L’Oréal CEO Jean-Paul Agon Sells Beauty to the World
Jean-Paul Agon, chief executive of French cosmetics and beauty giant L’Oréal, is used to smoothing out wrinkles. He’s good at handling other crises, too.
Agon was running L’Oréal’s German business in 1994 as Germany struggled with reunification. He headed Asian operations in 1997, when the Thai baht’s collapse provoked a regional economic meltdown. He took charge of L’Oréal USA in the summer of 2001, just before the Sept. 11 terrorist attacks. “It became a bit of a joke that wherever I sent him, there was going to be a crisis,” says the former CEO, Lindsay Owen-Jones, who quickly identified his flexible young protegé as a candidate for the executive suite.
Agon, 58, laughs off the notion that he was unlucky. “On the contrary, it was good training,” he says in an interview at L’Oréal’s headquarters, in a former soap factory in a Paris suburb. “Challenges make you discover strengths or talents or skills that you didn’t even think you had.”
Agon’s battle scars left him especially well prepared to assume L’Oréal’s helm in 2006, on the eve of the worst financial and economic crisis since the 1930s. While most companies retrenched, L’Oréal (ticker: OR.France) continued to invest in its dozens of makeup, skin-, and hair-care brands, which range from Maybelline, Garnier, and L’Oréal in the mass-market category to prestige names such as Lancôme, Yves Saint Laurent, Giorgio Armani, and Kiehl’s. The strategy, which Agon first tried successfully during the Asian downturn, paid off handsomely, helping L’Oréal secure its position as the world’s largest beauty-products seller based on annual revenue, ahead of Unilever (UL) and Procter & Gamble (PG).
L’OREAL’S SPENDING ON research, development, and marketing also laid the foundation for rapid growth, and positioned the company to potentially double its customer base in coming years. Sales are forecast to rise almost 14% this year, to 25.6 billion euros ($29.12 billion) while earnings could climb 13%, to €3.6 billion, or €6.30 a share. Analysts are projecting earnings of €6.80 a share in 2016, on revenue of €27 billion.
In Agon’s first year on the job, L’Oréal netted €1.8 billion, on revenue of roughly €16 billion.
L’Oréal’s sales are geographically diverse, with Western Europe accounting for 36% of annual revenue; North America contributing 25%; and Asia-Pacific, 21%. The remainder comes from Eastern Europe, Latin America, Africa, and the Middle East. The company claimed 12.5% of the global market for cosmetics and beauty products in 2014.
L’Oréal Luxe, which sells prestige makeup, skin-care, and fragrance brands through department stores, is doing particularly well. It generated more than a quarter of last year’s revenue, or €6 billion.
Customers haven’t been the only beneficiaries of L’Oréal’s growth. The company’s shares, which fetched €170.15 late last week, have returned an average of 14% a year for the past decade—and 21.7% in each of the past five years, including dividends. L’Oréal pays an annual dividend of €2.70 a share, for a yield of 1.6%. At a ratio of 27 times this year’s expected earnings, the stock looks expensive, but investors have been willing to pay up for consistent performance.
L’ORÉAL WAS FOUNDED in 1909 by Eugène Schueller, a French chemist of German descent. Schueller developed hair dyes from chemical compounds and produced a range of colors that were more subtle than other dyes then available. Parisian hairstylists were persuaded to use the dyes, originally called Aureale, which evolved into L’Oréal, and Schueller hired representatives to sell them through France. Even before the outbreak of World War I, use of L’Oréal’s dyes had spread through Europe and even reached the U.S.
As more women joined the workforce after the war, they had more money to spend on beauty care, and the company flourished. But Schueller’s reputation was tarnished during World War II, when he founded and funded an extreme right-wing group that collaborated with the Nazis and supported France’s Vichy government. After the war, L’Oréal hired some of the movement’s members as executives, and Schueller’s only daughter, Liliane, married one.
Liliane Bettencourt, as she is known, inherited her father’s stake in the company on his death in 1957. L’Oréal went public in 1963, but Bettencourt retained a majority holding. In 1974, fearful that the French government might nationalize the company, she exchanged almost half of her stake for shares in Swiss foods giant Nestlé (NESN.Switzerland).
The arrangement provided a firm foundation for L’Oréal that has lasted more than 40 years. The two companies began to unwind the cross-shareholding last year when Nestlé sold an 8% stake in L’Oréal back to the French company. Nestlé’s stake currently stands at 23%, while the Bettencourt family own 33%. Liliane, 92, has no role in the company, although her daughter, son-in-law, and grandson sit on the board.
“L’Oréal’s success is linked to the excellent relationship that has always been between management and the Bettencourt family,” says Agon.
Continuity of management arguably has been as important as a stable shareholder base. Agon is only the fifth CEO in L’Oréal’s history. He says he has no plans to retire soon—his mother worked until she was 85—and that his eventual successor will be a L’Oréal insider.
