Caso 3 L Oreal

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Neeraj Kumar SinghSrikanth GIC PA I U niversity P ress, B usiness School C aseD evelop ment C entreThe success of new products, the international breakthroughsmade by our brands and our spectacular progress in theemerging markets have enabled L'Oreal to achieve anotheryear of strong sales growth. This momentum, combinedl withthe tight control of costs, led to an important improvement inprofitability, despite an exceptionally unfavourable economicand monetary environment.'

- Lindsay Owen-Jones, Chairman and Chief ExecutiveOfficer of L'Oreal Group

I.NTRODucnONFounded in 1909, L'Oreal had become the world leaderill the cosmetics market by 2003. Providing a varietyof beauty products, it has transformed from a Frenchcompany in the early 1900s to a global titan in the200,os. Its product range included makeup, perfume,and hair and skin care products, which were tailoredaccording to the consumer needs. The companybelieved in the strategy of innovation and diversifica-tion. L'Oreal's growth depended on the global brand,which helped in sustaining the mature consumer-producrs market even in times when global marketsthemselves were shaky. High profile, celebrity-drivenmarketing campaigns and Web-enabled informationand customization sites as well as aggressive expansionand acquisition enhanced its global braad image. Thecosmetic market as a whole had! been. slightly on thedecline since the late 1990s. But the L'Oreal productswere becoming popular due to dneir uniqueness andcatering to the beauty needs of different ethnic groups

and gender. In 2003, the group was number one inU.S. cosmetic market, but it faced tough competitiofrom Estee Lauder and Procter & Gamble. This mthe group refocus its business strategies.

BACKGROUNDL'Oreal, the world's largest cosmetic company,established in 1909 by a French chemist, EugSchueller. After manufacturing and selIing the cosmeproducts in Paris for a few years, Schueller starexporting to other European countries like HollanAustria, and Italy. Gradually the L'Oreal products wdistributed to the United States, South America, Rusand the Far East. By 2003, the L'Oreal groupentered 130 countries, through its 290 subsidiariesaround a hundred agents. More than 80 percentgroup sales were generated outside France, with opetions in every major territory.

In the 1970s, it acquired Laboratories GarnierParis, and this group became one of L'Oreal's largdivisions. The heart of L'Oreal's strategy was themetic and dermatological research department,group earmarked 3 percent of its turnover (sales)the research and development work. Since the 19~he group had particularty focused its attentionNorth America with a series of smart launches, cleacquisitions, arid dynamic marketing causing problefor domestic rivals.

Since its establishment, the L'Oreal groupmarketed over 500 brands, consisting of more t2,000 products. m t provided products for all sectors

L'Orea'I'sBusiness Strategy by Neeraj IKumar Stnqh, under the direction of Sri tkantih G.


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beauty business, such as hair color, permanents,styling aid, body care and skincare, cleansers, and fra-grances.? Its general cosmetics portfolio containedmany of the world's biggest beauty products. It ownednumerous brands, including Kerastase, Garnier, May-belline, Helena Rubenstein, Giorgio Armani, Vichy,and La Roche Posay.

The company believed that diversification andinnovation were its critical success factors. L'Oreal'sconcern for offering products that were adaptable tothe demands of its clients showed its passion for inno-vations. Thus, it invested heavily in research anddevelopment and recovered its investment by globallylaunching its new products. All research was centeredin France. As finished products were developed, theywere offered to subsidiaries across the world. Becausebrand life cycles for cosmetics could be very short,L'Oreal tried to introduce one or two new productsevery year in each of its worldwide markets. L'Orealmarketed products under its own name as well asunder a number of other individual and family brandnames. For example, it marketed Anais Anais perfume,the high-end Lancorne line of cosmetics, and L'Orealbrand haircare products.

L'Oreal's strategy was to trickle down technologyover time from high-end outlets like department storesto mass markets, such as drugstores. The mass-marketbrand Plenitude had become the market leader inFrance, but sales in the United States had not beenpromising. With innovations and diversifying strate-gies L'Oreal overcame all these hurdles to an extent. In

2001, the Group, headed by CEO Lindsay Owen-Jones,had a turnover (sales) of 13. 7 billion. In 2003, L'Orealwas the world's largest skin care company, with rev-enues of US$17 billion, and employed 50,000 people."

PRODUCT CATEGORIESSince its beginning, the L'Oreal Group had developedproducts in the field of cosmetics. It had four productcategories: consumer, luxury, professional, and active(Exhibit 1). These products catered to the needs ofhair, skin, makeup, and so on. The consumer productsencompassed all the brands distributed through mass-market channels, ensuring that L'Oreal quality wasavailable to the maximum number of consumers. Theconsumer division accounted for more than half of thesales in 2003. The luxury division offered a range ofprestigious international brands selectively distributedthrough perfumeries, department stores, and duty-freeshops. The professional division, the market leader inits sector, offered specific hair care products for use byprofessional hairdressers and products sold exclusivelythrough hair salons. The active division created andmarketed brands of cosmetics and dermatologicalproducts for selective distribution through pharmaciesand specialty health and beauty outlets. The majorbrands in these divisions were L'Oreal Paris, Biotherm,Giorgio Arrnani, Lancorne, Shu Uernura, Polo RalphLauren Blue, and L'Oreal Professional.

