The cosmetic industry can be analysed using Porters five forces framework, by identifying threats of New Entrants, Industry Competitors Suppliers, Substitutes and Buyers. According to Euromonitor International (2008), the threat of new entrants into the cosmetic markets is low, considering that majority of the market is already owned by leading companies such as L’Oreal, Unilever, Proctor and Gamble (Appendix 4). Hence, it would be extremely difficult for a new firm to establish their brand name, due to the intensity of competition. Since there are few differentials between products, and due to strategic objective of growth by business rivalry is high. Porter (2004)
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Therefore it can be argued the American barrier to entry into the industry is fairly low, which is a key driver for globalisation. However if a new firm is unable to compete there is the possibility of business failure or threat of being acquired by leading manufactures. Due to the industry leaders acquiring a variety of cosmetics, hair and beauty companies, consumers have the option of an array of substitute products; as a result this lowers the industry attractiveness and sets a limit on price levels. However in order to overcome the issues L’Oreal have established a prestigious brand image based on quality and allowing them to higher price compared to their competitors.
This allows the bargaining power of buyers to be greater, since there are many sellers in the industry and fewer dominant buyers. The bargaining power of supplier is currently low, since majority of the establish firms do not require dependence on suppliers to supply cosmetic products. Porter (2004)
Therefore in order to identify L’Oreal’s position with in the industry a SWOT analysis has been conducted, (Appendix 2).
L’Oreal, How it Began
The French company L’Oreal started in 1909, with production of world’s first hair colour product. The products were first sold in Parisian hair salons, using very tight production, sales and marketing strategy and by 1912 the products were distributed in other European regions such as Italy and the Netherlands (L’Oreal: 2010).
According to L’Oreal (2010), in order first build on their brand portfolio, the company had acquired a number of French companies such as Lancome and Garnier, thereby diversifying into other markets, such as upscale perfumes and cosmetics. The acquisitions had allowed L’Oreal to increase their range of products among mass distributors and by 1970 eighty percent of company sales were coming from France, (Cardona: 2000). Hence the company became France’s leading beauty company, however the international presence was still little and the concept of expensive Parisian products by consumers limited L’Oreal ability to expand into international markets.
According to Cardona (2000), L’Oreal first entered the American Market in 1954 by forming a licensee with the cosmetics and hair product company Cosmair Inc. Licensing as method of entry into the market involves L’Oreal granting rights under contract to intangible property. This had L’Oreal at began by distributing their products to U.S. beauty salons, however the company presence was still small due to the company brands being managed individually. Hence, without a licence it could have proven difficult for L’Oreal to enter the market, consider that there product was unfamiliar to the American market. Also this had allowed L’Oreal to understand the American market, the buyer behaviour and level of competition. However, According to Bartlett and Ghoshal (1989) the disadvantage of this method is it forces L’Oreal to depend on the skills, abilities and resources of the licensee as the source of revenue.
However it is further argued by Cardona (2000), that L’Oreal acquired Cosmair Inc in 1994, which enabled the company to further strategise its influence in the American market and acquire cosmetics company Maybelline in 1996. According to Ono (1995) Maybelline was America’s third largest cosmetics company, sold mostly in supermarkets, cosmetic speciality stores and mass market discount stores. L’Oreal believed by improving the Maybelline’s products, marketing and brand image would give the products huge international potential. According to Edmondson et al (1999), this gave L’Oreal entry into the younger consumer base from the affluent European consumer base, due to its strong American brand image. Maybelline was a cheaper product, carried a wider distribution network and a wider product range which appealed to a vast number of ethnic consumers in America and outside. As a result, L’Oreal’s sales from Maybelline outside the United States had grown by fifty percent (Edmondson: 1999). The acquisition of these businesses gave L’Oreal a seventeen percent share of the $2.3 billion U.S. cosmetics industry, (Ono: 1995).
Therefore it can be argued the mode of entry into the market soon developed into strategic acquisitions, in order to pursue the strategy of growth and internationalisation. This method according to Bartlett and Ghoshal (1989), allows L’Oreal spread risk and reduce the level of competition since rivals are take over. This has also given L’Oreal greater market share for horizontal integration within the industry and thus allowing them to charge higher price for their products. However Bartlett and Ghoshal (1989) further argue this mode of entry can often cause clash in cultures, which is discuss further in this report.
