MBA

Senior Experience Project 1

A Comprehensive Business Analysis of L’Oréal Group.

BUS 495 Strategic Management

Opall Brent

University of Wisconsin Superior

December 15, 2015

Table of Content:

1. Introductions and Overview

a. History

b. Brands of L’Oréal

2. Cooperate culture

3. Competitive positioning

4. Thesis statement

a. Why so many brands/ product?

5. Market Segmentation

6. Five Forces Model

7. SWOT Analysis

8. Strategic Group Map

9. Weighted strength assessment

10. Financial Analysis

a. Income statement

b. Balance sheet

11. Conclusion

History of L’Oréal:

L’Oréal was founded in 1907, by Eugene Schuller in Paris, it was formally known as Socixete Francoise des Teintures Inoffensive pour Cheveux, L’Oréal has since then gained reputation for quality and luxury products. The L'Oreal Company has become the most famous, luxurious cosmetics and make-up product manufacturer in the world. L’Oréal manufactures and distributes different products related to hair solution, Make-up, skin care, sunblock, perfumes, etc. The main office of L’Oréal is situated in Paris at the suburbs of Clichy, during mid-1920, L'Oréal had employed only 3 chemists, and by 1984 the number of employees was around a 1000, and today it employs a little over 2000 chemists as employees. L’Oréal started with a hair-color product, but after a decade, it expanded in the beauty and cosmetic products industry (Drug & Cosmetic 1996). L’Oreal currently markets about 500 brands and has more than a 100 of products in the beauty markets focusing on hair color, hair styling products, body and skin care cleansers, makeup and fragrances. L'Oréal has established research and development center, two are in France, one in USA, one in Japan and the other is in China. Also planning to have another one in New Jersey, USA. L’Oreal is currently active in performing business in over 130 countries, giving jobs to about 68,000 individual. L’Oréal is also operating on 42 manufacturing plants around the world which on the other hand provides employment for nearly 14,000 individuals (Fayolle, Basso, Legrain, 2008). The company was ranked 3rd organization in Fortune Global 500(Fortune Global Magazine, 2007).

Brands of L’Oreal include:

Consumer products- these products are of high technology and at a competitive price. Usually, these products are sold in hair salons and the end consumer users are focused through retail chains. Some of the products under this category include:

Garnier

Maybelline

L’Oréal Paris

Professional products-These products are mostly sold in mass- market retail chain. The users at hair salons that provide their customers with a wide range of products to use mostly for business reasons. Some of these products include:

L’Oréal Professional

Kerastase

Matrix

Luxury Products-Mostly luxurious items that are offered to customers at selective retail channels, e.g. luxury stores, departmental stores, boutiques etc. Some of these products include:

Lancôme

Ralph Lauren

Giorgio Armani

Biotherm

Diesel

Active Cosmetics-These are categorized cosmetics that have approval by dermatologists and probably pharmacists. This I mostly targeted towards consumers who are looking for skin treatment. They are mostly available at pharmacies and other selective stores. Some of these products include;

La Roche Posay

Vichy

Corporate culture

Deviating away from the history of L’Oréal, A Panoramic Overview of Entrepreneurship: Insights from Different Regions of the World, A note from the guest editor states that “personal values of the Founders or first actors of organizations have a strong effect on the development of the corporate culture”. The article analyzes the top organizations from around the world, it shows a pattern that the first actors of an organization have a great impact on what the long run outcome of the company will turn out to be. The founder of L’Oréal Chemist Eugene Schuller had a strong passion for technology, and we can see how he used that to bring the company to the forefront of the industry. A company’s principles such as values and behavior is said to be as important as the economic performance. This is why L’Oreal incorporates ethics into the core of its practices. In 2014, L’Oreal was announced as the world’s most ethical company. This is also the fifth time that L’Oreal was awarded with this award. In the household and personal sector, L’Oreal has reached the 1st place and 8th globally. L’Oreal also signed the Women’s Empowerment principles which is associated with the United Nation Women and the Global Compact. (L’Oreal recognized as one of the best World’s most ethical companies, 2014) Since L’Oréal is a multinational company with different manufacturing plants all over the world and employees. L’Oreal group took it upon themselves to create a work safe environment for their employees which results in low injury and illness rates that exceeds government standard. This act got them a VPP merit status in 2005. A L’Oreal spokesperson mentioned that the well-being of their employees means a lot to the growth of the company and that is why they tend to go extra mile in creating site-specific programs and facility training for all employees (L’Oreal facility achieves VPP star status, 2009)

