BUSINESSWEEK ONLINE : JUNE 28, 1999 ISSUE
INTERNATIONAL -- EUROPEAN COVER STORY

L'Oreal: The Beauty of Global Branding (int'l edition)
The French giant stays on top by selling cultural cachet as well as cosmetics

It's a sunny afternoon outside Parkson's department store in Shanghai, and a marketing battle is raging for the attention of Chinese women. Tall, pouty models in beige skirts and sheer tops pass out flyers promoting Revlon's new spring colors. But their effort pales in comparison with L'Oreal's eye-catching show for its Maybelline brand.

To a pulsing rhythm, two gangly models in shimmering lycra tops dance on a podium before a large backdrop depicting the New York City skyline. The music stops, and a makeup artist transforms a model's face while a Chinese saleswoman delivers the punch line. ''This brand comes from America. It's very trendy,'' she shouts into her microphone. ''If you want to be fashionable, just choose Maybelline.''

Few of the women in the admiring crowd realize that the trendy ''New York'' Maybelline brand belongs to French cosmetics giant L'Oreal. In the battle for global beauty markets, $12.4 billion L'Oreal has developed a winning formula: a growing portfolio of international brands that has transformed the French company into the United Nations of beauty. Blink an eye, and L'Oreal has just sold 85 products around the world, from Redken hair care and Ralph Lauren perfumes to Helena Rubinstein cosmetics and Vichy skin care.

Thanks to this strategy, masterminded by L'Oreal Chief Executive Lindsay Owen-Jones, the French company has not only enjoyed a decade of double-digit growth but has pioneered new ground rules for staying on top in a fiercely competitive industry. L'Oreal's net profits rose 12% in 1998, to $768 million, while its stock has soared 900% in the '90s.

L'Oreal's success is proof that when done right, global branding can speed growth in mature consumer-products companies even when global markets themselves are shaky. Asia's economy is a mess, Latin America is tottery. Other worldwide marketers, such as Procter & Gamble Co., are suffering partly as a result. But L'Oreal is surging in markets stretching from China to Mexico. Its secret: conveying the allure of different cultures through its many products. Whether it's selling Italian elegance, New York street smarts, or French beauty through its brands, L'Oreal is reaching out to more people across a bigger range of incomes and cultures than just about any other beauty-products company in the world. That sets L'Oreal apart from one-note marketers such as Coca-Cola Co., which has just one brand to sell globally.

L'Oreal's strategy positions it beautifully to profit even further when the middle class begins to grow again in emerging markets. Says Veronique Adam, analyst at J.P. Morgan Securities Inc. in Paris: ''L'Oreal is the only real global leader in every segment of the industry.''

For Owen-Jones, the trick will be staying ahead in the game as his powerful rivals seek to play the global branding game. From giant P&G to niche players such as Los Angeles-based cosmetics maker Stila, L'Oreal's competitors are hustling to catch up. ''We want to become more of a global company like L'Oreal,'' says Yoshikuni Miyakawa, a general manager of the cosmetics-marketing division of Shiseido Co., Japan's No. 1 cosmetics company. Already, Shiseido is dominant at home and now expanding around the world. Meanwhile, the French company is No. 10 in Japan, trailing rivals such as Clinique and Estee Lauder.

ELECTRONIC THREAT. As Owen-Jones races to expand international sales of his products, he must be careful that his brands don't blur together for consumers. Yet another threat may come from the electronic world. An Amazon.com of the beauty business could shake up the industry in unexpected ways--just when L'Oreal is experimenting with its own retail formats.

Owen-Jones knows the risks--the 53-year-old CEO is always asking himself what aggressive marketer, what hot fragrance could steal share from L'Oreal. Glancing at shelves in his Paris office lined with L'Oreal's latest products, he notes: ''I'm never satisfied and never convinced we are winning. I try to convince my people we might not be.''

That healthy doubt is just one of the ways L'Oreal's chief has kept his company on top. Known by his rivals as a marketing whiz, he loves to prowl the aisles of department stores, quizzing customers and salespeople alike on every aspect of the beauty business. On his latest visit to China, he stopped two women on the street and asked whether they used L'Oreal products to color their hair. When the women said they had their hair done in a salon, Owen-Jones escorted them to the nearest store selling L'Oreal products and offered them hair-color kits for free.

The knowledge he gains in the street helps him keep his executives sharp. Owen-Jones is known for raking his managers over the coals in meetings, hammering them with skepticism. ''He tries to destabilize you to see if you are capable of defending your ideas,'' says a senior L'Oreal executive.

At the same time, Owen-Jones--known simply as ''O-J''--has used his own multicultural background to the company's advantage. Owen-Jones was born in Wales, studied at Oxford and Paris, married an Italian, and has a French-born daughter. Although his first job was selling shampoo in Normandy in 1969, he has spent half his professional career outside France and all of it outside Britain. ''I've tried to be a hyphen between France and English-speaking countries,'' says Owen-Jones, who speaks four languages. ''We have made a conscious effort to diversify the cultural origins of our brands.''

That philosophy has proved key to L'Oreal's success. While many companies seek to homogenize their brands to make them palatable in myriad cultures, Owen-Jones has taken L'Oreal's products in the opposite direction. He wants them to embody their country of origin. So he has turned what many marketing gurus consider a narrowing factor into a marketing virtue.

