Quoted from Fortune
In 1909, the French chemist Eugène Schueller refurbished a small apartment, converting the dining room into a showroom and the kitchen into a lab. The tiny French hair dyeing company he created with the equivalent of 120 euros became L’Oréal 30 years later. Now passing its first century as a cosmetics and beauty products company, L’Oréal stands as one of the most successful companies in Europe over the past 100 years. The world’s largest cosmetics company, L’Oréal comprises 26 international cosmetic brands, which have penetrated into the markets in over 130 countries and reached a global market share of 15.8%.
Jean-Paul Agon, CEO of L’Oréal, knows that L’Oréal has maintained a passion for beauty for more than century. The company has invested heavily in scientific research, a company tradition closely related to the company’s founding by a chemist who led L’Oréal for nearly 50 years. Currently, L’Oréal employs over 3,200 research staff in 30 fields and budgets more than 3% of its operating income for R&D each year—a percentage much higher than the industry average of 1.5% to 2%. In the fiscal year 2008, L’Oréal R&D investment accounted for 581 million euros and resulted in 628 registered patents, placing the cosmetics manufacturer among the top French companies in terms of annually registered patents. The company currently has over 30,000 valid patents.
Another secret for L’Oréal’s success is the importance the company places on talent cultivation. For young people with great potential, L’Oréal generously offers opportunities to put their abilities to full use. The career development of Mr. Agon, the fifth CEO in the century-long history of L’Oréal serves as an example for this dedication to talent cultivation. In 1981, only two years after he joined L’Oréal, Mr. Agon was appointed as General Manager of the company’s Greek Branch. “I was just 24 years old and I was only a Product Manager for the LaScad brand at that time. And suddenly one day, I found myself assigned as a division leader! I felt so honored because I was valued. So I assumed the position happily”, recalls Mr. Agon, who soon learned that the division was rather small, with ups and downs in its performance. In fact, several of Mr. Agon’s colleagues had turned down the position before it was offered to him. However, Mr. Agon did not retreat and instead rolled up his sleeves and dedicated himself to working with the local Greek team.
At the same time, the company also gave him the freedom to try out various innovations, including introducing all-new business policies. In the end, Mr. Agon and his Greek team successfully brought the Greek Branch back on track. “Today, whenever I recall this period of my career, I also hope that I can offer such opportunities to the young employees,” says Mr. Agon. Although there currently is a lower possibility of L’Oréal appointing a 24-year old branch manager, the company provides many opportunities for young employees to challenge themselves. A result of this focus on youth cultivation is shown at L’Oréal China, where the average age of employees is only 31, and there are employees who assume product manager positions as young as 25.
Sir Lindsay Owen-Jones, Mr. Agon’s rather legendary predecessor, led L’Oréal in a near miracle of more than 10% annual growth over his twenty years as CEO; also, Sir Owen-Jones was honored as the most outstanding CEO in Europe during the 20th century. As the successor of such a successful CEO, Mr. Agon undoubtedly faces many great pressures. “Sir Lindsay Owen-Jones is the person whom I admire most in my life, and I was lucky to work with him for some 20 years. During this period, I learned a lot. I felt greatly honored when he picked me as his successor to shoulder greater responsibilities and meet greater challenges. Sure, I did feel pressure,” says Mr. Agon frankly. Although there have been challenges, Mr. Agon performed his first years as CEO with extraordinary confidence. Soon after his inauguration in 2006, Mr. Agon proposed an ambitious target for an annual sales increase of 6%-8%. Although hit with the most severe global crisis “in a hundred years” in 2008, Mr. Agon was still full of confidence as the company acquired Yves Saint Laurent, the renowned French designer brand, in 2008.
According to the financial report released by L’Oréal on February 16, the company’s sales increased by 6.6% on a constant exchange rate basis, that is, during the one year when the financial crisis struck, Mr. Agon still accomplished his main sales target. The earnings per share of the company in 2008 fiscal year stood at EUR 3.49, an increase of 3.8% over the previous year. The company decided on a dividend distribution of EUR 1.44 per share, a dividend distribution rate of 41.26%. After the financial crisis, L’Oréal maintained such a high dividend rate while many other companies slashed their dividend distribution; this move showed that Mr. Agon was highly confident about the future development of the company. That said, Mr. Agon was by no means blindly optimistic. In his career, he had been through several crises already: three months after becoming the President of L’Oréal Asia, the financial crisis swept across Asia; and a short two weeks after taking office as the President of L’Oréal USA, the 9-11 terrorist attack cut deeply into the American market. Therefore, Mr. Agon has deep experience with tackling crisis situations. Mr. Agon says, "Crisis is not something unfamiliar to me, and I consequently learned that we must remain determined in the crisis, without hesitancy, to direct our efforts properly and to be united as a team. Thus, I firmly believe that any kind of crisis can be dealt with. When the crisis is over, a team like L’Oréal will be stronger. We may need to apply an emergency brake for a crisis, but we will not stop the vehicle."
