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OJ: On the Record

PARIS -- Lindsay Owen-Jones, L'Oreal's chief, knows his biggest challenge is to stay on top. His track record over the last six years proves he can do just that.<BR><BR>But even the world's largest cosmetics company is not invincible.<BR><BR>To...

PARIS — Lindsay Owen-Jones, L’Oreal’s chief, knows his biggest challenge is to stay on top. His track record over the last six years proves he can do just that.

But even the world’s largest cosmetics company is not invincible.

To comprehend both the awesome clout and lingering vulnerability of the world’s largest cosmetics company, go no farther than Aisles 51 and 52 of the bustling Cora hypermarket in the Paris suburb of Massy.

Each month, 50,000 shoppers roll their carts past more than 1,000 feet of shampoos, bar soaps, deodorants, creams, toothpastes, fragrances and lipsticks.

L’Oreal Group rings up 50 percent of the store’s toiletries and beauty volume, and in categories like hair gels, L’Oreal’s share hits 90 percent.

Not even Coca-Cola claims a greater market share in its category, said Philippe Bizet, department head for toiletries and dry grocery at this Cora store, a unit in one of France’s top hypermarket chains.

“L’Oreal is a formidable competitor,” he said. “They are innovative and they overinvest to ensure they are the leaders. Few others have their resources to support so many brands.”

However, the company has an underlying weakness, he said: “They are the leaders — cocky, pretentious and so sure of themselves and their products that they are sometimes caught off guard.”

For example, Nivea’s anti-aging cream last year surpassed the market leader, L’Oreal’s Plenitude, Bizet recalled with a grin.

“The L’Oreal guys couldn’t believe it,” he said. “They came and bought up crates of Nivea to take to their labs to study.”

But all this is not lost on Owen-Jones, the firm’s 48-year-old chairman and chief executive officer, who has been making his global vision a reality.

Owen-Jones has been transforming what he affectionately calls “a French cathedral” into a truly international beauty conglomerate, since he assumed command in 1988.

Last year, L’Oreal posted total global cosmetics sales of $7.8 billion, including licensees, some 77 percent outside of France. Meanwhile, for the past six years, L’Oreal has reported that its operating profit growth has outpaced the sales increases that are healthy by any industry standard.

For 1993, operating profits rose 12.5 percent to $464 million (2.6 billion francs at the current exchange rate), with a consolidated sales increase of 6.9 percent to $7.2 billion (40.2 billion francs).

Here’s the L’Oreal formula:

  • Reach out to six continents to hedge against local downturns.
  • Operate at every level of price point and retail distribution, from professional salons to department stores and all manner of mass-market outlets.
  • The “trickle down and fire up” philosophy, whereby profits from the mass level fund research on the class level. In mass, the company focuses on the premium end of the price spectrum, where margins are fatter.
“Will luxury companies in the next century, which do not have mass-market bases, have the resources to do the research necessary to compete? I think the answer is no,”said Owen-Jones, during a recent, wide-ranging interview in his office in suburban Clichy.

He sketched L’Oreal’s growth strategies, consisting not only of geographic market penetration, but a blizzard of new products, increased spending for research and advertising and a strong push in the company’s pharmaceutical and dermatological activities.

Owen-Jones’s international outlook was underscored April 14, when L’Oreal announced that it intends to acquire four foreign licensees, including Cosmair Inc., the U.S. business that Owen-Jones ran and turned into a major power in the early Eighties.

But the new frontier is Asia, which accounted only for only 6 percent of L’Oreal’s global sales last year. “Certainly that is the biggest challenge and one of the biggest opportunities for totally new business for the L’Oreal corporation over the next 10 years,” he said.

He dismissed a question raised by some as to whether L’Oreal can make the cultural leap into the Far East.

“L’Oreal’s been overcoming cultural leaps for as long as I can remember,” he said with a laugh. “When I joined the company [in 1969], the question was, ‘Could L’Oreal become a European force?’ Then when I went to America [in 1981], the question was, ‘Could L’Oreal exist within the highly competitive environment of the U.S.?’ We were doing a little more than $150 million at that time, and there were some very serious questions raised as to whether we could survive,” he said of Cosmair, which chalked up sales of $1.3 billion last year.

In Asia, where 1993 sales totaled $446.4 million (2.5 billion francs), L’Oreal has adopted a uniform regional strategy. “The best way has seemed to play the luxury card first because you don’t have to set up manufacturing plants,” he said. “Luxury products are allowed as imported goods. Even if they are subject to tariffs, they get sold more expensively. But they do get sold in the end.

