All Articles
Weekly

House of Beauty

“Hair dyes are a niche market with a very limited future. You are going to fail”

– The boss of Eugène Schueller (founder of L’Oréal) on his plans to build his own company

The beauty market.

This is one of my favorite sectors to invest in.

It has a huge total addressable market because almost everyone in the world can be your customer. It satisfies a need that exists every day, and it involves consumer goods that need to be replenished on a regular basis. People love to try new offerings, and demand is very inelastic – meaning consumers tend to buy your products regardless of economic conditions.

The $360 billion market is growing at 6% annually and is divided into the mass and high-margin premium segments.

Enter the world’s largest cosmetics company.

The House of Beauty.

L’Oréal.

Chart 1: L’Oréal’s product portfolio

Source: L’Oréal

Beauty Market Leader

L’Oréal, whose roots and humble beginnings in hair dyes go back more than 100 years, has become the world’s largest beauty group.

It holds the highest market share in all beauty categories and owns 11 mega-brands, both in the premium (including Lancôme and Yves Saint Laurent) and mass markets (such as L’Oréal, Garnier and Maybelline). They each generate annual sales of more than €1 billion.

L’Oréal leads the skincare and makeup categories with market shares of 21% and 14%, respectively, in 2022, well ahead of second-place Estée Lauder (10% and 6%, respectively).

Its expertise in all beauty categories also enables it to address different regional preferences. From elaborate, multi-step skin care regimens in Asia to higher-than-average fragrance and hair care needs in Latin America.

The French beauty giant’s undeniable market leadership is underscored by one incredible metric – its very high profitability.

Like its make-up, it seems to be weatherproof.

Chart 2: L’Oréal H1 2023 Income Statement

Source: Financial Results L’Oréal, App Economy Insights

High and Stable Margins

I regularly visit cosmetics stores with my better half. One of them is Sephora in Sihlcity, which belongs to the luxury supertanker LVMH or Louis Vuitton Moët Hennessey. The high prices for all kinds of products are mind-boggling to me.

A so-called eyeliner costs more than CHF 20, but it is just some sort of a…

… pencil?

During our visit, I tend to annoy my partner by not answering her questions because I am daydreaming about the profit margins these cosmetic companies should be making.

I would point to L’Oréal’s consistently high gross margins, which have averaged 73% (vs global equities of 40%) over the past five years. This is a strong indication that consumers are willing to pay a premium for the quality attributes associated with L’Oréal brands.

At arvy, high gross margins are music to our ears. They indicate that a company is a leader in the market and that the barriers to entry for competitors in its industry are high.

To illustrate my point, let me give an example with two companies in the consumer staples sector and the impact of input cost inflation.

Bottom line: Fundamentally, companies with high gross margins have greater leeway to manage inflation.

Chart 3: Example; Impact of input cost inflation on L’Oréal and Ahold Delhaize

Source: Koyfin, arvy

Human Desire and Strong Growth Markets

Driven by people’s deep-rooted desire to look and feel better with the help of beauty products, the global cosmetics market is conducive to L’Oréal’s brand value.

Through its balanced exposure across categories (mass and premium) and strong position in traditional and digital distribution channels, L’Oréal can capitalize on structural growth opportunities in the beauty market.

This is expected to be confirmed at today’s earnings announcement. An important factor to consider when investing in the luxury market is the following rule of thumb: 1/3 of sales come from Asia, mainly China, and 2/3 of company growth is driven by this region. A key factor is the rising disposable income of consumers in these emerging markets.

Asia is very important for this sector, and we need to keep a close eye on it.

Finally, L’Oréal is at the forefront of beauty innovation. Laboratory research in derma-based products and plant-based bioactive ingredients is in line with the necessary sustainable aspects of today’s life.

C’est vraiment beau, n’est-ce pas?

Chart 4: L’Oréal since 1995

Source: TradingView

arvy’s takeaway: L’Oréal, the undeniable leader in the beauty market, shows how premium quality and strong brand equity can command consistently high margins. Its global reach, balanced product offerings, and focus on innovation position it for enduring success. In a world where people’s desire to look and feel better knows no bounds, L’Oréal’s resilient profitability exemplifies the art of weathering any storm. It is like the eternal appeal of a classic red lipstick. PS: Liliane Bettencourt was the only daughter of Eugène Schueller.

Your Blog Post

Newsletter Disclosures

Subscribe to newsletter

The Weekly shows you the big picture, every Friday, in 5 minutes. Join us on our journey and let's unleash your potential as an investor together.