ASSIGNMENT 1 EXTERNAL ANALYSIS OF

SUBMITTED TO PROFESSOR SANJAY BHOWMICK

SUBMITTED BY AARTI MOHITE 1|Page

Company Overview
The LOral Group which is the worlds largest cosmetic and Beauty Company manufactures hair and skin care products, perfumes and cosmetics. The company has made its presence felt in dermatological and pharmaceutical fields and is the top nanotechnology patent holder in the United States.

L'Orals Mission
At, LOral we believe that everyone aspires to beauty. Our mission is to help men and women around the world realize that aspiration, and express their individual personalities to the full. This is what gives meaning and value to our business, and to the working lives of our employees. We are proud of our work. (1)

L'Orals Vision
Become the first choice of people who wish to feel beautiful by continuously offering high quality products by exploring new opportunities by formulating organic products by continuous technological innovations and by valuing the stakeholders. (1)

L'Oral India
LOral started doing business in India in the early nineties. Initially it did business through a distributor and later in 1994 established LOral India a wholly owned subsidiary of The LOral Group. LOral India imports most of its product from its own facilities abroad and manufactures the rest in Pune, Chakan. (2)

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L'Oral Indias Product Line

Consumer products

Professional Products

Luxury Products

Active Cosmetics

(Refer Appendix B)

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Indian Cosmetic Industry

Size: Globally $274, Nationally $4.6 Market Capitalization: According to CII, market size the total Indian beauty and cosmetic market size is $950 million Output per annum: Expect a growth rate of 20% per annum Percentage in world market: $2680 million according to CII estimates (3)

Forecast for the colour cosmetics Market

150 (year 2012) 130 (year 2011) 105 (year 2010) 85 (year 2009) (4)

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GROWTH DRIVERS

Growth Drivers

DEMAND SIDE DRIVERS Consistent GDP growth Increasing consumer income High private consumption Rising urbanization Increasing discretionary income

SYSTEMIC DRIVERS Favourable changes in government policies Infrastructure development SUPPLY-SIDE DRIVERS

Growth of retail
Low labour cost

(4)

Global Industry scenario (End of fiscal year 2010)

1 2 3 4 5 6 7 8 9 10 (9) Procter & Gamble LOral Unilever Estee Lauder Shiseido Avon Johnson & Johnson Beiersdorf Kao Alticor $28.22 $25.83 $18.24 $8.06 $8.06 $7.77 $7.28 $7.09 $6.410 $5.711

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External Environment Analysis

Porters Five Forces Model

Power of suppliers

Bargaining Power of buyers

Industry Competitors

Threat of substitute products

Threat of new market entrants

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Industry Competitors: LOral Consumer products include

Cosmetics Hair Care products Skin Care products These products contribute more than 70% of total LOral Indias sales. The companys competitors in the Indian market are Procter & Gamble, Hindustan Unilever, Shiseido, The Estee Lauder, Avon and Johnson & Johnson, Dabur and Kose, Chambor, MAC, ColorBar Cosmetics, Oriflame Cosmetics. In the recent years herbal cosmetics produced in India have also gained popularity. Shahnaz Husain, Emami, Biotique and Lotus Herbals products are the most well known in this area. LOreals skin care range is yet to challenge brands of bigger rivals Hindustan Unilever and Procter Gamble despite reasonable growth. The major competitors in the industries where LOreal competes have strong brands. This helps mitigate the rivalry. The rapid growth in the consumer goods industry will help reduce competition in the developing countries. Though there are many small firms in the industry too and there is low product differentiation, LOral is an exception. One of the core competencies of LOral is product innovation and it invests in heavily in R&D. This core competency being costly to imitate holds a lot of value. Taking into consideration all these factors and the high fixed costs and exit barriers it can be said that the rivalry among existing firms is moderate. (Refer appendix B)

Innovative threats by competitors:

P&Gs Reflect.com Web site produces customized skin care or hair care products to meet a customers need

Threat of substitute products:

Threat of substitute products is high. For e.g. when a consumer wants to buy a lip gloss there are 50% chances she will buy the one she previously used, but there are 50% chances she will browse through the other brands available at the store. So on a rainy day the consumer may prefer buying the same shade of the lip gloss available with Revlon at a lower price. According to the strategic market definition LOral s target group would be anyone who is interested in hair and skin care and not only those who are conscious about their appearance. Lately herbal and natural products are preferred because they do not have any side effects. The Shahnaz Husain Group is the leading company in the field of natural beauty products. Natural products such as shikakai for hair care, aloevera gel for skin care, henna for hair color and surma for the eyes are some of the substitutes. Private label products such as Olay and Neutrogena are also gaining popularity in the skin care area. The price of these substitutes is substantially lower than LOreal products. Substitute products restrict the prices the company can charge thereby reducing profitability. 7|Page

Power of Suppliers:
In this industry there are large number of suppliers hence their bargaining power is low. Availability of resources from multiple sources restricts the power of the suppliers. The raw materials used in the cosmetics have not changed much in the last twenty years and hence the degree of differentiation is low. Also new raw materials require animal testing, and so many companies in the cosmetic industry being against animal testing restrict there is pressure against introducing something new. The high costs involved in R&D also contribute to this pressure. Suppliers of plastic and which is a raw material in packaging are large in number and the switching costs to the firm is also low. All these factors contribute to the low bargaining power of suppliers. (6)

Bargaining power of buyers:

Bargaining power of buyers is high because there is a wide variety of a choice available. The constant innovations in the industry by consumers tempt the consumers to try out new and different products as the switching costs are low. Online sales channel has added to this power. Consumers are easily able to compare the prices, attributes and qualities of various brands at a click which has vested great power to them when it comes to selection of brands.

