L’Oreal’s Top Acquisitions And The Underlying Strategies

by Trefis Team
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L’Oreal (OTC:LRLCY) is the international leader in cosmetics and beauty care and competes with other notable pure-play cosmetics manufacturers like Estee Lauder (NYSE:EL), Shiseido, Avon Products (NYSE:AVP) and Revlon (NYSE:REV). The company also competes with cosmetics products from global consumer product companies such as Unilever (NYSE:UL), Procter & Gamble (NYSE:PG) and Beiersdorf.

In results posted thus far for 2014, L’Oreal witnessed a moderate 2014, as judged by its financial performance. For the first nine months of 2014, L’Oreal reported a sales contraction of 0.4% to €16 billion. Like-for-like sales, which exclude currency headwinds and other inorganic growth impacts, increased 3.5% during the nine months in FY14.

In this article we discuss the major acquisitions undertaken by L’Oreal in 2014 and the strategic significance of each deal. In 2013, the top three markets accounting for around 50% of the world’s beauty market growth were China, Brazil, and the U.S. [1] Hence, it comes as no surprise that L’Oreal’s major acquisitions in 2014 focused in those regions.

We have a $37 price estimate for L’Oreal, which is at a slight premium to the current market price.

See Our Complete Analysis for L’Oreal Here

  • China’s Magic Holdings: L’Oreal Battles To Gain A Larger Share Of The Chinese Beauty Market With The Aid Of An ‘Inside Player’

In April 2014, L’Oreal completed the acquisition of Magic Holdings in China. The Chinese beauty and cosmetics market is the third largest market globally, after North America and Japan, and had a market sales of approximately $23 billion in 2013. [2] Within this huge market, L’Oreal reported sales of over $2 billion in 2013. [3] This translates into a 9% market share for L’Oreal in the overall Chinese beauty market. However, the company has faced intense pressure from domestic players within the mass-market cosmetics space and has bowed out of the Chinese hair care market by shutting down its Garnier brand.

L’Oreal still commands market leadership positions in beauty and make-up cosmetics in China, with L’Oreal Paris and Maybelline New York being the number one brands in their respective segments. However, domestic players, like Shangai Jahwa United, have displayed a better understanding of the Chinese consumer tastes. The company’s brand ‘Herborist’ uses traditional Chinese medicinal and herbal practices in developing its beauty products and has shown strong resonance with Chinese consumers. [4] Adapting such practices  has given domestic Chinese beauty players a decent lead over large, international players.

To counter this strengthening competition from domestic players and retain their market share, global beauty companies have been on an ‘acquire-to-grow’ strategy in the Chinese market. L’Oreal announced its acquisition of Magic Holdings International Limited for $850 million in 2013, which is the company’s largest acquisition in the Chinese market. Magic Holdings is the leader in the Chinese facial care market, with annual revenues that grew 14% on a constant currency basis to reach $220 million in 2013. The acquisition of Magic Holdings indicates L’Oreal’s stance against domestic competition. (For more on L’Oreal’s previous acquisitions, see L’Oréal Vies For Top Spot In Growth Markets With Rapid Acquisitions)

  • NYX Cosmetics: L’Oreal Aims To Win North American Hearts And Wallet Share With A Broader Make Up Portfolio

L’Oreal’s acquisition, NYX Cosmetics, is a high-growth mass market makeup cosmetics brand with presence in more than 70 countries globally. The company is a direct competitor to Estee Lauder’s M-A-C brand of makeup cosmetics and has seen explosive growth in sales over the last two fiscal years. Sales for NYX Cosmetics increased by 46% and 57% in the years ending May 2013 and May 2014, to reach $93 million. [5]

L’Oreal wants to replicate the success it had with brands such as Maybelline and Kiehl’s in the makeup space. Prior to  the acquisitions in 1996 and 2000, Maybelline and Kiehl’s had revenues of $300 million and $30 million, respectively. [6] Now, Maybelline and Kiehl are L’Oreal’s most popular brands in the low-end and prestige makeup space, with annual revenues of approximately $2.7 billion and $810 million, respectively. [6] The long term acquisition strategy has payed off very well for L’Oreal until now, and NYX should contribute to its success going forward.

