In a move to further expand its African presence, French cosmetics giant, L’Oreal (OTC:LRLCY) signed an agreement with Compagnie Française de l’Afrique Occidentale (CFAO), the specialized distributor from Cote D’Ivoire, to cover the production and distribution of cosmetics in the Ivory Coast. Headquartered in France, CFAO is a multinational company selling manufactured goods such as automobiles and pharmaceutical products. It operates in Africa and France’s former colonies.
The partnership will allow L’Oreal to access CFAO’s extensive distribution channels, cosmetics production and packaging facilities in Africa, and gain from the latter’s experience of the African markets. CFAO will be the sole distributor of L’Oreal’s international consumer brands, including L’OReal Elseve, Mixa, Ultra Doux, Maybelline, among a few. (Read press release here).
According to CFAO’s Chairman, Richard Bielle, the partnership supports CFAO’s strategy to facilitate the manufacturing and distribution of international brands and facilitate the consumption of world-class products in West Africa. Even though the deal allows for L’Oreal’s activities for a short period, the company is aiming at establishing Cote D’Ivoire as the hub for its African operations.  L’Oreal seeks to expand its reach in the French speaking West African region with the aid of this partnership.
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We have a $37 price estimate for L’Oreal, which is at a slight premium to the current market price.
L’Oreal’s Current Presence In Africa
L’Oreal is strategically expanding its presence in Africa with a focus on countries such as Kenya, Egypt, South Africa, and Nigeria. In 2013, L’Oreal had three branch openings in Nigeria, Kenya, and Ghana, and a new plant opening in Egypt. It is building its presence in Uganda currently.  There is great potential for growth in these countries as cosmetics consumption is still 10 to 20 times lower than the developed countries. L’Oreal underlined its growing focus on the region by creating a new position – Head of the Africa Middle East zone – in 2013.
L’Oreal has three commercial hubs in Africa: South Africa, Kenya and Nigeria, covering neighboring markets. Its has a 650 strong employee base and two plants in South Africa and Kenya. L’Oréal sold almost 120 million units in Sub-Saharan Africa in 2013 (+52% from 2012). 
How Is The CFAO Partnership Strategically Important For L’Oreal?
- L’Oreal Has Been Focusing On Africa To Build A One Billion New Customer Base
L’Oreal aims to add 1 billion new customers by 2020, so as to double its existing user base. The majority of the growth is expected to come from emerging nations in regions such as Asia, Africa, and Latin America. We believe Africa will play a pivotal role in L’Oreal’s expansion plan. The Middle East and Africa segment is the fastest growing geographical segment for L’Oreal (12.5% year on year growth in 2014). In 2014, L’Oreal’s revenues grew by 1.8% to €23 billion out of which 2.5% came from this region. CFAO can help increase the contribution of revenues from the African region, for L’Oreal. Presently, CFAO has operations across 37 countries, including 34 African countries and overseas regions. In 2014, CFAO generated €3.5 billion in revenues and the French-speaking Sub Saharan Africa contributed to 42% of its revenues. 
- CFAO Will Offer A Stronger Distribution Network For L’Oreal’s Products
L’Oreal had been on the lookout for more robust distribution channels in the African region. L’Oreal’s growth is impeded to some extent by parallel importers in Africa. For example, in East Africa, Dark and Lovely is offered at lesser prices through different channels, when L’Oreal East Africa is the only trademark owner, official manufacturer and importer. 
Distribution remains unstructured and hence cumbersome in Africa. Africa’s geographical expanse is greater than USA, China, India, Japan, and Europe combined. The entire market cannot be captured through a single distribution channel. The partnership will bolster L’Oreal’s distribution network as CFAO will be the sole distributor for L’Oreal products in French speaking West Africa.
- Partnerships And Acquisitions Are The Best Modes For Building An African Presence
L’Oreal already commanded a dominant position in Africa’s haircare segment with its brand, Dark and Lovely. It acquired the local skin care leader Interconsumer products (ICP) in April 2013, to establish dominance in the skin care segment as well. L’Oreal’s market penetration was enhanced with ICP’s manufacturing plant in Kenya and a distribution network in growing East African economies. Finally, the acquisition expanded L’Oreal’s portfolio of offerings to these emerging geographies. 
As a part of the current deal, CFAO’s subsidiary Sicobel will be responsible for manufacturing L’Oreal products in Cote D’Ivoire. L’Oreal will offer assistance to Sicobel, with raw material supplies, manufacturing, and marketing related activities.  The partnership will allow L’Oreal to access CFAO’s extensive distribution channels, cosmetics production and packaging facilities in Africa, and gain from CFAO’s experience of the African markets.
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- L’Oreal expands into African market, African Business Review, March 11, 2015 [↩]
- Why Africa is an important market for beauty company L’Oréal, How We Made It In Africa, April 2013 [↩] [↩]
- L’Oréal pursues its growth strategy in Sub-Saharan Africa building on its expertise in geocosmetics, loreal.com, March 2014 [↩]
- CFAO 2014 Annual Results, February 23, 2015 [↩]
- Kenyan Acquisition to Give L’Oréal a Boost in Sub-Saharan Africa, Euromonitor, May 2013 [↩]
- L’Oréal aims to be no. 1 for beauty in Africa with new partnership, Cosmetics Design Europe, March 10, 2015 [↩]