Credit: Shutterstock photoL'Oreal is slated to release its Q4 2016 earnings on February 9th . The first half of 2016 has been a slow one for the company on account of currency headwinds and impairment charges worth €447 million on some of its acquisitions (China's Magic Holding and Clarisonic). However, its performance picked up in the third quarter boosted by both organic and inorganic growth. Its Consumer division recovered well during Q3 and its erstwhile slow North American market displayed strong growth. The company's most successful division, L'Oreal Luxe, also grew impressively due to the success of its makeup and fragrance segments and due to a greater market share in important regions such as China and the U.S. L'Oreal's two important focus areas at present seem to be strategic acquisitions and digital progress. Going by the recent trend of L'Oreal's strong performance in North America, Europe (except France) and some of its New Markets including Southern Asia, Latin America, and Eastern Europe, we can expect the company to end 2016 on a significantly healthy note.
L'Oreal Will Reap The Benefits Of Its Strategic Acquisitions And Partnerships
The year 2016 has been an active one for L'Oreal in terms of acquisitions. In July, the company announced the decision to acquire 1. premium fragrance brand, Atelier Cologne, 2. the France-based spa group Société des Thermes de Saint-Gervais-les-Bains, 3. the US based prestige beauty company, IT Cosmetics (for $1.2 billion), and 4. the license to use the Saint-Gervais Mont-Blanc beauty brand. In January 2017, in an effort to further grow its active cosmetics segment, L'Oreal announced its intention to acquire the skincare brands, CeraVe, AcneFree, and Ambi from Valeant Pharmaceuticals for a sum of $1.3 billion .
These acquisitions will help the company with its growth in its target areas. For example, IT Cosmetics, which is currently a part of L'Oreal Luxe, is touted as one of the most rapidly growing U.S. prestige beauty brands. L'Oreal's premium categories is one of its fastest growing segments and hence the acquisition will further help in the growth of the segment along with capturing a greater part of the North American market. The U.S. makeup market is one of the largest in the world and is estimated to be growing at a CAGR of 3.8% between 2013 to 2018 to reach close to $9 billion in 2018 . Currently, the U.S. mid-tier department stores seem to be lagging behind in terms of sales. Hence, acquiring companies which have better reach through alternative channels, and also brands that are popular with the U.S. clientele, does seem like a good idea.
Similarly, the acquisition of the active cosmetics brands might help L'Oreal further strengthen its leadership position in the active cosmetics market. These brands are quite popular with health professionals and are expected to almost double the revenue for L'Oreal's active cosmetics division in the U.S. According to a recent report by Research and Markets, the global cosmeceutical market is expected to grow at a CAGR of nearly 6% between the period of 2017 to 2021.
In May 2016, L'Oreal announced a partnership with Founders Factory, a global digital accelerator and incubator based in London. The exclusive partnership enabled the companies to invest in Beauty tech startups across the world along with the opportunity to co-create two new companies every year. In January 2017, L'Oreal and Founders Factory selected five startups to further help them with their growth. The selected companies range from those helping businesses improve social media reach and with online campaigns, to those selling customized skincare and nail art. L'Oreal's own digital initiatives and innovative product pipeline might receive a boost as a result of these investments.
L'Oreal's Digital Spends Will Continue To Rise
By now it is a well established fact that digital growth is one of the biggest focuses for the company. L'Oreal's allocation of its media budget for digital grew from 15% in 2013 to 30% in 2016. Last year, the company chalked out a plan for large scale expansion of its online media and announced some new digital upgrades or investments almost on a monthly basis. A few of the initiatives taken by the company in 2016 include: the launch of a stretchable skin sensor designed to monitor ultraviolet light exposure via a wearable called My UV Patch, the formation of L'Oreal's Beauty Squad with five of the most influential YouTube beauty vloggers, the partnership with Founders Factory, and the global alliance with augmented reality app company Modiface to launch several beauty apps. In January 2017, besides selecting five startups for its accelerator program, L'Oreal also launched a digitally connected 'smart' hairbrush called the Kerastase Hair Coach. The percentage of digital spend will undoubtedly keep rising this year with L'Oreal's constant endeavors to promote itself in the digital media.
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Notes:
1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com
2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for L'Oreal
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