According to L’Oreal (2010), during 1980s the company had purchased stakes in two additional American companies, the cosmetics maker Helena Rubinstein and Ralph Lauren Fragrances. Both firms were later fully acquired in 1988 and 1990. Weil (2006) argues, even though Helena Rubinstein had lost most of their product appeal among American consumers, L’Oreal believed with effective merchandising and a complete re-launch of the brand, the products would be successful in the U.S. Market. This was due to the brand having a good position in other regions such as Europe and Asia, where Helena Rubinstein products were considered upscale, according to Weil (2006). On the other hand, the acquisition of Ralph Lauren Fragrances was completed in order to strengthen L’Oreal’s luxury products division, which possessed a smaller mass market fragrances brand (L’Oreal: 2010). Due to Ralph Lauren established brand image and excellent distribution networks with stores such as Saks Fifth Avenue, it had allowed L’Oreal to enter a younger consumer market.
It had been identified that the key acquisition for L’Oreal in order to increase their global presence was through the purchase of Kiehl’s, in 2000. According to Anon (2000), Kiehl’s was a important addition to L’Oreal’s luxury product division, offering a diverse range of specialised products for the high cost segment of the market from perfumes, skin, body and hair care. Thus by acquiring Kiehl’s, L’Oreal’s was able to increase their product range and influence on American society. Considering that L’Oreal had expensive multi-million pound advertising campaigns, Kiehl’s did not require such advertising due to exclusivity of the products at the time and its recognition among famous individuals (Anon: 2000). This had allowed L’Oreal to grow, with the company revenue increasing yearly, (L’Oreal: 2009).
Therefore the acquisitions of such major U.S. companies allowed L’Oreal to increase its global presence and enter new emerging markets. Also the company has been able to develop an effective internal organisation, which is split into Consumer Products, Professional Products and Luxury Products. Due to these factors approximately twenty to twenty five percent of the company annual revenue comes from the United States (Cardona: 2000).
Diversifying into Other Markets
L’Oreal had acquired the professional hair product company Redken in 1993. This acquisition had allowed L’Oreal improve the structure of their hair product division, due to Redken’s extensive distribution networks (L’Oreal: 2010). Hence L’Oreal had reassessed the company hair care division to focus on the sales to salons and hairdressers. Compared to the European market where luxury hair products were sold in department stores, in the U.S. luxury hair products were primarily sold in hair salons and speciality beauty supply stores. According to Nichol (2010), L’Oreal was able to increase their revenue, since sales from salons carried a higher profit margin compared to mass market hair products. Hence, L’Oreal’s sales from the professional hair care division had provided one third of the company’s sales from hair care (L’Oreal: 2010).
According to Morais (2000), in 1998 and 2000, L’Oreal had made a combined strategic acquisition of the companies Soft Sheen and Carson, in order to enter the ethnic hair care market. Soft sheen was one of the leading American ethnic hair care products and Carson had an eighty two percent share of the U.S ethnic hair care market. Rhea (1997) argues in particular the acquisition of Carson had helped L’Oreal to entire the South African market which was worth an estimated market value of one billion dollars, due to the establish presence Carson had already developed.
L’Oreal had saw the entrance into the American market particularly important, since African Americans represent 12.85% of the American population (Appendix 1) and accounted for thirty percent of the total U.S. hair care expenditure, totalling $1.2 billion in 1997 (Morais: 2000). The purchase of the companies allowed L’Oreal to increase their distribution channels further, since majority of sales come from wholesales such as Costco and beauty shops. According to Morais (2000), the market is fragmented, and mostly responsive to word of mouth, hence does not require much advertising or promotions.
From the analysis it can be identified that L’Oreal has followed the Uppsala Model (Appendix 6) in the process of internationalisation. The model illustrates the gradual international expansion of the company by the four stages. In stage one; it was L’Oreal’s objective to first build a presence in the American market through a licensee with Cosmair rather than make a large foreign direct investment. This allowed the company to develop market knowledge in order to control the international expansion within the American market. Therefore this method of entry was the most idyllic approach for L’Oreal, since according to Forsgren (2002) business will enter a new market using the lowest possible resource commitment and expand from there on to establish the firm. As a result, L’Oreal was able to control the level of risk and eventually increase resource commitment. In Stage two, L’Oreal had exported their products through independent representatives in America through regional middlemen. In the third stage, L’Oreal had made establishment of sales subsidiary through Helena Rubinstein and Ralph Lauren Fragrances. According to Forsgren (2002), in this stage L’Oreal is able to collect about market conditions, leading to a more wide market experience and give greater information regarding factors of language, culture and political system. In stage four L’Oreal had established a foreign production facility in the American market.
