By  on May 5, 2006

PARIS — What's in store for L'Oréal now that Jean-Paul Agon is its chief executive officer?

"That's the million-dollar question we'd all like to answer," said Michael Steib, an analyst at Morgan Stanley in London.

Yet he and other financial analysts concur that there should be no huge surprises.

"I think along most lines it means a continuation of the old strategy," said Eva Quiroga, an analyst at UBS in London.

That includes growing faster than the market and improving profitability and cash flow.

Of course, there are other concerns facing the new ceo.

"For Jean-Paul Agon, the biggest challenge and the biggest priority is getting the top line on track," continued Quiroga.

In 2005, L'Oréal's consolidated sales rose 6.5 percent to 14.5 billion euros, or $18.4 billion at current exchange rates, up from 13.6 billion euros, or $17.3 billion, in 2004.

There's also the question of how L'Oréal should best continue competing with its archrival Procter & Gamble, particularly in the mass-market skin care arena.

Introducing Garnier skin care in the U.S., which "should happen in the next few years" is one approach, according to Sandy Beebee, an analyst at HSBC in New York.

Stretching active cosmetics and skin care distribution in the U.S. is another method, said Quiroga.

"I think L'Oréal will have to be more aggressive in skin care with more pricing power," added Steib. "It will probably make more acquisitions in that space; it has done that already in China, with Mininurse and Yue-Sai."

L'Oréal is expected to wait until price points for hair care products settle before reassessing the Chinese market, said Steib. The company has not yet entered the shampoo or conditioner race in China, where competition is already rife among P&G and local brands.

"L'Oréal should create some excitement in China," added Beebee.

Quiroga believes that L'Oréal's core strategy in China should now be the systematic development of the two acquired local brands, a further strengthening of L'Oréal's global brands there and possible small acquisitions.Speculation abounds over what companies L'Oréal will snap up following its announced bid in March to acquire the Body Shop. For many financial analysts, the news came as a surprise.

"It was basically an acquisition out of the box," said Steib, reflecting others' views. "I definitely think L'Oréal will make more. Jean-Paul Agon indicated that."

Analysts say L'Oréal is in position easily to make a $1 billion acquisition.

Said Beebee, "L'Oréal needs an answer to MAC, which they do not really have in their portfolio. The skin care market is so fragmented; I would not be surprised if they had an opportunity to make an acquisition there."

"From a geographic perspective, in Japan, it has to be Shiseido or nothing," said Quiroga. "But it is not available at this stage."

She added that spa and active cosmetics brands could also make interesting acquisition targets for L'Oréal.

Other ways analysts believe L'Oréal can ratchet up growth are to continue improving its price mix and further expand into developing markets, including Latin America, Central Europe, Eastern Europe and elsewhere in Asia.

"Emerging markets make up only about 20 percent of L'Oréal's sales. There is no reason why in a few years it could not be about 30 percent of sales," said Steib.

There are other ways of gaining a competitive edge.

"I think the big opportunity is on the efficiency side," added Beebee. "Jean-Paul Agon has been in the U.S. and knows P&G's profit margins are higher. He might change L'Oréal's approach to cost-cutting.

"I think L'Oréal needs to respond more aggressively to competitive situations," she continued, explaining that could take the form of more advertising or promotional spend.

Already, some analysts have noted a change in management style at L'Oréal. Most recently, its bid for the Body Shop marked an about-face in strategy for the company, whose executives have long said going into retail would be taboo.

Agon has been vocal about not having any taboos. And the financial community is bullish on L'Oréal's strategy.

"I think what they are doing is right," said Steib. "It is a combination of a pick-up in internal growth, and the price mix is improving. There will be extra growth through acquisitions."

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