L’Oreal: Strengthening Africa Presence Can Bolster Target Of 1 Billion New Customers (Part 2)

French beauty giant, L’Oreal (OTC: LRLCY) intends to add 1 billion new customers to its existing user base pool by the year 2020. We believe that Africa will play a key role in L’Oreal’s ambitious plan. The Middle East and Africa segment is the fastest growing geographical segment (approximately 15% year on year) for L’Oreal. In 2013, L’Oreal’s revenues grew by 2.3% to €23 billion (~$30.5 billion) out of which 2.4% came from this region.

In our previous article, which was the first part of a two-part thought piece, we explained why Africa is gaining importance in the beauty and personal care market. We described Africa’s growth potential due to the following factors: The African continent has some of the fastest growing economies, and a relatively young and growing middle class population. This, coupled with Africa being one of the most rapidly growing regions in the beauty and personal care market, makes the continent an attractive market for cosmetics behemoths like L’Oreal.

We next elaborate on L’Oreal’s developments on the continent  so far. The strategic alliances, coupled with an emphasis on research and development, have resulted in the company’s dominance in Africa.

In this article, which is the second part of the two-part thought piece, we discuss L’Oreal’s further efforts for development in Africa.

We have a $37 price estimate for L’Oreal, which is at around 9% premium to the current market price.

See Our Complete Analysis for L’Oreal Here

What Are L’Oreal’s Further Plans For Development In Africa?

• Distribution Channels Need To Be Strengthened
  

Building a better distribution channel is imperative to the company’s growth in the African region. L’Oreal faces the problem of parallel importers in Africa, which need  to be mitigated. For example, in East Africa, Dark and Lovely is offered at lesser prices through different channels, when L’Oreal East Africa is the only trademark owner, official manufacturer and importer. ^[1]

Distribution remains unstructured and hence cumbersome. The logistical barriers are evident when we consider the Africa is made up of more than 50 countries, spreading across 30 million square kilometers. To add some color, Africa’s geographical expanse is greater than USA, China, India, Japan, and Europe combined.

The entire market cannot be captured through a single distribution channel. For example, in South Africa, the majority of sales happen through structured distribution channels. By contrast, in Kenya only 15% of beauty and personal care products are sold in supermarkets.

The nascent stages of development of the retail sector leaves a lot to be done for growth and consolidation. Only 10% stores fall under “modern trade”. Rest of the trade is done the traditional way, through grocery shops and open air markets, especially for products like hair care and soaps.

• Customization Of Products According To African Needs
  

The beauty market is also divided by a demand for both local and international products. African consumers typically expect high quality products that are both reliable and affordable. Furthermore, consumers often alternate between local brands and international ones depending on local life-styles, customs and purchasing power. ^[2]

L’Oreal does give great emphasis on the customization of its products to suit African needs (as was mentioned in our previous article). However, there’s still a lot to be done by the prominent beauty manufacturers to suit the unique aspects of African skin and hair care. Some important pointers which need to be considered are: African skin tones need darker shades of makeup than the traditional makeup lines offer. The makeup also needs to be more heat resistant. In terms of skincare, anti-ageing creams for Africans need to emphasize on the removal of dark spots and uneven skin tones, as opposed to the fighting of wrinkles, which is an European ageing skin priority. In terms of haircare too, African hair has unique demands as it differs significantly from Caucasian or Asian hair-types. Hence, providing customized yet affordable products remain the key to winning people’s hearts and wallet-shares, in this region. ^[3]

• Professional Training And Beauty Salons Are Important Avenues For Growth
  

Spas and salons, another main distribution channel for L’Oreal, are still at a nascent stage, located mainly in larger cities and mainly target wealthier clients and expatriates. ^[4]

L’Oreal intends to expand its position in two sectors: mass retail and professional channel. Increasing market share through the development of professional training remains high on its priority list as African consumers tend to rely on their hairdresser’s advice. ^[5]

• Competition Needs To Be Addressed

The potential of the African beauty market has attracted other prominent players too. Thus, L’Oreal needs to address the competition, not only from the domestic cosmetics manufactures (including counterfeiters), but also from international players. Estée Lauder (NYSE:EL), one of L’Oreal’s biggest competitors, sees huge potential in the the sub-Saharan African market and continues to expand its footprints in the region. It has already launched its $1 billion revenue generating brands such as Clinique and MAC in regions including Kenya, Nigeria, Botswana, Zambia, to name a few. ^[6]

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1. Why Africa is an important market for beauty company L’Oréal, How We Made It In Africa, April 2013 [↩]
2. Africa’s Beauty Market, loreal.com, March 2014 [↩]
3. Beauty and personal care market in Africa, Roland Berger, May 2013 [↩]
4. Beauty and personal care market in Africa: one billion people to care for, Roland Berger, May 2013 [↩]
5. L’Oréal in Africa, loreal.com, March 2014 [↩]
6. Estee Lauder eyes buoyant cosmetics demand in Africa, Reuters, July 2013 [↩]