EUR 850.00 For Business Accounts Only

Morningstar | L’Oreal Poised to Benefit From Vast Geographic Reach and Rising Global Per Capita Beauty Spending

As a dominant player in the global cosmetics industry, L’Oréal has developed an attractive portfolio of leading brands that have helped it secure an enduring competitive edge. We maintain these brands have allowed L’Oréal to develop long-standing relationships with retailers that rely on its offerings to drive store traffic; these assets, coupled with the firm’s attractive cost structure, underpin our wide moat rating. While we expect ample competition in the near term, particularly as newer distribution channels like e-commerce remove some of the initial barriers for newer entrants, we think L’Oréal’s hefty investments in product development and advertising will allow it to remain a step ahead of smaller rivals and gain further share.We think L’Oréal’s widespread geographic range also positions it for further growth. For one, we believe the firm has been able to establish a foothold in developing markets (which we expect to be a key driver of sales as per capita beauty spending rises) by adapting to local consumer tastes and trends. As evidence, it often invests in research and development on a regional level to tailor products and technologies toward consumers in the area. L’Oréal has also made several strategic acquisitions to build a presence in underpenetrated markets. In 2015, it acquired Niely Cosmeticos, a leading hair care firm in Brazil, to expand its position in one of the world’s largest hair care markets. We estimate L’Oréal is now a top hair care player in the country, with an above 20% share.It has also acquired certain fast-growing cosmetics brands to expand this fare on a global scale; NYX, an American makeup brand acquired in 2014, posted sales growth of 78% the following year and 124% in 2016, quadrupling its sales within two years of being acquired as its offerings were launched globally. We expect the firm will prudently pursue additional bolt-on deals to expand its presence in underpenetrated countries and channels; we believe doing so (even at slightly elevated multiples) affords it the ability to tap into opportunities (from a distribution and customer perspective) that would be costly to build out on its own.