Contemporary Strategic Issues Assessment of the Cosmetic Industry - LOreal - Essay Example

Lecturer L'Oreal Consultancy Report: Contemporary Strategic Issues Assessment of the Cosmetic IndustryIntroduction In today's world beauty products are no longer a luxury but an essential part of the modern lifestyle. Internationally cosmetic manufactures are developing new products to try and stay competitive in a fast growing and very competitive market. This report is developed on a request from L'Oreal executive management to inform them on the current cosmetic industry direction, new innovations and possible new strategies for the organisation. The report is composed of five sections. The first section will give a overview of the cosmetic industry. In part two the key strategic issues facing the cosmetic industry in the next five year are explained. Part three contain the key and critical success factors for L'Oreal which could insure the organisations success and growth. Following in part four the report will identify organizations and alliances, what impact they may have on the industry and on the competitive position of L'Oreal. Finally, I determine what strategic options are the most appreciate to this organization to ensure its success in the next five years. Index Overview of the Cosmetic Industry 3 Size of industry 3 World Markets 3 PESTEL Analysis 4 1.Key Strategic Issues Facing the Cosmetic Industry 6 Product Development 6 Unique Product Acquisition 7 Micro Segmentation 7 Global Expansion 8 Online Shopping 8 Change of marketing strategy 9 Diversification 9 The Strategic Situation Of The L'Oreal 9 Market 9 Market size 9 Segmentation 10 Life cycle 11 Competition 12 Strategic group 14 Competitor profile 14 Key Players in the Cosmetic Industry 15 Merger and Acquisitions 15 Cosmetic Business Outlook 16 Strategic Options for the L'Oreal Group 17 Company's Key Success Factors in the Cosmetic Industry 17 Conclusion 19 Reference Page 20 Overview of the Cosmetic Industry Size of industry The sales of cosmetics and toiletries is on the rise after it slowed down globally in 2004, the world market was valued at $253 billion in 2005. With a positive growth after sentimental recovery from SARS scares and the war in Iraq (GCI, 2006), with strong cosmetic sales in Latin America and Eastern Europe, peaking in Western Europe the largest market. According to indications there was a 4% growth in 2004, an according to the Global Cosmetic Industry Magazine the Euromonitor International forecast of a possible 20% can be obtained if current key trends are followed. World Markets Major World Cosmetic Markets Western Europe 30% $76.4 billion North America 21% $54 billion Asia-Pacific 25% $63 billion Latin America 11% $28 billion Rest of World 13% $32 billion Dividing the world cosmetic market in two sections, the mature and the developing markets, it is possible to show where sales are peaking, and where there are still opportunity for expansion. The mature markets can this be seen as Western Europe, Asia Pacific, North America and Latin America as this are where the lion share of the market currently lies. Many of the consumers in this mature market demand more sophisticated products and due the amount of competition product prices needs to be reduced if a company wants to stay competitive. The one market in this section that shows promise are China and most of the high profile players are entering this new market, such as Este Lauder and P&G, with retailers including Sephora and Sa Sa, and direct sellers Avon, Alticor, Mary Kay and New Skin (GCI, 2006). Developing markets can be seen as Venezuela, Vietnam, New Zealand, Australia, South Africa and Russia. In 2003 Vietnam showed a 19% growth in cosmetic sales even though demand are still concentrated in the urban areas, offering ample opportunity to expand. The South African market showed a healthy growth as consumers started to buy high margin multi-functional products. With more black South Africans entering the middle income group with the governments aggressive affirmative action policy, there is a increasing demand for products catering for this segment of the market. In Australia the cosmetic market have matured and several products showed a moderate growth, such as skincare products, sunscreens, self tanning lotions, men's grooming products and depilatory Products. A 3% market growth is expected annually for the next few years, with 49% of products being imported from the U.S, France and the UK (Annette Ahern,2004). In Russia rising levels of income have made this the fastest growing market for many global companies such as Procter & Gamble and Gillette. The influence of foreign fashion magazines, and the strengthening retail infrastructure have help to drive the Eastern European value of the regional market to $12.5 billion. For four years in a row this was one of the fastest growing markets, with growth figures in the double digits (GCI, 2005). PESTEL Analysis Microenvironment, Political, Economic, Social and Technology, affect the cosmetic industry