Financial analysis on beauty and personal care industry

The dissertation studies 4 big players in the beauty and personal care industry which includes: L’Oreal, Estee Lauder, LVMH, and Unilever.. Some biggest highlights that will be analyzed

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Dissertation submitted in partial fulfillment of the Requirement for the MSc in Finance

FINANCE DISSERTATION ON FINANCIAL ANALYSIS ON BEAUTY AND PERSONAL CARE INDUSTRY

BAO-CHAU NGUYEN

ID No: 19046145 Intake 3

Supervisor: Prof Dr PHAM DUC CUONG

September 2020

ACKNOWLEDGEMENT

On completing this dissertation paper on the beauty and personal care industry, I’d

like to extend my appreciation to Dr Pham Duc Cuong, who has been supervising me and giving me guidance on my research

Dr Pham Duc Cuong has helped me tremendously in delivering a comprehensive layout for my dissertation Without his help, the process of completing this dissertation wouldn’t be as educative as it has been

Moreover, though he has been guiding me, Dr Pham Duc Cuong still allowed me to have the freedom to develop my original research idea and interest This freedom has kept me interested and motivated during the entire research process, which is undeniably important

Besides my direct supervisor, I’m also thankful for my supporting family and friends,

especially my peers who are also enrolled in MSc Finance 2019-2020 Without their support, the time spent at Banking Academy Vietnam and the courses taken would have not been as meaningful At the end of the day, it’s the journey that counts

TABLE OF CONTENT

ACKNOWLEDGEMENT……… 2

TABLE OF CONTENT………3

EXECUTIVE SUMMARY……… 6

CHAPTER 1 INTRODUCTION TO THE RESEARCH……… 7

1.1 Necessity of the research topic……….7

1.2 Literature review……… 8

1.3 Objective of the study and research question………9

1.4 Scope and Area of the study………10

1.5 Research methodology………11

1.6 Structure of the thesis……… 11

CHAPTER 2 GENERAL ANALYSIS OF BEAUTY AND PERSONAL CARE INDUSTRY……… 12

2.1 Introduction to industry……… 13

2.2 PEST analysis……….13

2.3 PORTER 5 FORCES FRAMEWORK……… 22

CHAPTER 3 COMPANY ANALYSIS 3.1 L’Oreal………24

3.1.1 Introduction to Loreal………25

3.1.2 Growth trend and SWOT analysis………25

3.1.3 Financial health………29

3.1.3.1 Profitability……… 31

3.1.3.2 Efficiency……… 31

3.1.3.3 Investment………32

3.1.3.4.Valuation……….32

3.2 Estee Lauder………32

3.2.1 Introduction to Estee Lauder………32

3.2.2 Growth trend and SWOT analysis………33

3.2.3 Financial health………34

3.2.3.1 Profitability……… 36

3.2.3.2 Efficiency……… 37

3.2.3.3 Investment……… 38

3.2.3.4 Valuation……… 38

3.3 LVMH………38

3.3.1 Introduction to LVMH………38

3.3.2 Growth trend and SWOT analysis………39

3.3.3 Financial health……….40

3.3.3.1 Profitability………40

3.3.3.2 Efficiency……… 41

3.3.3.3 Investment……… 42

3.3.3.4 Valuation……… 42

3.4 Unilever………43

3.4.1 Introduction to Unilever……… 43

3.4.2 Growth trend and SWOT analysis……… 44

3.4.3 Financial health………44

3.4.3.1 Profitability………45

3.4.3.2 Efficiency………46

3.4.3.3 Investment………47

3.4.3.4 Valuation……… 47

CHAPTER 4 DISCUSSIONS, RECOMMENDATIONS AND CONCLUSION……….48

APPENDIX 1……….50

APPENDIX 2……….54

APPENDIX 3……….58

APPENDIX 4……….60

REFERENCES……….63

EXECUTIVE SUMMARY

The dissertation provides insights into the promising beauty and personal care industry The first chapter explains the reason why the industry has been growing at a remarkable pace, which is nothing surprising but the fact that humans are a visual creature and social standards originate from people’s perception of beauty

The dissertation studies 4 big players in the beauty and personal care industry which includes: L’Oreal, Estee Lauder, LVMH, and Unilever These four companies have

been dominating global markets and creating consumer trends for the entire industry Despite their economy of scale, they still undergo competition with other small but innovative young companies and macro-economic factors that either directly or indirectly affect the sales of beauty and personal care products

Some biggest highlights that will be analyzed deeper in the dissertation includes: Asia-Pacific is the most potential geographic market for this industry, how some major global events such as trade war or COVID 19 affect consumers’ purchasing

behaviors, and how well the beauty and personal care industry responses to such changes

The purpose of the dissertation is to provide convincing analysis on the beauty and personal care industry, thus to provide investment recommendations on the industry

as a whole

CHAPTER 1 INTRODUCTION TO THE RESEARCH

1.1 Necessity of the research topic

According to the article “A History of Cosmetics from Ancient Times,” civilization

has used cosmetics in the ancient time starting from 10,000 BCE when Egyptian men and women used oil and oils and ointments to clean and soften their skin In 4000 BCE, Egyptians used mesdemet and malachite to add definition to their faces; and in

3000 BCE, Chinese women started to stain their nails and apply fake eyebrows or paint their faces with white lead in order to look trendy according to the time’s standards Thus it’s safe to say humans are visual and social creatures: we pay close

attention to how we look and we gain social acceptance sometimes via our physical appearance As humans always have a strong demand for beauty and personal care products, the industry has been developing at a fast pace and constantly releasing new products to cater for consumers’ dynamic needs and wants

The beauty and personal care industry, being one of the most dynamic and innovative industry, has contributed significantly to world’s economy:

● According to the Personal Care and Products Council, the industry accounts

for nearly $237 billion of U.S GDP and supports 3.6 million domestic jobs that generate $144.3 billion in wages and incomes

● According to the Cosmetic Europe - The Personal Care Association, the

industry supports over 2 million jobs across Europe, which helps contribute to

the total exports of 21.5 billion of cosmetic products from Europe up until

2018

● For Asia-Pacific market, the beauty and personal care industry is expected to

garner $126.8 billion by 2020 thanks to the growth of the middle class in big market countries like China, Indonesia, and Vietnam The industry is shining

a spotlight on Korean beauty products thanks to their high functionality (Statista)

Thanks to the industry’s extensive range of products and dynamic functions, some of

the products have become a default for global consumers Therefore, it is essential to conduct research on the social and economic impacts that the industry has carried as well as the potential development that the industry is expected to reach Moreover, it’s also necessary to analyze how well the industry responds to changes in global

economies and politics

1.2 Literature review

Though it’s hard to believe, humans started to have the idea of using external help to

enhance their beauty as early as 10,000 BCE Cosmetics info provides a thorough timeline of how cosmetics were used during ancient times Egyptians were amongst the very first to apply scented oil to their skin and hair Following were Chinese and Japanese people who applied rice powder to whiten their complexion during 1500 BCE The Early Common Era recorded the use of Henna by Indian people to draw tattoos on their hands and feet The Middle Ages marked the first use of perfumes in Europe and the Renaissance featured a very popular period of cosmetics use in

Europe - especially in France and Italy (A History of Cosmetics from Ancient Times, Cosmetics Info)

Many researches have then been conducted to study the potential of the beauty and cosmetics industry Global Insight published “A Study of the European Cosmetics Industry” in 2007 which analyzes the market size and market potential of 4 major

areas: Europe, the United States, Japan, and China The study claims that Europe and China were amongst the most dynamic markets for beauty products - with skincare being the most potential product segment

Other studies are also conducted to study the financial aspects of major players within the industry Big global players such as L’Oreal or LVMH who have successfully

built themselves a big global customer base are especially often chosen for case studies For example, L’Oreal is often being studied for its global management and

brand marketing strategies Thus, such studies are great resources for the conduction

of this dissertation

1.3 Objective of the study and research question

This research is conducted in order to reach the following objectives:

● To provide insightful analysis on the beauty and personal care industry, its

challenges as well as opportunities

● To analyze macroeconomic factors influencing consumption of cosmetic

products in some key markets, including the U.S, Europe, and Asia Pacific

● To provide insights about cosmetics production and consumption in the U.S,

Europe, and Asia Pacific

● To analyze financial ratios (profitability ratio, gearing ratio, and investment ratios) of four selected companies, namely L’Oreal, Estee Lauder, LVMH,

and Unilever

● To make investment recommendations for the four selectec companies as well

as for the industry as a whole after considering financial ratios and analysis mentioned previously

1.4 Scope and Area of the study

This research will dig deeper into the promising beauty and personal care industry through analyzing the profile of four companies which include: L’Oréal, Estee

Lauder, Louis Vuitton Moet Hennessy, and Unilever The research will analyze how external and internal factors affect these companies’ performances, from there draw investment recommendations on them

The reason why the four companies mentioned above are chosen for the purpose of this research is their similarities L’Oréal and LVMH are France-based companies

while Estee Lauder is established in the U.S and Unilever is a British-Dutch transnational company; and all these four companies have successfully gone global with big portfolios of product ranges Operation of L’Oréal and LVMH will be under France’s regulations and Unilever is still a Europe-based company so all these three

companies will share certain favors as well as difficulties that politics and macroeconomy bring to them Also, their primary customer base will have similar

characteristics, which means they are challenged to make their products stand out though their product lines do vary While L’Oréal caters for all segments of

customers, Unilever provides more household-friendly products On the other hand, Estee Lauder and LVMH focus on customers who have more disposable income to spare

1.5 Research methodology

As the dissertation seeks to explore whether it’s worth investing in the beauty and

personal care industry, the dissertation employs qualitative research methods Qualitative research methods allow the necessary flexibility to collect and analyze information about the industry

Data collected includes general information and financial ratios of four companies mentioned previously Thus, the dissertation makes suitable comparisons between each company and the industry average as comparisons with the company’s own performance in the past

Analysis is made to answer the question how fast the industry has been growing and how well it answered to global political and economic events

1.6 Structure of the thesis

The dissertation comprises 4 chapters Chapter 1 is to give an introduction about the dissertation itself Chapter 2 is to give insights about the beauty and personal care industry in general which includes the analysis of how micro-economic factors affect the industry and the analysis of Porter 5 Forces Chapter 3 engages in analyzing 4 chosen companies: L’Oreal, Estee Lauder, LVMH, and Unilever These 4 companies

are studied in terms of company structure and financial ratios Last but not least, chapter 4 is to draw conclusions on whether investors should invest in the beauty and personal care industry in general

CHAPTER 2 GENERAL ANALYSIS OF COSMETIC AND PERSONAL CARE INDUSTRY

2.1 Introduction to industry

Over the past years, people’s conception regarding beauty has changed drastically:

from products for health and hygiene interventions to makeup products and plastic surgeries that aim to “perfectionate” one’s look according to modern society’s

standards (Frith, 2014) Recently trends are shifting towards the organic-ingredient and anti-aging products that claim to preserve and honor users’ natural beauty Along with a frequent change in consumers’ preference, the beauty and personal care

industry has also experienced positive annual growth rates for the past 15 years, according to Statista

One big reason behind this is the fact that the global economy had been witnessing a constant growth, at least up until the unexpected and unfortunate tragic hit of Coronavirus This means more disposable income had been generated, which encouraged people to spend more on beauty and personal care products Also, social media has become a default for both Millennials and many Baby Boomers, which has created various platforms for beauty manufacturers to reach out to a broader audience

Up until 2019, the beauty and personal care industry was valued at $532 billion (Forbes) with Asia Pacific as the market leader The industry has been seeing remarkable performances of some giant players such as L’Oréal, Estee Lauder, Louis

Vuitton Moet Hennessy, Procter and Gamble, and Unilever who have always occupied a great deal of market shares thanks to their significant portfolios of products and their advantage in lowering the cost of production However, their dominance does not mean they are the only players to watch out for The industry, even though very competitive, still allows room for startups and young companies who can bring their creativity and innovation to the table For example, Glossier is a

beauty brand that was originally started as a blog named Into the Gloss The company

made its debut in the United States in 2014 and quickly captured customers who are loyal readers of the blog Using Instagram as their main platform to do campaigns, they are now a $1 billion brand after their successful venture capital calls in 2019 (Kelly, 2019) Thus, no matter the size of the company, this industry is a battle of being an avant-garde in trend setting and catching consumers’ dynamic demands

2.2 PEST analysis for Cosmetic and personal care

Political factor

Recently, the cosmetics industry has undergone influences of the concept of ethical consumerism Briefly, ethical consumerism is defined as personal consumption where choices could be driven by particular ethical issues such as human rights, social justice, the environment or animal welfare (Williams, Taylor, and Howard, 2005) For the cosmetics industry, ethical consumerism concerns the cruelty of animal

testing, the uses of chemicals in manufacturing products, and the responsibility to stay environmentally sustainable

First, regarding the cruelty of animal testing, the U.S Personal Care Products Safety Act, introduced in the Senate in April 2015, claims to require cosmetics companies to register with the Food and Drug Administration (FDA) ingredients statement that minimalizes animal testing for cosmetic products Also, if the FDA discovers that a cosmetic has a reasonable potential to cause serious health consequences, the FDA can then suspend the manufacturing facility’s registration In Canada, the federal Bill S-214, called the Cruelty-Free Cosmetics Act, amends the FDA to ban cosmetics animal testing and the sale of cosmetics produced using animal testing (BCSPCA, 2020) For the EU market, the European Commission provides the regulatory framework that includes a testing ban (prohibition of testing finished cosmetics and cosmetic ingredients on animals) and a marketing ban (prohibition of marketing finished cosmetics and ingredients in the EU which were tested on animals) However, China does not seem to be on board with these “beauty without bunnies''

policies yet According to People for the Ethical Treatment of Animals (PETA), China still requires all imported cosmetic products and special use cosmetics to be tested on animals, regardless of where they were produced This basically put beauty companies to choose between profits and principles because China has been a very potential market with huge purchasing power As a result, many beauty companies have not been able to apply a company-wide policy against animal testing as they still have to pay Chinese government to test their products on animals in order for them to

be sold For example, according to PETA, Estee Lauder still have the following brands that test on animals: Clinique, Bobbi Brown, La Mer, and Origins For L’Oréal, it’s Lancôme, Armani, and Maybelline New York For Unilever, it’s Pond’s, Vaseline, and TRESemme For LVMH, it’s Dior, Guerlain, Sephora Brand, etc Meanwhile, consumers’ concerns towards animals’ welfare has risen up: in a survey

featuring 15,000 women, 36% claimed that they only buy from cruelty-free beauty brands (Perfect365 inc, 2018); also, trends against animal testing among younger generations had increased from 31% in 2001 to 54% in 2013 (Min, Lee, and Zhao, 2018) Thus, as soon as China put an end to animal testing, the question of profits and principles for beauty companies will be solved

Besides the issue of cruelty-free, people are becoming more and more selective in terms of product ingredients.The demand for natural and organic cosmetic products is

on the rise due to the fact that the negative effects of synthetic materials on consumers’ health and the environment have become more and more apparent

(Amberg and Forgarassy, 2019) Regarding regulations on product ingredients, Canada and Europe are much stricter than the U.S According to Safe Cosmetics, the Canadian government constantly updates its Cosmetic Ingredients Hotlist that contains hundreds of chemicals prohibited from use in cosmetics such as formaldehyde, triclosan, selenium, nitrosamines, and 1,4-dioxane - all of which are allowed in the U.S While the EU bans 1,328 chemicals from cosmetics that can potentially cause cancer, genetic mutation, reproductive harm, or birth defects, the U.S FDA only bans 11 (Safe Cosmetics) Thus, beauty companies operating in the

U.S can take advantage of the country’s relaxed regulations and do whatever they

want with very little government oversight This explains well why the beauty industry in the U.S is more booming than it is in other regions of the world and why the U.S is a more potential market for companies to invest in

Economic factor

It is no doubt that China and the U.S have been two leading markets for the global industry of cosmetics and personal care products with rapid growth in terms of sales revenues Besides, in recent years when sales through E-commerce has been increasing consistently, China - with its 800 million Internet users - continues to be the world’s largest market for online shopping of beauty and personal care products

China also plays a key contributor in terms of manufacturing beauty and personal care products for international companies Thus, when the trade war between the States and China happened, the industry certainly underwent financial influences

It is undeniable that Donald Trump leads the United States with a strong focus on the country’s economy In 2018, he started to apply trade tariffs on a wide range of the country’s trading partners, starting with China as he believed China has had a long

history of doing unfair trading practices

The competition between China and the U.S started during the time China was attempting to gain access to WTO As China was experiencing a very high growth in economy and starting to produce more sophisticated industrial products, American companies directly faced competition with Chinese companies at an intense degree

(Lester and Zhu, 2020) Thus, soon after Trump took over the office, the Trump administration started an investigation into Chinese trading practices in August 2017 and has claimed to find out that China had been restricting U.S technology companies

in terms of venture requirements, licensing process, or entrance to markets Therefore, on August 1 2018, the U.S claimed to consider raising the tariff from 10%

to 25% on $200 billion of Chinese imports, which would be equal to a $30 billion of tax increase (Tax Foundation) The list of products, which is published online by Office of the United States Trade Representative, includes cosmetics goods as well as ingredients for manufacturing cosmetics products such as:

 Soaps and organic surface-active products used as soap

 Chemicals such as 2'-Aminoacetophenone & other specified aromatic aldehydes, -ketones andqui nones, other than those with more than one oxygen function; or acetic acid

amino-To fire back, Beijing then announced that they would apply up to 25% of tariffs on

$60 billion worth of U.S goods which include cosmetics, lipsticks, fragrances, nail polishes, and ingredients for cosmetics production such as cocoa butter and coconut oil (International Trade Administration)

China is not the only trading partner that Trump’s administration imposed increasing tariffs on With the Trump’s administration’s “America First” rhetoric, the U.S also

threatened to or raised import tariffs on selected goods of other trading partners, including EU and Canada (Demertzis and Fredriksson, 2018) According to the

Independent Cosmetics Manufacturers And Distributors, EU cosmetics products that received higher tariffs (up to 25%) include eye make-up preparations, manicure or pedicure preparations, make-up or skin powders, olive oil, essential oil (which is then taken out of the list), brushes for the application of cosmetics, etc The same goes for Canada: effective from July 1st, tariffs increased by 10% on selected goods that include the following manicure or pedicure preparations, hair lacquers, products for shaving, perfumes and perfume-related products, and face-wash products (Independent Cosmetics Manufacturers And Distributors)

Obviously, the industry as a whole was not in favor of this trade war because it is such an international industry, and beauty manufacturers and brands would flourish in

an open marketplace that doesn’t narrow down their opportunities to go global With big, luxury portfolios like L’Oréal, Estee Lauder, and LVMH, their sales in Asia

Pacific, especially in China, have been flying Thus, increased tariffs would tend to limit the availability of products, drive prices to go up, and reduce economic output

Social factor

In recent years, it is undeniable that consumers have become more conscious about their appearance and well-being This can be explained by the attractiveness halo effect which basically says that “attractive” individuals are often assumed to carry positive traits (Eagly, Ashmore, Makhijani, & Longo, 1991; Langlois et al., 2000; Dion, 2002), thus human’s decisions are often biased towards whichever side that is considered to be more physically attractive For example, in terms of academic

performances, there is a suggested positive correlation between teachers’ rating of attractiveness and expectations for students’ success: more “attractive” students are

rated more social, academically stronger, and more likely to become leaders compared to less “attractive” students (Talamas, Mavor, and Perrett, 2016) Also,

beauty is a socially constructed idea that is always shifting from one trend to another, and people indeed do believe physical attractiveness gives them society’s acceptance These two reasons are enough to grant the beauty and personal care industry a real potential to bloom

With a closer look at the chart above, Millennials and Gen-Zers are dominating the world’s population demography These two generations, especially Millennials, have

the tendency to spend more but have less loyalty to the brands Also, with their dynamic perceptions of personality, lifestyle, social standards, and community values, they will favor brands that deliver more of an experience than just a product Thus, brands who win are those who can connect and interact with a great group of customers, those who represent customers values and personality traits, and those who do not just adhere to the out-of-date/old-fashioned beauty standard The fact that Millennials and Gen-Zers represent a great majority of consumers gives the beauty and personal care industry an opportunity to constantly innovate and come up with new product ideas For example, Fenty Beauty by Rihanna received a great support from global consumers as the brand provides foundations for all skin shades from dark to light and features models with different beauty traits for its campaign Meanwhile, some other “prestige” brands are called out for their lack of diversity,

such as Yves Saint Laurent and its “50 white shades of foundation,” claimed by

Internet consumers For the companies that will be studied in this research, they do have a great advantage in keeping up with young customers as they all have giant portfolios of product lines that can cater for various needs and wants

Technological factor

Another factor that drives the growth of the beauty and personal care industry is the increasing number of internet users According to Statista, as of April 2020, there are nearly 2.5 billion people using Facebook (32% of world population), 2.0 billion people using Youtube (26% of world population), 1.0 billion people using Instagram (13% of world population), and 800 million people using Tiktok even though Tiktok hasn’t been around for too long These are all very powerful platforms with a wide

range of content, and they play a key role in shaping consumption trends Also, as the world has been experiencing a rapid development of science and technology, personal computers, wide applications of network technology, logistics and payment instruments have become very popular and efficient in helping consumers get used to online shopping (Liu, Zhang, Qin, 2016) Taking advantage of the role social media plays in society, beauty companies have attempted to increase their brand-awareness through collaboration with beauty gurus and social influencers, which then helps to boost their E-commerce sales:

 L’Oréal experienced a 52.4% like-for-like growth in e-commerce sales in

2019

 E-commerce represents 30% Estee Lauder’s business in its top markets (Coresight Research, 2019)

 Unilever sold €3.12 billion worth of goods (representing 6% of total sales) through E-commerce channels in 2019 The company claimed this is a positive touch of digital transformation (i-com, 2020)

 LVMH also announced that the company has been experiencing “rapid growth” in online sales, though its financial report does not publish a specific

2.3 PORTER 5 FORCES FRAMEWORK

Rivalry among existing firms - High

The beauty and personal care industry is extremely competitive The entire industry has been growing and changing at a very fast pace thanks to an increase in people’s

disposable income as well as the development of technology and wide spread of social media For existing companies, this creates opportunities for them to grow and exercise their creativity, but on the other hand they will have to compete way harder

to win consumers’ loyalty Big players like L’Oreal, Estee Lauder, LVMH, and

Unilever have achieved a certain level of economy of scale, thus they can use this as

an advantage to stay profitable But as market leaders, they will have to spend a lot on R&D to be the avant-garde in the industry

Threat of substitute products - Moderate

The threat of substitute products means that competitors can provide similar products that satisfy the market’s demands, which means customers have really high

purchasing power They can switch from one product to an alternative if they are not satisfied with the product’s quality or price However, customers’ loyalty does come

with age While younger customers like to shop around more often, older customers tend to stick to particular products or retailers Once these customers choose to stay loyal, they are willing to pay for the brand premium Therefore, for big companies with giant product portfolios, they have to market their signature products and innovate to tackle niche markets at the same time

Threat of new entrants - Low

The competitiveness of this industry creates challenges for new entrants to enter First, since there are already many big, successful brand names in the industry, in order to set its own name a new entrant must be able to cover the high cost of establishment such as R&D cost, manufacturing cost, and marketing fees New entrants do not have the economy of scale and as much product visibility like big players do, and they can’t set their selling price too high either as there will always be

substitute products being sold at lower prices Also, big players have the tendency to acquire smaller brands to strengthen their position within the industry, which makes it even harder for a new entrant to successfully enter the industry Thus, either a new entrant can offer the market a product that outstands any other existing products or it can create a breakthrough, it can be very challenging to enter this industry and win market shares from already existing players

Bargaining power of suppliers - Low

For suppliers, having bargaining power means that they can easily change product prices through market manipulation (e.g limiting supply) However, as explained above, due to a large number of players, suppliers in the beauty and personal care industry have a low bargaining power Products with the same function are manufactured by both large and small scale companies, and customers can easily find

a substitute if companies decide to raise up their prices or decrease the value of the products

Bargaining power of buyers - High

Opposed to suppliers, consumers have a high bargaining power when it comes to beauty and personal care products The great availability of products and price range allow customers to not have to be loyal to one particular product Purchase preference

is more likely to be determined by price than quality during the pre-purchase evaluation (Voss and Parasuraman, 2003), thus companies must understand consumers’ price sensitivity in order to win market shares and customers’ loyalty

CHAPTER 3 COMPANY ANALYSIS

The chart below provides a thorough capture of the 4 company’s financial ratios in comparison with the industry averages

Leverage Ratio (TTM)

Total Debt to Equity (TTM)

15.43% 8.83% 16.07% 17.09% 12.79%

Net Profit 11.53% 8.5% 10.05% 12.32% 6.15%

Receivable Turnover (TTM)

Sales/Employee (TTM)

319.85K 321.96K 318.05K 311.40K 860,108

Net Income/Employ

10.32% 12.31% 6.43% 14.29% 7.85%

Return on Equity (TTM)

11.57% 29.23% 12.74% 41.6% 15.01%

3.1 L’Oreal

3.1.1 Introduction to Loreal

L’Oréal S.A is no doubt the biggest beauty manufacturer in the world since 1909 with

a headquarter in Clichy, Hauts-de-Seine and a registered office in Paris, France The company is currently being led by Jean-Paul Agon who acts as chairman and chief executive officer Up until 2019, L’Oréal has 88,000 employees and exists in 150

countries with 36 brands That totally scored a sales record of €29.87 billion, which has gone up 11% compared to a sales revenue of €26.9 billion in 2018 (L’Oréal,

2019)

As of 31 December 2019, L’Oréal shareholding structure suggests that the company

is dominantly owned by Mrs Francoise Bettencourt Meyers and her family (33.27%), Nestlé (23.27%), and international institutional investors (29.60%) (L’Oréal, 2019)

L’Oréal has four divisions of products that cater for customers with different needs and sources of income: Consumer Products, L’Oréal Luxe, Professional Products,

and Active Cosmetic

hair care, skin care, and make up products This division aims to cater for a mass market of customers, thus its sales record accounts for 42.7% of L’Oréal’s total

revenue

ranges: skin care, make up, and fragrance The division consists of total 17 brands and account for 36.9% of L’Oréal’s total sales revenue

supplies With 5 brands, the division accounts for 11.5% of the group’s total sales

· Active Cosmetic products are dedicated to skin care segment and are marketed at

healthcare outlets such as drugstores, pharmacies, and medi-spa The division has 5

brands and contributes 8.9% to the group’s total sales

Below are the consolidated sales of L’Oreal from 2009 to 2019 in million euros

(statista, 2020) The company has confirmed its strong position within the industry

with its constant growth in sales volume and the number of subsidiary brands

In 2019, the company achieved a total sales revenue of €29.87 billion which can be

divided into 4 product divisions and various geographic zones as below

Consumer products division contributes the most substantial sales share (42.7%) thanks to its dynamic product portfolio with a strong focus on makeup products This division mainly targets young consumers who are trend-creators and trend-followers Following up is L’Oreal Luxe with its contribution of 36.9% of total sales which has

helped the company deliver sharp performance and achieve its best year in a decade

In 2019, in terms of geographic zones, Asia Pacific contributed almost ⅓ of L’Oreal’s

consolidated sales and has always been the leading market with the most potential not only for L’Oreal but for other beauty manufacturers as well Realizing the

continuingly growing demand for beauty products of Asian consumers, L’Oreal seized the opportunity of acquiring Korea’s leading retailer called Stylenada - the

parent company of the successful and very trendy makeup brand 3CE In 2017 alone, Stylenada accumulated €127 million of sales and 3CE accounts for more than 70% of the company’s business (Song Seung-hyun and newswires, 2018) This strategic

expand its brand visibility to global market thanks to L’Oreal global market network and L’Oreal can strengthen its position within the Asia-Pacific industry thanks to Stylenada’s significant influences on countries it operates in like Korea, China, Japan,

Malaysia, Thailand, and HongKong

3.1.2 SWOT analysis

Strengths

● Leading position in global

market

● Giant product portfolio

● Great economy of scale in

● Increasing demand for

eco-friendly and organic products

Having liquidity ratios of roughly 1 helps put L’Oreal in a safe financial position

compared to other competitors in the same industry For the most recent quarter, with

a quick ratio of 0.9 which is lower than 1, the company can’t currently fully pay back

its current liabilities However, with a current ratio of 1.12, the company can still liquidate its assets if needed

Capital Structure

From comparing the debt/equity ratios of L’Oreal throughout the years, the amount of

long-term debts in 2019 was more than twice the amount in 2018 and 2019, meaning

L’Oreal has been quite aggressive in financing its growth with debt

Taking a closer look at L’Oreal’s balance sheet, by the end of 2019 the company had

roughly €10.8 billion in debts that due within 12 months and €3.5 billion in debts that

due after 12 months; meanwhile the amount of cash in hand and short-term

receivables were €3.39 and €4.59 respectively The difference of €5.39 billion

between its total liabilities and the combination of cash and short-term receivables

should not be a big alert due the company’s huge market capitalization and its

increasing EBIT over the years

3.1.3.1 Profitability

L’Oreal has certainly been outperforming its industry thanks to its smart strategy in

focusing on Asia and its giant product portfolio that keeps getting bigger and bigger

every year Sales volume keeps reaching a new record every year which explains

quite well its growth in terms of sales and popularity Moreover, having high margins

also means L’Oreal has been quite cost-effective in its manufacturing process

There’s no doubt the company’s biggest advantage is its economy of scale

3.1.3.2 Efficiency

Efficiency ratios tell how well a company uses its assets and liabilities in the current

period or in the short-term More specifically, these ratios measure how many times a

company takes to generate cash or income either from its customers or from its

inventory With these ratios, the higher the ratios the healthier the business

L’Oreal generates 0.65 cents for each dollar in its asset, turns over its inventory

roughly 2.5 times and collects its receivables 6.8 times in the same period However, these ratios of L’Oreal are lower than industry’s averages, meaning the company is

performing slightly less efficiently than its average industry With its high record of sales volume, L’Oreal can aim to improve its efficiency ratios by reducing the portion

of its expenses compared to its revenues

3.1.3.3 Investment

The comparison of investment ratios between L’Oreal and its industry indicates that

the company is holding a stable position in its industry Over the period of 5 years, the company’s investment rations are relatively higher than its industry averages,

especially with return on investment

3.1.3.4 Valuation

For L’Oreal, it’s a buy-and-hold stock situation due to the stable performance and

constant leading position the company has been holding Those who look for term income with constant dividend growth should certainly consider buying stocks from L’Oreal

long-3.2 Estee Lauder

3.2.1 Introduction to Estee Lauder

The company was founded in 1946 by Estee and Joseph Lauder Estee Lauder started with four skin care products that she sold in her first store in Manhattan, NYC Thus, the company’s headquarter is located at 767 Fifth Avenue, New York, New York

Until now, the company owns 25+ brands with their existence in more than 150

countries and employs 48,000 full-time employees as of 30 June 2019 (Estee Lauder, 2019)

As of August 16, 2019, the Lauder family members own 86% of the company’s

outstanding voting power of the Common Stock which include Class A Common Stock (with one vote per share) and Class B Common Stock (with ten votes per share) (Estee Lauder, 2019)

Estee Lauder’s brands are on the high-end side with premium quality Besides some

of the brands that target women such as Estee Lauder, Clinique, or Bobbi Brown; the company has brands that are solely dedicated to men’s demands such as Aramis – specializing on men’s fragrances and Lab Series – uniquely created to provide solutions for improvement of men’s skin

Unlike L’Oréal, Estee Lauder divides its product ranges based on their main function,

which includes skin care, make up, fragrance, hair care, and other

As the primary segments of the company are skin care and makeup products, these two segments dominate the company’s sales record Over the past three years, it is

easily seen that trends are shifting from makeup towards the skin care segment By 30 June 2019, Estee Lauder recorded a $14.8 billion in net sales with 44% contributed

by skin care products and 39% contributed by makeup products

3.2.2 SWOT analysis

Strengths

● Great reputation for high quality

products

● Strong distribution network

● Young fan base in promising

● Growth in economy which

drives spending of disposable

income

Threats

● Global catastrophe such as COVID which discourages spending on luxury products

3.2.3 Financial health

Liquidity

Table 3

Estee Lauder Current Ratio Historical Data