Case Study
L’Oréal beauty products: using financial data to explore the strategy dynamics of an industry
How does the world market leader, L’Oréal, compare with its rivals? How has the company built its beauty products business? What strategies are likely to prove successful in the cosmetics and fragrances business?
This case provides some answers: importantly, all the data is available from publicly available resources – Company Annual Reports, the World Wide Web and library-based surveys. For reasons of space, the case focuses on one part of L’Oréal and then one section within this part. In a more complete strategic analysis, it would be essential to explore every part of the company.
Comparison of L’Oréal with two competitors
We begin by comparing the financial performance of L’Oréal with two major national competitors – Estée Lauder and Shiseido – see Table 5.4 . What does the data tell us? Clearly, L’Oréal has been consistently profitable over the last ten years. Moreover from a strategy dynamics perspective, it has been more profitable than the two rival companies. We can see this more clearly by calculating the net profit margins for each company – see Table 5.4 . Net profit margin is calculated by dividing the annual net profit, i.e. profit after tax and interest, by the turnover of that year and expressing the result as a percentage. How has L’Oréal managed to increase its net profit margin over a number of years to levels not achieved by its competitors? We would need to examine all three companies in depth to answer this question fully. For this case, we will simply focus on L’Oréal.
More detailed examination of the L’Oréal Annual Report and Accounts
We can look further at the company accounts of L’Oréal to see the geographic spread of sales – see Figure 5.3 . The data shows
that the profit margin is higher in Western Europe than elsewhere. Moreover, Western Europe is the biggest contributor to sales and the most profitable part of the business. We can also examine data at the other two companies: not shown here for reasons of space. This shows that L’Oréal derives more of its sales from Western Europe than its two rivals, suggesting either that Western Europe is a more profitable market in itself or that L’Oréal’s dominant position in Western Europe is particularly important in delivering profits. For reasons of space, this is not explored further here. But it is directly related to the dynamics of the cosmetics market and the three companies competing worldwide. It would also be useful to examine in more depth which products have the highest product margins. The starting point is to examine the contribution that each product group makes to the overall sales of L’Oréal – see Figure 5.4 and Table 5.5 . Although the company accounts show the various products in L’Oréal’s range, they do not show which products are the most profitable. Nevertheless, the annual report does give some further data on each product group. For our purposes, we will focus on the largest group – consumer products .
L’Oréal Consumer Products Division 2003
This product group uses mass-market retail channels to sell its products. Brand names included L’Oréal Paris, Garnier Fructis, SoftSheen Carson and Maybelline . The next two tables are taken from the web version of the annual report and accounts. They show sales by geographic zone and sales by business segment within the Consumer Products Division – see Tables 5.6 and 5.7 . Readers will see that some of the numbers appear to be inconsistent. For example, the sales appear to have declined between 2002 and 2003 whereas the web table claims that sales actually grew by 7.7 per cent on a like-for-like basis. We have to trust the accountants here – they will give the actual sales figures for 2002 and 2003. But in recording like-for-like comparisons, they will have adjusted for other events – for example, perhaps a product was discontinued or a subsidiary sold during the year and therefore removed from the accounting data. L’Oréal Consumer Products Division was very satisfied with a +7.7 per cent sales growth, which it described as substantial.
The company claimed to outperform its competitors with such strategies. It also gives similar information on the other product areas. This information is available on the web at This growth is much higher than the market growth in the more mature parts of the ice cream industry (see Case 3.2 ) so the conclusion is not unreasonable. The company then goes on to explain how it achieved this growth by the following strategies:
• Operational teams in each country adapted the product mix provided by the centre – local strategy within a global base. ‘Garnier’s success with shampoo in the United States and with skincare and colourants in Asia is a good example,’ explains the company’s report.
• Focusing on three flagship brands – L’Oréal Paris, Maybelline New York and Garnier – with each being targeted at a different customer segment. The report does not name the targets but looking at the products in-store would probably provide evidence for this.
• Launching new products patented by headquarters and then marketed globally.
• Targeting ‘growth driver countries’ like China with Maybelline make-up and the Russian Federation with Garnier skincare products in order to deliver growth objectives.
• Maintaining strong co-operation strategies with leading local country partners – the company comments that the ‘point of sale’ presentation is ‘absolutely critical’ to sales success and this can only be achieved with local partners and distributors.
• The skincare growth was exceptional at nearly 24 per cent. This was achieved using the L’Oréal Paris and Garnier brands along with new patented products in every part of the world.