L’Oréal Eyes Emerging Markets

Jean-Paul Agon estimated the global cosmetics market grew 4.1 percent in the first half.

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PARIS — L’Oréal expects emerging markets to become significantly more profitable this year, but is not giving up on prospects for its more mature markets, despite renewed financial turmoil that is seen dampening consumer confidence in Western Europe, L’Oréal chief executive officer Jean-Paul Agon said Wednesday.

This story first appeared in the September 1, 2011 issue of WWD.  Subscribe Today.

Agon said the French beauty giant, which published first-half results late Tuesday, was confident in its prospects in the medium and long term as the company marches toward its target of recruiting an additional one billion customers in the next 10 to 15 years.

He estimated the global cosmetics market grew 4.1 percent in the first half, fueled by a growing appetite for luxury cosmetics and strong demand in new markets, which accounted for three quarters of the growth. By comparison, total cosmetics sales at L’Oréal were up 4.9 percent during the period.

“After a very turbulent summer on the economic front, the context is obviously uncertain. The economic environment of certain regions like Western Europe is obviously difficult to forecast,” Agon said, speaking to financial analysts and journalists Wednesday morning at company headquarters in the Paris suburb of Clichy.

“Nonetheless, we believe the global cosmetics market should continue to grow in the second half at a rate similar to the first half, and we also confirm our ambition to outperform the market and to continue reinforcing our market share,” he added.

L’Oréal is training its sights on underdeveloped markets in Africa and the Middle East, a zone for which it recently appointed a new managing director, company veteran Geoff Skingsley. It also sees continued strong potential for growth in the Asia-Pacific region, where the group has doubled market share in the last decade.

Eastern Europe, which has hit a bump after being the group’s fastest-growing region over the last decade, should see a turnaround as early as the second half of this year, Agon predicted. But if new markets are delivering the highest growth rates, L’Oréal still believes in the prospects for the U.S. and Western Europe.

“We are not planning to have zero growth in the developed markets in the years to come,” Agon said. “We are definitely planning for growth in the U.S. but at the same time we are also optimizing our production capacities,” he continued, referring to the decision to close the company’s hair color plant in Clark, N.J., and move the jobs to Mexico in early 2013.

“In Western Europe, the markets are for the moment flat, but we still have the ambition to grow our market share or to launch new products or to gain on some new categories,” he added.

Agon predicted that, overall, sales at L’Oréal should grow faster in the fourth quarter than in the third quarter, thanks to the timing of important new launches including a comprehensive revamp of its Elseve hair care line, Garnier’s Miracle Skin Perfector B.B. cream, and Lancôme’s Visionnaire serum.

In early 2012, the group plans to launch a new Yves Saint Laurent skin care line to grow this category, which represents only 10 percent of the brand’s sales, versus 40 percent for Lancôme, and is key to snagging market share in Asia. In China, Agon noted, skin care represents 70 percent of sales of luxury cosmetics.

Meanwhile, L’Oréal expects to boost its lagging professional products division with the launch next year of an updated version of its ammonia-free hair color Inoa, which will require two application phases rather than the original three, in a bid to reach a greater number of salons.

L’Oréal’s net profits rose 11.6 percent to 1.47 billion euros, or $2.06 billion, in the six months to June 30. All dollar figures are calculated at average exchange rates for the period in question.

Operating profits grew 2 percent to 1.7 billion euros, or $2.39 billion. The operating margin stood at 16.8 percent of sales, versus the record level of 17.3 percent recorded at the same time last year.

The 50 basis point decrease was due mainly to increased investments in research and development, up 12.2 percent versus the same time last year, in addition to advertising and promotion expenses, which rose 6.3 percent year-on-year, the company said.

Agon forecast the operating margin would hold roughly stable through the second half. As a result, he said, operating margin for 2011 as a whole could be expected to exceed the 15.7 percent posted in 2010, though he declined to provide a specific target.

“The margin will improve for the company as a whole and will significantly improve for the new markets,” Agon said.

“There are reasons for which, historically, Europe was the most profitable region, but long-term the new markets could be — I don’t know if they will be — but could be, absolutely, a zone where we have very high profitability,” he added.

Subsidiaries like China and Russia have already reached a critical mass that means the cost of growth there today is lower than in very mature economies, he noted. This, coupled with L’Oréal optimizing indirect purchases and centralizing media spending, should allow the group to keep improving its profitability.