Innovations from the research laboratories and alarge number of initiatives ensured growth for the

Breakdown of 2003 Consolidated Cosmetics Sales by Division

'0 54.80% Consumer Productso 25.10% Luxury Productso 13.90% Professional Productso 5.50% Active CosmeticsSource: www.loreal.com.
http://www.loreal.com./http://www.loreal.com./


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group's core brands. The company achieved majormarket share in all of its product divisions. TheProfessional Products Division achieved 8.8 percentgrowth in the first half of 2003. The division took newinitiatives in all business segments, particularly incolorants with the launch of Luo (a new translucidcolorant) and Equa (a formula developed specificallyfor the needs of the Japanese market). The ConsumerProducts Division achieved 9.3 percent growth for thefirst half of 2003 over that of the previous year, whichwas well ahead of the growth rate for mass-marketproducts. This growth could be attributed in particularto the launch of innovative products such as CouleurExperte colorants and Double Extension mascara. TheLuxury Products Division, operating in markets thatwere more sensitive to the economic slowdown and thereduction in air travel, managed to maintain growth of0.2 percent. This performance came from the successof new products such as the Resolution facial skin carefrom Lancorne, a brand that at the end of 2002 becamethe world's number one in the selective retailingchannel. In perfumes, the successful European launchof Polo Blue by Ralph Lauren confirmed the excellentresults achieved in the United States. The ActiveCosmetics Department continued its internationalrollout, while improving its market shares in Europe.It thus achieved a growth rate of 10.9 percent, in linewith the figure for the first half of 2002. This wasboosted especially by the successful Myokine facialskin care from Vichy and the skin redensifier InneovFerrnete, launched in five European countries, herald-ing the group's first move into the cosmetic nutritional

supplement market. Dermatology achieved sales of139 million, representing like-for-like growth of 7 per-cent. Galderma performed well on the acne anirosacea markets. In geographic terms, Galderma COIl-tinued to achieve sustained growth in North Americaand made strong advances in Latin America (growthin Brazil was 8 percent and in Mexico 22 percent) anr'Asia (growth in South Korea was 23 percent).

NEW W ORLDW IDE M ARKETSL'Oreal was surging in markets from China to Mexico(Exhibit 2). Its secret was conveying the allure of dif-ferent cultures through its products. Whether it wa~selling Italian elegance, New York street smarts, 0;French beauty through its brands, L'Oreal was reachinzout to more people across a bigger range of incomesand cultures than just about any other beauty-product,company in the world."

The success of L'Oreal cosmetics had been buii;on the promotion of different brands in differennations, the choice of which was based on views of i r . : . .local culture. For people interested in finding the mosAmerican product possible, the French company \1>::_the name Maybelline. Those preferring the mooFrench were given the L'Oreal brand. All the differe=lines were sold in all of the markets, but only one \ _excessively promoted, depending on the market.

L'Oreal was number one in the cosmetic indust+but competition in the U.S. market as well as interns-tiorial markets such as Japan, China, etc., was gro\\ir:..:.In the United States, L'Oreal and Estee Lauder \\.~~_

Breakdown of 2003 Consolidated Cosmetics Salesby Geographic Zone

D 27.60% North AmericaD 52.70% Western EuropeD 19.70% Rest of the WorldSource: www.loreal.com.
http://www.loreal.com./http://www.loreal.com./


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head to head and Procter & Gamble was slightlybehind them. Internationally L'Oreal was facing com-petition from global as well as local players. Germany'sBeiersdorf had stolen a march on L'Oreal by beating itto the market with its Nivea Kao brand of strips used toclean pores. Worldwide, Nivea ranked number one inmass-market face cream, with 11 percent share, slightlyahead of L'Oreal's Plenitude. Procter and Gamble's Oilof Olay skin cream was on par with L'Oreal's Plenitudearound the globe.By tailoring its products to the demands of a spe-cific marketing group with the backing of the interna-tional brand name, L'Oreal achieved profitable resultsfor the year 2000, in countries such as Japan (up46 percent), Korea (70 percent), Brazil (44 percent)and Russia (47 percent) to name but a few. The growthcontinued in 2003 also. It was very strong in Centraland Eastern Europe (up 26.2 percent), particularly inthe Russian Federation, where sales advanced oncemore (up 3S.S percent) after three years of extremelyfast growth.

