L’Oreal CEO - ‘E-commerce isn’t the cherry on the cake, it’s the new cake’

L’Oreal has said that it is confident that it will see much success in 2016, thanks to its continued digital investments. Having doubled its digital staff in less than 18 months, CEO Jean-Paul Agon believes that e-commerce as a channel can no longer just be seen as a peripheral revenue stream for the company. It is the new growth engine.

Despite some somewhat disappointing results for the quarter to June, where revenue dropped by 0.6 percent to €6.34bn, which was blamed on a lagging French market, there was room for optimism elsewhere.

During an analyst Q&A following the investor update, CEO Agon and chief financial officer Christian Mulliez made repeated mention of the company’s digital strategy, where it is investing in staff, R&D and companies to help connect with a generation of cosmetic buyers that look to the online world for influence.

Agon said:

Across all brands in functions we continue also to drive our digital transformation at full-speed. Digital now amounts to 30% of our media. And E-commerce growing at plus-33%, it’s close to 6% of total group sales.

Our confidence for 2016 is also routed in our digital edge, with our strategically centralized, yet operationally de-centralized agile approach, we are moving forward fast. We now have more than 1,400 digital experts on board, driving our transformation with up-skill teams. More than ever, we can build empathy with consumers and do what we do best, invent the beauty products of tomorrow.

At the end of June, L’Oreal’s like-for-like sales grew 4.2%, which Agon attributed to progression in the gross margin (which he added was helped by investments in e-commerce) and the “acceleration of the digital transformation”.

Commitment

Not only has L’Oreal now hired over 1,4000 digital bods, it has also appointed Lubomira Rochet to the executive top table as Chief Digital Officer and it also recently announced a ‘strategic investment’ in Founders Factory, a global digital accelerator and incubator based in London.

L’Oreal is the latter’s exclusive partner for investments in beauty tech startups worldwide, and it hopes that it will allow the company to tap into a global eco-system of innovative companies and entrepreneurs interested in bringing digital and cosmetics closer together.

This strategy echoes what I said towards the end of last year about companies with existing assets and scale co-developing and co-investing in smaller, more innovative companies in a bid to stay agile and keep up with consumer interests.

As part of the agreement, L’Oreal will invest and scale five early stage startups and co-create two new companies every year. Not only this, but the in-house experts at Founders Factor will provide support and advice to L’Oreal to help build and launch new products and services.

At the time of the announcement, chief digital officer Rochet said:

This strategic investment will give L’Oréal direct access to a powerful global ecosystem of exciting startups and innovative technologies at their earliest stage allowing us to invest in and nurture innovative business models based on digital platforms to better serve consumers’ aspirations.

Leveraging the Founders Factory’s ecosystem and experienced entrepreneurs in residence, L’Oréal will provide significant contribution to the development of incubated companies in the beauty sector by bringing our knowledge of the beauty industry, the beauty consumer and our marketing and innovation expertise in all beauty categories.

A new channel for growth

During the investor conference call, L’Oreal CFO Mulliez how the company had increased spend on digital media from 25% in the first half of 2015 to 30% in the first half of 2016. Not only this, but selling, general and administrative expenses came out 10 basis points above the first half of 2015 levels, largely because of the acceleration of L’Oreal’s digital business.

In other words, the company is putting its money where its mouth is in this area.

However, it was the CEO’s comments on e-commerce that gave investors an indication of how seriously L’Oreal takes it as a future channel for growth. He said:

Across the board, e-commerce continues to develop very significantly. E-commerce is really now a very important part of the business. As I keep explaining to our teams, e-commerce is not the cherry on the cake. It becomes the new cake. And for example…I think that e-commerce in this first-half was more than one-third of the growth of the market. So definitely, the market is growing also thanks to the transformation of it into more and more e-commerce.

So at the same time you cannot say that e-commerce is totally additional to normal market, because at the end the market is still growing between 3.5% and 4%. And it makes sense. If you want to wash your hair, you’re not going to wash twice more your hair if you buy one shampoo in a store and one shampoo in e-commerce. So it’s more transformation of the purchase. It may stimulate a little bit the consumption of make-up for example. But all in all, we have to see it as a new channel in which we want to take the lion’s share. And that’s what we are trying to do.

And have you seen - as you have seen the e-commerce at the end of June is - has grown 33%, when the market was growing only 20%. And it’s now almost 6% of our sales globally, which is very important.

And not only this, but it is helping L’Oreal drive down costs. He added:

I also give the example of luxury. If you compare, for example, everything we have to do to sell for brand in the traditional channel, for example with counters, with BAs, with samples, with purity materials, with all that. When you sell it on e-commerce, definitely the cost is much lower. So all in all, if we do it well it should be margin enhancing.

My take

Aside from the challenges facing L’Oreal in its home market of France, which negatively impacted the results, this is a good example of a company that has operated in a traditional market for a long time, but is doing what it can to keep up with the threat of digital.