L'Oreal business strategy and market analysis

L'Oreal Nederland B.V.

Situation Analysis

Identification of Alternative Solutions

Decision Criteria

Recommendation and Implementation

Exhibit 1. Alternatives Analysis

The managers of the Dutch subsidiary of the L'Oreal Group wrestled with a decision about whether to introduce additional products into the Netherlands market. L'Oreal, headquartered in Paris, was the largest cosmetics manufacturer in the world. With a heavy corporate investment in research and development, Paris expected each of the 100 country subsidiaries to distribute the new products; but the country managers were required to take the decision on whether to introduce each product based on the particular situation in their country. The French labs made unilateral decisions about all new product developments and the country managers had no input into the R&D process. Any new product line introduction had to be financed by the current operations of each subsidiary.

Some years earlier, L'Oreal had acquired a rival French company called Laboratoires Garnier. In France, with a population of 60 million people, Garnier operated as an independent company in direct competition with the L'Oreal products. However, in smaller markets such as Holland, with a population of 15 million people, the Garnier products would be marketed by the regular L'Oreal sales force, competing for their time and attention. Madame Yolanda van der Zande, director of the Netherlands subsidiary, and her marketing manager, Mike Rourke, were considering the introduction of two Garnier product lines into the Dutch market: the Synergie skin care line and the Belle Couleur permanent hair colorants. Synergie was a new line -- recently introduced in France -- made with all natural ingredients, which was a new trend in Holland. Belle Couleur had been on the French market for 20 years, but had no presence in Holland. Madame van der Zande gave Rourke two weeks to come up with a marketing plan to decide which if any of the new Garnier products to embrace in Holland and how to preserve the existing L'Oreal products that might be impacted by the introduction.

Rourke had been in the business long enough to know that any new product launched in the Dutch market would have to present a strong concept and high market potential. Therefore, the products had to offer unique, desired and identifiable differential advantages to Dutch consumers in order to overcome the customers' natural loyalty to their existing brands. Rourke was aware that without that edge new products would be at a competitive disadvantage and would not only fail, but would tarnish the Garnier name and poison the well for future Garnier products introductions.

At the time of this decision, 40% of the Dutch population was under 25 years old, but the population as a whole was aging; the fastest growing segments were those over 25 years old. The population surveys also revealed that Dutch women were getting out of the house in growing numbers. Twenty nine percent of the women had entered the labor force and there was reason to believe that percentage would rise. The percentage of working women in the United States and the United Kingdom was over 50%, but the Dutch working women segment was growing faster than those countries. Dutch women were also delaying the decision to have children, exhibiting greater self-reliance and independence. These women also had more disposable income and could afford to buy more cosmetics for daily use. These statistical observations led Rourke to believe that the market was right for products that promised to delay the aging process.

Even though the Dutch women had more money to spend, they continued to exhibit their long-held habits of shopping for value, especially for cosmetics. European Union surveys showed that while the Netherlands ranked fourth in per capita income, they were sixth in spending on personal care products. Dutch per capita spending on personal care products was only 60% of the amounts spent in France or Germany, therefore, the Dutch market for cosmetics was only four percent of the total European Union sales.

The Dutch market for cosmetics and toiletries was led by the skin care segment, which was growing at an annual rate of 12% on a unit basis and 16% on a value basis. This segment included hand creams, body lotions, all-purpose creams and facial products. Skin care products were often divided by retailers into the care and cleansing products. Care products were further categorized into day and night creams; cleansing products included milks and tonics. Noticeable as a faster growing segment was the anti-aging and anti-wrinkling creams. A corollary to that trend was the keen awareness of natural ingredients and the attention paid to claims of scientific formulations.

The competitive landscape for skin care products was well defined by large and well-known brands. Shiseido and Estee Lauder were firmly ensconced at the high value end of the market, while the economy segment was occupied by mass marketers such as Ponds, sold in drug store chains and supermarkets. In the middle were several products such as Oil of Olaz by Procter & Gamble and Plenitude (one of the existing L'Oreal product lines that had to be protected in Rourke's new marketing plan.)