Table 1. Number of Registered Patents and R&D Investment of L’Oréal
The good news for Mr. Agon was that customers’ pursuit of beauty was not declining during the crisis. Last year, L’Oréal conducted a survey of many women in England. When asked if they would reduce expenditures on cosmetics, the majority said that they would prefer to use more cosmetics to make their appearance more attractive so that they would feel more confident under the current circumstances. At the same time, L’Oréal also invested more on its research and development, targeting the creation of new formulas. On top of these measures, the company enhanced its public communication to speed up its internationalization strategy. In 2008, L’Oréal set up its “Pacific Zone around Asia and frica” to make breakthroughs in the large markets that had seldom been targeted in the past, such as the Gulf countries, the Middle East, Africa, and Pakistan. “These emerging markets are the last forefront areas for the globalization of our products and brands and they will make contributions to the development of L’Oréal in the coming 10 years,” says Mr. Agon.
Figure 1 L’Oréal Global Sales in 2008: per segment
Mr. Agon also inherited from Sir Lindsay Owen-Jones the management strategy of visiting sales outlets no matter how busy he is. In June he traveled to China and his first stop was Beijing where, in addition to visiting new landmark architectural sites like the “Bird’s Nest” National Stadium, he personally visited various sales outlets like Carrefour, Walmart and other general merchandise stores (GMS) as well as local department stores and cosmetic shops. The weeklong agenda for Mr. Agon’s stay in China was tightly scheduled. Apart from paying visits to Chinese government officers and investigating the market, he spent most of his time in meetings with local teams, which usually started at 8:15AM and, with only a 15-minute rush lunch, lasted until 7:30PM, followed by dinners with the teams. “These meetings were held with different brand teams. At L’Oréal, all work achievements arise from the collective wisdom of the employees and these brainstorming processes. Therefore, it is our very important working method to work with the teams for detailed exchanges of ideas and for giving them direction,” says Mr. Agon. Mr. Agon’s agenda also included time for media interviews. On June 26, the last day of this year’s trip to China, this L’Oréal CEO who loves China and Chinese folk music granted a special interview with Fortune China at the L’Oréal Shanghai office.
Fortune China: What is the purpose of your visit to China this time?
Mr. Agon: It’s been 12 years since I first came to China. At that time, we were setting up a subsidiary in China. Ever since then, I came to China for one week every year to learn about the development status of the country, the life of the Chinese people, and the current state of the Chinese cities before spending four days to work with our Chinese L’Oréal teams to understand the specific work status of each team.
Figure 2. L’Oréal Global Sales Income
Q: As CEO, did you visit sales outlets each time you came to China?
A: Yes. I spent the whole day on Monday, June 22, in Beijing investigating and learning about various sales outlets, from department stores and GMSs like Carrefour and Walmart to cosmetics shops, conducting a careful survey on our brands and the market here. I was accompanied by Paolo Gasparrini, President of L’Oréal China, and my team. At the same time, I was also pleasantly surprised to see the rapid development and improvements made in the city of Beijing.
Figure 3 L’Oréal Global Market Share: Cosmetics
Q: For every L’Oréal annual financial report, you would compare the growth of the company with the growth of the cosmetics market, why?
A: It is very nice for an enterprise to gain market share. L’Oréal also expects to have strong performance in any market. If the normal market growth rate is around 10%, we would expect an increase of about 15% for our company. If the market increase is null, we would have lower expectations there because any growth would be in accordance with the market conditions. However, this is not something absolute; if there is no increase in the overall market, it would be favorable for us to gain 5%. The market share of L’Oréal Group increased from 15.2% in 2007 to 15.8% in 2008 and that was satisfactory for us.
