L’Oreal (PINK:LRLCY), the leading cosmetics manufacturer in the world, arrived in India 15 years ago and has been growing at about 30% year-on-year in the last decade.  It then comes as no surprise that L’Oreal has decided to sharpen its focus on the Indian consumer. L’Oreal’s sixth R&D center worldwide is expected to start operations in Mumbai, India by the end of this year. What’s more, almost 70% of the launches from the new facility shall be designed and developed for the Indian market. LOreal shall have to face stiff competition from Procter & Gamble (NYSE:PG) and Unilever (NYSE:UL), which have been present in India for much longer and have customized their product offering considerably to match the Indian consumer’s tastes and spending power.
We value L’Oreal with a $23.27 stock price estimate, roughly at parity with its current market price. Here we take a closer look at L’Oreal’s moves in India.
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Negligible Impact on L’Oreal’s Stock
India still insignificant within L’Oreal
India does not appear in the top five countries for L’Oreal, which happen to be U.S., France, China, Germany and Brazil. With close to $160 million in sales, India still contributes less than 1% of L’Oreal’s overall global sales of around $25 billion. Even a sustained growth, at historical rates of close to 30%, presents negligible upside to L’Oreal’s stock.
Premium Nature of L’Oreal Cosmetics
L’Oreal cosmetics carry a premium image and price tag, which still have limited traction in India. L’Oreal would not only have to invest in R&D but also in local sourcing and manufacturing to be able to cater to the price-conscious Indian consumer profitably. The double-digit growth in the Indian economy can be leveraged by offering volume at competitive price-points. L’Oreal’s portfolio in India does not only need customization, as is being targeted through the upcoming R&D center, but it also needs high volume manufacturing and an extensive distribution network across the vast landscape.
So What Does L’Oreal’s Increased Focus on India Mean?
While L’Oreal setting up an R&D center in India leverages the expertise of the qualified local staff, it is also an attempt to achieve more cost-effective R&D spending, given the relatively lower cost of labor and manufacturing in India.Notes: