Behind L’Or?al’s Makeover In India: Going Upscale

Wednesday, August 1, 2007

In India, most beauty products sell for less than a dollar. L’Or?al SA is betting its future here on products costing three to 20 times as much.

MUMBAI — In India, most beauty products sell for less than a dollar. L’Or?al SA is betting its future here on products costing three to 20 times as much.

The French cosmetics giant has embarked on a strategy that sharply differs from that of its rivals. Having failed to turn a profit selling low-priced shampoo in India, it now hopes to capture the growing ranks of middle-class Indian women by luring them upscale.

In shops across the country, L’Or?al’s offerings include a $5.60 Garnier Nutrisse hair dye, a $17 L’Or?al Paris face powder and a $25 Vichy sunscreen.

Jaya Sethi says she’s willing to splurge. The office assistant in New Delhi recently bought two bottles of the Garnier hair dye. Ms. Sethi used to buy cheaper dyes made of henna plant extract, but says the foreign brand is “good quality” and “fun.”

Racing to expand in a competitive global marketplace, L’Or?al is tapping into a powerful demographic force: India’s emerging middle class, estimated at 200 million people, according to Tata Consultancy Services in Mumbai. Over the past decade, foreign brands, from Tommy Hilfiger jeans to Absolut vodka, have moved in to capture a slice of the market.

At the heart of the transformation in consumer spending is a cultural shift among Indian women. Decades of poverty instilled a strong sense of price-consciousness in women, which was passed on from mothers to daughters. But the generation that came of age during the market liberalization of the early 1990s is more willing to splurge on luxuries, from bottled water to lipstick and eating out, consumer analysts say.
[in a shop]1
Christina Passariello
At the Sarvodya Medical pharmacy in Mumbai, shopkeeper Prakash Jain stocks different hair-dyes made by L’Or?al in the shop’s most prominent position.

“For these people, consumption is a way of life,” says Neelesh Hundekari, principal at AT Kearney Inc., a management consulting firm in Mumbai.

Working women in India spend 23% more on cosmetics such as antiwrinkle cream and sunscreen than women who don’t work, according to a survey by Roopa Purushothaman, chief strategist for the Future Group, which owns India’s largest retailer, Pantaloon Retail (India) Ltd. Thanks to a recent rise in foreign-style salons and international shampoos and dyes, hair-care sales are expected to jump to $1.33 billion in 2011 from $957 million last year, according to Euromonitor.

A strong tradition of beauty already exists in India. Historically, women emphasized the two most valued parts of the body for beauty with kohl, made from soot, around the eyes and mehendi, or hand painting. But L’Or?al and other cosmetics companies such as Hindustan and Revlon are peddling more modern practices such as lip gloss and foundation.

L’Or?al’s strategy stands out as particularly aggressive compared with its competitors. Most Western cosmetics companies stock grocery stores in India with low-priced basic shampoo and cold creams that compete with an array of local brands. For example, market leader Hindustan Unilever Ltd., the Indian subsidiary of the Anglo-Dutch consumer-goods giant, sells 70-cent bottles of body lotion and 90-cent shampoo. Its target audience includes the more than 800 million people in India who live on less than $2 a day.

In contrast, one of L’Or?al’s biggest sellers in India is its Excellence Cr?me hair color — priced at $11 a bottle. Teeing off its success at the high end of the market, L’Or?al recently accelerated its rollout of mass-market products, too, including a $2.70 hair dye and small packets of shampoo costing less than $1. But many L’Or?al products are still relatively pricey by Indian standards.

“We don’t do poor products for poor people,” says Alain Evrard, managing director for L’Or?al’s Africa, Orient and Pacific zone.

L’Or?al’s sales are still a fraction of Hindustan Unilever’s, whose personal-products unit rung up $832 million in sales last year from items including deodorants and toothpaste that L’Or?al doesn’t sell. Hindustan Unilever declined to comment.

But L’Or?al is growing. In 2004, the company became profitable in India after 13 years of losing money. Sales, which have doubled every two years since 2002, jumped 40% last year to $108 million, and are expected to hit $159 million this year. The company’s target, which it says comprises the 60 million urban middle-class men and women who make more than $275 a month, is on the rise, and should increase to 73 million in two years, according to L’Or?al’s own data. Yesterday, L’Or?al said first-half group sales rose 9.4% to ?8.5 billion, or $11.71 billion, propelled in part by strong growth in emerging markets.

When it first entered India in 1991, L’Or?al’s strategy was markedly different than it is today. Following the lead of Hindustan Unilever, it launched with a product designed to appeal to the largest number of consumers possible: a shampoo called Garnier Ultra Doux.

Executives at L’Or?al say they thought that the combination of low price and natural ingredients would be a good match for the Indian market, where women use plants and herbs as part of their daily beauty routines. To drive the price down even further than in Europe, L’Or?al simplified the shampoo’s formula by eliminating some polymers, the molecular compounds that make hair stronger or shinier.

But Ultra Doux was a failure from the start. The shampoo offered no particular innovation compared with rival products from Hindustan and Cavin Kare, a local company. L’Or?al struggled to persuade owners of local shops to stock it.

It was an “absolute flop,” says Mr. Evrard, who assumed oversight for L’Or?al India several years later, in 1996. Before that, the company was part owned by a local distributor, MJ Group, in accordance with laws in place at the time which forbade foreign companies from owning a majority stake in their Indian operations.

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Source: Wall Street Journal (link opens in a new window)