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

By: Oru Mohiuddin, Euromonitor International
Posted: November 4, 2010

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.