directly. Authors conduct a PESTEL analysis to examine existing cosmetic industry's environment in table 2.1 shown below. Table 2.1 PESTEL Analysis Political Retailers and direct sellers have the potential to benefit from the Chinese government's December 2005 decision to lift restrictions prohibiting sales agents that are not attached to stand alone stores (GCI. 2006). As a result of the Free Trade Agreement between the United States and Australia, the general import duty on cosmetics and toiletries will decrease on January 1, 2005, from five percent to zero(Annette Ahern,2004). South African governments aggressive implementation of affirmative action, increasing the consumer market for cosmetic products targeting darker skinned people (GCI, 2005) Economic Cosmetic Industries is growing at up to 7% a year, more than twice the rate of the developed world's GDP. skin care worth $24 billion; make-up, $18 billion; $38 billion of hair-care products; $15 billion of perfumes (Economist.com 2003) This growth is being driven by richer, ageing baby-boomers and increased discretionary income in the West, and by the growing middle classes in developing countries. China, India, Russia, South Africa and South Korea are turning into huge markets (Economist.com 2003). Although the industry's customers are predominantly women, it is increasingly marketing itself to men as well. Social Being beautiful has become a kind of polite manner in social activities and also formal function, especially in western culture. Branded attire, from make-up to costume, from top to toe justify one's wealth and statues physically. Hence, Packaging on outlook is important to build up self confident among crowds. Men are becoming more concerned with their appearance and a steady growth in Men's cosmetics is evident in the cosmetic market. Technology Technological advances are increasingly benefiting the cosmetic industry as many companies starting to market and sell there products via the internet. The change in the environment due to global warming have brought the danger of skin cancer to the front, and better informed customers are increasingly spending on more advanced and better sun screen products in order to reduce risks. New Products developed by pharmaceutical companies are being combined with cosmetic products to give consumers additional medical or other therapeutic benefits. 1. Key Strategic Issues Facing the Cosmetic Industry Some of the most important strategic issues the cosmetic industry will be faced with in the next five years can be seen as product development, unique product acquisition, micro segmentation, global expansion, online shopping, a change in marketing approaches and diversification. The cosmetic market are highly competitive and the above are a combination of key strategies that are or will be implemented by key players in the industry. Product Development Product development are the basis of most cosmetic companies, as the ability to enter a new and unique product into the market gives a organization a clear competitive edge. Depending on what market a company may target will be the deciding factor of what product to sell. Western Europe with a mature and aging market, the consumers are used to sophisticated products. In this type of market health consciousness are being taken into consideration and more natural ingredients are used in manufacturing. Companies such as Nature Cosmeticos SA, Brazil's leading direct sales company in Cosmetics is attempting to capitalize on the preference for natural products in Western markets (GCI.2006). Cosmetic companies world over has also started to develop special cosmetics and toiletries for men. Men is starting to give more attention to their appearance and during the past few years a steady increase have been observed. Key players have show interest in further product development and global expansion. Then global warming and warnings of the effects of the sun have resulted in increase of sales in sun blocking products. This combined with aging customer base who are creating a high demand for anti aging solutions is offering opportunities for key players in the market. Companies such as Olay and Avon's regenerative products are competing with L'Oreal's DermoEpertise in this product range. This market segment still offer a growing customer base as bigger parts of countries population are becoming aged. Unique Product Acquisition Currently there are many companies and organisations researching products that may result in unique cosmetic products, with possible beneficial effects to customers. Products which contains active ingredients that could provide clinical, therapeutic, or cellulite reduction in addition to its cosmetic properties. As these products are mostly developed by pharmaceutical companies, key players could acquire such products through acquisition or buying the patent or even manufacturing or selling such products under licence of the developer. In June 2005, LVMH's Benefit brand launched its Wonderbond collection. February, Beiersdorf subsidiary