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L’Oréal Looking to Make an Acquisition; Avon May Not be a Good Fit

Oru Mohiuddin, Euromonitor International

It was reported in the second week of October 2010 that L'Oréal is interested in acquiring Avon for   $19 billion. Nothing has been reported since then, but the question is how well will Avon work for L'Oréal. One of the key issues, according to Euromonitor International analysis, is that the companies have different operating models—Avon is a direct seller, while L'Oréal sells through retail outlets, meaning that there may be integration issues. There are benefits and challenges, but ultimately there may be better options L'Oréal will consider acquiring.

Avon Acquisition Would Lift L'Oréal to Number One Position

The acquisition of Avon would lift L'Oréal to the leading position in the beauty and personal care industry, ahead of Procter & Gamble. Procter & Gamble's total beauty and personal care sales total $41 billion, while L'Oréal's total $36 billion. Acquisition of Avon would lift L'Oréal's sales by around $12 billion to $48 billion, outpacing Procter & Gamble by $7 billion. Until 2005, when Procter & Gamble's acquired Gillette, L'Oréal ranked first in sales. In its secondary position, L'Oréal has sought an avenue to lift it back to its original position. L'Oréal's ranking would also increase to number one in Asia-Pacific, Latin America and Eastern Europe following the acquisition of Avon.

Attempts to Increase Regional Coverage

L'Oréal's goal is to double its consumer base by targeting emerging markets, which, according to the company, would account for 50% of the global population 2020–2050. Avon has good coverage of emerging markets, particularly Latin America, deriving more than 40% of its total revenue in Latin America. Even in absolute terms, Avon generates greater sales than L'Oréal in Latin America: Avon's sales in the region amount to more than $5 billion, while L'Oréal's sales are a little under $3 billion. Latin America is expected to be the second highest contributor to the global growth in beauty and personal care sales between 2009 and 2014. Growth in Latin America will be driven by fragrances, skin care, hair care and color cosmetics—categories in which L'Oréal is already present but in which it also faces strong competitive barriers from the dominant players in the region. Avon has a strong presence across these categories and is the third leading player in beauty and personal care in Latin America behind Procter & Gamble and Unilever.

Eastern Europe and Asia-Pacific account for 15% and 12%, respectively, of Avon's total sales. In Eastern Europe, it is the third leading provider of beauty and personal care products. In Asia- Pacific, it is a much smaller player in the overall market, but sales amount to approximately $1.5 billion in absolute terms. Avon's success in emerging market comes from its direct selling method. Given modern retail infrastructures are still developing in these markets; there is a large part of the market not covered by retail outlets. Hence, L'Oréal, depending on retail outlets for its sales, may find it challenging to create deeper market penetration, with direct selling one way to overcome this challenge.

Increased Category Coverage

Avon and L'Oréal compete in the same categories, with color cosmetics, skin care and fragrances being the three most important. L'Oréal enjoys a leading position in all three categories, but the acquisition of Avon would entrench its position even further in these categories. More importantly, L'Oréal would be able to increase its profile in these categories in regional markets, i.e. Latin America and Eastern Europe.

Skin care looks set to drive global growth in beauty and personal care, with competition intense within the skin care category. There are rumors that Procter & Gamble is interested in acquiring key skin care player Beiersdorf. If this happens, Procter & Gamble will be lifted to the number one position within skin care, usurping L'Oréal from its current reign. Therefore, the acquisition of Avon would secure L'Oréal's position in the market. In addition, growth in Latin America will be led by mass fragrances, and Avon is one of the key players in this category.

Different Operating Systems May Make Integration Difficult

Despite the opportunities afforded by direct sales in less developed retail markets, the different operating modes of integration will be a major issue, which could make it unworkable despite the benefits L'Oréal stands to gain from the acquisition. For example, L'Oréal has not been able to do much with The Body Shop, which lost 10 basis points in terms of global market share in 2009, after remaining stagnant following the acquisition in 2005. The two different operating modes have proved difficult, and, in the case of Avon, the difference is far greater than that of The Body Shop. L'Oréal is prudent enough to realize the challenges involved and most likely not interested, with the acquisition report probably just a rumor.

Looking Forward

Even though L'Oréal may not be interested in Avon, it will not be surprising if L'Oréal is looking at other possible targets. Unilever's recent acquisitions of Sara Lee Personal Care brands and Alberto Culver may well have increased the pressure. First, L'Oréal lost its position to Procter & Gamble and now it would not want to further risk its position by remaining complacent when Unilever has become very proactive with the appointment of a new CEO. L'Oréal may very well be looking at other potential targets, and Beiersdorf could be one of these.

With the acquisition of Beiersdorf, L'Oréal would be able to gain back its number one position in the beauty and personal care market following Procter & Gamble's acquisition of Gillette, but with much less risk of it failing to be successful. If such an acquisition takes place, L'Oréal and Beiersdorf's combined revenue would be approximately $47 billion, compared to Procter & Gamble's $41 billion revenue in 2009.

The product portfolios of both companies would complement each other, as both companies operate in the same categories, but, at the same time, both companies would receive new category exposure. L'Oréal would benefit from increased presence in commodities ranges such as deodorants and bath and shower, where it has a very limited presence. On the other hand, Beiersdorf would benefit from an increased presence in color cosmetics and hair care. Together, they would form a formidable skin care company, very hard to challenge. Regionally, they would complement each other too as they are present in the same markets, and a merger would boost their rankings and market shares in all regions. Given that L'Oréal wants to double its consumer base, this may be an ideal opportunity, as it would not only help it gain new consumers but it would also provide the basis to further increase numbers.

L'Oréal may be in an acquisitive mood, which may be fueling rumors, but Avon may not be the best target and there may be better options in the market.

Oru Mohiuddin, Home and Personal Care Analyst at Euromonitor International

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