L’Oréal recently inaugurated its new state-of-the-art global research center in Paris that would also serve as global head of a network of six regional facilities. The center’s research & innovation programs would be exclusively dedicated to hair care products, including hair coloring, hair care and hair styling. L’Oréal targets to acquire one billion new customers over the next decade, and product innovation is critical to reaching out to new customers and conquering newer markets, particularly emerging markets in Asia, Africa and Latin America. L’Oreal’s products compete with hair and skin care products of consumer giants Procter & Gamble (NYSE:PG) and Unilever (NYSE:UL) and beauty companies such as Revlon (NYSE:REV).
Need To Diversify Product Offerings, Customize to Local Preferences and Price Points
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The €100 million facility is one of the largest investments made by L’Oréal’s in research & innovation, and it will serve as global head of the company’s other regional centers located in Japan, China, India, the U.S. and Brazil. The facility will focus on hair coloring, hair care (shampoos, conditioners), styling (sprays, gels, waxes) and perms, smoothing or straightening.
Hair Care is L’Oréal’s largest division, contributing to 30% of its stock value. The company’s market share of global hair care grew from 18% in 2005 to 24% in 2008, but slipped to 22% in 2009 as consumers down traded to cheaper local/regional and supermarket brands in the wake of sluggish macro-economy and reduced income levels. Moreover, since nearly 40% of its hair care sales come from professional hair care, reduced customer visits to salons also led to a decline in its market share. L’Oréal’s market share has improved since then, but is yet to reach pre-recession levels.
The L’Oreal products have so far carried a premium image and price tag and have had limited traction in emerging markets, particularly competing with the more attractively priced competitor products from P&G and Unilever. With a target of acquiring one billion more customers worldwide, it needs to push more aggressively into emerging markets and offer more customized products to suit local preferences as well as cater to different price points to gain higher market share.
We have a Trefis price estimate of $23 for the L’Oreal stock, which is at a significant discount to the current market price.