As Rourke turned to the available research on the hair coloring product market, he found that there were some particular trends that he had to carefully consider. There were two types of colorants: semipermanent and permanent. The semipermanent washed out after five or six shampoos. The permanent color stayed until the hair grew out from the roots. While 73% of Dutch women, who colored their hair, used a permanent product, the four-year trend was toward semipermanent coloring, which increased from 12% to 27%. The sales of both varieties increased by 15% per year.

The competitive landscape was dominated by a small handful of products, including Recital, the existing L'Oreal product in the market. Recital was the market leader, but its market share had declined from 35% to 33% over that previous three years. Rourke also had to contend with hair salons, but he came to believe that the trend toward more women working outside the home favored the home coloring option, because of its convenience.

Rourke discovered that consumers thought of permanent hair colorants as technical products and were leery of new brands because of the risk of hair damage. He found that buying a new brand entailed reading the full description on the package and asking store clerks for advice and counsel. Traditionally, the use of hair colorants had been associated with the desire to cover graying hair. However, a recent trend had been toward using coloring as a fashion statement -- partially accounting for the rising popularity of semipermanent products. One study cited one reason for coloring was to achieve warm/red tones (33percent) and 17% wanted to lighten their hair color, the remaining 29% wanted to cover their gray.

Rourke had recently conducted specific market research studies of the two Garnier lines with Dutch consumers. The panel of users gave the Synergie line higher favorable marks than did the Belle Couleur panel. Market research also confirmed a strong product loyalty factor among Dutch women, with concerns about possible allergic reactions to unfamiliar products cited as a reason. Rourke learned in his research that the older the woman, the stronger the loyalty factor. This was especially important since Dutch women tended to buy facial creams only once or twice a year, so they naturally gravitated to the label on the container in their medicine cabinet.

Rourke found that facial care products were heavily advertised and sold on the basis of brand image. New products tended to have trouble gaining traction in the Dutch market. The advertising agency Rourke typically used advised that the "share of voice" (percent of total industry advertising) should be about the same as the expected "share of market." This rule of thumb didn't work for all categories. At the high end, the successful companies tended to spend much more as a share of total advertising budget than they achieved in market share. For instance, Rourke spent 13% of the total on advertising for Plenitude, but was only able to capture a five percent market share.

Situation Analysis

Strengths

L'Oreal had a strong worldwide market presence and favorable brand image.

The company invested heavily in research and development, producing one or two new product introductions each year.

Synergie was made with all natural ingredients, following a fast growing market trend.

Dutch retailers perceived L'Oreal as offering high-quality, innovative products supported with good in-store merchandising.

Weaknesses

Dutch consumers had very little awareness of the Garnier brand.

The Belle Couleur hair colorant was a "permanent" product (reapply only when the hair grows out.) The market trend was toward semi-permanent products (that wash out after five or six washings,) which had increased from 12 per cent to 27 per cent of the market.

L'Oreal had a competing hair colorant (Recital) on the Dutch market. Its market share was declining.

The Belle Couleur hair colorant was formulated for French tastes for darker colors, whereas the Dutch women preferred lighter shades.

Opportunities

Twenty nine per cent of the Dutch women worked outside the home, and were delaying childbirth. Women in the Netherlands were gaining self-confidence, independence and disposable income, and more of them were using it to buy cosmetics for use on a daily basis.

The skin care market was the second largest sector of the Dutch cosmetics and toiletries market.

The fastest growing category of skin care products was anti-aging and anti-wrinkle creams.

The fastest growing population segment was the 25 and older group, which was more concerned with youth preservation.

Threats

Dutch per capita spending on personal care products was only 60 per cent of the amount spent in France or Germany.

There were numerous competitors in the market, including existing L'Oreal products.

Holland ranked fourth in per capita income in the EU, but sixth in per capita spending on cosmetics and toiletries.

Dutch women were highly cost conscious when shopping for cosmetics.

Consumers tended to be loyal to their current brands -- worrying about possible allergic reactions to a new product.

Any innovative product could be quickly copied by retailers or other manufacturers.