The group made important breakthroughs in thenewer markets in 2003. It ventured into the Chinesemarket, which was crowded with 3,000 domestic cos-metic manufacturers. More than 450 foreign companieshad invested in excess of US$300 million in China overthe last decade, further stimulating the rapid growth ofthis sector. L'Oreal, Procter & Gamble, Unilever, andShiseido ranked among notable international competi-tors in China. Total sales of cosmetic products in 2000exceeded RMB30 billion (US$3.66 billion). Since eco-nomic reform started 20 years ago, China's cosmeticsmarket had grown an average of 23.S percent a yearfrom 19S2 to 1998. Although this growth slowed downto about 12.9 percent a year after 1998, cosmetic salesin China were expected to reach RMBSO billion(US$9.76 billion) by 2010.5 L'Oreal wanted to cash inon this opportunity.

Achieving success in the Asian market was a goalfor L'Oreal in 2000, an aim the company saw as "inter-nationalization" as opposed to "globalization." BeatriceDautresme, vice-president in charge of strategic busi-ness development, commented, "L'Oreal sees the worldas a mosaic of different cultures.:" In China, where thegroup's core brands are now fully installed, the growthrate was 69.3 percent, largely thanks to the emblematicsuccess of Maybelline, the country's number onemakeup brand. Alongside L'Oreal Paris, which rein-forced its luxury brand image, Garnier successfullyextended its product offering, particularly in theskin care market. Vichy strengthened its number oneposition in the 2,500 pharmacies that sold the brand'sproducts across the Russian Federation. In Japan the

growth was maintained due to the acquisition of ShuUemura, cosmetics giant in Japan, and the launch ofL'Oreal Paris skincare and makeup lines in Japan,which marked a major advance in establishing thebrand in the Japanese market. In India too, growth wasextremely rapid at 33.4 percent. This strong perfor-mance reflected the breakthroughs achieved by theGarnier brand, which had managed to launch moderncolorants that met women's needs at affordable prices.To help fulfill the growth potential in India, the grouphad started a new factory near the city of Pune (inWestern India), which benefited from the mostadvanced production quality standards.

CHANGING STRATEGYL'Oreal was gradually turning marketing efforts to theethnic beauty industry, and reaping profits. L'Orealwas working hard to grab a portion of the estimated$14 billion? (by 200S) ethnic beauty industry by focus-ing product lines and marketing on African-Americanand Asian-American communities. Since 1995, L'Orealhad purchased Soft Sheen and Carson, two black-centered beauty companies, and rolled them into onemega-company. The company had also been busy inacquiring Asian-centered companies, such as Mininurseof China and Shu Uemura of Japan.

L'Oreal had also tuned its research work for devel-oping products specific for the ethnic groups. L'Orealopened a new research center in Chicago in 2003, toresearch and study the skin and hair of different ethnicgroups. The Institute's first major project was centeredon characterizing the chemical and physical propertiesof African hair. The goal of this research was to betterclassify hair according to fiber structure so that the per-formance of hair relaxers currently in the market couldbe improved. Other projects would investigate skincareproblems such as pigment and scarring disorders.Chicago was chosen for a number of reasons. SoftSheen had long been headquartered in the city; Chicagohad historically been a center of black American cultureand learning; and there were a number of renowneduniversities in the area that provided opportunities forsynergy with L'Oreal's new research institute. The needsand requirements of consumers of different ethnic ori-gins were different. They had specific skin and haircareneeds that required products especially formulated forthem. L'Oreal's acquisition of the Soft Sheen-Carsonbrand, a world leader in skin and haircare for blackwomen, had greatly expanded the Group's activities inthis market sector. Jean-Paul Agon, president and CEOof L'Oreal USA, says about the new research center,"The knowledge and insights that we gain through


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research conducted at the Institute will ultimately allowus to develop innovative new products that better servethe beauty care needs of the global ethnic market.""

As the cosmetic market for women was becomingsomewhat saturated, the cosmetic companies shiftedtheir target. The male cosmetic market, a slow burnerin beauty, was predicted to take off in the future. Theoverall market for men's cosmetics grew by 9 percent in1999, according to NPD Beauty Trends (source: EuroRSCG report}? Research sbowed tbat men were farmore brand loyal in this market than women, mainlybecause tbey disliked shopping around.'? An industryinsider commented, "The global male cosmetics marketis growing 30 percent annually."! ' L'Oreal had some ofthe most popular male cosmetics brands in Europe andthe United States-including Biotherm Homme, ahigh-end brand witb more than 50 percent marketshare in Europe. The company began introducing itsBiotherm Homme skincare products in China in 2002.The firm had targeted young and fashionable malecustomers. L'Oreal saw the potential of the cosmeticsmarket for men, although cosmetics for men in 2003accounted for a very small portion of L'Oreal's sales inChina.