The company’s mission, based on product innovation, quality, and safety, hasn’t changed much, either. “I strongly believe that I am continuing the legacy of my predecessors on the essentials, but the essentials are almost 90% of what is important,” Agon says.
The CEO sees his role as ensuring that L’Oréal adapts to a changing world. He hopes to make his mark by building a robust digital presence for the company, and promoting environmental sustainability.
Agon believes that digital technology can transform the relationship between consumers and brands, not only by offering a sales platform but also educating potential buyers about products before they go shopping. They need help understanding how to use the products, too, he says, noting that L’Oréal has responded by providing online tutorials.
Agon is equally committed to reducing L’Oréal’s carbon footprint—by 60% from 2005 levels. The company also aims, by 2020, to create new products using raw materials only from sustainable sources.
AGON GREW UP in Paris, where his father was a manager in the pharmaceuticals industry and his mother worked as an architect. An only child, he attended the prestigious École de Hautes Études Commerciales, or HEC Paris, a business school whose alumni include French President François Hollande and numerous captains of French industry. Agon studied finance, mainly to please his parents, but it didn’t interest him. “I was terribly bored,” he says. “I didn’t find it intriguing at all.”
He discovered a passion for marketing, however. “My head teacher said, ‘Jean-Paul, you are definitely very gifted [in] marketing,’ because, for every finance case, I found a marketing solution,” Agon says.
He was recruited from business school in 1978 by L’Oréal, and chose the job, in part, because of the opportunity for international travel. As a child, he had decorated his bedroom with maps of the different countries he dreamed of visiting, including Brazil, India, and China. A globe sits next to his desk in his office.
Agon’s passion for travel is well known among his colleagues. When traveling for business, he likes to visit countries for a minimum of a week to soak up the culture. Owen-Jones recalls a year in which Agon spent most of his time on the road, but used two weeks’ vacation at the end of it to take his family on a long-distance holiday. “I said, ‘What, are you crazy? Haven’t you taken enough planes already?’ ”
L’Oréal also gave Agon an opportunity to put his marketing talents to good use. The company is the world’s third-biggest spender on advertising, behind P&G and Unilever.
Sipping coffee, Agon suddenly grows animated when the subject turns to marketing beauty products. “If you do marketing for food products or detergents, it is pretty rational,” he says. “With beauty, you have some rationality, but you have a large part of emotionality. It is very cultural. It is linked to the image you have of yourself, or of the community. It is very much about imagination, intuition, taste.”
CHARLES REVSON, THE founder of Revlon (REV), called beauty products “hope in a jar.” Behind that hope is technology, a key focus of L’Oréal’s endeavors. L’Oréal spends 3.4% of annual revenue on research and development—equivalent to €760 million last year. Out of a workforce of 78,600, it employs 3,500 people in advanced research, focusing on areas such as the biology of skin and hair, and stem cells.
R&D has taken L’Oréal in some unlikely directions. In 1970, it acquired control of the French pharmaceuticals company Synthélabo to advance its research into dermatology. After several drug-industry mergers, that investment has evolved into a 9% stake in the pharmaceuticals giant Sanofi (SAN.France), a holding that is now worth more than €11 billion. L’Oréal views the investment as financial, and it could be sold if the company needs the money to pursue other opportunities. “We will be ready to use it if we need it,” Agon says.
Acquisitions have been an important part of L’Oréal’s growth story. Of the company’s 25 international brands, only the L’Oréal brand was developed in-house. The company’s acquisition strategy is simple, if not always easy to achieve. “The L’Oréal way is to acquire small businesses that can become very big,” Agon says.
Agon points to Maybelline as an example. It was a Memphis, Tenn.–based, predominantly U.S. brand with $300 million in annual sales when L’Oréal bought it in 1996. Under the L’Oréal umbrella, it has become the No. 1 cosmetics brand worldwide, with estimated sales of about €2 billion.
Agon sees strong potential for other L’Oréal brands, including Redken, in hair care; Kiehl’s, in skin care; and the makeup line Urban Decay. Brands like these could help push the company into new markets and realize Agon’s ambitious goals. L’Oréal sells six billion products a year, and had an estimated one billion customers in 2009. The CEO is aiming for two billion customers in the next 10 to 12 years.
THE FIRST BILLION were mostly in Europe and North America, with some customers in Latin America and China. The next billion, he says, will come primarily from Asia, Latin America, and Africa. Their needs will be different, and will force L’Oréal to adjust its R&D, marketing, and production. The company must adapt products from region to region to cater to different skin and hair types, climates, traditions, and beauty regimes.
“You can’t just invent a [beauty] product and sell the same product to everyone,” says Agon. “It is not like Coca-Cola. You cannot just globalize one product, one taste, one performance.”
Yet, while the breadth and scope of L’Oréal’s business have changed, Agon reckons that the company has changed little in the past half-century. “It is much bigger,” he says. “We are at a different stage of the adventure. But it is still the same adventure with the same goal, the same vision, and the same ambition.”