CEMS Case Study “L’Oréal (A): Fighting the Shampoo Battle” Case Study “L’Oréal (A): Fighting the Shampoo Battle” At the end of June 1997, L’Oréal’s Chairman and CEO, Lindsay Owen-Jones, called a meeting to study the European shampoo market. Although L’Oréal had several shampoo brands, among them Elsève, the shampoo market had never been one of the company’s main priorities because margins were extremely narrow. In addition to that, consumers perceived very few differences and therefore positioning and differentiating a particular brand was a trying task. Still, Lindsay Owen-Jones was convinced that L’Oréal’s Elsève brand had a lot of potential. It was the market leader in France and the challenge was to make it a leader throughout Europe. This would involve constant research on new formulas, targeting new market segments, introducing new packaging, a new communications strategy and maybe even changing the trademark, typography and colours. L’Oréal couldn’t ignore the competitive environment that surrounded the firm. Competitors were very active and aggressive. Procter & Gamble had recently introduced Wash & Go, a 2-in-1 shampoo and conditioner. One of the meeting’s main subjects of discussion was the high penetration rate that this product had achieved in its introduction. Would the 2- in-1 concept be valid in the long term or was it just another passing fancy? How should Elsève react to their competitor’s new product? Neither could L’Oréal overlook the fact that there was serious competition from other major brands –among them Pantene, the European market leader– which were very international and increasingly using global marketing strategies. The question was whether Elsève could become part of this international group of brands. Elsève’s experience and the keys to its success in France were very likely points to keep in mind when designing a global strategy for the rest of the world... Copyright © 2000 CEMS. This case was written by Josep Franch, Professor of Marketing at ESADE (Barcelona), and Neus Quintana, Teaching Assistant. The authors would like to thank L’Oréal for their information and assistance. The case is intended to serve as a basis for discussion and not as an example of appropriate or inappropriate management of a particular situation. No part of this material may be reproduced without written authorisation from CEMS. –1– CEMS Case Study “L’Oréal (A): Fighting the Shampoo Battle” L’Oréal: Company Background L’Oréal was founded in 1907 by chemist Eugène Schueller when he invented the first non-damaging synthetic hair dye. Since its beginnings L’Oréal’s policy has been one of constant innovation, research and hard work in a field which would eventually come to be known as marketing. The fact that its founder was a chemist still influences the company’s research orientation, as witness the 300 new patents L’Oréal takes out every year, enabling the company to launch 200 new products annually. The first hair colour dyes were called Auréale. In 1909, Eugène Schueller created La Société Française de Teintures Inoffensives pour Cheveux1, which subsequently became L’Oréal. The name was intended for products, not for the company itself. It is a combination of two of the endings most used in French company names in the early 20th century: “or” and “al”. “Or” was also the name of one of Auréole’s range of warm- coloured tints. Joining “or” et “al” produced the name L’Oréal, which was reminiscent of the company’s first brand of hair colour: Auréale. During the 1930s L’Oréal extended its product portfolio to include skin care and suntanning products. Following World War II, the company diversified its products and brands to gradually include all types of cosmetic products and conserve its position in the distribution networks. Steady growth soon made L’Oréal a world class operation. In 1997, L’Oréal was a leader in beauty products, selling 500 brands and 2,000 different products (80,000 SKUs2) throughout the world. The company had more than 47,000 employees, and operations in 150 countries handled by 400 subsidiaries, 100 import agents, 60 offices and 42 factories. L’Oréal’s export sales increased from 50% in 1987 to 80% in 1997. Although 58.6% of the company’s sales were made in Europe, there was enormous growth potential in Asia, where sales amounted to only 6.8% of total billings. Forecasts for future growth there were very optimistic (See Appendix 1 for company figures). While still a European company, L’Oréal was becoming increasingly global, as witness its acquisition of the US Maybelline brand in 1996, for which the company paid $758 million. The holding company Gesparal owned 53.7% of L’Oréal’s capital. Gesparal was 51% owned by Madame Bettencourt –daughter of L’Oréal’s founder, Eugène Schueller– and 49% owned by Nestlé. The remaining 46.3% of L’Oréal’s shares were traded on the Paris Stock Exchange, and through the London SEAQ and American Depository Receipts in the United States. 