“It’s surprising, but our prestige market share in Asia is on par with our worldwide prestige share [of about 12 percent],” he continued. “On the other hand, we’re starting from scratch in mass market.”

The L’Oreal ceo is enthusiastic about evolving markets like Thailand, “where you really have to invent everything” and, particularly, South Korea, where department stores have sprung up rapidly and restrictions on company ownership and importing have been relaxed.

Owen-Jones is convinced that the climate is right for peddling cosmetics in Korea. “The girls are most attractive, and keen on being attractive, which is important,” he said.

Ironically, L’Oreal’s prestige brand, Lancome, was one of the first Western luxury brands there 10 years ago — “but,” as Owen-Jones said, “in the wrong way.”

The line was sold door-to-door, with Korean manufacturer Hankook as the local distributor. But as the market became more sophisticated, LancÖme’s distribution shifted exclusively to department stores.

The big question is China. Currently, L’Oreal markets a locally produced fragrance called Voila Paris there and sells Lancome in a few exclusive department stores. The company is conducting market research to pinpoint which of its other brands might be viable. L’Oreal is also negotiating to start up local production of mass market goods over the next three or four years, according to Owen-Jones.

In Latin America, L’Oreal does 58 percent of its business in the mass market, with another 16 percent in salon products and 26 percent in prestige cosmetics and fragrance.

Owen-Jones projects the Latin American business to jump, from $321.4 million (1.8 billion francs) last year to $892.9 million (5 billion francs) by the year 2000.

L’Oreal executives argue that because they have to use French accounting rules, the company’s South American figures are underrepresented in the high-inflation region.

“Without a doubt, Latin America is the geographical zone with the most underdeveloped potential on earth,” Owen-Jones said. “Consumer tastes are very western, the population responds well to European brands and advertising, and we are already well-established.”

L’Oreal’s experience in the U.S. is a reflection of the ceo’s philosophy of global product development, in which different subsidiaries contribute to ensure the final product’s international success.

The latest example is the hot-selling moisturizing lotion, Bienfait Total, from Lancome: Owen-Jones claims it’s 80 percent American. “Where is the world’s biggest market for fluids?” he asked. “It’s the U.S., not Europe.”

Despite the cross-border cooperation and an influx of foreigners in key corporate posts, L’Oreal’s management remains largely male and French. Owen-Jones, who is half Welsh, points out that the organization’s cohesion makes it more disciplined, effective and efficient. But industry executives and some of L’Oreal’s younger managers say the entrenched culture sometimes appears to resist outside ideas.

A decade ago, headquarters balked at the German subsidiary’s idea for a hip line of hair styling products, according to sources. When the concept, complete with funky hairdos and rock music, was presented to top executives at Clichy, most of them appeared unimpressed, recalled one young manager. “But before they could object, O-J — who was then only number two — spoke up and said he loved it,” the executive said.

The project, called Studio Line, is now L’Oreal’s biggest mass-market brand, with worldwide sales last year of $446.4 million (2.5 billion francs).

More recently, observers claim, L’Oreal was caught flat-footed — despite warnings from some Cosmair executives — when a parade of American competitors juiced up their assortments last year with alpha-hydroxy acid treatment products.

L’Oreal has now counterattacked with Plenitude’s Excell-A3 and has recently introduced low concentrations of fruit acids in Lancome’s Bienfait Total, a new Biotherm cellulite product, called Minceur Beaute Express and a Vichy cream, called Novactia.

To outsiders it looks like catch-up, but Owen-Jones defends the way the company has played the fruit acid game and suggests that consumers have been duped. “Our attitude is that alpha-hydroxy acid is a well-known cosmetics ingredient and has been used for a long time,” he said, noting that Lancome incorporated alpha-hydroxy acid in a 1983 product.

“It has recently been surrounded by such considerable hype, with rather wild declarations,” Owen-Jones said. “We were not satisfied that the new, very high concentrations being used were necessarily in the long-term interests of the industry.

“Therefore, we developed a more cautious approach, in which we decided that we would limit our products to concentrations of just over 1 percent,” Owen-Jones said.

In addition to the alpha-hydroxy issue, L’Oreal has had other controversies on its hands.

Jean Frydman, formerly an executive of the L’Oreal film distribution subsidiary, Paravision, and his brother, David, are pursuing a suit against Cosmair in New York State Supreme Court, seeking $100 million in damages.