Juvena introduced Juvedical Renewing Body Serum (GCI,2006). Micro Segmentation Due to the deep penetration and maturity of many of the larger cosmetic markets a decline in growth are being experienced with current products offered. Some key players have started to further segment markets in order to satisfy specific needs. This the time of general segmentation as in age and gender is no longer enough. By Micro Segmentation companies are targeting specific needs of smaller groups within segments. This include different skin and hair colours, and different authenticity within an age group. By micro segmentation key players are increasingly offering customers products suiting their specific needs, and by then expanding this product range globally a company can establish a profitable customer base. Global Expansion Globalization have effected most of the key players in the cosmetic industry. Even though this is a concept being around for a few decades already, global expansion is and will stay one of the most profitable strategies a organization could implement if done correctly. With Russia and China opening up to the big players in the cosmetic markets, many have tried to establish themselves within these markets, and many of them have realized with a shock that not the same rules or business culture prevail in these countries. For a company to expand their business to other countries such as China and Russia they are not only governed by the trade laws, but also by culture and local practices. This companies that which to enter these markets need to not only do their homework on economic and social conditions, but also on cultural differences and accepted behaviours and practices. For example in April 1998, China put an immediate ban on direct selling. Avon Products was a casualty of the government's battle against pyramid schemes and fraudulent sales practices. Avon a well-established direct-selling company was forced to move away from what it knows best and venture into retail and wholesale. That has meant a scramble to retrain managers, rethink marketing and overhaul strategy (Slater 1998). Online Shopping According to a study by the European Advertising Association more European woman are going online for shopping. Their study showed that 46% has shopped online in 2005 compared to41% in 2004 and 38% in 2003 (Internet Retailer, 2006). This offers a huge opportunity for the cosmetic industry to revive growth in this Western European market through aggressive internet marketing and sales. Through strategic alignment, by creating a effective online shop a cosmetic company could gain the competitive edge. Change of marketing strategy Cosmetic companies have been using stars and celebrities to endorse their products for decades. This approach has grown to such an extend that some companies have begin using celebrities to brand their products. Companies such as Coty and Elizabeth Arden, with celebrity labels such as Hilary Duff, Sarah Jessica Parker and Danielle Steel (GCI, 2006). But a new trend have started to emerge, self-esteem marketing. This marketing drive by such companies as Unilever with their Dove skin firming range encourage woman to feel comfortable with who they are and their own beauty without trying to squeeze themselves into a unrealistic mould. A sharp rise in this sector have been experienced, while a decline is evident in the celebrity labels such as Lux soap. Diversification New markets segments are opening up globally, bringing a demand for new product lines. People with darker complexions are but one of these emerging markets. In the past these people have not had a wide range of products to choose from. Just taking the opportunity that exist in the black African hair market could give a company that competitive edge needed. This by diversifying their product range to not only cater for people of European origin, but also those from Africa and China will give a company that edge in the cosmetic market. Already Unilever filed a trademark for Sunsilk Anti-Sponge shampoo, suggesting that an ethnic hair care launch is on the cards for the Sunsilk brand (GCI, 2006). The Strategic Situation Of The L'Oreal Market Market size L'Oreal SA is the world's leading beauty company, whose primary focus is on the manufacture and sale of cosmetics, skincare, and haircare products. Its annual sales of around $4 billion, is a wholly owned subsidiary of L'Oreal SA, based in Paris. (http://www.wetfeet.com) In 2002, the largest US cosmetics company was L'Oreal USA, with a 14.2% share of the market by value. The two main players were L'Oreal USA and Revlon. They accounted for 23.5% of the market by value. (Snapshots International) The sales of the L'Oreal group amounted to 3.938 billion euros, an increase of 11.3%. Like-for like, i.e. based on a comparable structure and identical exchange rates, the increase in the group's sales was 6%. The net impact of changes in consolidation, mainly as a result of the acquisition of skinCeuticals in June 2005 and Delial in August 2005 amounted to 0.5%. Growth