By  on July 12, 2007

L'Oréal Professional Products Division has significantly closed the gap between itself and the largest distributor of professional salon products in the U.S. with the acquisition of Maly's West Inc. of Valencia, Calif.

Maly's, one of the last large privately owned distributors with sales of $205 million for the latest 12 months, will bring L'Oréal-owned distributor sales annually to around $600 million.

The cash deal, which industry sources estimate cost L'Oréal between 1.5 to 2.5 times sales, or $302.5 million to $512.5 million, is expected to close in August pending approval from U.S. government regulators.

"It's a major step toward national coverage," said David Craggs, president of LPPD, which makes the Matrix, Redken, L'Oréal Professionnel, Kérastase and PureOlogy professional hair care brands. LPPD is part of L'Oréal USA, the U.S. division of Paris-based L'Oréal SA.

Craggs said that Maly's, a 20-year-old family-run operation, distributes products to some 30,000 salons in California, Arizona, Utah, Washington, Nevada and Oregon, and owns more than 100 professional beauty stores in these markets. The company's 1,000 employees, which includes its 340 sales representatives, as well as company president John Maly, will stay aboard the organization, said Craggs.

Buying Maly's fits in with L'Oréal's strategy to better control distribution and build on relationships with salons, as well as to suppress diversion, said Craggs.

Almost 70 percent of Maly's business consists of L'Oréal brands, he added. The distributor was also a major partner of PureOlogy, the hair care brand for color-treated hair that L'Oréal acquired in May.

Seth Peterson, Citigroup's London-based European household and personal care analyst, said the L'Oréal purchase of Maly's is one of several steps taken by the Professional Division to help it overcome a bumpy 2006.

"L'Oréal is a company that ran into problems with its professional business last year and has taken a series of aggressive steps to address the weaknesses. It bought what is perhaps the most exciting brand in professional hair care, PureOlogy, which it will actively internationalize. It is launching Kérastase into skin to serve the upper end of the market, which at the very least will be high margin. It has made an effort to develop a footprint in distribution in the U.S. It's been a series of rapid actions to address weaknesses, which is evidence of its commitment to maintaining global leadership."A slowdown in sales to distributors in 2006 led L'Oréal to reevaluate its strategy, he added.

L'Oréal opted to buy distributors as a way to not only guarantee distribution of its products but also to have better relationships with salons, which ultimately sell products to consumers. In July 2006, L'Oréal bought a stake in Beauty Alliance LLC, a Clearwater, Fla.-based distributor that sells to 125,000 salons throughout Florida, stretching out toward California and into the middle of the country. L'Oréal bought the remaining 30 percent of BAI in April. Buying distributors also helped L'Oréal build distribution after it pulled its products from Beauty Systems Group's distribution arm in 2006 following a string of events beyond L'Oréal's control, which sources said ranged from BSG's partnership with rival Procter & Gamble to a failed union between BSG parent Sally Beauty Holdings and L'Oréal.

Craggs said the Maly's acquisition was not done in reaction to the end of the BSG distribution relationship but rather as a way to build a relationship with salons and to better oversee the group's business.

"We have a very significant business in the U.S., quickly approaching $1 billion. We have a 35 percent dollar market share. It is very important that we have a significant interest in our distribution."

Maly's main competitors are West Coast Beauty and CosmoProf, both owned by Sally Beauty.

Peterson said L'Oréal's distribution gives the company a "solid footprint," especially if competitors get crafty.

"In a worse-case scenario, Procter & Gamble decides to get creative with Sally, like with an exclusive deal. That could be a problem. It is a shrewd offensive effort to ensure they remain the market leader."

Peterson estimated L'Oréal is about three-quarters of the way to reaching BSG's annual sales figures. According to Alberto-Culver's Annual report — the former parent of Sally Beauty Holdings — BSG generated $983 million in sales for 2006, but that number includes sales from more than 800 stores.

Jody Byrne, a Streetsboro, Ohio-based trend forecaster for salon manufacturers, said the salon business is all about relationships and that the Maly's acquisition just bought L'Oréal a lot of friends.

"It's always hardest to understand a revolution in the middle of it or even at the beginning of it, but this gives L'Oréal control. It may seem tree-hugging to say, but there is no more cost-effective way than being close to the salon than owning the distributor. Having all the boots on the ground when there's a new launch, knowing the strategy of a new launch, having the same message from the distributor sales consultant to the salon to the stylist, who ultimately sells to the consumer. It is worth a lot of money to get close. It may seem weird to spend that kind of money to get close, but it is actually shrewd."Bear Stearns analyst Justin Hott gave L'Oréal credit for giving better service to salons. "The big opportunity here is in building equity with salon owners and stylists."

Citigroup's Peterson agreed that the key to a successful professional business is a good relationship with a salon.

"The salon business is one about relationships. It's about training and education and it is bringing the romance and the flair of a place like Paris to middle America."

Alliance Boots Sees Management Shifts

LONDON — Alliance Boots plc announced a new management structure and board Wednesday, and the company said its chief executive officer Richard Baker has left the firm.

Alliance Boots, which was acquired earlier this year by private equity concern Kohlberg Kravis Roberts & Co. and Stefano Pessina, owns the Boots the Chemists health and beauty retail chain. Alliance Boots' executive deputy chairman and biggest shareholder before the takeover, Pessina now chairs the board of Alliance Boots and acts as the group's executive chairman.

"We are grateful to Richard Baker for all he has done in leading the Alliance Boots group through its merger and for all his hard work and excellent results," Pessina said in a statement. "We are confident that he will go on to new levels of achievement in a role commensurate with his undoubted skill and ability."

Baker decided to leave after discussing the option of continuing in a role as ceo.

Scott Wheway, managing director of Boots the Chemists, decided not to accept a position in the new business, also according to the statement, which added his career plans did not allow him to commit to stay with the firm for the next few years. Alex Gourlay, who is health care director for the chain, takes on the roll of managing director.

"We are pleased to announce the new management team," said Pessina. "We see fantastic opportunities for a business that is a pharmacy-led, health care and beauty expert, and a significant player in all its markets. The future potential is enormous, and we're excited about working together to deliver this growth. It's important to our success that the team is committed to the company for the long term as we deliver our strategic vision."Dominic Murphy, Ornella Barra, George Fairweather, Steve Duncan and Marco Pagni were appointed directors, according to the statement.

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