By  on April 13, 2007

NEW YORK — L'Oréal Professional Products Division has stepped up its rivalry with Procter & Gamble by purchasing the remaining 70 percent share of salon beauty distributor Beauty Alliance LLC, an acquisition that industry insiders speculate could lead to a parting of the ways of the other Beauty Alliance vendors it carries.

The ownership of Beauty Alliance, which is based in Clearwater, Fla., is a coup for L'Oréal, since the distributor sells to 125,000 salons through 870 distributor sales consultants and 400 professional stores throughout Florida, stretching to California. It brings L'Oréal back in business with many salons to which it lost service, according to industry speculation, when it restructured its distributor deal with Sally Beauty Holdings last year after allegedly losing out to buy part or all of Sally Beauty. This deal marks the latest chapter in the rivalry between the professional divisions of L'Oréal and P&G, and the ramifications of the rumored bid-gone-sour for Sally Beauty, the nation's largest salon beauty distributor.

David Craggs, president of L'Oréal Professional Products Division, said that his desire and strategy is to continue Beauty Alliance as "a best-in-class multibrand distributor."

Beauty Alliance, which generated sales of approximately $400 million in 2006, will operate as a separate business unit under the L'Oréal Professional umbrella and will continue to be led by Jamie Cheek, its current president.

A purchase price for Beauty Alliance has not been disclosed. L'Oréal Professional, a business unit of L'Oréal USA, expects that the acquisition will not affect earnings this year and will be accretive thereafter.

The strategy of buying distributors is one Craggs said he will certainly adopt where appropriate.

"We think it is an exciting move for the industry because it secures in a certain way an independence within the American distribution system. It ensures healthy competition. Up until today there has only been one significant national player," Craggs said, speaking of Sally Beauty.

The acquisition allows L'Oréal to become vertically integrated and subsequently to deliver better costs to hairdressers.

"It will ensure we meet the needs of the hairdresser, have closer contact and a direct relationship in order to take full advantage of consumer relationship marketing, training, new product development."Fighting diversion is another opportunity the deal allows.

L'Oréal purchased its first stake — 30 percent — in Beauty Alliance last July, a move that was punctuated by L'Oréal removing a significant amount of its field sales force from Sally Beauty's distribution arm, Beauty Systems Group. L'Oréal instead focused on a business arrangement with Sally's retail stores. But, Craggs added, "[Sally Beauty] continues to be a significant partner for us in the U.S."

"When L'Oréal left Sally, Sally lost about $110 million in sales to salons," said one source, adding that "the salons were furious Sally could no longer supply them with L'Oréal" professional products, which includes the L'Oréal Professionnel, Matrix and Redken brands.

In what some said was a mark of retaliation by Sally Beauty, P&G earlier this year entered into a distribution agreement with BSG for the southeastern region of the U.S. BSG replaced Beauty Alliance as a distributor in this region.

Craggs said the purchase of a distributor, a first for L'Oréal in the U.S., is going to pave the road for a new way of doing business in the U.S.

Indeed, rumors of additional manufacturers scooping up distributors have been surfacing, including John Paul Mitchell Systems eyeing several West Coast-based distributors. John Paul DeJoria, co-founder, owner and chief executive officer of JPMS, declined to comment.

Craggs said the deal doesn't affect L'Oréal's relationship with other distributors.

"We have a very fluid and close relationship with them. They are informed of our plans."

But the deal may push non-L'Oréal brands into the arms of Sally Beauty, perhaps even brands by its archrival, P&G.

"This will accelerate brands out of Beauty Alliance and speed the migration of brands to Sally," said Justin Hott of Bear, Stearns & Co. "[L'Oréal's] goal is to have better control of their brands and they are using out-of-the-box thinking, but, if you are a brand at Beauty Alliance do you want L'Oréal controlling your fate?"

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