Loreal Analysis

Loreal Analysis

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Strengths:

Through direction from Owen Jones and his hard-charging American management style, L’Oreal has gone through a transformation from a European based cosmetics company to a world leader in the cosmetics industry. L’Oreal’s particular skill is to buy local cosmetics brands, give them a facelift, and export them around to world. Their good brand management is about hitting the right audience with the right product, through a very carefully crafted portfolio. Each brand is precisely positioned to fill a certain market or product niche.

The L'Oreal name will always be linked to Parisian sophistication, but now the more modern L'Oreal is only French when it wants to be, and the company is eager to represent all nationalities. L'Oreal is aware that in the global market you have to be diverse and flexible, especially in ad campaigns, a danger for many cosmetic companies in the global market is to try to "impose one type of Western beauty on the world," says Owen Jones. This attitude is reflected in many of L'Oreal's advertisements. L'Oreal has made concentrated efforts to create new markets through their Soft-Sheen/Carson African hair-care line. They have made a strategic alliance with the Japanese Shu Uemura in an attempt to gain a foothold in the rapidly expanding Asian market.

Another of L'Oreal's greatest strengths is that they are a "scientific" beauty company, spending 3% of their revenue on research, compared to the industry standard of less than 2%. They are always looking for niche markets, as shown by their opening of a research laboratory in Chicago to study the properties of African hair. They are quite aware in today's economy that with even small technological improvements you have to get it out there to sell it, and the easiest way to own a market is to be the only source for a new product.

Weaknesses:

Thanks to L'Oreal's global expansion, even if business is down in one area, they can still expect revenue from another. Right now the company's biggest weakness is the forthcoming retirement of CEO Owen Jones in 2006: many investors see Owen Jones as "central to L'Oreal's current valuation," says Sandhya Raju, a cosmetics industry analyst at Merrill Lynch in London.

L'Oreal has had some trouble expanding into the Japanese market; in an attempt to find products more slanted to the Asian psyche they have bought a 35% interest in Shu Uemura. They are considering a friendly takeover in the near future.

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Delicate management of this venture is important, because the Japanese have a fluid sense of style that is not easy to predict.

The future situation of L'Oreal's corporate structure is also uncertain. Lilaine Bettencourt owns a controlling interest in the company (27.3%). After her death, Nestle may try to launch a takeover with their 49% interest in L'Oreal.

Despite L'Oreal success at globalization, they have done little to diversify their products; instead they have focused on creating products in these four sectors: hair, skin, makeup, and perfume.

L'Oreal's business is divided into four areas: consumer products (56%), luxury (24%), professional (14%), and dermocosmetics (6%). In his goal to conquer the world market, Owen Jones has focused most of his efforts on the consumer products brands because as they are generally less expensive, it easy to build a large customer base quickly. You will notice the area with the least brands (and revenue) is dermocosmetics, this is an area with great potential, considering L'Oreal's strong research resources, they should be considering further expansion into this area.

L’Oreal also needs to consider ways to smooth the flow of supplies to some global areas, for example, in Moscow; they have trouble keeping popular colors in stock. This is good because it shows a demand for the product, but it also shows there is a loss of business during the time it takes for new shipments to arrive.

Opportunities:

L'Oreal has a number of opportunities open to them. In Africa they are already on the right track because they have recognized the enormous potential customer base there. So far most companies have ignored the African market, assuming there was not enough interest for beauty products. L'Oreal realized that all they had to do was create the need-- then they would fill the demand. They went out and organized training sessions for hairdressers and retailers who stock L'Oreal skin care products. L'Oreal knows that women anywhere in the world want to look good, and there are many places in this world where a good hairdresser is hard to find, by providing training they create jobs, while also creating a market need for products. In the future it might be profitable to open a line of training salons where people can purchase product and get an inexpensive hair cut from students.

The Japanese market is difficult to predict, L'Oreal has had some trouble in the past with their failure of the Moisture Whip lipstick. Trends are unpredictable in Japan, fads can sweep through the nation in weeks, there is much potential for creating different brands to fill certain fashion needs. They could create brands scientifically designed for Asian hair and skin, as they have done for African products. In the past global trends have flowed from west to east, with much of Europe and Asia embracing westernized brands. Currently this trend is changing as fashion flows east to west. There is a growing interest in North America in Asian culture; this can be seen in the popular use of Chinese and Japanese symbols on clothing, and the funky styles inspired by the Japanese Harajuku fashion divas.

As noted in the background, of L'Oreal's four areas of business, the dermocosmetics area was doing poorly, with only two brands and a measly 6% of the annual revenue. Considering L'Oreal's extensive research network, and the growing demand for affordable alternatives to cosmetic procedures, the company should focus on creating some new cosmetics lines. The current dermocosmetics lines are La Roche-Posay and Vichy, both of these brands are expensive and hard to find in some areas, they are also aimed at the posh older demographic. A new anti-aging line aimed at a younger demographic, something less expensive and more readily available could be developed.

Another opportunity that L'Oreal should consider is diversifying into new areas. Clothing production could be one, as they already have a strong grasp on world fashion trends. As mentioned previously, in areas where there is little demand for L'Oreal products, instead of moving on, a line of training salons could be started, creating a new market. This model could be designed to work in other areas like South America, where L'Oreal has little presence. L'Oreal could even open a chain of cosmetics stores featuring all of their products, a la Kiehl's, with their own trained staff to offer advice and recommend the perfect line of products for each customer.

Threats:

L'Oreal has a number of rivals in the cosmetics industry. In the luxury cosmetics, Estee Lauder is the main threat. In the mass market hair and skin care Proctor & Gamble, Unilever and Revlon are competitors. Proctor & Gamble's Max Factor line is the most popular foreign makeup line in Japan, a market L'Oreal is desperate to get into. In Russia the Avon ladies are the main competition. Germany's Beiersdorf Chemicals owns Nivea, a mid-market line that easily outsells L’Oreal’s similar brand Plentitude. L'Oreal is considering the purchase of Nivea to fill this gap in their portfolio but the purchase of Nivea could also expose L'Oreal to a takeover attempt by Germany's Tchibo group, who has a 30% interest in Biersdorf.

After 9/11 there was a drastic decrease in up-market brands like Lancôme, revenues only increased 3.3% in 2001, as compared to a 14% in 2000. These last few years have been full of turmoil on a global scale, a factor which will certainly have an impact on annyual revenues.

The choice of a successor for Owen Jones will be a hard decision, anyone who finds themselves in the position will have some pretty big shoes to fill and the company may not experience the same level of growth as people adjust to a new CEO.

There is uncertainty in L'Oreal's share structure which will not be resolved until after the death of Lilaine Bettencourt.

The potential takeover of Japanese Shu Uemura is also a risk. L'Oreal has experience difficulties in the Japanese market before: there is no guarantee that putting a Japanese face on L'Oreal products will prove any more successful.

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