L'Oreal

L'Oreal's Global Makeover: Case Study

Problem: L'Oreal has a number of issues to consider; the approaching retirement of CEO Owen Jones, the potential takeovers of Nivea and Shu Uemura, their trouble gaining a presence in the Japanese market, and the lack of revenue in certain areas of their products offerings. There is also some loss in business for high demand products during turnover time as buyers wait for new shipments.

Condensed Recommendation: L'Oreal should carefully select a CEO candidate who has experience in global management and the ability to spot trends. L'Oreal should proceed with the potential takeover of Japanese Shu Uemura, but they should reconsider the Nivea takeover as it may open them to a potential takeover threat. They should continue with their global expansion by developing new brands to meet particular ethnicities, perhaps aiming to catch the South American market as they have done with the African market. They should also flesh out their dermocosmetics products lines to increase the low 6% revenue in that area.

Problem

L'Oreal has experienced unprecedented success through global expansion into new beauty-product markets, under the direction of Owen Jones, who became a chairman in 1988. In 2006, Owen Jones plans to retire, so there is some speculation on how things may change with his successor. Currently there are a number of business maneuvers L'Oreal is considering: the friendly takeover of Japanese brand Shu Uemura, the bid for German Nivea, and the sale of their 19.5% interest in Sanofi-Synthelabo. There is also a potential takeover threat from Nestle, as they have a 26% interest in the L'Oreal; and the potential takeover threat from Beiersdorf/Tchibo Group, who have a 30% interest in Nivea, so if L'Oreal buys into Nivea they could expose themselves to a takeover attempt and start a bidding war.

L'Oreal is also struggling to break into the Japanese market, despite their success with Water Shine and Wonder Curl.

They are also loosing business in certain areas (Moscow) because their supply chain is failing to meet the demand for product.

Background

Eugene Schuller founded L'Oreal in 1907. Schuller was a chemist who started the company selling his patented hair dyes to local hairdressers in Paris. When he died in 1957, Francois Dalle took over as CEO. In 1963 L'Oreal went public. In 1973, to avoid interference from left-wind politicians, Dalle convinced the founder's daughter, Lilaine Bettencourt, to dilute her majority stake. In a complex deal, the Swiss food-products company, Nestle, took a 49% stake in the company Gesparal, the other 51% being owned by Bettencourt, Gesparal in turn acquired just over half of L'Oreal's stock. In an agreement between Nestle and Lilaine Bettencourt, the company's share structure will not change in her lifetime, but after her death Nestle might consider a takeover.

Owen Jones is the current CEO. He started at the bottom, working for L'Oreal in the late 60's as a salesman. He did well and was marked for rapid promotion. From 1978-81 he ran L'Oreal's Italian business. From 1981-84 he headed the U.S. subsidiary. In 1988 Owen Jones was named chairmen of L'Oreal, making him the only foreigner to head a major French company. Since his appointment as chairman Owen Jones has met the challenge of leading L'Oreal to the front of the global cosmetics business through a careful strategy of global expansion.

1983: Jones defies colleagues who argue European brand Lancфme couldn't compete with established American brands like Estee Lauder and Revlon. He declares war on Estee Lauder, convincing Macy's to provide equal shelf space in its stores to Lancфme. Lancфme U.S. sales are boosted by 25%.

1996: L'Oreal makes a risky $758 million purchase of Maybelline. Maybelline's core market was Middle America, with just 7% sales overseas, focused on undaring lipsticks and nail polish. Jones shifts Maybelline headquarters from Memphis to New York, launching new and exciting color lines. In 2003 56% of Maybelline's $1 billion in sales came from outside the U.S. Maybelline becomes the leading medium-priced makeup brand in Western Europe, sold in over 90 countries. In 1999 Japanese teens went wild for Maybelline's Wonder Curl mascara, and now the Volume Express lines are growing in popularity. The failure of Maybelline's Moisture Whip in Japan lead to the creation of a new line, Water Shine, which proved so successful they are having trouble keeping it in stock in some areas.

1998: Jones buys Chicago-based Soft-Sheen, an African hair-care line with no international presence. In 2000 he combines Soft-Sheen with Carson, another African hair-care line with some presence in the South African market. Jones recognized the potential market for African hair-care products, opening a research laboratory in Chicago to study the properties of African hair. L'Oreal's goal is to have half of the total African market by the end of the decade. Currently they control 41% of the South African market.

2000: Jones decides to buy Kiehl's, a small New York cosmetics firm with a cult following. Kiehl's is a complete departure form your average slick L'Oreal brands, their strengths are exceptional customer service from the lab-coated assistants, and quality products. Little consideration is given to packaging or product placement. This turns out to be the main reason Jones wanted to buy Kiehl's, because "it was interesting to see a brand doing things successfully that were contrary to what we have done." Jones has followed to Kiehl's rule book, discreetly launching the brand outside New York, in a San Francisco store, and through sales to selected European stores like Space in London, and Colette in Paris. This was all done with no ads, promotions, and product changes.

2000: To help gain a foothold in Japan, L'Oreal forms strategic alliance with Japanese Shu Uemura, a large cosmetics company rapidly expanding into China and other Asian countries. L'Oreal may start a friendly takeover of Shu Uemura in the next few years.

L'Oreal, apart from buying and rejuvenating old brands, has also started a number of new brands itself, with each brand positioned on a very precise market, which overlaps as little as possible with the others. Here is a quick breakdown of L'Oreal's different brands (circa 2002):

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