Why Is L’Oreal Increasing Its Focus On India?

L’Oreal (OTC:LRLCY) is planning on ramping up its investments in India. The company’s target is to make India one of its top 5 global hubs and it also aims to increase the export of products and technologies from the country to the greater Asia-Pacific region. In 2014, L’Oreal had assumed a stronghold in China with its Magic Holding acquisition. In India, L’Oreal’s Garnier brand is a massive hit and the company is looking at India’s huge scope for growth, due to the low penetration of beauty products. India is expected to be among the top 4 beauty markets by the next decade or so. Also, it is slated to become the most populous country in the next few years. The increasing spending power of women on cosmetics, the rising consciousness among men for grooming products, and India’s soon-to-be a $10 billion beauty market might be some of the reasons for the company to increase its focus on India.

We have a $36 price estimate for L’Oreal, which is at a slight discount to the current market price.

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L’Oreal Is Focusing Eastward For Further Growth

• L’Oreal Assumed A Dominant Position In China With The Acquisition Of Magic Holdings

L’Oreal has been increasingly looking towards the east to fuel its growth. In April 2014, L’Oreal completed the acquisition of Magic Holdings in China. China is currently the third-largest beauty market in the world, after North America and Japan ^[1] Though L’Oreal held a 9% market share in China in 2013, the company faced intense pressure from domestic players within the mass-market cosmetics space and bowed out of the Chinese hair care market by shutting down its Garnier brand. To counter this strengthening competition from domestic players and to grow its market share, L’Oreal announced its acquisition of Magic Holdings International Limited for $850 million in 2013. This is the company’s largest acquisition in the Chinese market. Magic Holdings is the leader in the Chinese facial care market and its acquisition indicated L’Oreal’s stance against domestic competition.

• L’Oreal’s $1 Billion Revenue Target In India By 2020
  

L’Oreal’s 2020 roadmap in India is to become a billion dollar company in terms of revenues and this aim had propelled the company to ramp up its research and innovation (R&I) activities in the country. According to L’Oreal India Managing Director Jean-Christophe Letellier, the R&I centers in Mumbai and Bangalore are striving towards  sustainable innovation, in order to meet the company’s target of reducing carbon emissions by 60% from its plants and distribution centers by 2020. L’Oreal aims to make India one of its top five markets by the next few years (currently India is among top 15). It aims to generate revenues to the tune of Rs 7,000 crore (~$1 billion) from India by 2020. ^[2]

L’Oreal Is Planning On Increasing Investments In India

In 2011, L’Oreal invested Rs 1,000 crore in India for a five-year period. The fund is utilized for the growth of its manufacturing and distribution facilities and marketing activities. The company is planning on a second level of investment in order to accelerate its export activities from India. L’Oreal India is valued at Rs 2,100 crore currently and the division grew at 18% in 2014. The company has 500,000 retail outlets in India. L’Oreal aims to grow this number with increased penetration into the lower-tiered Indian cities. ^[3]

India Is A Good Market For Lower Priced Products

L’Oreal has manufacturing units in Pune and recently set up another one for hair color in Himachal Pradesh. Some of the noteworthy innovations in India include non-sticky hair oil and hair cream, and face washes which were later released in other markets, as well. For example, its Garnier for Men, which was a grooming set for men, and developed in India, has now been launched in several South East Asian markets. The company sees significant growth for its lower priced Garnier range in the Tier II and Tier III Indian cities. Also, the introduction of products such as the hair color, shampoo, and face wash in the sachet format had helped L’Oreal in penetrating further into the Indian markets. It also sees good growth opportunity in men’s grooming products. ^[2]

L’Oreal Will Ramp Up Export Opportunities From India

With the growth of the company in India, L’Oreal is also planning to increase its export of products and technology from India into the Southeast Asia and larger Asia Pacific region. India is a key hub for L’Oreal’s South Asia-Pacific region, which includes Australia, New Zealand, Cambodia, Indonesia, Singapore, Malaysia, Myanmar, India, and the Philippines. Its North Asia region comprises of China, Japan, South Korea, and Taiwan. ^[3]

Indian Beauty Industry Size And Growth Prospects

The global beauty market is estimated to double its size in the next 10 to 15 years with the top markets being China, U.S., Brazil, and India. Also, by the year 2020, over 50% of beauty consumers will belong to tropical and hot climates and around 60% of the global population will inhabit major urban areas that are prone to pollution. These factors will increase the demand for good quality cosmetics products. ^[4]

According to a KPMG Wellness sector report, India’s beauty and wellness sector will nearly double from Rs 41,224 crore (~ $6 billion) in 2012-2013 to Rs 80,370 crore (~ $12 billion) by 2017-2018. The hair care market size is estimated to be around Rs 3,630 crore (~ $500 million)  with around a 20% average annual growth rate as per AC Nielsen. ^[5]

According to L’Oreal, the Indian beauty market presents significant opportunity for growth as beauty products still have a lower penetration–approximately 50% of the Indian households use shampoo and close to 25% use skin care products. ^[6]

Indian Women’s Cosmetic Market Is Projected For Double-Digit CAGR Growth 

Women in India are becoming more receptive to new and innovative cosmetics products that help them maintain youthful appearances. Along with the traditional make-up fares, new products to protect the skin from harmful effects of the sun and pollution, are also gaining precedence, especially among working women. According to a report titled, India Women’s Cosmetics Market Forecast & Opportunities, 2020, the market for women’s cosmetics is projected to grow between 2015 to 2020, at a 16% CAGR. The main growth drivers would be increased consciousness of women about enhancing their looks and the aggressive advertisement campaigns. The Indian women’s cosmetics industry faces stiff competition, and hence beauty companies focus on innovation and attractive packaging to gain a competitive advantage over their peers. Another rising trend is the endorsement of beauty products by female celebrities as the aspiration to follow a celebrity’s beauty regimen in order to look like her, has been an important growth factor for sales of cosmetics in India. ^[7]

(L’Oreal India Brand Ambassadors, Image Source: Global Cosmetics News)

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1. Revlon and Garnier exit the Chinese $22.8 billion beauty market, Telegraph, January 2014 [↩]
2. L’Oreal ramps up India ops to be ‘billion dollar’ firm by 2020, Financial Express, October 11, 2015 [↩] [↩]
3. India to become regional export hub for L’Oreal, Business Standard, October 8, 2015 [↩] [↩]
4. Challenging growth in the luxury and cosmetics sector, 2014 Edition, Ernst & Young [↩]
5. Indian Cosmetic Industry at a glance 2014 – 2015, Indian Mirror [↩]
6. A glowing cosmetics market?, L’Oreal Press Release [↩]
7. India Women’s Cosmetics Market Forecast and Opportunities, 2020, MarketWatch, July 28, 2015 [↩]