L’Oréal (PINK:LRLCY), the French cosmetics giant, performed strongly in the first half of 2012 with double digit sales growth in Q2. The performance was supported by strong growth in luxury sales and recovery in the North American market. It also noted weakening trends in demand for luxury products from Asian markets. Meanwhile, the company increased its focus on Asian markets, particularly on India, where it plans to set up a new production facility with an investment of $80 million and pass on the benefits of the reduced production costs to the consumer. Higher prices have been a critical factor in limiting L’Oreal’s traction in India where it competes with lower-priced hair and skin care products of consumer giants Procter & Gamble (NYSE:PG) and Unilever (NYSE:UL).
Indian operations grow despite the economy slowing down
The company estimates the annual spending per head on beauty products in India to grow from US$4 to US$13 by 2025. A key test for the company as it tries to corner a major share in these spending would be to adjust to the tastes of India’s 1.2 billion population, the majority of whom still shop at small neighborhood outlets rather than at supermarkets. It has experimented with selling products in cheap, individual sachets for a few rupees, and believes it currently has presence across 750,000 small shops nationwide. It has also used its Garnier product range to develop a special range of products that use Indian ingredients and is testing makeup products to expand beyond hair and skincare categories. Backed by these initiatives the company grew by 25 percent last year when India’s economy growth slowed down from 10 percent to 5.5 percent.
Wealthy Indians to drive growth in the near future
The company sees the upper class of the population as the most attractive target. It believes that at least 60 percent of wealthy Indians currently buy luxury goods while traveling abroad.  The rapid emergence of sleek new shopping malls in metropolitan cities provide an opportunity for L’Oreal’s elite brands, including Lancome, Yves Saint Laurent and Kiehls to expand their presence and could help the company realize a major portion of the 5 year, US$26 billion growth in the Asian cosmetics markets forecast by the Euromonitor research group. 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.
We believe that the initiatives by the company cater to the price conscious nature of the Indian population, and they could drive long term growth given the low proliferation of high-end cosmetics in the market, the market size and increasing disposable income of the middle class.
We have a Trefis price estimate of $27 for L’Oreal, 5% ahead of the current market price.Notes:
- L’Oreal ventures to India in bid to be region’s No. 1, Taipei Times, September 2012 [↩]