Troubled with the euro-zone’s economic turbulence which is weighing on consumer spending in its primary markets, L’Oréal (PINK:LRLCY) is looking to India for growth. Last week the company announced that it plans to invest about $176 million by 2016 in India as it moves to grow its market-share in the country’s fast-growing market for high-end beauty and hair-care products. ((L’Oreal Plans to Invest $176 Million in India, The Wall Street Journal, January 2012)) India is Asia’s third largest economy and despite a slowdown, it is outpacing other major economies. A wider presence in India and South East Asia in general is expected to reduce L’Oréal’s dependency on mature consumer markets and help the company approach FY 2013 on a stronger footing.
Higher prices have been a critical factor in limiting L’Oreal’s traction in emerging markets where it competes with lower-priced hair and skin care products of consumer giants Procter & Gamble (NYSE:PG) and Unilever (NYSE:UL).
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- L’Oreal’s Q2 2016 Earnings Preview
- Why Does L’Oreal Want To Acquire The Skincare Brand, Société des Thermes de Saint-Gervais-les-Bains?
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The Focus Shifts To India
The recent announcement of a $180 million investment in India was preceded by an expression of interest to set up a $80 million unit in the northern state of Himachal in July.  The company has already invested about 30% of the proposed $180 million investment. A part of the remainder will be invested in further developing the research center in Mumbai and Bangalore.  This should help the company tune its products to cater to the tastes of India where it aims to reach 150 million consumers by 2020.
Why Is The Focus On India?
The company expects India to be among its biggest markets by 2020. This would require substantial revenue growth from India which currently contributes about 1% of its total worldwide revenues. The company plans to quadruple its turnover in India by 2020 and the recent investments are to support this target. 
L’Oréal estimates the annual spending per head on beauty products in India to grow from US$4 to US$13 by 2025 and a product portfolio customized to the Indian needs will help the company capture a majority share of the growing middle class.  A growth in the company’s market share in India would be instrumental in the company attaining its target of 1 billion new customers. ((L’oreal’s CEO Discusses Q4 2011 Results – Earnings Call Transcript, Seeking Alpha, February 2012))
Company’s Strategy To Tap The Indian Market
The majority of Indians still shop at small neighborhood outlets rather than at supermarkets and this would require the company to pursue an innovative retail strategy. 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. ((L’Oréal unveils new Research & Innovation center in India, L’Oréal Finance, January 2013))
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. A local research center will help the company further cater to the local tastes while tapping the cheap human capital which could be used to develop products for other markets. Besides localized products, the company is also experimenting with a dual pricing strategy which will help it differential its prestige brands. 
Backed by these initiatives the company India operations grew at +20% last year when India’s economy growth slowed down from 10% to 7%. ((L’Oréal unveils new Research & Innovation center in India, L’Oréal Finance, January 2013)) 
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 $26 for L’Oreal, 8% below the current market price.Notes:
- L’Oreal expresses interest in setting up a unit in Himachal, MoneyControl, July 2012 [↩]
- L’Oréal unveils new Research & Innovation center in India, L’Oréal Finance, January 2013 [↩]
- L’Oreal bets Rs 1,000 cr on India, DNA India, January 2013 [↩]
- L’Oreal ventures to India in bid to be region’s No. 1, Taipei Times, September 2012 [↩]
- L’Oreal woos aam aadmi with dual pricing strategy, The Hindu Business Line, July 2012 [↩]
- India GDP Growth Rate, World Bank, October 2012 [↩]