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Will L'Oréal's Mantra Of “Emerging Markets First” Pay Off?

March 21, 2015 | About:

We are seeing most of the companies focusing on emerging markets these days. What are the emerging markets? They are the group of countries which include Asia Pacific, Africa, Middle East, Latin America and Eastern Europe. So why have they become important suddenly? It is simply because these markets have been growing at a remarkable rate. These economies have registered great improvements in the recent past and sales from these regions have been increasing tremendously for almost all the US and European companies. Earlier some of the big giants used to witness only close to 2 to 5% of sales in these regions on an average. Of late, this percentage has increased to 40% at least. That is the rate of growth that we are talking about. This has made many companies shift their focus to these growing economies. French cosmetic giant, L’Oréal (LRLCY) is no exception to this rule.

How emerging markets contributed to L’Oréal’s business

What made a company as big and as reputed as L’Oréal, make a shift in its strategy to focus more on emerging markets? Until 2005, the break-up of sales for the company was as follows – North America (27%), Western Europe (47%) and Emerging Markets (26%). During 2014, this break-up changed drastically and it now stands like this – North America (25%), Western Europe (34%) and Emerging Markets (40%). The African economy is going through a flourishing period right now and L’Oréal has made the right move by entering into a partnership with Compagnie Française de l’Afrique Occidentale (CFAO) so that the latter will market L’Oréal’s products in the African country of Ivory Coast.

This move should bring good news to investors because the company is now focusing on an economy that is growing by leaps and bounds. The GDP growths for 2012 and 2013 were around 11% and 9% respectively. Economists expect that the Ivory Coast will grow by the same 9% for 2015 also. Since the growth of these economies has been excellent, the purchasing power of the people of these countries has increased considerably. As their financial levels have increased to a great extent, these people can now afford luxury brands in their lifestyle. This has induced L’Oréal and other giant foreign brands to penetrate further into these countries.

What does the partnership with CFAO mean for L’Oréal?

Ivory Coast will now get more exposure to L’Oréal’s products thanks to the subsidiary distribution channel of CFAO, Sicobel. Since CFAO has already a first-hand feel of African markets, L’Oréal will benefit hugely from this partnership. With CFAO having cosmetic production and distribution units in Africa, L’Oréal will only be required to supply the required raw materials and help Sicobel with making and marketing the goods. Currently, CFAO has its distribution network spread over 37 countries, out of which, close to 34 are present in Africa. Also, the African and Middle East regions recorded an increase of 12.5% in sales for 2014, the fastest for L’Oréal. Hence the company wants to tap this potential more and who better than CFAO to partner with, to get the best out of the flourishing economy of Africa?

Being the sole distribution channel for L’Oréal’s products, CFAO will efficiently cover the complex geographical area of Africa, especially Ivory Coast and parts of Western Africa, where there are lots of French-speaking people residing. CFAO will help bring the much-needed structure for L’Oréal product distribution network across the Africa. This way, L’Oréal can save its products from being marketed by some of the other local distributors at low prices, which would have resulted in lower margins for the company. Investors can now safely invest in L’Oréal as the company has taken the right decision to provide focus on improving its presence in the emerging markets. The following is the share price trend of the company for the last few years:

Conclusion

L’Oréal has just announced to the world how important it is to pay focus on emerging markets. These markets were a minority section not long ago; however, today, they have grown to a great extent from where, it is difficult to turn back. The progress in these economies has been so well-planned, that they have been beating the US and European market shares of many other companies by a long margin. L’Oréal is sure to reap rich profits by partnering with one of the best distribution networks to take full benefit of the African market, one of the most promising emerging markets, the company has ever seen.

About the author:

reports.droy
We are a group of analysts exploring and analyzing different domains of business and writing reviews based on information available in public domain web portals. We do not hold any stock or investment position in any of the companies that we write for.

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