excluding exchange rate impact was 6.5%. Currency fluctuations had a positive impact of 4.8%. (http://www.loreal.co.uk) Segmentation The different customers have different needs. A market segment is a group of customers who have similar needs that are different from customer needs in other parts of the market. To drive the group's future growth, L'Oreal must constantly look for new market segments that offer rapid expansion potential. It has invested in: Ethnic cosmetic through its brand SoftSheen-Carson. This market has a tremendous worldwide potential for future, as there is an estimated 1 billion people of African origin across the world. Dermatological activities with Galderma, a 50-50 L'Oreal/Nestle joint venture in dermatology. Galderma ranks sixth in its market worldwide. Nutricosmetics. They are already becoming an integral part of women's beauty routines and rituals. In 10 years "the beauty pill" may change the lives of women. (http://www.wetfeet.com) In terms of cosmetic sales growth, the operational division and geographic segmentation play an important role. L'Oreal can depend on the market segment analysis to determine which part of products should be pay more attention. 1st quarter 2006 1st quarter 2006 1st quarter 2006 m Growth like-for-like Growth reported By operational division Professional Products 522.9 +0.6% +4.8% Consumer Products 2,061.4 +6.1% +10.7% Luxury Products 903.4 +6.5% +13.0% Active Cosmetics 359.2 +14.0% +19.8% Cosmetics total 3,872.2 +6.0% +11.2% By geographic zone Western Europe 1,849.4 +4.2% +4.5% North America 1,013.9 +2.9% +13.5% Rest of the World. of which: 1,008.9 +13.0% +23.2% - Asia 388.0 +6.4% +15.3% - Latin America 224.4 +18.1% +39.6% - Eastern Europe 214.4 +28.8% +35.1% - Other Countries 182.1 +6.1% +11.5% Cosmetics total 3,872.2 +6.0% +11.2% Dermatology (1) 66.1 +7.5% +15.1% Group total 3,938.3 +6.0% +11.3% Table4.1 Cosmetics sales growth by operational division and geographic segmentation Life cycle In the last few years, the group has achieved a better balance of development across the range of product categories, across different retail channels, and across geographical zones, creating an additional asset for the group, a distinct advantage in countering economic difficulties and in fostering balanced and steady growth. The nature of the L'Oreal business is to be new, different, and better, which translates into new products being launched all of the time in all of the categories. Due to the focus on research and development, the advancements in technology are ongoing. L'Oreal is also a key player in the men's beauty market and has launched products for restoring skin in the comforts of one's own home. International expansion is also a top priority for L'Oreal. We have introduced several of our brands into China and Latin America, and the global expansion will definitely continue. BCG Analysis The position of L'OREAL should be question mark. L'OREAL is absolutely giant in beauty markets. For example, few women knows that trendy "New York" Maybelline brand belongs to French cosmetics company L'Oreal. Actually, there are so many brand belongs L'Oreal like Lancom. L'Oreal's net profits rose 12% in 1998, to $768 million, while its stock has soared 900% in the '90s. Therefore L'Oreal is a absolutely successful company in cosmetics company. However, there are some threats which will influence developing of L'Oreal. For example, the real threat from the World Wide Web. An Amazon.com of the beauty business could shake up the industry in unexpected ways, just when L'Oreal is experimenting with its own retail formats. Competition L'Oreal puts its research and expertise into the service of beauty for women and men all over the world, which provides everyday solutions to fulfil this essential component of the well-being. As each culture has its own beauty rituals, its cosmetics secrets, and its vision of beauty, L'Oreal draws of this diversity to offer the product that will best suit consumers' needs. The L'Oreal brand portfolio includes European, American, and Asian origins. L'Oreal products cover all of the categories within the beauty industry and the research and technology is geared toward the development of beauty products. (http://www.wetfeet.com) Porter's Five Forces Analysis A way in determining the marketing strategies, L'Oreal can analyze from the internal factors in the cosmetic industry from the customer, competitors, suppliers, threats and possible product substitutions using the five forces analysis as seen in figure 2.3 bellow. Figure 4.1 Five Forces Analysis in Cosmetic Industry Strategic group In 2002, the largest US cosmetics company was L'Oreal USA, with a 14.2% share of the market by value. The two main players were L'Oreal USA and Revlon. They accounted for 23.5% of the market by value. (Snapshots International) The two companies have the similar strategic characteristics, the similar market size and share, following similar strategies or competing on similar bases. Figure 4.2 Source: Information Resources, Inc, MMR, Snapdata Research