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 L’Oréal’s worldwide business strategy – including its
see this more clearly by calculating the net profit margins for Hungarian brands above – can be analysed in depth from
each company – see Table 5.4. Net profit margin is calculated company financial data available on the web. Data on
by dividing the annual net profit, i.e. profit after tax and interest, rival companies like Estée Lauder (USA) and Shiseido
by the turnover of that year and expressing the result as a (Japan) can also be sourced from the internet.
percentage.
How has L’Oréal managed to increase its net profit margin
over a number of years to levels not achieved by its compet- More detailed examination of the L’Oréal
itors? We would need to examine all three companies in depth Annual Report and Accounts
to answer this question fully. For this case, we will simply focus We can look further at the company accounts of L’Oréal to see
on L’Oréal. the geographic spread of sales – see Figure 5.3. The data shows

Table 5.4 Three companies in the world beauty business

All figures in $ billion

Year L’Oréal, France Estée Lauder, USA Shiseido, Japan

Sales Net profit Sales Net profit Sales Net profit

2003 16.8 2.0 5.8 0.3 5.2 0.2

2002 15.0 1.5 5.1 0.3 4.5 (0.2)

2001 12.1 1.1 4.7 0.2 4.7 0.4

2000 11.9 1.0 4.6 0.3 5.6 0.1

1999 10.8 0.7 4.3 0.3 5.1 0.1

1998 13.4 0.8 4.0 0.3 4.7 0.1

1997 11.5 0.7 3.6 0.2 4.8 0.2

1996 11.5 0.7 3.4 0.2 5.2 0.2

1995 10.9 0.6 3.1 0.2 6.2 0.1

1994 8.9 0.6 2.9 0.1 5.3 0.1

 Table 5.5 Net income margins at three cosmetics
companies: net income divided by sales revenue

Year L’Oréal Estée Lauder Shiseido

Net profit Net profit Net profit
margin margin margin

2003 11.9% 5.2% 3.8%

2002 10.0% 5.9% –

2001 9.1% 4.2% 8.5%

2000 8.4% 6.5% 1.8%

Figure 5.3 L’Oréal: Geographic location of sales and profit 1999 6.5% 6.8% 2.0%
margins 2004
Source: company accounts for 2004 with graphic prepared by author. 1998 6.0% 7.5% 2.1%

1997 6.1% 5.5% 4.2%

1996 6.1% 5.9% 3.8%

1995 5.5% 6.4% 1.6%

1994 6.7% 3.5% 1.9%

Source: calculated by author from company accounts.

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
Figure 5.4 L’Oréal: share of sales by product group 2004 inconsistent. For example, the sales appear to have declined
Source: company accounts with graphic prepared by author. 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
that the profit margin is higher in Western Europe than else- to trust the accountants here – they will give the actual sales
where. Moreover, Western Europe is the biggest contributor figures for 2002 and 2003. But in recording like-for-like com-
to sales and the most profitable part of the business. We can parisons, they will have adjusted for other events – for example,
also examine data at the other two companies: not shown perhaps a product was discontinued or a subsidiary sold during
here for reasons of space. This shows that L’Oréal derives more the year and therefore removed from the accounting data.
of its sales from Western Europe than its two rivals, suggesting L’Oréal Consumer Products Division was very satisfied with
either that Western Europe is a more profitable market in itself a +7.7 per cent sales growth, which it described as substantial.
or that L’Oréal’s dominant position in Western Europe is par-
ticularly important in delivering profits. For reasons of space,
this is not explored further here. But it is directly related to the Table 5.6 L’Oréal: Consumer Products Division sales by
dynamics of the cosmetics market and the three companies geographic zone
competing worldwide. Sales in € millions
It would also be useful to examine in more depth which
Sales Sales % of Like-for-like
products have the highest product margins. The starting point
2002 2003 2003 sales growth
is to examine the contribution that each product group makes sales 2003/02 (%)
to the overall sales of L’Oréal – see Figure 5.4 and Table 5.5.
Although the company accounts show the various products Western Europe 3,837 3,991 53.2 5.3*
in L’Oréal’s range, they do not show which products are the North America 2,319 2,080 27.7 6.7*
most profitable. Nevertheless, the annual report does give
some further data on each product group. For our purposes, Rest of world 1,445 1,434 19.1 16.4*
we will focus on the largest group – consumer products. Total 7,601 7,505 100.0 7.7*

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,
Table 5.7 L’Oréal: Consumer Products Division sales bybusiness segment
Sales in € millions

Sales Sales % of Like-for-like

2002 2003 2003 growth
sales 2003/02 (%)

Haircare 4,048 3,957 52.7 6.2

Make-up 2,100 1,983 26.4 5.9

Skincare 1,020 1,179 15.7 23.7

Perfumes 151 128 1.7 –11.9

Other 282 259 3.5 –6.4

Total 7,601 7,506 100.0 7.7

Source: company accounts.

Source: Retrieved from Lynch, R. (2015). Strategic management. Pearson. 7th edition (page 163).

ADDITIONAL INFORMATION:

- L’Oréal corporate website: https://www.loreal.com/en/

QUESTIONS ABOUT THE CASE STUDY (Lessons 4 & 5):

1) According to the interest-power matrix, identify at least one L'Oréal

stakeholder for each of the quadrants (low power and interest, low power and
high interest, high power and low interest, high power an interest). Give reasons
for your answer.

2) Mention the key points of L'Oréal Corporate Governance.

3) It describes some of the actions carried out by L'Oréal, within its Corporate
Social Responsibility.

4) What about business ethics of this firm? Explains briefly.

5) Taking into account the information from the case study as historical context,
where we can see the comparison of L'Oréal with two competitors (Estée Lauder
and Shiseido), what strategies do you think L'Oréal has followed to achieve
this growth? You can find support on the Three 'S' Framework for your answer
(sensing the changes in the environment; seizing the opportunities that such
changes present; and surveying the outcomes of such changes).
You must submit your response to the proposed questions, individually or in groups
(maximum 3 students attending the interactive session; you must add your names in
the first page). In case of not attending the interactive session (Wednesday, Oct 20th),
you must submit the case individually.

Deadline for submission: Monday, October 25th (included).

IMPORTANT: Just one member of each group should submit the file, including the
name of all the authors.