L'Oreal's work with Maybelline is a prime example. In 1996, L'Oreal acquired Maybelline for $758 million and began a complete makeover of the brand, including moving the headquarters from Memphis, Tenn., to New York City. The key: figuratively stamping ''urban American chic'' all over Maybelline products to promote their U.S. origins. In 1997, for example, Maybelline rolled out a radical new makeup line, heavy on risky colors such as yellow and green, dubbing it Miami Chill. And when L'Oreal marketers discovered that the moderately successful Great Finish nail enamel dried in one minute, they changed the name to Express Finish--and sold it heavily as a product used by urban women on the go.

The makeover was a hit. Maybelline's share of the nail-enamel market in the U.S. has climbed from 3% to 15% since 1996. Altogether, over the past three years, Owen-Jones has almost doubled Maybelline's sales, from $320 million to $600 million, and pushed the brand into more than 70 countries. Sales outside the U.S. market now make up 50% of total revenues.

Maybelline's success exemplifies the L'Oreal blueprint. The company has pursued the same basic approach with Ralph Lauren fragrances and Redken hair care. ''It's a cross-fertilization,'' says Guy Peyrelongue, head of Cosmair Inc., the U.S. division that oversees Maybelline.

TWIN HUBS. The Maybelline deal has prompted a change in management, too. Recognizing that two beauty cultures are prominent--French and American--Owen-Jones figures L'Oreal's empire will thrive best by embracing both. So after buying Maybelline, he decided to galvanize L'Oreal's Paris operations by setting up a second creative headquarters in New York, complete with R&D as well as marketing and advertising teams. ''We set up a counter-power in New York with people that have a totally different mind-set, background, and creativity,'' he says.

The two creative hubs tap into the same fundamental research but compete in marketing. Although he admits it's a recipe for tension, ''a charged atmosphere is exactly what I'm looking for,'' he says. One example: L'Oreal is preparing a rollout of hair care products by Redken, a U.S.-based brand it acquired last year, into the French market, even though Redken will directly compete with the long-established L'Oreal Preference line. Most CEOs would be afraid of cannibalizing their established brands by introducing newcomers. But Owen-Jones says the competition will inspire both the Redken and Preference marketing teams.

The pressure is on L'Oreal to keep reaching higher as the company faces attacks from rivals big and small. ''Global branding is something we are all interested in, we are all pursuing,'' says Revlon CEO George Fellows. Revlon has had little in the way of worldwide efforts until recently--and it's not the only cosmetics maker ramping up globally. Germany's Beiersdorf, which owns the well-known Nivea skin care and cosmetics brand, is betting on a new anti-aging cream to help build its presence even more both in Europe and the U.S. ''This is war,'' declares Rolf Kunisch, chief executive of the Hamburg-based cosmetics company.

Beiersdorf has already stolen a march on L'Oreal by beating it to the market with its Nivea Kao brand of strips used to clean pores. Worldwide, Nivea ranks No. 1 in mass-market face cream, with an 11% share, slightly ahead of L'Oreal's Plenitude, according to market researcher ACNielsen Corp. The Germans aren't the only problem: P&G's Oil of Olay skin cream is going head-to-head with L'Oreal's Plenitude around the globe.

As the competition intensifies, Owen-Jones is likely to continue making acquisitions. He has purchased five companies in six years. The company is actively exploring acquisition targets elsewhere in Asia. Already huge in established markets such as Europe and the U.S., L'Oreal is venturing further afield. Last year, the company acquired Soft Sheen, a U.S. line of hair-care products aimed at African-American women. Owen-Jones intends eventually to use it as a springboard for expanding into Africa. L'Oreal is expanding rapidly in India since it introduced its L'Oreal Excellence line of hair color in 1997--the first time a company dared sell any color other than black. In Mexico, L'Oreal ranks No. 1, with a 28% spurt in sales last year.

SORRY SHOWING. Most of all, though, Owen-Jones is eager to improve L'Oreal's poor market position in Japan, whose $25.4 billion cosmetics market is second-largest in the world. Owen-Jones partly blames L'Oreal's sorry showing there to market regulations ranging from a protectionist distribution system to strict scrutiny by health and safety authorities. While its luxury brands are starting to gain, the company's problem has been selling Maybelline to the mass market. Only recently did L'Oreal acquire marketing control of Maybelline from Japan's Kose, a cosmetics maker that owned the rights prior to L'Oreal's purchase of the U.S. company.

L'Oreal is also taking greater risks with its in-house projects, partly to be sure each of its brands stands out with its own image. ''That's a big challenge for this company--to add brands, yet keep the differentiation,'' says Marlene Eskin, publisher of Market View research reports on the cosmetics industry. The most radical experiment is the relaunch of the 96-year-old Helena Rubinstein skin care and cosmetics brand as a hot product providing for the 21st century. The target is 20- to 30-year-old women in urban centers such as New York, Paris, London, and Tokyo who want wild colors. ''We've made it the coolest of luxury brands,'' says Owen-Jones.

To sell the new Helena Rubinstein line, L'Oreal has opened a New York spa--the first time L'Oreal has tried to run a retail operation. And the target market is younger and trendier than L'Oreal's typical luxury customers. It's not clear how well the company will be able to manage its ever-growing stable of upscale beauty brands while mixing it with street-wise new products. But that's the thrill of being in the beauty business--what's hot is always changing, and only the savviest of sellers can keep up with the trends. In this fickle business, Owen-Jones is trusting that his instincts won't lead him astray.

By Gail Edmondson in Paris, with Ellen Neuborne in New York, Amy Louise Kazmin in Shanghai, Emily Thornton in Tokyo, Karen Nickel Anhalt in Hamburg, and bureau reports

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