Competitor profile The cosmetic industry has achieved a very significant growth world wide in recent years. Some companies are trying to expand their businesses over wider areas, even overseas. Some of the companies; such as L'Oreal, Johnson & Johnson, Unilever; have succeeded in gaining market shares globally. These are the 15 largest beauty companies in the world, as follows: Company Country Sales 1996 (US Billion) L'Oreal Group France 9.6 The Procter & Gamble Co. USA 7.1 Unilever The Netherlands & UK 7.0 Shiseido Co. Ltd. Japan 4.9 The Estee Lauder Co. USA 3.3 Johnson & Johnson USA 3.0 Avon Products USA 2.9 Wella Group Germany 2.3 Sanofi SA France 2.2 KAO Corp. Japan 2.2 Revlon Inc. USA 2.2 Beiersdorf AG Germany 2.1 LVMH France 1.8 Henkel KGAA Germany 1.7 Joh. A Benckiser Germany 1.6 Table 4.2: The World's 15 largest beauty companies(Source: Center for the Promotion of Imports from Developing Countries, 2002). Key Players in the Cosmetic Industry Merger and Acquisitions In 2005 merger and acquisitions changed the landscape of the cosmetic industry according Eoromonitor. The largest acquisition was that of Procter & Gamble's take over of Gillette for $57 billion, knocking L'Oreal from its number one spot in the rankings. Other mergers and acquisitions was that of Kao bying both Molton Brown and Kanebo. Coty signed a deal with Unilevers fragrance division. L'Oreal's acquisition of the Body Shop in 2006 was seen as an attempt to take back the number one spot on the rankings (GCI, 2006). Puig Beaty & Fashion Group and Coty partnered to introduce prestige cosmetic fragrances in the U.S domestic market, with Coty providing Puig with back office services, logistics and its commercial platform, while Puig manages the development of its brand portfolio through its own marketing team. Cosmetic Business Outlook Major Players who gain to improve their market share of the Cosmetic Industry can be seen as Estee Lauder, P&G,Sephora, Sa Sa, Avon, Alticor, Mary Kay and New Skin with their expansion into China. Depending on their introduction strategy and with China lifting restrictions prohibiting sales agents that are not attached to stand alone stores, they could increase profits considerably. The trend towards natural and more healthy Cosmetic Products can help the Brazilian company Natura Cosmeticos SA with introducing their product line into Western Markets. The mega brands such as Shiseido, Avon, Unilever and P&G are focusing their attention on a handful of high impact brands split into new categories extended into different sectors. With huge marketing these companies may get deeper penetration and could increase their sales marginally. The companies focusing on skin care seem to make a larger inroad into the customer base. L'Oreal with their DermoExpertise, Olay's Regeneriste and Avon's Anew have been targeting this second largest sector in the cosmetic market with profitable results. The hair care, bath and shower, and oral hygiene sectors have been stagnant since 2001, and could be due to the already deep penetration of this market. Acording to Euromonitor Skin care and Sun care products are to lead growth, with emerging markets Russia, China and Brazil offering opportunities for key players. It is expected that local companies such as Natura, Kalina and Faberlic will increase their market share on a global scale (GCI, 2006). With L'Oreal's acquisition of the Body Shop and Colgate-Palmolive purchase of Tom's Maine, a natural care company, it is evident that key players are targeting niche companies to give them a foothold in new segments with growth potential. Strategic Options for the L'Oreal Group Company's Key Success Factors in the Cosmetic Industry The cosmetic industry has achieved a very significant growth world wide in recent years. L'Oreal is trying to expand its businesses in niche markets and new natural products and active products which offer more benefits than just cosmetics.. How did L'Oreal survive in the high competition and make substantial benefits Figure 5.1 shows its factors of success. Figure 5.1 Company's Success Factor in Cosmetic Industry Some cosmetic companies are investigating moving their manufacturing to foreign locations which offer many advantages, and possible production cost reductions. Yet the key players in the industry prefer keeping their mass production facilities and distribution in Western Europa and North America. The reasons Cosmetic companies favour Europe and North America can be seen as firstly the highly evolved and adequate technology and infrastructure already in place, resulting in effective distribution channels. Then research and development technology is far more advanced in this regions, facilitating new product development and protection of intellectual property. Thirdly, products imported from France and America is always preferred by the consumers globally because of the quality and reputation. Lastly, manufactures in their home country are assured of a stable political and legislative environment, and licensing procedures and processes are