Threat of new entrants:

Even though there would be new entrants this would not impact the sales of big brands in this rapidly growing industry. For e.g. the hair care market in India is valued at $200 million. Gone are the days when hair conditioners and gels were used occasionally. Today they have become a way of life. The capital requirements and government regulations are high which makes it difficult to enter this industry. (5)

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PESTEL ANALYSIS:
Political:
LOreals external environment is highly complex as the company is having a hard time to adapt its strategies to the different countries and their government policies. Also different countries have different governing laws which make it mandatory for LOral to change its company strategy which calls for changes in the resources as well as the production processes.

Economic:
Due to economic crisis LOral s sales in the third quarter of 2010 dropped by 3.4 %, followed by a decrease in the overall profit and a decrease in the earning per share by 7%. LOral has to adapt its operations according to the economic conditions of the different countries which depend upon factors such as labour cost, exchange rates etc. Also the global strategy followed by LOral makes it unaffordable in countries with low economies.

Social:
The upper middle class want to emulate the rich and be noticed in the social circle. This as well as exposure to fashion and beauty trends prevailing in the developed world through television and other media has resulted in changing tastes and choices and given a boost to the high priced LOral products. Indian women also have better paying jobs than they did a decade ago which has led to an increased spending on beauty products. Indian men are becoming increasingly conscious about their appearance which has led to the creation of a new target segment for the LOreal group. (4, 5)

Technological:
There is a rapid advancement in the hair, beauty and skin care industry. Everyday consumers are exposed to newer and better products which have led to increased completion. Therefore LOreal has to invest huge amounts in R&D to hold its ground in the competitive environment.

Environmental:
LOreal uses plastic packaging for most of its products. It explains this by stating that since most of its products are used in bathroom there is a possibility of breakage. Plastic prevents the danger of causing any hurt to the user. Plastic not being recyclable causes harm to the environment which may land LOral in trouble as most of the companies are striving to have an eco friendly approach to their business. On the other side LOral is an active member of the European Partnership for the development of alternative methods and is striving to bring an end to the animal testing prevalent in the industry. Legal: The cosmetic industry is threatened by fakes and imitations. The illicit trade causes damage to LOral business. The EU law affects LOral and it is restricted in use of certain ingredients.

( 1474 words)

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Appendices and References

Important Note: The analysis is specific to India. The results will vary drastically depending upon the location. Appendix A In this industry consumers are increasingly demanding customized products which suit individual needs. Micro segmentation for product development and mass customization for identifying different product variants is already underway. For instance, a decade ago, only a limited variety of products such as shampoos, were available within a particular brand. Now most brands have launched a variety of shampoos to suit different hair types (oily/dry/normal), the seasons in which these can be used (winter/summer) as well as consumer categories (men/women/children). The beauty products market is expected to grow by 15-20 %( twice as fast as the U.S. and European markets) in the future .Indian men are also becoming more conscious of their appearance. HUL has launched Vaseline for men, Emami came out with Fair and Handsome, and LOreal has launched Garnier men power light products. As per estimates, the demand for in salon skin care treatments by men is increasing by 40% annually. Urban areas contribute the maximum to the overall cosmetic revenue, however the rural region still holds a huge potential for players. The key factor for future growth in the rural region will be low price and high quality products with easily accessible supply chain networks.(5) Appendix B LOreal Indias product line Consumer products LOreal Paris Garnier Maybelline NY Professional products 10 | P a g e

LOreal Professionnel Kerastase Matrix Keraskin Esthetics Luxury Products Lancme Georgia Armani Ralph Lauren Diesel Kiehls Active Cosmetics Vichy La Roche Posay The companys competitors in this area are Schwarzkopf Wella and Revlon. Schwarzkopf sells hair care products that include hair colour, hair styling and hair repair.In 2005 according to the industry sources Schwarzkopf has a market share of 24% and LOreal dominates with a 76% market share. But currently the company has been piling up debts and losing its market share. As a result Henkel has announced the sale of its hair care division Schwarzkopf professional to group firm Henkel Adhesives technologies. Wella being a comparatively new entrant in the hair colour industry in India is not a very strong competitor. (7,8) Since the consumer products category constitutes of more than 70 % of total sales I have analyzed the same.

References http://www.loreal.com/_en/_ww/html/company/pdf/code_of_ethics_uk.pdf (1) http://www.loreal.co.in/_hi/_in/html/our-company/Welcome-to-L-Oreal-India.aspx (2) http://www.indianmirror.com/indian-industries/cosmetics.html(3) Marketing White Book (2010-2011) (4) Marketing White Book (2011-2012) (5) Kotler (6) http://articles.economictimes.indiatimes.com/2011-04-09/news/29400657_1_henkel-india-henkel-aggerman-parent (7) http://superbrandsindia.blogspot.in/2005/05/hair-colour-market-booms-india.html (8) http://www.beautypackaging.com/articles/2008/11/the-top-20 (9) 11 | P a g e

http://www.loreal.com/_en/_ww/html/company/pdf/code_of_ethics_uk.pdf http://www.loreal-paris.co.uk/faq.aspx http://articles.economictimes.indiatimes.com/2012-01-23/news/30655698_1_beauty-salon-l-orealindia-joint-venture http://nanocolors.wordpress.com/2009/10/29/nano-the-top-10-big-cosmetics-companies-lorealprocter-gamble-and-henkel/ External analysis PowerPoint slides provided in the classroom sessions. (Professor I started working on the assignment before you informed us about turnitin so I dont have a few sources from where I had taken the data.)

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