PARIS — If there’s a motto for L’Oréal in this, its centennial year, it could be “leaner and meaner.”
The world’s largest beauty company this year plans to up its advertising outlay while at the same time cutting its number of stockkeeping units, introducing lower-priced items, implementing a hiring freeze in certain markets and focusing on innovative products, L’Oréal chief executive officer Jean-Paul Agon told financial analysts at a meeting Tuesday at the firm’s headquarters in Clichy, just outside of Paris.
This story first appeared in the February 18, 2009 issue of WWD. Subscribe Today.
For 2009, Agon said L’Oréal’s organic growth should rise faster than the cosmetics market overall, which is expected to remain positive despite a difficult first quarter and half. He anticipates gains from the integration of YSL Beauté, a more positive monetary effect and the company’s consumer products and active cosmetics, for instance.
“The greatest uncertainty is in luxury products, for which it is harder to make any kind of forecast,” he said.
As reported, L’Oréal posted 2008 net profits that fell 26.6 percent year-on-year to 1.95 billion euros, or $2.87 billion at average exchange. The company’s full-year revenues came in at 17.54 billion euros, or $25.81 billion, up 2.8 percent.
L’Oréal’s net profits excluding nonrecurrent items after minority interests rose 1.2 percent to 2.06 billion euros, or $3.04 billion. Its earnings per share gained 3.8 percent to 3.49 euros, or $5.14. (At constant exchange, the increase was 6.8 percent.) Operating cash flow was 1.85 billion euros, or $2.72 billion, down 9.1 percent.
“In 2008, as did a number of other companies, L’Oréal faced an extremely difficult environment with a slowdown in markets and also inventory reductions by our distributor customers who themselves were subjected to very difficult financial pressures,” said Agon. “Because of this particularly adverse environment, our organic growth slowed down to 3.1 percent in line with the estimated growth in the worldwide market.
“Generally speaking, however, we put up good resistance,” he continued, explaining the company maintained its market share and in some cases grew it. “Overall, therefore, in a particularly difficult world economic environment, the L’Oréal group has continued its growth, but rates were highly differentiated by division and by region because there were great differences in the effect of the economic crisis in each case.
“In North America, where our sales trend was minus 4.8 percent, the crisis had a violent impact on both consumers and distributors,” said Agon. “Our market share declined slightly in luxury products because of promotional pressure from our competitors. On the other hand, we have held onto and even strengthened our positions in the mass market.
“The difficulties in the United States had a severe impact on the group’s overall growth in 2008, and if North America is excluded, L’Oréal’s growth rate would have been 5.1 percent,” he added, explaining other regions, such as Asia, had a good performance.
Agon said despite troubles in North America, L’Oréal has “conserved our growth-driving resources, and we ended this year with the best possible conditions to prepare for 2009. We consider that we are very well-equipped to tackle this new year while being aware of the fact that the economic climate will continue to be difficult at least until the summer.”
Agon said L’Oréal’s advertising and promotional spending has remained at the same level for several years as a percentage of sales despite a continuous and significant decline in the cost of media, plus point-of-sale and promotional items.
“Our intention for 2009 is to accelerate in the same direction with a dual impact,” said Agon. “Firstly, we intend to further strengthen investment allocated to advertising and promotional resources. Secondly, we intend to take full advantage of what is currently a buyer’s market in which costs have already started falling very sharply.”
Agon said L’Oréal is keen to improve gross profits in 2009. As part of the effort to streamline and simplify its organizational structure, the firm has frozen hiring in some developed countries and will maintain its head count in rapidly growing emerging markets. In the U.S., it will reduce that subsidiary’s workforce by 500.
There is also a focus on offering highly innovative products, such as Lancôme’s new Oscillation mascara, said Agon, adding another way the firm is adapting to the current crisis is by introducing more accessibly priced products to brands such as Garnier, L’Oréal Paris and Vichy, in order to reach a wider audience. The firm will also concentrate on categories including styling, body care and men’s products, plus enter new markets. Over the next few months, for instance, L’Oréal is to open subsidiaries in Egypt, Pakistan and Kazakhstan.
“We have launched a plan to reduce the number of references across all divisions and brands,” continued Agon.
He had no news regarding a possible change in Nestlé’s holding in L’Oréal come April 29, when it is free to sell its almost 30 percent stake in the French beauty firm. Under terms of the current shareholder agreement, Nestlé is free to sell its holding in L’Oréal from that date but cannot take a majority share in the firm unless Liliane Bettencourt, who owns 30 percent of the firm, passes away earlier, and, in that case, not until six months after her death. After April 29, Nestlé does not have the right to acquire L’Oréal unless Bettencourt gives her approval. Agon said Bettencourt, whom he saw Monday at a board meeting, didn’t mention any intentions regarding her L’Oréal stake. However, Agon said she has been committed to the company.
L’Oréal’s 2008 results brought mixed reactions. Jean-Christophe Liard, analyst for consumer goods, retail and luxury at KBL Richelieu, said the company’s fourth quarter was disappointing.
“I think all long-term investors know that the 2008 and 2009 trend for health and personal care is very mediocre; therefore, there was no big surprise in what was published,” he said, adding the good news from L’Oréal included the hiring freezes and continuation of ad and promotion spending.
“We are confident in the L’Oréal business model,” continued Liard. “The company will increase its margin in the long term and will increase sales.”
Another analyst found L’Oréal’s 2008 growth to be “a bit disappointing, especially in the U.S. I am still somewhat concerned that, even excluding the luxury and professional divisions, L’Oréal is underperforming a number of its peers, including Beiersdorf and Unilever.
“I was surprised by the low volume number, although that is likely mainly from luxury, and am wondering what they can do to reinvigorate that,” he said. “With L’Oréal looking more at affordability, you also have to wonder what the combination of the two will mean for total organic growth going forward. It’s early days to talk about margins, but beyond pressure from collapsing volumes in luxury, there are a number of positive factors at play, notably lower input costs and continued cost control.”
On Tuesday, L’Oréal stock closed up 0.59 percent to 53.17 euros, or $66.84 at current exchange.