known. However, new consumers have resulted in new markets, the emerging nations such as China, Thailand and India, and due to the saturation and high competitions in the developed countries market, a large demand in emerging and developing countries and a positive policy of the emerging nations toward foreign investment, have created new opportunities for the cosmetic industry. The correct entry mode and operating strategy are crucial for a company when they choose to expand their global presence. In the cosmetic industry key players mainly utilise exporting, joint venture, acquisition and FDI for expanding. Strategies include control and marketing strategies, both serves for selling the original brand or developing a new brand for the new markets, thereby gaining a bigger market share. The ability to control operation overseas determines the objectives and achievements (Radebaugh, 2004). It is all about centralization vs. decentralization. In the cosmetic industry the high pressure for the response to location condition, L'Oreal tends to engage in decentralization. It means that in each geographic divisional area, the units can enjoy more autonomy. Every branch responses to the local market demand and have the right to design its own distinct strategy to satisfy local business conditions. The last factor to succeed in the global beauty industry is to avoid the risks associated with the host country in order to catch opportunities. Risks in the cosmetic industry mainly come from government policies which include tariff restriction, legal regime, product licensing and level of competition. However due to Globalization there are some big opportunities emerging, such as online shopping via the internet. Pharmacies, food stores, clothing stores, electronics are currently being using online shopping successfully. Most top brands have already take action in exploring the opportunity the internet offers. L'Oreal imposes several strategies namely, trend innovations, decentralized company structure with regional headquarters (Europe, US, India), thereby adopting more to local responsiveness with product differentiations with overseas management control and marketing strategies (www.loreal.com, 2004). Conclusion The cosmetic industry is growing steadily and is expected to reach 300 billion in 2010. New players can be seen entering the market and local companies can be seen following the key players by expanding globally taking up a slice of the cosmetic market. New product lines with active ingredients can be seen to feature more prominently and customers demand for more sophisticated product lines will dictate to cosmetic companies. Sun care can be seen as one of the segments of the market that will become more important as global warming become a reality. L'Oreal strategy should include increased R&D into more natural and healthier product lines, which should include active ingredients offering customers more than just cosmetics. Their marketing strategy should move away from celebrities and more to self esteem driven approach. Tell people it is ok to like themselves for what they are, and develop products around this idea. Then L'Oreal should look into and research products targeting different ethnic groups. The market for people with darker complexions are huge, and products in the hair and skin care line for people with darker complexions can be seen as a niche market waiting to be explored. Lastly expansion into developing markets such as China, Russia, South Africa and Australia will ensure L'Oreal keep the competitive edge. Africa is slowly becoming a possible market for ethnic products and South Africa could be used as a springboard into countries such as Angola, Nigeria, Mozambique, Namibia, Zambia and Democratic Republic of Congo. A huge market waiting to be exploited. Reference Page I. Global Cosmetic Industry Magazine (GCI), State of the Industry: Will Megabrands Rule, 15 August 2006, Visited: 19 August 2006, Webpage: II. http://www.gcimagazine.com/industry/3574517.html II. Global Cosmetic Industry Magazine (GCI), C&T Rallies in Economic Recovery, 26 July 2005, Visited: 19 August 2006, Webpage: http://www.gcimagazine.com/industry/1736152.html III. Annette Ahern, Australian Cosmetics and Toiletries Market, Strategis, 08/15/2004, Visited: 19 August 2006, Webpage: http://strategis.ic.gc.ca/epic/internet/inimr-ri.nsf/en/gr126831e.html IV. Slater, J. (1998), Cosmetic surgery, Far Eastern Economic Review 161(43): 64. V. Economist.com (2003). The beauty business. Pots of promise, The Economist Newspaper Limited 2005 VI. Sweeney, A. Caught in a trap - women and the beauty industry, 2005, The National Forum and contributors 2000-2005 VII. Internet Retailer. 46% of European women are shopping online, 28 March 2006, Visited: 20 August 2006, Webpage: http://www.internetretailer.com/dailyNews.aspid=18055 VIII. Global Cosmetic Industry Magazine (GCI), Puig and Coty Announce Partnership, 24 February 2006, Visited: 20 August 2006, Webpage: http://www.gcimagazine.com/news/fragrance/2363991.html Read More