L’Oreal takes aim on Procter & Gamble in China

At L’Oreal’s Shanghai research center, more than 260 scientists working with skin cells and test tubes tailor products from lipsticks to shampoos for Chinese shoppers.

This year’s offerings: a cosmetic balm for Chinese men looking to mask face blemishes, and skin serums made from white fungus, ginseng and cordyceps - a type of parasitic mushroom widely used as a herbal remedy.

The world’s largest cosmetics maker is launching the new products to whittle away at Procter & Gamble’s lead in China’s market for beauty and personal care products, estimated to reach $34 billion this year by Euromonitor. To gain an edge over its Cincinatti competitor, L’Oreal is counting on lotions using traditional medical ingredients and offerings targeting Chinese men.

The strategy will help the Paris-based company boost China sales more than 10 percent in 2013 from 12.05 billion yuan ($1.9 billion) last year, said China Chief Executive Officer Alexis Perakis-Valat predicted in an interview.

“L’Oreal has become a formidable competitor for Procter & Gamble in skin care,” Oru Mohiuddin, a senior analyst in London at researcher Euromonitor International, said in an e-mail. “Not just has L’Oreal approached China from various angles, including pricing and retail coverage, it also strived to make the brands more customized and effective.”

The maker of labels from Lancome to Biotherm has been narrowing the gap with P&G. L’Oreal’s share of the market rose to 11 percent in 2011 from 9 percent in 2008, according to the most recent data available from Euromonitor.

P&G, which banks on home staples such as Olay and Gillette, lost 1.6 percentage points to 15.8 percent in 2011. L’Oreal is already ahead in skin-care, with a 15 percent share in 2012 compared with less than 10 percent for P&G.

The companies are fighting for shoppers like 24-year-old Shanghai advertising executive Corina Su, who has an extensive daily beauty regimen. As part of a determined battle against acne, she spent $169 on a Clarisonic electric face brush made by L’Oreal. Her morning routine includes a herbal gel cleanser, cucumber toner and avocado eye cream.

“Chinese people place a huge emphasis on beauty and skin care as they are especially afraid of aging,” Su said.

L’Oreal’s stock has jumped 35 percent over the past year, compared with a gain of about 14 percent for P&G. The Garnier maker trades at about 24 times this year’s estimated earnings compared with P&G’s 19 times.

China is the second-largest market for P&G, with sales of $7 billion including daily goods such as Bounty paper towels in addition to personal care brands.

The overall China business expanded about 50 percent in the past three years and the company continues to grow through new categories and innovation in existing ones, it said in an e-mailed statement. P&G chose China to launch its Oceana skin-care brand in January.

L’Oreal, headed by chief executive officer Jean Paul Agon, reported a 12 percent gain in last year’s earnings and said it is “well prepared” to outstrip the growth of the beauty market this year. It is likely to extend market share gains in China skin-care, Euromonitor’s Mohiuddin said.

China, which provides about 6 percent of L’Oreal’s annual revenue of 22.5 billion euros ($29 billion), offers a window into how the French company is tapping new markets to boost growth as spending in Europe slows.

The company’s business benefited in China from the 2009 introduction of the Kiehl’s skincare brand that drew consumers looking for mid-priced skin-care products, according to Paul French, a Shanghai-based analyst at Mintel Group.

“In China, for a long time you just had your high and low end,” said French. “Kiehl’s, along with Korea’s Face group and L’Occitane, really opened up the mid-market range.”

Market share declines for P&G’s Olay brand in China also open opportunities for L’Oreal’s Garnier brand, which is in a similar, more affordable price range, Mohiuddin said.

“In China, P&G had been very successful, but then got complacent in terms of innovation and tried to consistently raise prices, leveraging its strong share position only,” said Ali Dibadj, an analyst with Sanford C. Bernstein & Co. via e-mail. “Eventually, competitors like L’Oreal and others caught up.”

While building global brands such as Kiehl’s and Garnier in China, L’Oreal has added local lines. In 2004, it bought the Yue-Sai brand, which uses traditional Chinese herbs in its creams. Sales of that line rose more than 20 percent last year as buyers snapped up items such as a 50-milliliter (1.69- ounce) jar of Youth Preserving Moisturizer for 210 yuan made with Ganoderma Fungi, or lingzhi.

The company will expand Yue-Sai on the mainland this year by selling more through online Chinese retailers such as T-Mall. The brand also plans a customized skin serum this year.

His company faces rising competition even as its China ambitions grow. Other global rivals such as Japan’s Shiseido, Anglo-Dutch personal care company Unilever and direct distributor Amway are diving deeper into the world’s most populous nation.

It still faces a formidable competitor in P&G, the world’s largest consumer products company, with 2012 sales of $83 billion.

Part of the French company’s success will depend on its ability to sell to men in China, where the male grooming industry will expand 13.4 percent this year, outstripping overall beauty and personal care by Euromonitor’s estimates. Bloomberg