In 2003, for the 19th consecutive year, the L'Ogroup showed a double-digit profit growth rate.net operational profit rose by 13.5 percent to 1billion ($2.1 billion) (Exhibit 3). But its consolidatesales (Exhibit 4) had fallen by 9 percent, mainly duecurrency fluctuations. In 2003, L'Oreal battlednomic slowdown and adverse currency moves, wwar in Iraq forced it to cram product launches intofirst and fourth quarters of the year. In 2003, L'Owas number one in tbe United States with a marshare of 21.2 percent. Comparatively, its competitoEstee Lauder and Procter & Gamble held market shof 19.6 percent and 13 percent respectively.

In 2004, L'Oreal climbed 10 places to the 2position in the annual F inancial T im es survey of"World's Most Respected Companies," comparedthe 30th position it held in 2003's ranking. L'OGroup CEO Lindsay Owen-Jones also made astrong impression for his leadership qualities; heranked number 16 on the list of the "World's MRespected Business Leaders:' climbing 14 positionsonly three years. In the sector rankings, L'Orealplaced fourth on the list of some of the world's largconsumer goods manufacturers. '?


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Consolidated Sales of L'Oreal Group in 2003t ) Breakdown of consolidated sales by branch

2003 Growth (as %) 2002 2001Excluding

% of Published exchange % of % of millions total figures effect millions total millions total

Cosmetics 13,704.3 97.7 -1.8 7.1 13,951.8 97.6 13,394.2 97.5Dermatology 306.5 2.2 -4.5 10.5 321.1 2.3 292.2 2.1Other 18.3 0.1 21.2 21.2 15.1 0.1 54.0 0.4Group 14,029.1 100.0 -1.8 7.2 14,288.0 100.0 13,740.4 100.0Group Share, i .e . 50%

2) Breakdown of consolidated sales by geographic zone

2003 Growth (as %) 2002 2001Excluding

% of Published exchange %of % of millions total figures effect millions total millions total

Western Europe 7,309.7 52.1 3.8 5.0 7,044.6 49.3 6,667.2 48.5North America 3,981.4 28.4 -10.3 6.8 4,438.7 31.1 4,450.5 32.4Rest of the Wor ld 2,738.0 19.5 -2.4 14.3 2,804.7 19.6 2,622.7 19.1Group 14,029.1 100.0 -1.8 7.2 14,288.0 100.0 13,740.4 100.0

3) Breakdown of cosmetics sales by geographic zone

2003 Grow th (as %) 2002 2001

% of %of millions total millions total

6,962.8 49.9 6,580.6 49.14,224.8 30.3 4,256.9 31.82,764.2 19.8 2,556.7 19.1

13,951.8 100.0 13,394.2 100.0

Western Europe

%of millions total

7,221.7 52.73,783.7 27.62,698.9 19.7

13,704.3 100.0

ExcludingPublished exchangefigures effect

3.7 4.9-10.4 6.6-2.4 14.3-1.8 7.1

North AmericaRest o f the WorldCosmetics branch

Source: www.loreal-finance.com.

NOTES1. "Strong increase in 2003 net operational profit" + 13.5 percent,"

wwwloreal.com, February 20, 2004.. "Brands," www.chamberoman.com. 2002.. ''L'Oreal-World's Largest Skin Care Company-Licenses Tissue-informatics Automated Pathology Slide Screening Software,"www.tissueinfcrmatics.corn. November 12, 2003.

. Edmondson, Gail, and Ellen Neuborne, "L'Oreal: The Beautyof Global Branding lint'l edition)," www.businessweek.com.June 28, 1999.

. "China's Booming Cosmetic Market," wwwprorenata.com,February 14, 2002.

. O'Reilly, Deirdre, "L'Oreal Conquers Asia with TailoredProducts," wwwarchives.tcm.ie, April 22, 2001

7. "L'Oreal Turns to Black and Asian Communities," www.racerelations.about.com, January 25, 2004.

8. L'Oreal Press, "The Diversity of Beauty," www.loreal.com.August 19, 2003.

9. Lyons, Kate, "Beauty make over, wwwbandt.com.au,August 23, 2001

10 Ibid.11. Jingj'lng, Jiang, "Male Cosmetics Consumers Smell Trend's

Scent," www.chinadaily.com.cn. March 2, 2004.12. "L'Oreal Moves Up among World's Most Respected Compa-

nies," www.financialtimes.com. January 27, 2004.1
http://www.loreal-finance.com./http://www.chamberoman.com./http://www.tissueinfcrmatics.corn./http://www.businessweek.com./http://www.loreal.com./http://www.chinadaily.com.cn./http://www.financialtimes.com./http://www.financialtimes.com./http://www.chinadaily.com.cn./http://www.loreal.com./http://www.businessweek.com./http://www.tissueinfcrmatics.corn./http://www.chamberoman.com./http://www.loreal-finance.com./

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