Cosmetics manufacturer L’Oréal (PINK:LRLCY) reported subdued third-quarter sales numbers on October 30, impacted by the currency volatility in emerging markets during the June-September period. In the nine months to September 30, revenues stood at €16.1 billion, up 3.1% over the same period in 2012. However, the company continued to maintain steady growth momentum on like-for-like basis. Since the recessionary period of 2008-2009, like-for-like sales for the company grew consistently between 5.0% – 5.6% on an annual basis. During the January-September period in 2013, L’Oréal reported a 5.3% growth rate on a like-for-like basis. In comparison, revenues increased 5.5% on a like-for-like basis and 10.7% on a reported basis, respectively in the first nine months in 2012.
To boost like-for-like product sales, the company has aggressively acquired companies in high-growth cosmetics markets of Africa and Asia in 2013. In addition to acquiring companies, the company recently announced the creation of a new Travel Retail Division to bolster growth in product sales. Through the new channel, L’Oréal aims to continue pursuit of its goal of reaching 1 billion new customers by 2020. In the present note, we look at various drivers impacting demand for travel retail products and describe how L’Oréal benefits through the expansion program targeted from the new travel retail channel.
Rising Passenger Traffic From Emerging Markets To Support Global Travel Retail Sales
Between 2010-2012, global travel retail sales (i.e., sales through locations positioned for travelers) grew 12.5% annually, from $39 billion to $50 billion.  The Asia-Pacific region, which has the largest share of global travel retail sales, witnessed annualized growth of 21% in retail revenues, followed by a 15.5% increase in the Middle East region. A major factor driving growth in these regions is the increase in outbound travel as a result of higher discretionary income among emerging economies coupled with a large number of low-cost carriers in the region. Between 2012-2016, travel retail sales from emerging economies are expected to continue grow at a double-digit pace, with Asia-Pacific continuing to contribute the largest share. However, growth from the Middle East region is expected to outpace growth in the Asia-Pacific region during the period. 
Strong performance in travel retail from Asia-Pacific and the Middle East regions is an outcome of increased passenger traffic in these regions. Airports account for 59% of total travel retail sales and hence, airline passenger traffic can be used as a metric to gauge demand for product sales through the travel retail channel. For the month of September, airline passenger traffic in Asia-Pacific and the Middle East increased 11.2% and 8.9%, respectively, compared to a 4.1% increase in global airline passenger traffic. 
The International Air Transport Association (IATA) estimates that passenger traffic from Asia-Pacific and the Middle East will grow 6.7% and 6.6% annually between 2012-2016, driven by an strong increase in disposable income levels in these regions.  Going forward, we expect consumer discretionary product manufacturers to expand their product offerings and retail floor space allocated to travel retail outlets across various customer touch points such as airports, hotel lounges, etc., in anticipation of higher growth in global passenger traffic.
Expansion In Product Offerings Through Travel Retail Channel To Benefit L’Oréal’s Top Line
The new travel retail service channel from L’Oréal is an expansion to its existing channel. Currently, products being offered through the company’s travel retail stores worldwide exclusively include the L’Oréal Luxe brand. However, the new travel retail division is expected to house a variety of products across L’Oréal’s product portfolio in Active Cosmetics, Consumer and Professional Cosmetics and L’Oréal Luxe. By expanding its product offerings in the channel to cater to an increase in geographic diversity in its travel retail customer base, L’Oréal expects an increase in footfall in high-growth cosmetics markets of Asia-Pacific, Latin America and Africa. In addition to expanding its product portfolio, the company will continue product innovations and global roll-outs of new products, driven by the ongoing adaptation to customer tastes. This should aid in the expansion of market share for the company.Notes:
- Excellence in Asia Travel Retail, Pernod Ricard, May 2013 [↩] [↩]
- Passenger Traffic Grows by 4.1% for the Month of September, Airports Council International, November 2013 [↩]
- Airlines to Welcome 3.6 Billion Passengers in 2016, IATA Pressroom, December 2012 [↩]