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Investment Overview for L'Oreal (PINK:LRLCY)
L'Oreal's Market Share of Global Hair Care Market: We currently forecast L'Oreal's share of the Hair Care market to grow from 21.4% in 2012 to about 22.3% by the end of our forecast period. There could be a 4% downside to Trefis price estimate if the market share were to decrease to 2006 levels of close to 19%.
L'Oreal's Market Share of Global Skin Care Market: We currently forecast L'Oreal's share of the Skin Care market to grow from 13.4% in 2012 to about 15.4% by the end of our forecast period. There could be a 7% downside to Trefis price estimate if the market share were to decrease to the 2007 levels of close to 11%.
L’Oreal is the largest manufacturer of cosmetics in the world. It manufactures and sells makeup, fragrances, skin care and hair care products through its 27 global brands. It caters to consumers across all income levels and distribution channels spanning mass volume retailers and drugstores to upscale perfumeries, pharmacies, department stores, company-owned stores and the e-commerce websites.
L’Oreal reports and segments its products range on the basis of price range and distribution channel into: Professional, Consumer, Luxury and Active products.
Professional Products constitute about 14% of net sales and are meant for professional hair care by stylists at hair salons. The main brands include: L’Oreal Professional, Kerastase, Matrix, Mizani and Redken.
Consumer Products constitute about 49% of net sales and are sold through mass volume retailers and drugstores. Consumer products include makeup, skin care and hair care products competitively priced and distributed through mass-market retailing channels. The main brands include: Garnier (skin and hair care for men and women), L’Oreal Paris (skin care, makeup, hair care and hair colors under Studio-Line, Dermo-Expertise and Elseve product lines), Maybelline New York and Softsheen-Carson (hair care for African ethnic descent consumers).
Luxury Products constitute about 25% of net sales and comprise prestigious brands and premium service through department stores, upscale perfumeries, travel retail outlets as well as free standing stores and e-commerce websites. The main brands include Lancome, Biotherm, and Kiehl’s.
Active Products constitute about 7% of net sales and include dermo-cosmetic (cosmetics with medicinal ingredients and recommended by pharmacists and dermatologists) skin care products sold exclusively through pharmacies, specialty drugstores, medi-spas and even dermatologists. The main brands are La Roche-Posay, Skinceuticals, Vichy and Sanoflore.
The main competitors include other major global beauty care products manufacturers such as Revlon, Estee Lauder, Avon, and Procter & Gamble among others.
The Body Shop constitutes about 4% of net sales and includes a chain of over 2500 free standing ‘The Body Shop’ stores in over 65 countries across the globe. Acquired in 2006, The Body Shop range of cosmetics is well known for its products based on natural ingredients and the brand’s strong ethical commitments and fair-trade practices.
Dermatology division under L’Oreal constitutes less than 4% net sales and is a 50% partnership with Nestle in the joint venture, Galderma Laboratories. Galderma addresses skin, hair and nail diseases and specializes in the research, development and marketing of therapeutic, corrective and aesthetic solutions for dermatology patients.
L'Oreal also has a 10.40% stake in Sanofi Aventis, the dividend from which contributes significant value to L'Oreal's stock.
Despite L’Oreal’s global presence, about 45% of its cosmetics revenue comes from Western Europe and about 23% from North America. Asia accounts for about 21% of its cosmetics sales. Latin America and Eastern Europe currently contribute around 7% each. The sales from North America and Asia Pacific are growing at about 18% compared to a growth at less than 3% in Europe.
Leading market share in Skin Care, Fragrances and Makeup segment
L'Oreal has the largest market share in the Skin Care segment, the largest and fastest growing segment within Beauty Care (on account of anti-aging skincare and skin care for men) as well as in the Fragrances and Makeup segment.
Second largest market share in hair care, the second largest product segment (after skin care) within beauty care
Hair care is a stable and growing market where L'Oreal commands the second largest share after Procter & Gamble and commands twice the share of the third largest player, Unilever. Hair care contributes about 33% to L'Oreal's net sales, of which 15% comes from hair colors and the remaining 24% from shampoos and styling products.
Highest R&D as percentage of net sales and marketing expenses in the beauty care industry which ensures market leadership
Launching new and innovative products is crucial to growing or even maintaining share in the beauty care industry. L'Oreal spends the most on R&D as a percentage of sales at 3.5% compared to Procter & Gamble at 2.7% and Revlon at 1.7%. L'Oreal far outspends Revlon, Avon and Estee Lauder on R&D, which helps L'Oreal remain a leader in the cosmetics market.
On the basis of revenue, L'Oreal (at $28 billion) is much larger than Revlon($1.4 billion), Avon ($10.5 billion) and Estee Lauder ($10 billion). Therefore, L'Oreal has more money to spend on marketing which is an extremely important factor for success in the cosmetics industry.
Strong prestige beauty sales growth in 2012
The global prestige beauty market grew in 2012 with the United States leading with sales growth of 7%, which significantly outpaced the mass segment sales growth. The prestige beauty segment generated sales of over $10 billion in the U.S. in 2012, compared to $9.5 billion in 2011. The growth was a favorable mix of more unit sales and pricing growth. The report also estimated that all beauty categories now have almost surpassed the pre-recession levels.
Booming Skin Care due to anti-aging creams
Anti-aging creams and anti-cellulite skin care products are in high demand among aging populations in developed countries notably Japan (oldest demographic), US and Western Europe. A big chunk of L'Oréal's skin-care business comes from anti-aging products. The anti-aging market comprises of those products that can treat multiple signs of skin aging at one time, and is a fast-growing segment under the anti-aging beauty products.
Growth of natural products categories and "Masstige" segment as well as male product lines
There is a growing demand for natural / organic products in most countries, a trend led by the developed markets in the US and Western Europe. Additionally, there is an increased preference for less synthetic, eco-friendly and more natural products and packaging.
There is a growing trend towards the so-called "Masstige", or premium brands sold at lower prices through mass distribution. In addition, beauty care products focused on men is the latest niche being targeted by most players globally. In developed markets, particularly in the US and Western Europe, the introduction and extension of the men’s product lines is a major source of growth.
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How do we get the historical numbers for this chart?
Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.
Who came up with the Trefis forecast for future years?
The Trefis team of in-house Analysts considers a variety of factors when projecting any forecast. The rationale for our projections is explained in the Trefis analysis section below.
How does my dragging the trendline on the chart impact the stock price?
- We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
- We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.
See more on: DCF Methodology
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