L’Oréal and the Globalization of American Beauty

Case Problem

Marketing managers of L’Oreal currently face the problem of expanding the geography of the
group by entering regional markets. However, the key challenge in this task is to preserve the
brand image created globally, but to adapt to the needs of the local customers. This task is
associated with careful evaluation of the market environment and competitive landscape,
which are specific to each region.

Company Analysis

L’Oreal Group is largely affected by the macro environment of the markets it operates in.
Thus, the current market trends open numerous possibilities for the company. Firstly, there
are vast opportunities for growth in the emerging markets and in the cosmetics for men.
Increasing welfare worldwide and population ageing in the traditional L’Oreal markets imply
that the number of consumers is likely to increase in the future.

However, external environment also presents a number of threats. Thus, L’Oreal products
have high price elasticity and therefore they are vulnerable to the economic crises.
Competition in the market is fierce and L’Oreal has to compete not only with its direct global
rivals, such as P&G, but also with the smaller local producers and non-beauty companies in
the fragrances business, such as Gucci.

L’Oreal Group’s strategic position should be assessed not only by considering the external
macro environment, but also by investigating internal strengths and weaknesses of the
company. Thus, L’Oreal has extensive experience in the area of beauty products, research
capabilities and a vast product and brand portfolio to acquire market share, cater to the needs
of all customers and to derive synergies. Moreover, the acquisition of local brands allows the
company to successfully apply global strategy while considering the local needs. The group
brands and the company culture allow achieving flexibility and high responsiveness to the
demand. However, there several weaknesses that L’Oreal should address in order to be
successful in the market. Thus, high degree of decentralization within the matrix structure
makes it hard to coordinate activities across regions and brands. In addition to that, globalized
approach to marketing products may be not universally effective. The current strategy of
acquiring local brands also does not guarantee success, especially in the emerging markets,
where there are no well-established brands to acquire.
Analysis of Industry Demand and Competition

Although beauty industry in general is mature, with relatively low growth rate and high
competition, L’Oreal continuously succeeds in finding opportunities for expansion. Firstly,
market growth is expected due to the increasing interest in beauty products in emerging
markets and due to the population ageing in the traditional markets. Moreover, the company
constantly seeks for new opportunities in new segments. Thus, L’Oreal Active Division uses
cutting-edge scientific developments for their products, which are positioned as
dermatological remedies rather than cosmetics. The Body Shop also addresses the needs of
the growing audience of customers, who are interested in natural and environmentally
friendly products. Both divisions have high potential for profitability, since they are still in
the growing phase and operate in less competitive market niches.

L’Oreal is by far the biggest cosmetics producers in the world with the 15.8% market share in
the U.S. market and the revenue of €17.5 billion in 2009 (L'Oreal Group). According to
Hoover’s, L’Oreal currently has 21 major competitors (Hoover's), where Revlon and Procter
& Gamble Company are the largest ones. However, it is hardly possible to list all the rivals
due to the variety of businesses the group is involved in and the complexity of the
competitive landscape. Thus, the company competes with the major global corporations, such
as P&G, as well as with the local players. While the former can take advantage of scale
economies, brand recognition and diversified portfolio that helps to derive synergies among
businesses, the latter possess extensive local market knowledge. However, global competitors
usually do not have L’Oreal’s expertise in the beauty industry, while small players are not
able to compete effectively due to small scale of operations and limited opportunities in terms
of R&D and marketing. Moreover, in the luxury segment and in particular in the fragrances
business L’Oreal has to compete not only with the traditional rivals, such as LVMH and
Estee Lauder, but also with non-beauty companies, such as Cartier and Gucci. In this area the
major strength of the competitors is the value of their brands, however, they lack expertise
and experience in the beauty sector.

Alternative

The current L’Oreal strategy is designed in a way to address most of the threats in the
external environment and to capture the opportunities that are presented. The highly
diversified portfolio helps to derive synergies among businesses, to reduce risk and to offset
low growth rates in the mature sectors by the growth in the younger ones. Internationalization
strategy of L’Oreal has also proven to be successful. While the group emphasizes internal
growth, it expands its operations into some regions by acquiring local players. Such strategy
allows gaining quick access to the market, obtaining shelf-space and benefitting from the
local knowledge of the acquired company.

Despite L’Oreal’s high profitability and current market leadership, its internationalization
strategy still possesses some weakness that may eventually become detrimental for the future
success. Thus, the number of brands and divisions within the group is becoming dangerously
large. Additional complexity makes it hard to coordinate activities of the group and to react to
the market demands effectively. Moreover, it is possible to relax the strict policy of
globalizing all the brands within the company, since the more markets L’Oreal penetrates, the
more heterogeneous the demand patterns of the customers become. Therefore, it will be more
and more difficult for the company to make sure that one product fits all consumers in all
parts of the world. Hence, L’Oreal could introduce several regional brands that could be sold
in macro geographic areas and could be designed with consideration of the customer needs in
the particular region.

Conclusion

Limiting the number of brands and division consolidation could potentially reduce
operational cost and improve coordination. In particular, Active Products Division and the
Body Shop need to be integrated into the overall company operations. The use of regional
brands would require extensive cost-benefit analysis and planning. This strategy can be
implemented in two different ways. Firstly, L’Oreal may acquire successful local brands
without changing their names and/or their essence, but by integrating them into own
portfolio. This method is relatively cheap and does not entail much risk. Secondly, it is
possible to enter new markets with own new brands, however, such strategy is very risky and
is unlikely to be effective in most markets.