1 Literally, The French Non-damaging Hair Dye Company. 2 Stockkeeping Units. –2– CEMS Case Study “L’Oréal (A): Fighting the Shampoo Battle” How L’Oréal Was Organised L’Oréal was divided into five functional areas, four divisions and three geographic territories, all of which answered directly to Chairman and CEO Lindsay Owen-Jones. The functional areas were Communications and Public Relations, Human Resources, Finance and Administration, Manufacturing and Logistics (which supervised the company’s 42 factories), and R&D which had more than 2,000 employees and a budget equal to 5% of group sales. The four divisions were organised on the basis of the four main distribution channels for cosmetics and beauty care products: Salon Division, Consumer Division, Perfumes and Beauty Division and Active Cosmetics Department. The Salon Division (Coiffure) was world leader, with 25% of the market. 1997 billings amounted to around 7,000 million French francs, up 12% over the previous year. The division manufactured and marketed hair care products for use by professional hairdressers and products sold exclusively through hairdressers’ salons. The leading brands were Kérastase, L’Oréal Professionnel, Inné and Redken. The Consumer Division (Produits Public) registered 31,700 million French francs in sales in 1997, up 18.1% from a year earlier. This division handled all products and brands distributed through mass-market channels, making L’Oréal products available to the largest possible number of consumers (see Appendix 2 for the Consumer Division’s organisation chart). The division was made up of several companies, each of which marketed its own brands: L’Oréal Paris (Elnett, Plénitude, Elvive/Elsève/El’Vital, Studio Line), Laboratoires Garnier (Neutralia, Belle Color, Ambre Solaire, Fructis, Ultra Doux), LaScad (Dop, Fluoryl, Narta), Gemey Paris (Gemey, Kookaï, Naf Naf, Club Méditerranée), Maybelline New York and Jade. The Perfumes and Beauty Division (Parfums et Beauté) registered 15,600 million French francs in sales in 1997, an increase of more than 12% over 1996 sales. The division commercialised a range of up-market international brands selectively distributed through perfume and cosmetics shops, department stores and travel retail shops throughout the world. Leading brands were Lancôme, Biotherm, Helena Rubenstein, Cacharel, Guy Laroche, Ralph Lauren, Paloma Picasso, Giorgio Armani and Lanvin. The Active Cosmetics Department (Cosmétique Active) registered 2,800 million French francs in sales in 1997. It produced and marketed several brands of cosmetics, skin care products and hair treatments, which were distributed to a select group of pharmacies. The division’s leading brands were Laboratoires Vichy, Phas and La Roche-Posay. The four divisions were independent of one another. Each division consisted of different business units, among which there was also a certain degree of independence. Occasionally, various businesses belonging to a single division competed with one another. For example, Elsève and Fructis, produced by Laboratoires Garnier, competed in the mass market. But this competition was actually encouraged by L’Oréal as it allowed the group to sum up the sales of all its brands, making it the market leader. –3– CEMS Case Study “L’Oréal (A): Fighting the Shampoo Battle” The different business units also competed among themselves when a new formula was discovered and sometimes it was difficult to decide which business would benefit from the discovery. Outside of Europe L’Oréal was divided into geographic territories. The three territories were North America, Latin America and Asia. The managers of each one of these territories were in charge of all L’Oréal’s activities in their particular zone, keeping in constant touch with the managers of the four operating divisions. In 1997, L’Oréal was the world leader in hair colour, styling agents and home perms, with market shares of 35.1%, 17% and 12.9%, respectively. It ranked second in salon hair care products, with a world market share of 13.6%. Market shares of 8.4% in shampoos and 8.2% in conditioners made L’Oréal the third-ranking company in the world. Its position in 2-in-1 products was not as good, with a 5.2% market share, making it the fourth ranking company in terms of sales. In 1997, L’Oréal’s share of the European market amounted to 30%. Market shares in Latin America and Eastern Europe were also fairly strong, amounting to around 15% in both zones. Corporate Culture L’Oréal group employed 47,242 people, 38,308 of whom worked in cosmetics. 2,100 of them were cosmetics researchers. L’Oréal’s corporate culture was rooted in dynamics, teamwork, growth and research. As the company’s CEO put it: “I am personally attached to this melting pot of individual dynamism, openness and entrepreneurial skills.