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View From the Bourse

Jean-Paul Agon’s doctrine of universalization has won favor with the financial community.

Appeared In
Special Issue
Beauty Inc issue 08/12/2011

 

This story first appeared in the August 12, 2011 issue of WWD.  Subscribe Today.

Jean-Paul Agon’s doctrine of universalization has won favor with the financial community, even though the French beauty giant had its worst performance in 2008 and 2009, during the economic downturn.

Two years into the crisis, consumer demand was impacted “especially in the more aspirational categories, as a result of which growth not only slowed substantially, but even underperformed that of the peer group,” says Eva Quiroga, an analyst at UBS. “Since then, however, there has been a clear turnaround.”

“It was not an easy start,” says Susanne Seibel of Barclays Capital. “Mr. Agon reacted quickly and identified correctly that a large part of its portfolio was premium-positioned and therefore would not be able to sustain historic growth rates. In addition, [he] kicked o! an acceleration of expansion into emerging markets, some not addressed before.”

Indeed, the foray into emerging markets seems to be one of Agon’s biggest victories thus far. “He understood the need to have a stronger and deeper presence in the ‘New Markets,’ and this could really mark L’Oréal’s corporate evolution under his tenure,” says Celine Pannuti, an analyst at J.P. Morgan.

Analysts note, however, that there is lost ground to recover. “From the Nineties, and under Lindsay Owen-Jones, L’Oréal focused on building its makeup business and de-emphasized its mass market hair care business—the right strategy then, but considering the growth potential now in emerging markets, clearly a lost opportunity,” says Seibel. “P&G and Unilever are the leaders in mass market hair care in emerging markets, building a strong, cash-generative base. For emerging markets, L’Oréal uses its makeup business (for example, in China) or its hair care business (for instance, in India), to build and strengthen its market position. We think this is the right strategy for the business and the long run, but it will mean ongoing investment for a number of years, implying limited margin expansion potential in the intermediate term.”

Agon’s restructuring program has also been met with approval. “On a divisional basis, all of the management has changed, which allows for some changes in direction. For instance L’Oréal Paris, which seems to have become more consumer-relevant again [regarding] a! ordability, innovation, communication,” says Quiroga. “Also interesting is the creation of the post for digital media, which I believe will be a competitive advantage over time.”

Pannuti believes that acquisitions could continue to play a role, especially to accelerate growth in emerging markets. “YSL Beauté and The Body Shop were both acquired at the start of [Agon’s] tenure,” she says. “Both have been hard-hit during the 2008 crisis and have somewhat recovered, though for The Body Shop, management has yet to prove it can develop this retail concept further.”

Most analysts agree that the transition from Owen- Jones to Agon is more an evolution than a revolution. “Mr. Agon has a much tougher job than can be seen from outside: He has to reinstall L’Oréal’s capability to grow strongly in a very di! erent and challenging market environment,” says Seibel. “Those who think that O.J. did a ‘better job’ just looking at earnings growth rates need to consider that Agon has inherited a business model that was based on premiumization, now obsolete in the light of a changed economic environment and consumer behavior.”