VALUATION HIGHLIGHTS

1. Skin Care constitutes 38% of the Trefis price estimate for L'Oreal's stock.
2. Makeup constitutes 27% of the Trefis price estimate for L'Oreal's stock.
3. Hair Care constitutes 21% of the Trefis price estimate for L'Oreal's stock.

WHAT HAS CHANGED?

1H 2021 Sales Update

With the economies opening up, demand for makeup and fragrance products has started rising again, and this shows in the company's 1H 2021 sales update. Revenues came in at EUR 15.2 billion, up from EUR 13.08 billion in 1H 2020. Most of this growth came from North Asia and Latin America sales, both of which rose around 23% YoY, with sales from all other regions rising around 11-13%. Operating profit rose 27% over this period, from EUR 2.36 billion in 1H 2020 to EUR 2.99 billion in 1H 2021.

POTENTIAL UPSIDE & DOWNSIDE TO TREFIS PRICE

L'Oreal's Market Share of Global Hair Care Market: Hair Care Market Share for L'Oréal declined from 24.3% in 2009, to 22% in 2012, and was around to 24%, 23%, and 20% in 2013, 2014, and 2015 respectively. In 2016, the company's market share stood at 20% and around the same in 2018. The company pulled out its Garnier brand from China in a bid to focus exclusively on prestige beauty products in the region. We currently forecast L'Oréal's share of the Hair Care market to reach 21% by the end of our forecast period. There could be a marginal downside to the Trefis price estimate if the market share remains flat at the current level.

L'Oreal's Market Share of Global Skin Care Market: L'Oréal's Skin Care Market Share expanded from 12.3% in 2009 to close to 14% in 2014 before declining to around 12% in 2016 and 2018. We currently forecast L'Oréal's share of the Skin Care market to grow to about 15% by the end of our forecast period. There could be a marginal downside to the Trefis price estimate if the market share were to remain flat at the current level.

BUSINESS SUMMARY

L’Oreal is the largest manufacturer of cosmetics in the world. It manufactures and sells makeup, fragrances, skin care, and hair care products through over 30 global brands. It caters to consumers across all income levels and distribution channels spanning mass volume retailers and drugstores, to upscale perfumeries, pharmacies, department stores, company-owned stores, and e-commerce websites.

L’Oreal reports and segments its products range on the basis of price range and distribution channel into: Professional, Consumer, Luxury, and Active products.

1. Professional Products

constitute ~15% of net sales and are meant for professional hair care by stylists at hair salons. The main brands include: L’Oreal Professional, Kerastase, Matrix, Mizani, and Redken.

2. Consumer Products

constitute approximately 50% of cosmetics sales and are sold through mass volume retailers and drugstores. Consumer products include makeup, skin care and hair care products, competitively priced and distributed through mass-market retailing channels. The main brands include: Garnier (skin and hair care for men and women), L’Oreal Paris (skin care, makeup, hair care, and hair colors under Studio-Line, Dermo-Expertise, and Elseve product lines), Maybelline New York and Softsheen-Carson (hair care for African ethnic descent consumers).

3. Luxury Products

constitute about 30% of cosmetics sales and comprise prestigious brands and premium service through department stores, upscale perfumeries, travel retail outlets, as well as free standing stores and e-commerce websites. The main brands include Lancome, Biotherm, and Kiehl’s.

4. Active Products

constitute about 8% of cosmetics sales and include dermo-cosmetic (cosmetics with medicinal ingredients and recommended by pharmacists and dermatologists) skin care products sold exclusively through pharmacies, specialty drugstores, medi-spas, and even dermatologists. The main brands are La Roche-Posay, Skinceuticals, Vichy, and Sanoflore.

Despite L’Oreal’s global presence, about 35% of its cosmetics revenue comes from Western Europe and over 23% from North America. Asia accounts for about 25% of its cosmetics sales. Latin America and Eastern Europe currently contribute around 8% and 6%, respectively.

L'Oréal's main competitors include other major global beauty care products manufacturers such as Revlon, Estee Lauder, Avon, Shiseido, and Procter & Gamble, among others.

SOURCES OF VALUE

Leading market share in Skin Care, Fragrances, and Makeup

L'Oreal has the largest market share in the Skin Care segment, the largest and fastest growing segment within Beauty Care (on account of anti-aging skincare and skin care for men), as well as in the Fragrances and Makeup segment.

Highest R&D as percentage of net sales and marketing expenses in the beauty care industry which ensures market leadership

Launching new and innovative products is crucial to growing or even maintaining share in the beauty care industry. L'Oreal spends more on R&D as a percentage of sales as compared to its competitors. This has helped L'Oreal remain a leader in the cosmetics market.

On the basis of revenue, L'Oreal (at ~$30 billion) is much larger than Revlon ($2 billion), Avon ($9 billion), and Estee Lauder ($11 billion). Therefore, L'Oreal has more money to spend on marketing, which is an extremely important factor for success in the cosmetics industry.

KEY TRENDS

Booming Skin Care due to anti-aging creams

Anti-aging creams and anti-cellulite skin care products are in high demand among the aging populations in developed countries, notably Japan (oldest demographic), the U.S., and Western Europe. A big chunk of L'Oréal's skin-care business comes from anti-aging products. The anti-aging market comprises of those products that can treat multiple signs of skin aging at one time, and is a fast-growing segment under the anti-aging beauty products.

Growth of natural products categories and "Masstige" segment as well as male product lines

There is a growing demand for natural / organic products in most countries, a trend led by the developed markets in the U.S. and Western Europe. Additionally, there is an increased preference for less synthetic, eco-friendly, and more natural products and packaging.

There is a growing trend towards the so-called "Masstige," or premium brands sold at lower prices through mass distribution. In addition, beauty care products focused on men is the latest niche being targeted by most players globally. In developed markets, particularly in the U.S. and Western Europe, the introduction and extension of the men’s product lines is a major source of growth.