Q: Sir Lindsay Owen-Jones, your predecessor, was a very successful CEO as he led L’Oréal in the miracle of more than 10% annual growth for nearly 20 years during his time as CEO. Did you feel that extra pressure when you took office as CEO in 2006?
A: First of all, I want to tell you that Sir Lindsay Owen-Jones is the person whom I admire most in my life, and I was lucky to work with him for some 20 years. During this period, I learned a lot and admired him ever so much. I felt greatly honored when he picked me as his successor to shoulder greater responsibilities and meet greater challenges. Sure, I did feel pressure. But in L’Oréal it is never just one person who is loaded with everything because L’Oréal has a very strong team. For example, in China, we have Paolo Gasparrini, the highly competent CEO of L’Oréal China, and we have the same story in the United States. In each division, we have very capable and responsible people. We are working together like one team.
Figure 4. L’Oréal Dividend per Share
Q: During the financial crisis, many companies reduced their dividend distribution, yet L’Oréal maintained a high percentage for dividend distribution. Why?
A: I took office as CEO in 2006. In 2006 and 2007, we had excellent performance. In 2008, our performance still increased by 3.8% despite the financial crisis. So unlike other companies that encountered declines or zero increases, we allocated dividends to shareholders as usual.
Q: Does this mean that you are comparatively optimistic about the future? Many companies are worried about the future and therefore retain more cash.
A: Right. You judged it correctly. L’Oréal is highly confident about the future and we are not worried about what is going to happen. On the contrary, we will have a brighter future after the crisis. Even under the current situation, we are operating fairly well in many countries. China is a good example. A few days ago, I was honored to meet Mr. Han Zheng, Mayor of Shanghai, who congratulated the great development of L’Oréal Group in Shanghai and China as a whole. Such development is favorable for the company, the country and the city where the company is located.
Q: In the history of L’Oréal, you have acquired many brands and many of them are well operated. How were the evaluations done before acquisition and how were these projects integrated after acquisition? You acquired Yves Saint Laurent last year. Can you take this as an example to give some explanations?
A: Yves Saint Laurent can serve as a good example. In terms of our brand acquisitions, we already have the Italian designer brand Giorgio Armani and the American designer brand Ralph Lauren. However, a large French designer brand was still missing. Therefore, we were highly interested in Yves Saint Laurent before the acquisition because of its position as a renowned global brand, from which we believe new portfolio can be successfully derived in the cosmetics field. We have sufficient resources in global R&D, marketing and sales networks which can be well adapted to the development of Yves Saint Laurent.
Q: Can you give an example where acquisition was not so successful?
A: We should recognize that in the historical processes of acquisition, there must be some brands which could be better operated than others. Just like the five fingers we have on our hands can’t all be the same length. On the whole, our acquisitions are very successful. In other words, after acquisition, some brands developed a bit faster while some were a slower. But this doesn’t indicate whether the acquisition is successful or not as there are many factors to consider. In our Group, except for L’Oréal Paris, all the other brands were acquired over time, and they are all very successful to build such a large L’Oréal family.
Q: How will you deal with those comparatively sluggish brands?
A: We need to understand that L’Oréal is a company with long-term goals and visions. All of our businesses are operated on a long-term basis. To do something, it is not necessary to have the results next month. This management strategy has a lot in common with Chinese history and Chinese practices. For anything to grow, we need to take the whole picture as well as the long-term development into consideration. Some brands are not performing so well at the present time. It doesn't matter. In the long run, these brands still demonstrate broad development capabilities. Actually, this is a very interesting question. We need to recognize that the progression of any brand does not rise in a straight upward line because brand development is affected by the market, investment, the team and other factors. Therefore, the progression must be a curved line. The growth may be slow after a surge and before another round of acceleration. These ups and downs are all very normal.
Q: Currently L’Oréal has 26 international brands, 14 of which have already been introduced into the Chinese market. Will the process of introducing your brands to the Chinese market be accelerated in the future?
A: To be more accurate, there are 18 international star brands among the international brands you mentioned, which account for 95% of our global sales; 14 of them have been already marketed in China, including our newly launched cosmetics branded with Giorgio Armani. In addition, we are going to launch our Kiehl's brand in the Chinese interior.
Q: Currently L’Oréal is developing rapidly in the Chinese market. Even in 2008, you achieved more than 10% growth. What is your expectation towards the future development of the Chinese market?