The acquisition of NYX Cosmetics should add support to a recovery in the weak North American market. Impacted by adverse weather conditions and a slowdown in the North American beauty market has resulted in weak consumer offtake for cosmetics. L’Oreal’s growth in the North American cosmetics market slowed down from 4.4% in 2012 to 2.6% in 2013, while other developed markets showed signs of expansion. [7] Going forward, the company expects the North American market to rebound to higher growth driven by an expansion in trendy mass market color cosmetics such as NYX Cosmetics, M-A-C, and UrbanDecay.

  • Decléor and Carita: L’Oreal Expands Its Presence In The Professional Beauty Division

In April 2014, L’Oreal completed the acquisition of Decléor and Carita from the Japanese group Shiseido. The turnover for Decléor / Carita was around 100 million euros in 2012. Decléor and Carita hold a second position worldwide, in the global Professional Spa and Beauty Institute market. [8]

The brands have been integrated into L’Oreal’s Professional Products Division, a category where L’Oreal has been a major player for more than 100 years. The acquisition would ensure L’Oreal’s entry into new distribution channels in the professional beauty segment, such as day spas, resorts, and destination spas which specialize in skin care. [9]

  • Niely Cosmeticos: L’Oreal Penetrates Further Into Brazil, One Of The Fastest Growing Beauty Markets

In September 2014, L’Oreal signed an agreement to acquire Brazil based Niely Cosmeticos, the largest independent hair care and hair coloration company in the country. The company earned 405 million Brazilian Reals (140 million euros) in 2013. Aimed at the middle class mass market, Niely products have a large penetration in Brazil, with a wide distribution network including retailers and wholesalers, supermarkets, pharmacies and perfumery chains.

L’Oreal gained 9% of its sales from the Latin American region in 2013, and sales in Brazil grew by 13% year-on-year. Brazil is currently the fourth largest beauty market in the world, with a number 1 position in hair care, hair colorants, and deodorants. L’Oreal Brazil is the sixth largest subsidiary for the L’Oreal Group. [1]

L’Oreal aims to improve its largest division, the consumer products, through this acquisition. As we had mentioned in our earlier article that lately, the consumer products division has shown a lack of robust growth for L’Oreal.  Brazil being the largest hair color and hair care market and Niely being one of the most prominent players in this segment, we expect Niely to boost L’Oreal’s sales in Brazil and later on, internationally. [10]

  • Coloright: L’Oreal Strives To Maintain Its Leadership In Hair Research

In December 2014, L’Oreal announced the acquisition of Israel-based hair research start-up, Coloright. Coloright develops hair-fibre optical reader technology and it will be a part of L’Oreal’s international Research and Innovation network. According to L’Oreal’s estimates, the top two contributors for the global beauty market are skin care (34%) and hair care (24% ). [1] L’Oreal has always been a pioneer in hair research, and this acquisition will further aid the company in being one of the forerunners in hair care related innovations.

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  1. L’Oreal’s Annual Report 2013, L’Oreal Finance [] [] []
  2. Revlon and Garnier exit the Chinese $22.8 billion beauty market, Telegraph, January 2014 []
  3. L’Oréal’s acquisition of Magic Holdings marks firm’s biggest investment in Chinese beauty market, L’Oréal News Room, April 2014 []
  4. Domestic Beauty Brands Use “Chinese Wisdom” To Edge Imports, Red Luxury, February 2013 []
  5. L’Oréal signs agreement to acquire NYX Cosmetics, L’Oréal Finance, June 2014 []
  6. L’Oreal’s Agon Sees More Acquisitions After NYX Cosmetics, Bloomberg, June 19, 2014 [] []
  7. 2013 Results, L’Oréal Finance []
  8. Draft agreement between L’Oréal and Shiseido for the acquisition of Decléor and Carita, L’Oréal Finance, October 2014 []
  9. L’Oréal Finalizes the Acquisition of DECLÉOR and CARITA, Day Spa Magazine []
  10. L’Oréal signs agreement to acquire Niely Cosmeticos Group in Brazil, L’Oréal Finance, September 2014 []
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