By and  on October 22, 2010

CANNES, France — Jean-Paul Agon, chief executive officer of market leader L’Oréal, came to this seaside town Monday to deliver the opening speech at the Tax Free World Association’s annual gathering. In the process, he gave the $34.5 billion travel retail industry a glimpse of its future.

Citing dramatic shifts in global affluence and population migration, Agon delivered his punch line: “Travel is the ultimate retail business of the future.” Noting that the U.S. has been the leading power since the end of World War II, Agon asserted, “We are now entering the Asian century, as China takes over.” He described this seismic shift in both financial and demographic terms. Later, Agon reiterated the point that 2009 was the first year when more than 50 percent of the market was in emerging countries and 90 percent of the world’s growth in the first six months of that year stemmed from them.

“The emergence of a middle class with growing purchasing power in Asia, as well as in Latin America, Eastern Europe and maybe one day in Africa, will thus strongly increase the need for travel, both from west to east and from east to west.”

Agon continued to press the point by predicting that within five years, “some 45 percent of traffic will be outside both North America and Western Europe.” This will have an impact on L’Oréal by the year 2020. “The frontiers of our market will be substantially redrawn,” Agon said. “At that time, the new markets, which include all countries outside North America and Western Europe, may represent more than two-thirds of the total cosmetics market.

“For a company like L’Oréal, it means that tomorrow Chinese, Indians, Brazilians and Indonesians will together form the majority of our customers leading to an extension and diversification of beauty needs.” In laying out the specifics on how L’Oréal is coping with the shift, Agon seemed to coin a new word, “universalization.” He made it clear this is the opposite of globalization, where a company sells one product everywhere, like a Big Mac. He said L’Oréal has established research centers around the world, on every continent, to tap into diverse beauty rituals. The objective is to create a geocosmetics approach to make sure products reflect local consumer needs.

The company also hopes that the process will provide inspiration for new products. This leads to a cultivation of a wide-ranging portfolio with the aim of supplying brands “at all price levels and for all cultural origins.” He elaborated on how the company is accelerating its research and development in Brazil and China and considering a facility in India. L’Oréal is also building production facilities in Russia, Indonesia and thinking about a new plant in Mexico.

Agon further predicted that over the next decade, one billion people will migrate from rural areas to towns. By 2030, five billion people will be living in cities, giving rise to a boom in tourism. The number of tourists is expected to grow from one billion this year to 1.6 billion by 2020, he added. This rootlessness, he said, will also result in 250 million people leaving their native countries to live overseas and wanting to return to visit their families. Agon also said as the planet’s population continues to age, two-thirds of those over age 50 say they plan to travel around the world. “In an increasingly globalized world, in which international trade never stops growing, with ever-stronger interdependencies between economies, growth generates travel and travel generates growth,” he said.

Quoting forecasts that air traffic should bring an additional 100 million passengers into airports every year for the next decade, Agon said traffic could almost double over the next 20 years. “What other distribution channel can claim such a level of growth in customer footfall?” he asked. “Quite simply, there isn’t one.” Agon sketched a picture of future airports developing into meccas in which people would shop for shiny new products and indulge in pampering services. “Over the next 10 years, airports may become ‘air towns,’” he said. Agon played a film outlining some ideas dreamed up by L’Oréal staff depicting what life could be like in the airport of the future. It included anti-jet lag and in-flight treatments and salon services, plus a virtual shopping experience, such as a beauty lounge.

However, Agon tempered his idyllic vision with the disturbing reality that brands face a tough challenge in luring all of the airport traffic into shops. “Today, only 40 percent of travelers enter stores and only one-fifth buy beauty products, which means only 8 percent of all passengers buy beauty products,” said Agon.

Last year, fragrances and cosmetics claimed 30.8 percent of the $34.5 billion total global duty free and travel retail business. Agon offered some suggestions on how to improve the penetration rate. These included expanding the shops and widening the aisles so shoppers could walk through with bags. Scrapping the old discount-driven approach to merchandising in favor of providing products that fit the needs and represent an add-on value for consumers, Agon said other ideas were to pool the information already available on consumers and analyze it in depth and to develop products — such as skin care — adapted to needs of travelers.

During an interview with WWD, Agon expanded upon many of the directions laid down in the morning’s speech. He reiterated his commitment to making travel retail a growth priority. While today it represents approximately 4 percent of the company’s total business, which in 2009 was 17.47 billion euros, or $24.37 billion at average exchange (and 15 percent of its luxury division’s revenues), it could ultimately generate 10 percent of overall revenues, Agon said.

For the first six months of 2010, the channel clocked 20 percent gains versus the same period in 2009, according to Eric Tarral, L’Oréal’s travel retail worldwide managing director.One of the first concrete steps toward this goal is Agon’s determination to conduct a study to understand the consumer that doesn’t already buy beauty products in the travel retail channel. Agon said he is willing to invest in finding a way to entice those people “who today are not really usual shoppers in the travel retail stores.

“I’m sure we’re going to discover that we can do much better, either with the launch of new products, because in beauty, innovation is key,” he said. “And maybe there will be a need to present innovation in a better way in the travel retail stores. I think we’re going to discover that there are many ways for us to develop — with the retailers’ ideas — to attract, to intrigue and to convince consumers who are not usual shoppers today.”

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