Where Did They Come From?
Of all the world’s top consumer goods businesses, L’Oréal is perhaps still the closest to the vision of its founder. Eugène Schuller was born into very modest circumstances, as the son of a pastry cook. By the age of four, before school, he was buttering tart tins and shelling almonds. These were the beginnings of a lifelong, ferocious work habit - clocking 6,000 working hours a year, over 16 hours a day, 365 days a year – that would be the driving force of his business. After finishing school, Eugène entered the Institute for Applied Chemistry in Paris, and paid his way by working nightshift as a pâtissier. He qualified top of his class. An academic career beckoned for the bright, hard-working chemist, and an instructor’s post at the Sorbonne initiated what seemed an inevitable rise to a professorship. But he found academia dreary, and left for a job at a maker of chemical products, the Pharmacie Centrale de France. Eugène soon became, first, the head of their research laboratory and then head of chemical services.
In 1905, Eugène’s life, and the future global cosmetics industry, changed. He was visited by a hairdresser anxious to pay someone 50 Francs a month to find a safe and reliable hair dye. Eugène eagerly grabbed the project as something to engage his evenings. In those days, cosmetics was a tiny industry in which serious chemists had no interest. It was widely considered to be a frippery used mostly by women of questionable morals. However Eugène found the challenge interesting. Hair dyes at the time were either safe or effective, but never both. Their use could be spotted at a hundred paces. Eugène deconstructed current hair dyes to discover their active and harmful components then, in his kitchen, experimented with new formulae. He would then test out, working at a hairdresser’s salon from 8 to 11pm.
By 1907, Eugène had cracked the problem and immediately saw the potential. The hairdresser was bought off and Eugène launched his new hair dye under the brand name Auréole. After selling Auréole to many Parisian hairdressers, in 1909 he founded a company to manufacture and sell the product. Its original name, Société Francaise des Teintures Inoffensives pour Cheveux (literally translated French Society for Inoffensive Tinctures of Hair), later gave way to L’Oréal. To publicise his venture, Eugène contributed articles to a magazine called Coiffure de Paris. This was primarily to get a cheaper (contributor’s) rate for advertising, of which he was a prodigious user. Notwithstanding, he was soon sole proprietor and editor, which no doubt helped the magazine’s editorial line regarding his product.
The outbreak of the Great War prompted Eugène to enlist in the army. Although he was over age, he persuaded them to admit him as a chemist. Later he was able to transfer to an active posting in the 31st Artillery, rising to the rank of lieutenant and amassing a chestful of medals for valour. While Eugène had been giving the German army the same treatment later doled out to his competitors, the running of L’Oréal was in the hands of his wife. It did very well. The formula for success was already very well established, and top scientists were coming up with products, which offered breakthrough performances at affordable prices. Right from the start, Eugène was clear how he wanted his company to run: it would be based on applying science to the problems of hair care. The rise of Lumière and then Hollywood films was making cosmetics and hair dye more mainstream. Eugène was convinced this growing market could only be conquered by scientifically advanced products.
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.
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 regional 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.
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 exemplified 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.