Intensity of Competition for L’Oreal
As seen on Appendix 4 the level of competition in the cosmetic industry is high however due to L’Oreal strategic international strategy the company has been able to be the industry leader. This was accomplished due to L’Oreal developing brands in different market segments and vast distribution channels in mass market, hair salon products, pharmacies and department stores, (L’Oreal: 2009). Due to the company’s operations in different markets, L’Oreal experiences a high number of challenges from competitors in different markets.
According to Drier (2004) in the consumer cosmetics division, the main competitors for L’Oreal are Proctor & Gamble, Revlon and Unilever. Similar to L’Oreal, Proctor & Gamble had established brands in health, beauty as well as household care. The company become a major competitor for L’Oreal due to the company’s acquisition of Clairol in 2001, Gillette in 2005 and majority stake in hair care brand Wella in 2003. Hence, Proctor and Gamble was one of the leading cosmetics businesses in the United States, where it had a seventy percent share of the American market from its hair colour brand Clairol (Drier: 2004). Hence a key globalisation driver for L’Oreal was to enter the hair care market, which was accomplished by the acquisition of Redken and rather than mass-market L’Oreal concentrated on specialised hair salons.
In addition, Unilever had also streamlined their brand portfolio, by developing similar strategies to that of L’Oreal and Proctor and Gamble. The company had developed a competitive advantage by identifying potential acquisitions. For example, the purchase of American business Chesebrough-Pond, allowed Unilever to become one of the world leaders in personal care and cosmetics, (Anon: 1997).
Therefore in order to compete, L’Oreal has developed their competitive advantage by positioning the business above the drug store cosmetic brands such as Revlon. Their marketing strategy has allowed them to establish a prestigious brand name; L’Oreal has been able to charge high prices.
According Trout and Rivkin (2009), in order for companies to charge higher prices, the products should offer prestige, thus consumers will pay a little more for the perceived value. Hence, by putting a particular emphasis on their packaging and advertising campaigns using celebrity models, the company has perceived the brand as elegant among consumers, (L’Oreal: 2010).
It can also be argued that L’Oreal’s factor of success in the industry is due to being able to develop a comparative advantage over competitors by making a powerful commitment to research and development. According to (La Roche-Posay: 2005), the company had invested $612 million on research in 2005, which was three percent in turnover compared to the industry average. As a result L’Oreal was able to significantly reduce production costs and the purchasing cost of goods for the company fell to nineteen percent of sales compared to there rivals Wella, who had cost of twenty five percent, (Morais: 2000).
Therefore it can be argued that L’Oreal competitive strategy falls into Porter’s Differentiation strategy as seen on Appendix 7. This is due to L’Oreal’s high research and development costs and acquisitions of companies such as Soft Sheen which involves producing a range of products that meets the specific needs of the consumer segments.
Thus by creating uniqueness and developing a prestigious brand image, L’Oreal is able to charge high prices for their products compared to the competitors. According to Porter (2004), this lowers the sensitivity to price of the brand loyal customers and can also act as a, entry barrier for new firms. It is further argue that, this strategy could generate higher revenue than the low cost strategy, due to the development of high barrier to entry and therefore making it difficult for new businesses to enter. However, the higher price is likely to result in a lower volume of sales and thus one strategy will not necessarily mean high profit than the other. It is argued by Kim et al (2005), the competition based strategy of Porter is not sufficient to sustain high business performance and firms should develop new growth opportunities through value innovation. In order for value innovation to be created for both the company and buyer, the company must discover unused areas of the market and create the new demand. Thereby focus is shifted towards innovation rather than competition.
