China Consumer

Loss of face

Acquisition-hungry L’Oreal looks to have stumbled with China deal

Magic-w

Can’t mask the poor results: one of Magic’s skincare products

“Because you’re worth it” is a slogan used in L’Oreal advertising campaigns since the 1970s. But the French giant may rue the phrase as far as its purchase of a Chinese facemask manufacturer is concerned.

The world’s largest beauty and cosmetics company purchased Guangzhou-based skincare firm Magic Holdings for HK$6.5 billion ($838 million) in 2013. Last summer, it wrote down the acquisition by $236 million and during its most recent results it revealed that Magic’s fading performance was one of the reasons why its Asia-Pacific sales recorded their worst quarter in a decade. Revenues in the region were up 1.3% year-on-year, compared to 6.3% growth in the US, 4.6% in Western Europe and 2.8% in Africa and the Middle East.

That prompted questions about China losing its status as L’Oreal’s second biggest revenue generator (about 10% of the total according to analysts). For the foreseeable future that looks unlikely (third placed France also had a difficult 2016), but the Chinese press believe L’Oreal’s problems with Magic are symptomatic of deeper woes.

For instance, Economy and Nation Weekly says the company has the wrong strategy in China and that it should stay focused on luxury brands, rather than chasing market share across the wider spectrum (Magic is more of a mass market brand). The newspaper also cites the French giant’s failure to establish the Garnier brand, which was pulled from China in 2014.

Sohu, a portal, takes a different line, highlighting the perennial challenge for foreign brands in adapting to the tastes of local consumers. Describing L’Oreal and Magic’s relationship as a ‘black fairy tale’, it concludes that “Cinderella and the prince are facing marital difficulties because of cultural differences”.

For a start, the original team that built the company including Magic’s founder quickly left the facial mask maker after the acquisition. There was also a period of time – because the company lacked clear leadership – that pricing was confusing and inconsistent. L’Oreal, too, had also slowed innovation at the company. “Over time, Magic failed to keep up with the needs of the consumers and the brand became increasingly irrelevant,” reckons National Business Daily.

But it certainly wasn’t for the lack of trying. More recently Magic has attempted to move more upmarket by updating its packaging and unveiling new products. It has also raised its price point to reflect the new image. However, all that effort has not yet paid off as the skincare brand has had to resort to offering steep discounts to attract users. On Tmall, the Alibaba consumer site, its products are often sold at 50% off, says Sohu.

Some industry insiders estimate that Magic made no more than Rmb200 million ($29 million) in sales in 2016, down from Rmb1.4 billion in 2012, before L’Oreal’s acquisition. Another research report points out that in 2016, Magic’s share in the facial mask market had plummeted to a mere 2.1%, lagging behind rival domestic brands like One Leaf, Mask Family and Yunifang.

Economy and Nation Weekly argues that L’Oreal has made other poor acquisitions, noting its decision to put The Body Shop up for sale.

At the time of its 2006 purchase, The Body Shop founder, Anita Roddick, countered concerns about the takeover by saying that “they are too intelligent to mess with our DNA”. But L’Oreal boss Jean-Paul Agon now says that one reason it has failed to build profits with The Body Shop was that it adhered to the British brand’s spirit for too long and “didn’t change enough”.

Agon has been CEO since 2006 (and with the firm since 1978) and he promises that Magic will rebuild market share during 2017. Acknowledging recent difficulties, he cited intense competition and problems associated with transforming from a longer supply chain (based around department store distribution) to a shorter one (e-commerce).

Bain’s most recent China Shopper Survey shows that local brands are peeling away market share from foreign competitors, particularly in the skincare segment, which is one of the biggest selling e-commerce categories alongside nappies and infant formula.

Agon says Magic has a new state-of-the-art facemask, launched during the first quarter, and he argues that L’Oreal is managing the transition to e-commerce effectively, with 30% of sales expected to be online in China this year, far ahead of the rest of the world.

L’Oreal operates a decentralised structure that gives regions the flexibility to develop their own R&D and branding. Of its 30 global brands, all but one have been acquired. Its business model has been built on taking niche brands and plugging them into its network to create global winners. And while Magic has yet to succeed, the acquisition of a boutique brand like Kiehls has been much more of winner.

As Agon told Fortune magazine last month: “Kiehl’s we bought in 2000. The business was $20 million [annually]. It was a store on 13th Street [in New York City] and a few counters at Saks. Then for 17 years we have built the business of Kiehl’s, and now it is a $1 billion business.”

Celebrating its 20th anniversary in China this year, L’Oreal will want its experience with Magic to resemble that of Kiehl’s rather than The Body Shop.


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