Competitive positioning

L’Oréal is constantly gaining attention for so many reasons. The company was recognized for Beauty Digital score and it placed as number one in 2014, that same year, the company was also recognized as Brand Finance France Top 50 and it also placed number one. L’Oréal is said to be a tough competitor in the industry, a major competitor of L’Oréal, P & G passed a comment that “L’Oréal is crucial to P & G’s future” (Neff, 2004). However, there are so many competitors in the beauty and personal care industry. For the year 2010-2011 some of the major competitors that were identified are:

Proctor& Gamble Co

Unilever Group

Estee Lauder group

Avon Products Inc.

Johnson & Johnson Inc.

Kao Corp

Why L’Oreal chose to have so many brands

One of the main focuses for this research paper is evaluating and exploring why L’Oréal chose to have so many products/brands and looking at how that decision affects their company either in a positive or negative way. According to the L’Oréal group, they chose to have a lot of products “in order to meet the diverse group of consumers in the world” (Brands-L’Oreal Group, 2015). Most successful global companies tend to have many brands attached to its name. L’Oreal, along with other cosmetic companies do have multiple products. L’Oréal mentioned that they have many brands in order to satisfy their numerous diverse groups of consumers which is understandable. According to the article BRAND MOT: L’Oréal, the article talks about how consumers actually think that some of the brands within L’Oréal are similar, and how they would rather see more individuality in the different L’Oréal products/brands. Some other researchers suggested that the brands should be on their own instead of categorizing it under the L’Oreal umbrella. Another article by Tournois Laurent Too many products? Reaching the next billion customers of the beauty market, examines L’Oreal’s proliferation strategy of market share and brand dominance. Survey and data were retrieved from the information resources Inc. (IRI) and also databases from retail panel data. The result shows that it is easy for consumer’s demand to shift and strong competition tend to arise in this kind of industry. This is why most companies offer broad product lines or brands in other to stay dominant and relevant in the industry. However, when many brands are introduced, the issue of quality and individuality becomes a pressing matter. Most companies in the cosmetic industry pay a lot of attention to advertisement and using celebrities to attract customers. However, it costs them a lot to do this. For instance, L’Oréal has over 500 brands and over 1000 products, it is left to our imagination on how much they spend on each product ad.

Market Segmentation

Income segmentation:

The products produced by L’Oréal are separated in to the affordable category and the rest. L’Oréal marked its products low in order to captivate the poorer category. In other to do this, ingredients that are not expensive are utilized in order to reduce price. After the industry started booming, L’Oréal decided to target the middle and upper class income earners as well. However, L’Oréal still prefers to regard everyone in their segmentation as a whole entity. (Lamp, 2013)

Demographic Segmentation:

The article by Passariello Christina “Beauty Fix: Behind L’Oréal’s Makeover in -2” talks about how in 2004, L’Oréal only became profitable after 13 years of losing money in India. Most places in India, beauty products are sold for less than a dollar while L’Oreal products sells for 20 times as much. The Indian middle class is estimated to be about 200 million individuals, so obviously L’Oreal saw a future in that. However, due to the decades of poverty in India, most women are cost considerate and they tend to pass that down to their daughters. With the new generation that are coming of age, they are more willing to splurge on products. With the demographic segmentation, it is easy to root out people that fit into a particular target, such as age, gender, ethnic, background and life cycle.

Geographic Segmentation:

Headquarter of L’Oreal is located in Paris, France but it has its branches in about 130 different countries. The products that the company might decide to produce in the United State would definitely be different from what it would produce in Taiwan or Malaysia. This is where geographic segmentation comes in handy. For instance, L’Oréal would not market its straight hair products to an African country where they only have curly hair but instead, they would market what is deems fit to that specific geographic.

Psychographic Segmentation:

L’Oréal does not produce products focused on just one country. It produces products keeping the whole world in mind. It is well aware of the fact that people are different when it comes to products. The Psychographic segmentation is a type of segmentation on the basis of personality, motives, lifestyle and geodemographic. There are constantly arguments about curly vs straight hair and how there isn’t enough curly hair products. L’Oreal completed a survey about this issue which shows how involved they are about ongoing issues that relates to their products. L’Oréal produces products for all hair types, and it sometimes focuses on specific countries in order to improve their brand image. (L’Oréal Paris takes the curly vs straight hair debate head on, 2013)

Porter’s Five Force

Threat of New Entry:

Household/personal care/cosmetic industry is an attractive industry since the demand is always increasing, shifting due to personal and individual factors.

