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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

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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.