Paris-based L’Oréal is the world's most valuable cosmetics company. Photographer: Laura Stevens/Bloomberg
Paris-based L’Oréal is the world's most valuable cosmetics company. Photographer: Laura Stevens/Bloomberg

L’Oréal shares offer investors a defensive profile

Time of article published Aug 6, 2020

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By Frants Preis

JOHANNESBURG - Paris-based L’Oréal is the world's most valuable cosmetics company. It manufactures 7 billion beauty products annually.

At a market value of R3.2 trillion it is larger than Estée Lauder, Colgate-Palmolive and Beiersdorf combined.

The company has more than 497 registered patents and 36 global brands with thousands of products in fields focusing on hair colour and care, make-up, skincare, sun protection, and perfume. Brands include Garnier, Maybelline, Kérastase, The Body Shop and beauty products of Yves Saint Laurent, Lancôme and Giorgio Armani. Nestlé owns 23 percent of L’Oréal.

Since its inception 111 years ago, research and development have played a crucial rule in L’Oréal’s success.

It has had many industry firsts, including soap-free shampoo and foam bath. The company has 21 research and development centres and 42 manufacturing plants across the globe.

L'Oréal has been against testing products on animals and has spent at least R18 billion on research to find an alternative. They developed Episkin, which is reconstructed skin that acts as an alternative for testing on animals. L’Oréal does not test products or ingredients on animals. However, it sells cosmetics in China that are required by Chinese law to be tested on animals.

L’Oréal reported resilient bi-annual results last week.

The consumption of beauty products over the period was strongly impacted by the closure of millions of points of sale as a result of the Covid-19 pandemic.

This caused a crisis of supply, rather than demand, since consumers were temporarily unable to purchase products. As part of its solidarity programme, L’Oréal used its facilities to make and donate more than15 million units of hand sanitiser gel and moisturising cream for medical officials in need. Although L’Oréal’s revenue in the first half declined 12 percent, its sales in China increased by 17.5 percent and online sales grew 65 percent - a further sign that the pandemic is accelerating a digital shift among retailers worldwide.

Online sales now comprise a quarter of its total revenue.

Chief executive Jean-Paul Agon announced that L’Oréal will embark on an aggressive plan of new product launches and advertising campaigns to remain competitive in a market that has been reshaped by the pandemic.

The global cosmetics market has grown steadily at 4 percent per annum. It is a market driven by the development of social media, increasing urbanisation and rising growth in online beauty spending due to the expected growth of the high-income class over the next decade.

L’Oréal’s strong and diversified brand portfolio enables it to lead the industry in terms of margins and organic growth. It is also the market leader in research and development capabilities in the cosmetics industry. Increasing demand for cosmetic products in China offers significant opportunity, but also intensifies competition.

The country’s animal testing policies remain a contentious issue. L’Oréal shares offer investors a defensive profile, but are currently trading at record highs and at a premium to peers and itself.

Frants Preis, a chartered financial analyst, is a portfolio manager at VEGA Asset Management based in Pretoria.

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