From Where The Analysts Sit

Major acquisitions will be the key to L'Oreal's growth.

Appeared In
Special Issue
Beauty Inc issue 05/18/2007

One year into his tenure as L’Oréal’s chief executive officer, Jean-Paul Agon is getting the thumbs up from financial analysts.

This story first appeared in the May 18, 2007 issue of WWD.  Subscribe Today.


Those queried say he’s a great manager with wide-reaching vision. But, they warn, L’Oréal faces challenges, particularly in the mass market and in the U.S.


Analysts concur the transition between Lindsay Owen-Jones—L’Oréal’s former president and ceo—and Agon has been practically seamless.


“I think that there has been limited change, since Agon made it clear from the beginning that he believes in the power of the L’Oréal model, notably the focus on top-line growth,” said Eva Quiroga, an analyst at UBS in London.


Still, an evolution has begun. “I would say Jean-Paul Agon is a bit more acquisitive. He puts a little more emphasis on driving efficiencies; there is more centralization going on with Agon than under Owen-Jones,” said Sandy Beebee, an analyst at HSBC in New York. “From a branding perspective, Agon is moving the company toward focusing on fewer but larger introductions.”


Indeed, Agon was largely credited with driving L’Oréal’s acquisition of The Body Shop in 2006.


“When he took over one year ago, he said he will continue making out-of-the box acquisitions,” said Michael Steib, an analyst in Morgan Stanley in London. “Clearly, he did one. It was met with a lot of skepticism at first, but when all is said and done, it was a good deal for L’Oréal financially.”


Although The Body Shop’s underlying profitability is lower than that of L’Oréal (an estimated 9 percent versus 16 percent), analysts say that’s normal, since The Body Shop retails and therefore has lower margins than a pure beauty manufacturer.


“I am sure, over time, L’Oréal will [improve] The Body Shop’s profitability,” said Beebee.


“In the near term, the attraction is that The Body Shop has access to L’Oréal’s expertise in R&D and product innovation. In the [immediate] term, there are opportunities to move some of the production under L’Oréal’s roof,” continued Quiroga.


Steib deems The Body Shop a major opportunity for L’Oréal, since it represents control of a distribution channel that doesn’t overlap with its retail clients’. “It is a good way for L’Oréal to get hands-on feedback,” said Steib. “The question then, of course, is: What’s next? Will L’Oréal try different distribution channels?”
Numerous analysts believe selling through alternative channels, such as door-to-door, could be effective for L’Oréal in emerging markets.


In the meantime, there are numerous macro-hurdles facing the company. “The main challenge at the moment is bringing L’Oréal’s top-line growth back into the 6 to 8 percent target range,” said Quiroga. “Beyond that, there’s the ongoing focus on industry-leading innovation, and the gradual stretching of existing brands into new categories and geographies should continue to secure that growth—with an aim to be number one (for instance, in mass market makeup in the U.S.). In addition, it would be good to continue seeing Agon make more growth-enhancing acquisitions along the lines of Matrix or Sanoflore.”


Beebee also believes L’Oréal needs to be acquisitive on an ongoing basis over the next few years, particularly in personal care, since more players are moving into that category. And, to keep up with consumers’ diversifying shopping channels, L’Oréal might do well to acquire a makeup artist brand or one strong in pharmacies, she said.


“I think the acquisition of Shiseido is one large deal L’Oréal could and should do…given the group leadership in a market known to be a key innovation hub with the highest levels of per-capita consumption and interesting demographics,” added Quiroga, who said L’Oréal could further globalize the Shiseido brand.


“Beside that, I would expect deals in emerging markets, luxury products and up-and-coming niches, such as natural products,” she continued.


Competition is heating up, from other brands, including private label, and in numerous categories, particularly the mass market, analysts say. P&G remains an ongoing threat to L’Oréal, but analysts agree that the French giant has the mettle and tools to fight it.


“L’Oréal has to do what it’s traditionally good at—focusing on innovation and core brands,” said Steib, who views the U.S. as one of L’Oréal’s biggest challenges, especially in hair care. “I think if L’Oréal can get into the 6 to 8 percent sales growth range this year, it would be a big step in North America,” he said.