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L’Oreal’s Organisational Structure
It can be identified from Appendix 3 that L’Oreal has incorporated a matrix organisational structure. According to Bartlett and Ghoshal (1990), matrix structures tend to be complex and combines two or more organisational responsibilities. For example, the CEO of L’Oreal is placed at the Head office located in France, with the top regional leaders reporting directly to the CEO. The responsibility of the division executives is to manage the brand strategy, global brand sales, profitability and marketing. The Region Managers (i.e. Asia, U.S.A, Africa and Europe) are responsible for the sales in their region and executing sales strategies. The strategies are developed by brand teams based in their respective region; and brand teams work closely with their division executives in order to implement effective marketing strategies within the region. Hence, in order to maintain an effective level of communication, managers of each country often keep close relationship with the general managers of each brand to identify needs of the specific country. In return, the general mangers provide information on marketing strategies for their region and product development ideas, which then requires co-operation with Research & Development.
Cogmap, (2009)
However, Bartlett and Ghoshal (1990) argue a matrix structure can prove to be unmanageable in the international context, since multiple reporting often leads to confusion and creates overlapping responsibilities. As a result distance is created between language, culture and time.
L’Oreal have avoid such problems by keeping a strong central oversight over executives of each division, since it then allows L’Oreal to identify whether each executive is effectively managing the division and the responsible regional mangers, to ensure there is no redundant work or conflicting interests. Therefore the implementation of the matrix structure has allowed L’Oreal to save costs, as fewer people are required due to employees sharing information between different projects. In addition, resource sharing saves time and costs, since those employees engaging in different projects often share related information. Hence it has been identified by Appendix 3, that L’Oreal’s executives work on more than one project at a time and keep a regular flow of information about the progress of the company, this has made the company stronger since different departments are working together and not against each other.
Cultural Issues for L’Oreal
It has been identified that L’Oreal had experienced number of cultural issues, due to their international strategy to become a global brand. When L’Oreal had decided to enter the American market through licensee with Cosmair in 1954, the company had faced cultural differences. According to Sharma (2010), compared to the European Market, in the American market L’Oreal was required to have business relationship with local middlemen rather than national distributors in order to distribute product to salons. This had become significantly difficult for the company, since L’Oreal’s presence within the U.S. market was limited, such relationships was hard to acquire. In addition, American salons were also unfamiliar with the quality of the products and disagreed on selling such goods.
To resolve the issue, L’Oreal’s primary goal was now to increase there global presence and was accomplished by strategic international expansion and by taking the company public in 1963. According to Sharma (2010) L’Oreal’s strategy was to sell cosmetics through different channels of distribution; which in turn affected the macro economic levels of sales. The four types of distribution channels from professional salon hair specialists, beauty advisors, medically trained advisors in pharmacies and self service department stores allowed L’Oreal to develop their international presence and acquire a competitive advantage over competitors.
Political Risks
However, L’Oreal had now once faced issues while operating in Europe. After the company had become a publicly traded company in 1963, L’Oreal was under threat of state control by the French government and feared that the company strategies for international growth would be jeopardised. Hence, L’Oreal took steps to internationalise the ownership structure, in order to prevent the government control by selling fifty percent of L’Oreal stock to french personal care manufacturer Gesparal and keeping other half of the company publicly traded (Moodie: 2004).
According to Balassa (1985), the reason for the French government to take ownership was due to threat from international companies. Therefore the French political system considered that it could provide security to the French communities trade by subsidising and directing publicly owned companies. Since, L’Oreal had become publicly traded in 1963 the company was prone to come under state influence.
Using Yips model (Appendix 8), it can be identified one of the key globalisation drivers for L’Oreal to enter the cosmetics market is growth of global and regional channels. This is a key market driver, since it has allowed the company to develop their distribution channels worldwide. By entering the American market and acquiring ready established brands, L’Oreal was able to access the acquired company’s resources. Another market driver can be identified from Appendix 1, which indicates that America has an aging population, therefore demand for L’Oreal’s anti-aging products have increased. These products success were a result of the company’s extensive investment in research and development. It has been identified that global acquisitions by consumer product companies also acted as a competitive driver. Since, the existence of various global competitors had indicated that the industry is good for globalisation; where global competitors have the cost advantage over local businesses, according to Bartlett and Ghoshal (1989). One of the key reasons for L’Oreal’s globalisation development is due to the lowering of trade and investment policies internationally, where GATT (General Agreement of Tariff and Trade) have made free trade agreements between participating countries. According to Hill (2007), this can also benefit the countries that do not have a large amount of sources to utilise their resources and hence encourage foreign direct investment companies to invest.
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