independent

Thursday 17 April 2014

L'Oreal brand still proving it's more than 'worth it'

Cheryl Cole

THE British advertising magnate David Ogilvy once told a great story about one of his advertising coups. He wrote a slogan for Rolls-Royce which proclaimed: "At 60 miles an hour the loudest noise in the new Rolls-Royce comes from the clock."

Expecting plaudits for this piece of genius, Ogilvy was disturbed to hear that the Rolls-Royce engineering department went spare when they heard the proposed advert. "We must do something about that damned clock," they complained.

Sometimes, however, the advertising is as important as the product and that would appear to be the case with the high-flying company we are analysing this week, the world's largest cosmetic and beauty company, L'Oreal.

It's the proud possessor of probably the best advertising slogan of the 21st Century, 'Because you're worth it'.

Every stand-up comic worth his salt, every clever politician and every admirer of Penelope Cruz, Cheryl Cole, Julia Roberts and other faces of L'Oreal products have either used the slogan or 'consumed' it with varying degrees of pleasure.

When you see how the aforementioned ladies are being rewarded for the use of their 'faces', it is clear that the slogan is paying its way.

The slogan gets used, too, in the current feud in the Paris courts involving the Bettencourt family who own 30pc of the enterprise.

L'Oreal is massive. It has well-known brands like Lancome, Garnier, Maybelline, La Roche-Posay and 500 other brands. It has been known as L'Oreal since before World War II and after the war it flourished. It was a listed company by 1963 and proceeded on an acquisitions spree scooping up big names like Elseve, Redken, and Kiehl's.

The company is broken into operating divisions; professional products, L'Oreal Luxe, consumer products and Active cosmetics. The dominant division, with 50pc of group sales, is consumer products.

The company's products are sold everywhere but especially in airports, high-end stores, pharmacies and perfumeries.

It recently announced a new division -- retail travel -- in an attempt to capture more of the growing €17bn worldwide travel market.

L'Oreal reports sales by geographic areas; Western Europe, North America and 'New Markets'. Last year was a milestone for L'Oreal in that "new Markets' became the number one geographic area, with sales above €8bn.

Western Europe was relegated to second place for the first time, however sales were still €7bn. North America sales contributed slightly above €5bn and, while growth was 7pc last year, recent indications are showing a decline.

Interestingly, of 'New Market' sales, Asia/Pacific accounted for 50pc. These markets are principally China, South Korea, India and Indonesia.

Since its launch in 1963 the value of the company has increased 750pc, today's value standing at €75bn. Group sales at L'Oreal were €22bn in 2012, a rise of 10pc on the 2011 figure.

Last year the group increased its market share, even in difficult markets like the US and Western Europe, helped by its outstanding portfolio of brands and 72,000 employees. As a result, group profits were €2.8bn, its shares trading at €120, up 23pc on the year but down on its record high of €137.

L'Oreal has a strong balance sheet, high margins, significant market position and good growth potential.

Recent results show a satisfactory performance across all categories and countries with the exception of the US.

Of concern to shareholders is the 29pc stake in the company held by Nestle. The investment, made almost 40 years ago, came with conditions.

For a start, the Nestle contract specified it could not raise its stake until six months after the death of Lillane Bettencourt (now aged 90), daughter of the firm's founder. Also, under the arrangement, both sides agreed not to sell their respective stakes without offering it to each other.

Nestle is hinting that it may not renew the agreement due to end next year. To buy out Nestle would cost about €22bn. This would involve L'Oreal not only using its considerable cash pile but also selling its 9pc shareholding in Sanofi worth €9bn.

So, it will be interesting to watch the manoeuvrings of these three giant companies. The French government might stick its nose in too. It's happened before.

DR JOHN LYNCH IS A FORMER CHIEF EXECUTIVE OF BORD GAIS. NOTHING PUBLISHED IN THIS SECTION SHOULD BE TAKEN AS A RECOMMENDATION, EITHER IMPLICIT OR EXPLICIT, TO BUY OR SELL ANY OF THE SHARES MENTIONED.

Irish Independent

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