New entrants might want to join this industry due to a couple of reasons:

Since consumer’s demands constantly shift due to internal and external factors, new entrants might feel less threat from the old companies. Issue of brand loyalty often comes up in this kind of industry. However, some of these old companies have been in existence for over 100 years, so they have a variety of products/brands to cover some of these consumers that might be shifting their demands.

It is expensive to join this industry because of the cost of the manufacturing plants, research institute for developing products, and this manufacturing plants are the key strategy of successful cosmetic companies (L’Oreal opens rs 50-cr manufacturing plant,2004). In addition, L’Oréal is a global firm so the threats do not only come from international firms, but also from the domestic ones where it operates. There are very low barriers to entry. The cost of entering into the market is also low. Meanwhile, in a country like India, L’Oréal can face a serious threat from new entrance as this country can have domestic firms producing similar products but at a lower price. However, L’Oréal has been in this industry for more than 100 years producing quality products and achieving the customer’s satisfaction. Though it might be easier to enter this industry, surviving in it might be difficult because L’Oréal on its own has about 500 products and brands and so do other big companies in the industry. Thus, threat of New Entry is relatively low for L’Oréal.

Bargaining Power of Customers:

Customers have a lot of bargaining power since there are a lot of substitutes for L’Oréal products, However, L’Oréal is well aware of the fact that substitutes exist because of the customers. So, satisfying customers is one of the most important roles of L’Oreal. This is where the idea of brand loyalty comes in. The article “How L’Oreal is Planning to Double its Customer Base to Billion by 2020”. This article talks about how L’Oréal is planning to double its customers by educating customers which on the other hand “drive more and higher frequency of purchase, better engagement and longer loyalty “This just show that L’Oréal know that customers have bargaining power and that is why they used the “providing information” strategy to win their customers” (The article “How L’Oreal is Planning, 2014).

Bargaining Power of Suppliers:

Suppliers are a vital part of any industry and L’Oréal is doing a great job in maintaining good relationship with suppliers. Some of L’Oreal’s materials that they get from suppliers are raw materials, packaging, point of sales (POS) and equipments. L’Oréal has many suppliers that are in charge of processing their products. So, their supply bargaining power is low.

Competitive Rivalry:

L’Oréal has gained a high accomplishment in the cosmetic/ personal care industry. L’Oréal operates in 130 different countries and it is obvious that every country has it rivals. However, if we talk about global markets, some of the companies have been able to give a really nice competition to L’Oreal, which are Estee Lauder and Avon. Along with trying to have the best quality product with reasonable price, these companies are spending lots of money on advertisements to defeat the other companies and gain the top position.

Threat of Substitute goods: L’Oréal might have other competitors, they have over 2000 chemists and manufacturing plants which are in charge of producing products that are exceptional. Consumers can easily get another product instead of L’Oreal products, however, customers can distinguish L’Oréal products from other substitutes due to the fact that they have been in existence for so long. Other substitute products might sell for a cheaper price, but when it comes to cosmetics, people tend to want the best even if it will cost them a lot to buy. For instance, when L’Oréal was selling to India at a higher price while India also had domestic products at a cheaper price. Indians preferred to buy from L’Oréal because of the quality and long existence of the company. Thus, the threat of substitute goods is very high. As a result, to be in the competition and kick their competitors out of the game, L’Oréal has to come up with new ideas often and bring some changes in their products that their competitors cannot follow.

SWOT Analysis of L’Oréal

Strengths:

· Operational Network-Enjoys Global outreach and is able to generate revenues from different diversified products (presence in 130 countries, 27 international brands, 42 factories across the world).

· Advanced Research Capabilities-high advance research activities (biology and bioformatics), increases innovation.

· Strong Financial performance

· Strong Brand Equity- Owns various leading international brands, allows them to attract and retain loyal customers

Weaknesses:

· Trade Receivables-As indicated on the financial statement, increased receivables indicates inefficient credit policies. Probability of default by creditors will impact the financial positioning

Opportunities:

· Rise of organic and natural cosmetics -New market opportunity (people are deviating away from chemicals

· Key Business Initiatives-These initiatives provide future growth potential for the company

In April 2013, The Company acquired the Health & Beauty business of Inter-Consumer Products in Kenya and also new research and innovation center for studying India hair and skin specialties.

