Ethel G. Kissack and, despite spending many weeks at a time away from home drummi
ng up sales on the road, found time to father a son, Forrest Edward Mars, in 1904.

  Frank’s business was not a success. He constantly veered towards bankruptcy, placing tremendous financial strain on a household that for weeks at a time saw no money whatsoever. By 1910, Ethel had had enough and divorced Frank, taking herself and her son to live with her parents in North Battleford, Saskatchewan, a remote Canadian prairie town. Neither mother nor son was too impressed with Frank, who rarely stumped up the alimony and was only ever referred to by Ethel as ‘that miserable failure’. But Frank soon got over whatever trauma he felt, married another Ethel, moved to Seattle and set up again, this time as a manufacturer of candy based on the recipes he’d learned as a child.

  Within a year, he was bust again, losing everything, including the new family home. Ethel Mk II had more faith in him, although that must have been sorely tested when, in 1914, this time in Tacoma, Washington, his third candy business went bankrupt. As Frank was wont to do, he fled the scene with the perennially optimistic Ethel Mk II in tow, leaving unpaid creditors in his wake. Back in Minneapolis, he sunk his last $400 into yet another candy-making venture. He was a tryer, perhaps a, if not he, vital quality in an entrepreneur. And this time the trying paid off. No doubt much to the surprise of everyone who knew him as nothing but a three-time failure, his newly named company, the Mar-O-Bar Co., hit on a winner, a line he called Victorian Butter Creams, which he got listed in the mighty Woolworths among other outlets. Failure was at long last behind him, and he built up a successful, locally successful, concern. Meanwhile, Forrest thrived at school and in 1922 won a scholarship to the University of California to study mining, a key industry where he had grown up. Understandably strapped for cash given the family circumstances, Forrest, who had clearly inherited his business brains from his mother, created for himself a range of entrepreneurial evening jobs to pay his way through college, with such success that he dropped out of mining to focus on business.