New products required substantial advertising expenditures. Smaller brands were taking market share, resulting in a 60 per cent increase in advertising expenditures for all brands of hair colorants.

Hair coloring had recently become a fashion statement, partially accounting for the increase in popularity of semi-permanent colorants.

The high end of the cosmetics market was dominated by Shiseido and Estee Lauder.

Primary Impact Factors

Any new product introduced to the Dutch market must have a strong product concept and high market potential. The products must offer unique, desired and demonstrable advantages to Dutch customers.

Problem Statement

Should L'Oreal Netherlands introduce the Synergie skin care line of products and the Belle Couleur hair colorants or just one? In any case, how should the marketing program be structured? How should management minimize the impact of one or both of the new products on the existing L'Oreal product lines?

Identification of Alternative Solutions

Introduce the Synergie line of skin care products

Synergie was a new line of natural-ingredient facial skin care products including moisturizing cream, anti-aging day cream, anti-wrinkle cream, cleansing milk, mask, and cleansing gel. This range of products would benefit from the recent trends in the Dutch market favoring anti-aging, scientific development and natural ingredients. It also fit the population dynamic that the Dutch people were getting older.

Introduce the Belle Couleur line of permanent hair coloring products

Belle Couleur was the market leader in France where it had been sold successfully for 20 years, with the advertising line "natural colors, covers all grey." In France, the line had 22 shades, mostly natural with a few strong red or very bright.

Introduce Synergie and Belle Couleur in one campaign

By introducing both products together, the advertising of the Garnier name would get leveraged as the consumers would see and hear the Garnier name twice, giving the impression of a major supplier.

Decision Criteria

The following decision criteria were chosen to evaluate the marketing strategy alternatives listed above. A weight has been assigned to each criterion depicting the analytical importance to L'Oreal Netherlands. The scale is from 1 to 10, with 10 being the most important.

Product in line with market trends (weight = 10)

The Dutch managers were being pressed by L'Oreal Paris to introduce more Garnier products. The first introduction must be successful. Go with the flow.

Evidence of consumer acceptance (weight = 8)

Retailers will be critical to a successful product launch. Consumer acceptance, closely followed by manufacturer advertising, is highest priority for retailers.

Advertising campaign effective (weight = 7)

L'Oreal Netherlands could leverage ad spending on the Garnier name by promoting two product lines in the same campaign.

Product is mature in the market (weight = 5)

Promoting a product that has been proven successful in the French market could help allay fears about allergic reactions.

Analysis

The following analysis was performed using the decision criteria listed above and assigning a score to each of the alternatives. Points were assigned on a 1 to 5 scale with 1 being the lowest (least beneficial) and 5 the highest (most beneficial) marks.

Option 1: Introduce the Synergie line of skin care products

Product in line with market trends (weight = 10) Score = 5-

Synergie was a new product line, with all natural ingredients, which was focused on 25 and older women, the fastest growing market segment in Holland.

Evidence of consumer acceptance (weight = 8) Score = 5-

Market research showed that Synergie was well received by the consumer panel. On a scale of 1 to 7, panelists gave Synergie marks of 4 and 5 on the question of buying intent. 24-39% said that they would "certainly buy" the product.

Advertising campaign effective (weight = 7) Score = 2-

Introducing a new product with no market history would likely be relatively expensive. Dutch women were highly loyal to their existing brand.

Product is mature in the market (weight = 5) Score = 1-

Synergie was not only new to Holland, but it had only recently been introduced in France; therefore, facing the natural inertia in consumer buying decisions. Comprehensive Score = 109 out of 150 possible points = 73%

Option 2: Introduce the Belle Couleur line of permanent hair coloring products

Product in line with market trends (weight = 10) Score = 1-

Permanent hair colorants were on the decline, in favor of semi-permanent. The proportion of women using semi-permanent had increased from12% to 27%.

Evidence of consumer acceptance (weight = 8) Score = 1-

On the question of purchasing intent, the consumer panel gave Belle Couleur marks of 3 out of 7. After using the product, 31% of the panelists said they would not buy, compared to 13% before their experience with the product.