The U.S. action follows a nasty series of legal actions in France, in which Jean Frydman claimed he was forced out of Paravision and defrauded out of a fair price for his share in the buyout. Frydman claims he was victimized because of his ties with Israel at a time when L’Oreal was allegedly trying to appease the Arab Leaque in order to end a boycott of its products.

During the April 14 analysts meeting here, Owen-Jones responded to a question about the case by saying, in part, that the Frydmans were motivated by greed. “These are people that are taking us to court to obtain money for themselves,” Owen-Jones said, referring to L’Oreal’s buyout of their share of Paravision.

Reached in New York, the Frydmans’ attorney, Stanley Arkin, said that money was only their secondary motive. Their primary motive, Arkin added, is that “they both feel that they were dealt with unfairly, dishonestly and fraudulently — in significant part because they are Jews.”

L’Oreal is also in the throes of a highly publicized contract tiff with the Lancome division’s spokesmodel, Isabella Rossellini. The 41-year-old actress has been quoted by British and Italian publications, saying that L’Oreal will drop her because of her age. Joe Hunter, Rossellini’s agent, said she had been misunderstood.

During the interview, Owen-Jones produced a statement, saying that, following the expiration of Rossellini’s contract in late 1996 she will be free to “develop a number of planned projects and Lancome’s advertising will evolve in additional ways.”

In New York, Rossellini’s agent, Joe Hunter, said Rossellini is already looking into doing her own cosmetics. “We’ve spoken to a few cosmetics companies,” Hunter said.

Owen-Jones noted, “It would have been the longest-lasting contract for any model in the history of this industry.” He recruited Rossellini for L’Oreal in 1982.

Advertising and research are two budgets that Owen-Jones has consistently increased faster than sales.

“We feel that we have spent 80 years building brands by a genuine effort to make them different, through innovation and research,” he said. “So our first commitment must be to the research budget, but our second is to the advertising budget,” he said.

Among L’Oreal’s prestige brands are Biotherm, Helena Rubinstein, Cacharel, Guy Laroche, Ralph Lauren, Paloma Picasso, Giorgio Armani and Lanvin, as well as Lancome. In addition to Plenitude, L’Oreal’s mass brands include Studio Line, Casting, Laboratoires Garnier and Vittel. Vichy and Phas are sold in pharmacies. In the salon and professional hair care market, there are Kerastase and Redken.

Like any beauty giant, L’Oreal is driven by new products, perhaps more so than most (see related story).

While Owen-Jones is one of the industry’s most inquisitive ceo’s when it comes to new products, he doesn’t readily take the plunge into every niche.

For example, there are ecologically friendly lines like Body Shop that Owen-Jones wants no part of.

“We didn’t think we’d be very good at that,” he explained matter-of-factly. “We’re not sure that it’s an area in which technological superiority or sincerity are necessarily very important, and I certainly don’t see myself walking down the High Street with banners and activists’ labels.”

While 90 percent of L’Oreal’s growth has come internally during the last 20 years, Owen-Jones said he’s open to acquisitions — “something that fits into my jigsaw puzzle.”

L’Oreal has reportedly passed on recent prestige offerings, including Yves Saint Laurent, Kenzo and Guerlain. Some sources argue that L’Oreal’s complicated ownership arrangement (see box), which marries food conglomerate Nestle management with the Bettencourt family, descendants of L’Oreal’s founder. Both have different strategic interests and make large-scale acquisitions more difficult.

But L’Oreal has not been completely absent from the takeover table. In 1991, L’Oreal acquired a German hair care manufacturer, Dralle. The French company then used Dralle’s market position and sales force to launch its Garnier business in Germany.

On the other hand, with last year’s acquisition of Redken, a California-based hair care company that sells its products in salons, Owen-Jones wants to do the opposite. “We will use the L’Oreal strength and expertise to make Redken a worldwide franchise,” he said.

But L’Oreal’s real forte is developing products — with a passion. Questions, such as should the bottle cap be blue or red, are considered and then reconsidered. And when the research is compiled and the concept polished, there’s a final check that has become a L’Oreal signature.

In a ritual begun more than 20 years ago, young product managers, some with only 18 months experience, are summoned to the “confrontation room,” where they must submit their new products to scrutiny of their hyper-critical managers, sometimes Owen-Jones himself.

“Although I don’t actually know of any young person who’s resigned as a result of a bad experience, there’s no attempt to mince words,” said one veteran of many confrontation sessions. “It can be a pretty brutal affair and it leaves a mark.”