· Fast growing E-retailing

Threats:

· Growing counterfeit Products-Affects sales and decreases the image of well established brands

· Competitive Environment-competition from the entry, as well as expansion of other companies in industry

· Change in consumer preference-must constantly develop, produce and market new products in order to maintain and enhance the recognition of its brands. (Consumer packaged goods,2014)

L’Oréal is a growing industry. It started in Clichy, France and then expanded all over the world. Looking back at its history, we know that the company became this big due to the acquisition and merger of other companies. L’Oréal is also known to “buy local cosmetic brands, give them a facelift and export them around the world” ( Tomlinson, 2002) Thus, L’Oréal is known to have over 500 brands and more than a thousand products attached to its name. Just when we think that there is nothing more for L’Oréal to produce or invent, its talented groups come up with new ideas. Recently, it added the anti-aging and men products in other to meet customers needs (Johnson, 2006). L’Oréal group is always improving its products to fulfill the changing needs of the customers. In addition, the products of L’Oréal are unique because they are directed towards a specific target audience and that brings them brand loyalty that will be very hard for any existing or new company to attain.

Strategic Group Map

Using the strategic group map, it would be important in analyzing and identifying which industry members are close rivals and which are distant rivals to L’Oréal. Some of L’Oreal’s greatest competitors include: Alticor Inc., Revlon, Mac, Clinique, Unilever, Estee lauder and many others (L’Oréal, 2015). Another thing to pay attention to is that among the list of competitors, L’Oréal shares an industry with the cosmetic industry and also household/personal care industry, so the rivalry is strong. From the strategic group map, L’Oréal, Estee Lauder and Avon are in the same bubble because they share the same competitive characteristic such as product line, price rage and quality. Mac, Clinique and Mary Kay are in a higher part on the chart because they target specific target audience which happens to be a lot of consumers. The lowest part of the chart that consists of E.L.F, La girl pro and N.Y.X are considered cheap and to be of less quality. However, even consumers that shop on the higher part of the chart also buy some of these lower products. When it comes to the cosmetic industry, it doesn’t really matter how expensive a product is, it depends how much it matches your skin.

Weighted Strength Assessment

From the Weighted strength assessment chart above, two of L’Oréal competitors are used to assess how L’Oréal is doing in the Industry. L’Oréal scored the highest with some of the factors in place. From the chart, L’Oréal has some of its highest scores in advertising, product quality, customer loyalty, and market share.

Income Statement

The figure on the following page shows L’Oréal income statement. It is also measured in thousands of Euros and was retrieved form Yahoo! Finance. Throughout the years, the company’s total revenue gradually increases. From 2011 20,343,000 to 2012 21, 6300, 000, there was an increase of about 1,295,000 euros which is approximately 1,414,981.75 US dollars approximately the same estimate for 2013 and 2014 with an increase in their gross profit. L’Oreal’s net income has been increasing throughout the years and its earnings also increases. Their cost of revenue has been increasing over the years, in 2011 it was 5,852,000 which is approximately 6,393,427.04 US dollars. In 2012 and 2013, it increased with about 536,000 euros which is approximately 585,660.40 US dollars but there was more increase in 2014 with about 709,045.48.

(Yahoo! Finance, 2014)

Balance Sheet

Again, on the following page there is L’Oreal Balance Sheet for the last four years retrieved from Yahoo! Finance, and all numbers are in Euros. The company’s current assets has increased through the years from 2011 through to 2013 with about 1,059,000 euros which is approximately 1,160,664.00 US dollar, but there was a slight decrease from 2013 to 2014 with about the same amount. However, the total assets in general as an overall increase all through the years. L’Oréal has a strong cash and cash equivalents balance sheet with a steady growth from 2011 to 2013 but there was a decrease in 2014 in cash compared to other years. The same goes to the inventory, there was also a slight decrease in inventory in 2014. In general, the total liabilities increased drastically from 2013 to 2014 with a difference of 3,738,000 approximately 411, 3295.20 US dollars. Looking at both the income and balance sheet, there was a slight downturn for L’Oréal in 2014.

Conclusion

· L’Oreal having multiple products is an advantage because it works for them and what they stand for as a company.

· The marketing strategy they use aligns with their mission and vision statement

· They could work more on their business culture. It is very difficult to get information about their culture online which does not speak well for such a big company.

References

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