Some Of The Key Regions Expected To Fuel L’Oréal’s Future Growth

by Trefis Team
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French beauty giant, L’Oreal (OTC:LRLCY) has been enjoying a healthy 2015, so far. Though this was mostly due to currency tailwinds, other factors such as L’Oreal’s strategic investments and the recovery of its erstwhile lagging Consumer Products division, and the continued good performance of the other divisions, were also responsible for L’Oréal’s growth. For the first nine months of 2015, the company churned out revenues  of €19 billion reflecting around 13% year-on-year growth. In this article we talk about the regions that might be crucial to L’Oreal’s future growth. L’Oréal is expanding its presence in these regions through acquisitions, alliances, and investments because of the potential they hold. L’Oréal 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 like Asia, Africa, and Latin America.

Our $36 price estimate for L’Oréal is almost in line with the current market price.

See Our Complete Analysis for L’Oreal Here

China

In April 2014, L’Oréal acquired Magic Holdings – the leading Chinese facial care company – and L’Oréal’s largest acquisition in China. China is currently the world’s second largest beauty market, just behind North America. Though L’Oréal enjoyed a 9% market share in 2013 and commanded market leadership positions in beauty and make-up cosmetics in China, it faced stiff competition from the domestic players who seemed to possess a better knowledge of Chinese beauty preferences. L’Oréal even shut down its Garnier brand and took cosmetics off from the mass-market  because the pressure of local competition was intense. International beauty companies had adopted the ‘acquire-to-grow’ strategy in the Chinese market in order to counter domestic competition. In 2014, L’Oréal enjoyed a 13% share of the China skincare market, surpassing both Japan’s Shiseido Co Ltd and Olay-owner Procter & Gamble Co.  L’Oréal is the market leader in China’s $25 billion skincare segment now, which is expected to grow to $35 billion by 2019, according to Euromonitor. [1]

Brazil

In a move to expand its position in Brazil – the world’s third largest beauty market, with a market size of $43 billion [2] – L’Oreal acquired Niely Cosmeticos in September 2014. Niely Cosmeticos is the largest independent hair care and hair coloration company in the country. 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’Oréal’s aim is to bolster its Consumer Products division sales through this acquisition. Lately, L’Oréal’s Consumer Product division is displaying slower growth in developed markets like the U.S.  Since 50% of L’Oréal’s sales are generated from this division, the company is looking into developing nations like India and Brazil to boost its Consumer Product sales.

Also, 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. [3]

India

L’Oréal’s Garnier brand is a huge hit in India and the company wishes to replicate this success for its other products in the country. India has a large scope for growth in beauty due to the still low penetration of beauty products – approximately 50% of the Indian households use shampoo and close to 25% use skin care products. [4]. India is expected to be among the top 4 beauty markets by the next decade or so. The increasing spending power of women on cosmetics, the rising consciousness among men for grooming products, and India’s soon-to-be a $10 billion beauty market might be some of the reasons for the company to increase its focus on India. L’Oréal had chalked a roadmap to become a billion dollar company in India by 2020 and the company also aims to make India one of its top five markets by the next few years (currently India is among the top 15). [5] Since its Rs 1,000 crore investment in the country in 2011, the company is planning on a second level of investment in order to accelerate its export activities from India. L’Oreal India is valued at Rs 2,100 crore currently and the division grew at 18% in 2014. [6] According to a KPMG Wellness sector report, India’s beauty and wellness sector will nearly double from Rs 41,224 crore (~ $6 billion) in 2012-2013 to Rs 80,370 crore (~ $12 billion) by 2017-2018. [7]

Africa

L’Oréal had been gradually expanding its presence in Africa as it considers it to be one of the key markets for growth. (Read about how L’Oréal is bolstering its Africa presence here and here). One challenge that the company had been encountering in the region was its unstructured distribution networks. In order to combat the same, in Q1 2015 L’Oréal struck an alliance with CFAO, the specialized distributor from Cote D’Ivoire, to cover the production and distribution of cosmetics in the Ivory Coast. CFAO being the sole distributor of L’Oréal products in French speaking West Africa, will ensure L’Oréal of a uniform and systematic distribution channel in Africa.

Turkey

L’Oréal is targeting Turkey for future growth because of its young population (half of its 78 million population is below the age of 29) and its digital interest (it is one of the top European countries in terms of time spent on social media). L’Oréal’s Consumer Products division is the leader in Turkey’s mass beauty market due to brands such as Maybelline and L’Oréal Paris. For example, Kohl is one of the key items in Turkish makeup and L’Oréal had been able to strike the right chord with its Maybelline Colossal Kajal. Towards the latter half of 2014, L’Oréal launched an online beauty magazine in Turkey called Makyaj.com, that focuses on articles related to most popular beauty related internet search queries. Currently, the site is Number 1 in Turkey in organic serach for makeup queries. [8]

MAKYAJ

 

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Notes:
  1. L’Oreal to lower imported product prices in China as tariffs cut, The Business Times, May 29, 2014 []
  2. BelezaNaWeb Raises $30M To Bring Brazil’s Beauty Market Online, Tech Crunch, June 15, 2015 []
  3. L’Oréal signs agreement to acquire Niely Cosmeticos Group in Brazil, L’Oréal Finance, September 2014 []
  4. A glowing cosmetics market?, L’Oreal Press Release []
  5. L’Oreal ramps up India ops to be ‘billion dollar’ firm by 2020, Financial Express, October 11, 2015 []
  6. India to become regional export hub for L’Oreal, Business Standard, October 8, 2015 []
  7. Indian Cosmetic Industry at a glance 2014 – 2015, Indian Mirror []
  8. Focus on Turkey : Make-up and digital, a winning pair, L’Oréal Finance, Dec 15, 2015 []
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