Sure, women may forgo the newest Prada lame suit or that ultra-hot Gucci handbag. But skimp on hair mousse or eyeliner? Never. That helps explain why L'Or?al defied the global slowdown and moved into the No. 74 slot in this year's BusinessWeek Global 1000, from 106 in 2001.
The dramatic increase is yet more proof that investors are shunning companies with volatile earnings in favor of those with dependable franchises. "The cosmetics industry is more defensive than other sectors--more predictable, less affected by a drop in discretionary spending," says Jacques-Franck Dossin, luxury goods and cosmetics analyst at Goldman, Sachs & Co. in London.
L'Or?al wasn't the only beauty company that cleaned up. Japan's Shiseido Co., the No. 4 cosmetics marketer worldwide, has seen its stock soar close to 45% since January. It also has shot up in our ranking, to No. 759, from a lowly No. 991.
Shiseido is something of a comeback story: The Tokyo-based company posted an $183 million loss, on $4.8 billion in sales, for the fiscal year ended in March. But operating profits remained strong, while most of the red ink came from appraisal losses on its stock holdings in other companies, and a product recall precipitated by last fall's mad-cow scare in Japan. The company has also cleared up its excess inventory. "They are clearly on a recovery track," says Machiko Amano, who tracks Shiseido for Standard & Poor's in Tokyo. Shiseido is forecasting a $206 million net profit in the fiscal year ending in March, 2003, on $5.1 billion in revenues.
Both L'Or?al and Shiseido have long outgrown their home markets. So L'Or?al CEO Lindsay Owen-Jones' company has made major inroads abroad with his $760 million acquisition of Maybelline in 1996, followed by his purchases last year of Japan's Shu Uemura and Kiehl's, a line of products with a cult following in the U.S. As a result, L'Or?al now derives more than 50% of its sales from outside Europe. For Shiseido, foreign markets have provided some relief from anemic Japan. International sales grew 25% in 2001, while those at home fell 6%.
China is the new battleground. Shiseido's president, Morio Ikeda, is counting on sales of its lower-priced Aupres brand--available only in China--to double foreign sales to 10% of overall revenues by next year. The company plans to open 50 more Aupres DX outlets in China (it has 200 now) by 2005. L'Or?al sales in China are growing by 25% a year, thanks to new plants near Shanghai. Maybelline, a uniquely U.S. brand when L'Or?al picked it up, is now China's best-selling makeup.
Even after emerging markets cool, cosmetics companies still have demographics in their favor. "We have an aging population. People have more wrinkles and use more makeup. Same goes for hair dye," says Scott Weldon, an analyst at Deutsche Bank in Paris. Now, if the beauty companies could only apply some firming tonic to the S&P 500, they'd really have something.
Corrections and Clarifications
In "Beauty companies turn investors' heads" ("The Global 1000," Cover Story, July 15), Shiseido overseas sales as a percentage of total revenues should have been stated as 22.4%. They are expected to reach 24% in fiscal year 2003.
By Cristina Lindblad in New York, with John Rossant in Paris and Brian Bremner in Tokyo