Financial analysts point to the mass market channel, accessibly priced treatment products, the men’s grooming category and emerging markets as some of the bright spots on the horizon for L’Oréal, which reported 2008 sales of 17.54 billion euros, or $25.81 billion at average exchange.
While those revenues — which were generated in part as worldwide financial markets were in upheaval and consumers, in response, clamped shut their pocketbooks — represented a 2.8 percent year-over-year increase, it was a relatively weak year for the company and exposed potential wrinkles in its setup. These were namely exposure to the luxury goods and salon sectors, which were particularly impacted by weakened consumer confidence. Mature beauty markets also proved problematic. North America, for instance, generated sales that slid 6.6 percent and Western Europe’s grew by less than 2 percent in 2008.
“Of late, L’Oréal has not outperformed in the developed world as it did in the past, but that is not to say it underperformed,” says Charles Mills, an analyst at Credit Suisse. “L’Oréal is absolutely the biggest beauty company, and I’m confident it will stay so in the long term.”
L’Oréal’s share price has come under pressure in recent years after enjoying decades as a stock market darling. Until last year, the company delivered more than 20 years of double-digit earnings-per-share growth.
“The market really liked that kind of visibility and paid a premium for it,” says Céline Pannuti, an analyst at J.P. Morgan.
“When growth is starting to slow, as an investor, you’re not willing to pay such a high valuation for those stocks,” adds Chicuong Dang, an analyst at Richelieu.
According to Eva Quiroga, a UBS analyst, a return to strong top-line growth would spur investor interest in the company. “L’Oréal’s share price is very closely correlated with top-line growth,” she adds. “When its share price peaked in the Nineties at about 100 euros [or $136 at current exchange], organic growth was at 11 percent. Now, with low-single-digit year-on-year growth, it’s at about 50 euros [or $68]. So there’s a clear correlation.”
Honing a razor-sharp focus on innovation and marketing as well as staking a strong claim on emerging markets are among ways in which analysts hope L’Oréal will ramp up sales.
“In this environment, innovation is important for this type of company, as 15 percent to 20 percent of sales will come from new products each year,” says Dang. “L’Oréal will need to stress innovation to get through the crisis and deliver growth to shareholders.”
“It’s important L’Oréal focuses on innovation,” agrees Quiroga. “Historically, it has a good track record on new product development. If it can step that up, it can weather the storm.”
Oru Mohiuddin, cosmetics and toiletries company analyst at tracking firm Euromonitor International, also underscores a need to innovate and invest in developing key categories, including antiaging treatments, moisturizers and shampoos. “L’Oréal has done well to place itself in the skin care and antiaging categories, but it’s still not immune to the economic situation and competition,” she says. Mohiuddin adds that Euromonitor forecasts antiaging treatments will be the fastest-growing beauty category in the next five years, followed by facial moisturizers. “L’Oréal has to be sure it invests in R&D and marketing to secure its position.”
Mohiuddin also suggests L’Oréal would do well to up the ante for its shampoo brands in emerging markets. “Shampoo is the fastest-growing hair care category, and in the next five years, growth will be led by the Asia-Pacific region, where L’Oréal is in 11th position,” she says. “L’Oréal should consider future growth there.”
Adding oomph to marketing initiatives is also key to the company’s gains in the future, according to analysts. “The challenge for L’Oréal is to jump-start its sales growth through its [advertising and promotional] spend,” says Dan Dolev, associate analyst, European HPC, of Sanford C. Bernstein & Co. LLC, who has accused L’Oréal of reining in its advertising and promotional spending to its detriment in the past. However, the company stoutly denies that charge with chief executive officer Jean-Paul Agon brandishing figures showing a continuity of marketing support for the past four years.
Analysts also pin growth hopes for L’Oréal on continuing opportunities in emerging markets.
“What people tend to criticize is that L’Oréal has not leveraged emerging markets, like China, enough,” says Dang. “We could ask for greater gains in market share in Asia — except Japan — particularly in China. L’Oréal needs to invest to gain market share.”
“Strengthening its position in emerging markets will be key, given its market share there is still weak in places,” agrees UBS’ Quiroga. “It is not selling mass market shampoo in China, for example. So there’s a big opportunity there.”
The current turmoil in international financial markets notwithstanding, emerging middle classes in fledgling beauty markets could be boon for the French company.
“The per-capita spend in emerging markets for L’Oréal-type products are still miniscule,” says Credit Suisse’s Mills.
Mohiuddin notes L’Oréal is using The Body Shop to gain ground in India. “Since L’Oréal is using The Body Shop as a vehicle to enter India, it pays to have made the acquisition,” she says, adding that, in the past, L’Oréal has used local acquisitions to infiltrate markets and set up a stronghold there. “I think the thing to do now would be to acquire a company in a developing market that would give good access to distribution and at the same time maybe get a good menu of natural ingredients. In India and China, there are brands that could be developed in the West, and the acquisition price would not be as high as buying a brand in a Western market.”
Other analysts, however, have mixed views on the need for L’Oréal to get more acquisitive, given that its recent purchases of The Body Shop in 2006 to the tune of 652 million pounds, or $1.14 billion, and YSL Beauté in 2008 for 1.15 billion euros, or $1.8 billion, are still works in progress.
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