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Investment Overview for L'Oreal (OTC:LRLCY)
WHAT HAS CHANGED
L’Oreal’s recent acquisitions have been strategically significant in nature and can give the company the scope to further expand its market share and profitability. L’Oreal’s annual sales for 2014 were €22.5 billion reflecting a year-on-year growth of 1.7% (3.8% in like-for-like terms).In Q2 2015, L'Oreal experienced one of its strongest growth (15.3% year-on-year growth) in the last couple of decades, majorly due to currency tailwinds. L’Oreal’s Western Europe and North American regions witnessed significant improvements, while Brazil is still reeling under economic problems. L’Oreal’s digital sales have been impressive and L'Oreal's initiatives in China are paying off. L’Oreal’s Luxe segment, the most successful division for 2014, continued to demonstrate the strongest growth so far in 2015, as well.
- Strategic Acquisitions
- In September 2014, L’Oreal signed an agreement to acquire Brazil based Niely Cosmeticos, the largest independent hair care and hair coloration company in the country. The company earned 405 million Brazilian Reals (140 million euros) in 2013. Aimed at the middle class mass market, Niely products have a large penetration in Brazil, with a wide distribution network including retailers and wholesalers, supermarkets, pharmacies and perfumery chains. L’Oreal aims to improve its largest division, the consumer products, through this acquisition.
- In June 2014, L’Oreal acquired NYX Cosmetics, a high-growth mass market makeup cosmetics brand with presence in more than 70 countries, with the aim of recovering the slow growth in the North American market. The company is a direct competitor to Estee Lauder's M-A-C brand of makeup cosmetics. NYX displayed almost 70% growth in sales in the first half of 2015.
- In April 2014, L'Oreal completed the acquisition of Magic Holdings in China. To counter this strengthening competition from domestic players and retain their market share, global beauty companies have been on an 'acquire-to-grow' strategy in the Chinese market. Magic Holdings is the leader in the Chinese facial care market, with annual revenues that grew 14% on a constant currency basis to reach $220 million in 2013. The acquisition of Magic Holdings indicates L'Oreal's stance against domestic competition.
- In April 2014, L'Oreal completed the acquisition of Decléor and Carita from the Japanese group Shiseido. The brands have been integrated into L'Oreal’s Professional Products Division, a category where L'Oreal has been a major player for more than 100 years. The acquisition would ensure L'Oreal's entry into new distribution channels in the professional beauty segment, such as day spas, resorts, and destination spas which specialize in skin care.
- Research & Development Focus
- In April 2015, L’Oreal entered into a skin tissue research agreement with the bio-printing technology firm, Organovo. The research will involve L’Oreal’s skin cell technology along with Organovo’s proprietary NovoGen Bioprinting Platform. The agreement will provide L’Oreal with exclusive rights to use the skin tissue models for the development, manufacturing, testing, evaluation and sale of non-prescription cosmetic, beauty, dermatology and skin care products and nutraceutical supplements.
- In December 2014, L'Oreal announced the acquisition of Israel-based hair research start-up, Coloright. Coloright develops hair-fibre optical reader technology and it will be a part of L’Oreal’s international Research and Innovation network.
- Distribution Expansion
- L’Oreal had been on the lookout for more robust distribution channels in the African region. Distribution remains unstructured and hence cumbersome in Africa. In a move to further expand its African presence, in March 2015, L’Oreal signed an agreement with CFAO, the specialized distributor from Cote D’Ivoire, to cover the production and distribution of cosmetics in the Ivory Coast. The partnership will bolster L'Oreal's distribution network as CFAO will be the sole distributor of L'Oreal products in French speaking West Africa.
L'Oreal's Market Share of Global Hair Care Market: Hair Care Market Share for L'Oréal declined from 24.3% in 2009 to 22% in 2012 and stayed close to 22% in 2013 and 2014. The company pulled out its Garnier brand from China in a bid to focus exclusively on prestige beauty products in the region. In April 2014, L'Oreal completed the acquisition of Magic Holdings in China, which is the company's largest acquisition in the Chinese market till date. Magic Holdings is the leader in the Chinese facial care market, with annual revenues that grew 14% on a constant currency basis to reach $220 million in 2013. The acquisition of Magic Holdings indicates L'Oreal's stance against domestic competition. We currently forecast L'Oréal's share of the Hair Care market to reach 24% by the end of our forecast period. There could be a marginal downside to the Trefis price estimate if the market share remains flat at the current level.
L'Oreal's Market Share of Global Skin Care Market: L'Oréal's Skin Care Market Share expanded from 12.3% in 2009 to close to 14% in 2014. We currently forecast L'Oréal's share of the Skin Care market to grow to about 16.5% by the end of our forecast period. There could be a marginal downside to the Trefis price estimate if the market share were to remain flat at the current level.
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 32 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 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 approximately 50% of cosmetics 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 24% of cosmetics 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 8% of cosmetics 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 Body Shop
constitutes about 4% of net sales and includes a chain of over 3,119 free standing ‘The Body Shop’ stores in over 60 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.
L'Oreal also has a 8.96% stake in Sanofi Aventis (as of December 31, 2014), the dividend from which contributes significant value to L'Oreal's stock.
Despite L’Oreal’s global presence, about 36.7% of its cosmetics revenue comes from Western Europe and about 25% from North America. Asia accounts for about 21% of its cosmetics sales. Latin America and Eastern Europe currently contribute around 9% and 7% respectively.
L'Oréal's main competitors include other major global beauty care products manufacturers such as Revlon, Estee Lauder, Avon, Shiseido and Procter & Gamble, among others.
Leading market share in Skin Care, Fragrances and Makeup
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, and L'Oreal commands the second largest share in the segment, after Procter & Gamble. Hair care accounts for about 20.5% of L'Oreal's net sales.
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 more on R&D as a percentage of sales as compared to its competitors. This has helped L'Oreal remain a leader in the cosmetics market.
On the basis of revenue, L'Oreal (at $30 billion) is much larger than Revlon($2 billion), Avon ($9 billion) and Estee Lauder ($11 billion). Therefore, L'Oreal has more money to spend on marketing which is an extremely important factor for success in the cosmetics industry.
Booming Skin Care due to anti-aging creams
Anti-aging creams and anti-cellulite skin care products are in high demand among the aging populations in developed countries notably Japan (oldest demographic), the U.S. 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 U.S. 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 U.S. and Western Europe, the introduction and extension of the men’s product lines is a major source of growth.
How Does Trefis Modelling Work?
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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