L’Oreal (PINK:LRLCY) plans to set up a new production facility in north India with an investment of $80 million. This will be the company’s second plant in India after Pune, which underwent a doubling of manufacturing capacity to 200 million units last year. Increased local production is likely to help the French cosmetics giant reduce production costs and pass the benefits to the consumer. Higher prices had been a critical factor earlier in limiting L’Oreal’s traction in India while competing with lower-priced hair and skin care products of consumer giants Procter & Gamble (NYSE:PG) and Unilever (NYSE:UL).
Local Production Would Further Bring Costs Down
For a long time, L’Oreal carried a premium image and price tag, leading to limited traction in India. Initiating local production eased L’Oreal into reducing its hair care products prices by 25% in 2010 that has helped it better compete with P&G’s Pantene and Unilever’s Dove. We believe the expansion of local production capacity will similarly help L’Oreal further reduce costs and penetrate the Indian “masstige” beauty market.
The company recently adopted a dual pricing strategy to make its hair care range under brand L’Oreal more affordable to Indian consumers, and also introduced sachets of its shampoos and conditioners with the hope of taking its distribution beyond the urban markets. L’Oreal also recently opened a new R&D center in Mumbai and is likely to increase its distribution to one million outlets by 2015 from the current 700K sites.
Asia is L’Oreal’s Growth Engine
L’Oreal targets reaching one billion customers in the next 10-15 years and is making a conscious effort to deepen its presence in the emerging markets of Asia and Latin America. It sees more than three-fourths of its future growth coming from markets like China, India and Brazil through a roll-out of customized products at attractive price points to tap into the unique requirements of local shoppers. Asia currently generates about one-fifth of L’Oreal’s sales.
In 2011, L’Oreal’s China sales grew at over 17-18% and crossed $1.6 billion. It plans to continue the growth momentum by increasing its distribution further in 600 second-tier Chinese cities, half of which have a population in excess of one million. International beauty companies like Estee Lauder and L’Oreal together occupy close to 80% market share in Chinese beauty market and stand well placed to benefit more from upcoming market growth and expansion.
L’Oreal India sales have grown at over 30% over the last few years and the company seeks to drive up its Indian customer base 4-5x from 30 million up to 150 million over the next decade. L’Oreal also plans to invest $100 million in Indonesia to add 50 million new customers by 2020, up from the current 20 million.
In 2011, L’Oreal’s markets outside North America and Western Europe generated about 40% of its sales, growing by 10%, compared to Western Europe that generated almost similar sales but grew by less than 1%.
We have a Trefis price estimate of $26 for L’Oreal, about 15% ahead of the current market price.