Advertising campaign effective (weight = 7) Score = 3-

Belle Couleur would have a modest advantage over Synergie with an advertising pitch of "French women have been happily using this product for 20 years."

Product is mature in the market (weight = 5) Score = 4-

Twenty years of history could help allay fears of product danger.

Comprehensive Score = 59 out of 150 possible points = 39%

Option 3: Introduce Synergie and Belle Couleur in one campaign

Product in line with market trends (weight = 10) Score = 2-

Score indicative of a mix of trendy and mature products.

Evidence of consumer acceptance (weight = 8) Score = 2-

Negative reaction to Belle Couleur outweighed Synergie's positives.

Advertising campaign effective (weight = 7) Score = 5-

L'Oreal Netherlands could leverage ad spending on the Garnier name by promoting two product lines in the same campaign, partially overcoming the loyalty factor in the market.

Product is mature in the market (weight = 5) Score = 4-

Garnier campaign could benefit from Belle Couleur history.

Comprehensive Score = 91 out of 150 possible points = 61%

Recommendation and Implementation

Based on the score of 73% for Option 1, compared to 39% and 61% for the other two options, introducing the entire Synergie product line in Holland is the best decision. The null option (doing nothing) would not be advisable for two reasons: Firstly, Synergie presented as being an attractive business opportunity, and secondly, L'Oreal headquarters was pushing for a broader distribution of Garnier products in the Netherlands and the Dutch management team would be hard pressed to defend a non-responsive position.

Madame van der Zande should direct Mike Rourke to prepare a promotional program emphasizing the Garnier by L'Oreal name and the natural ingredients along with the technical advantages of the Synergie product: "An alliance of science and nature to prolong the youth of your skin." The marketing focus should be on the 25 and older woman, which was the fastest growing market segment in Holland.

For the Synergie marketing program, Rourke could take a page from Shiseido's playbook when the Japanese company introduced its products into the European markets. (Drawn from "How Shiseido Succeeded in Europe." Yutaka Goto, Director General Shiseido Communications Center for Europe. January 12, 2005 www.japansociety.org.uk.) Shiseido expanded into Italy first before moving into France, the heart of European cosmetics. Since they were confident of the quality of their products, Shiseido aggressively dispatched beauty consultants to the high-class boutique perfumeries in Rome and Milan, and had them diligently convince customers, one-by-one, to try their products. They adopted the attitude that the quality of a cosmetic can only be experienced by actually using it on one's skin. With these efforts, they were able to acquire a number of loyal followers in Italy after people tried their products.

After the early experience in Italy, Shiseido decided to adopt a prestige brand as its overseas strategy, and targeted the upper class as they moved into France. Instead of aiming for recognition by the general public, Shiseido directed its efforts in pursuing the prestigious customer. The opening party held at the Shiseido retail boutique in the arcades of the Jardins du Palais Royal, near the Avenue de l'Opera in Paris, marked the highlight of the many receptions held by Shiseido in French retail shops. Celebrations lasted for two days: on day one, a reception and display of products for journalists from morning to evening and a grand reception at night for 100 carefully selected VIPs, while on day two, a reception for the bankers, neighboring shops, and other parties to whom Shiseido owed its gratitude. In addition, compared with other manufacturers, Shiseido is more aggressive in approaching journalists in France. As a cosmetics manufacturer, they are in constant contact with beauty and fashion journalists.

The other competitor in the high-end market segment, Estee Lauder, also offers Rourke guidance on how to enter new markets. (Drawn from Leonard Lauder, "The Secret to Estee Lauder's Good Looks: Savvy Marketing" November 6, 2002, http://knowledge.wharton.upenn.edu/article.cfm?articleid=660) As Lauder recounted in his article, the company grew by constantly looking for new markets and by competing with itself with new brands and distribution channels. For example, the idea of handing out samples, a one- to three-month supply of cosmetics, was derided by their competitors. Lauder recalled, "The idea was right. We believed in the quality of the product and women liked it and they came back and they came back."