A: I'm rather happy with the development of the Chinese market. I would especially like to thank Mr. Paolo Gasparrini, President of L’Oréal China and his China team for their contribution. I can tell you that we will maintain the level of more than 10% growth in China and we have great expectations for China. I firmly believe that China will be the largest market for L’Oréal Group in the world. I also firmly believe that L’Oréal China will be the largest brand company of the Group. I also firmly believe that L’Oréal will be the largest cosmetics company in the Chinese market.
Paolo Gasparrini adds: Ten years ago, when Mr. Agon was still the President of L’Oréal Asia, he occasionally said that he believed that China would the world’s largest market and L’Oréal China would be the largest market of the L’Oréal Group. When I heard this casual talk, I thought it was so ambitious, and I just kept silent. Today, I have to admit that Mr. Agon’s vision 10 years ago was very strategic; it was really forward-looking.
Q: How well is China ranked in L’Oréal? When do you think China will be your largest market?
A: Currently, L’Oréal China ranks 7th and is expected to be the 4th largest market of the Group by the end of the year. I think that China will be the number 1 market in the next 10 years. Currently, the development of L’Oréal in China has already exceeded our traditional European markets like UK and Spain and has almost reached the level of Italy and Germany. The next one to surpass is France, the origin of L’Oréal. Our market position is strong and the final market for us to overtake will be the USA.
Q: You’ve been the CEO for three years. What are the key decisions you’ve made during this time?
A: First of all, during the past three years, we accelerated our innovation, our investment in R&D and our process of internationalization, including setting up new subsidiaries and speeding up our discovery and cultivation of new talents. I’m not the only one in the company; it is a well organized team and we hope that more and more talents will join us for the better development of the company.
Secondly, as a responsible corporate citizen, we have made many efforts towards fulfilling our social responsibilities. We encourage a diversified image of beauty and make great efforts towards supporting ethnic groups and towards helping more vulnerable members of society. For example, in June, we celebrated L’Oréal’s centennial anniversary by launching the roll-out of 100 Citizen Projects Program to channel our contributions towards make the world better. For the roll-out of 100 Citizen Projects Program, the 100 subsidiaries of our Group each select a plan which best matches the needs of the local circumstances in the support and assistance to vulnerable groups, the young, poor children, and sick and disabled people. The local plan allows each subsidiary to have maximum effect among different cultures and societies so that we can be truly effective and illustrate our image as a corporate citizen. L’Oréal also had similar programs in China, where the “University Graduates Venture Fund” was launched to support university graduates in creating their own businesses to ease employment pressures and help the government resolve employment issues.
Q: You were appointed as the GM of Greek Branch at the age of 24. At L’Oréal today, do young people still have the kind of opportunities you had?
A: The scenario was different at that time. The Greek Branch was a very small subsidiary with just a few employees. However, even today, the management philosophy of L’Oréal is to endow the young talented employees with many responsibilities to allow them to deploy their capabilities; at L’Oréal, entrepreneurship is encouraged. Each young manger is cultivated towards becoming the GM of a brand, division or country. One example in China is that you can see that almost all the brand managers at L’Oréal China are Chinese. Some brand managers get big challenges because the operational turnovers of some brands can be very large. We have a very young team in China, with an average employee age of about 31 years old.
Q: You have just celebrated the 100th anniversary of the Group. Can you sum up your successful experiences during the 100 years?
A: We think that L’Oréal owes its success to our strong values and beliefs. L’Oréal has retained a passion for beauty during these 100 years. We firmly believe in and devote ourselves to R&D as we think that only by producing the appropriate products needed by the consumers through high-tech means can we move this world forward. Our pursuit of product quality and improved technology is ongoing. We also firmly believe that a company is made by its people and teams. These basic values provide the fundamental guarantees for the past, current and future success of L’Oréal.
Q: What is the focus of your key concerns currently?
A: In cosmetics sector, there’s actually no secret. If there is any, that would be spending the time to the most important considerations. I will focus on three points: 1) R&D. We spend a lot of time focusing on our R&D to make our company more innovative and more pioneering; 2) Marketing. I do spend a lot of time looking into the development of our products and how safety and efficiency can be better achieved; and 3) Market and country reviews. It is always something pleasant and beneficial to visit different countries, just like my visit to China this time. Generally, I visit 15 important markets in different countries each year.
Q: There is a management concept of “taking the ending as the starting”, that is, the targets to be achieved at the end will serve as the basis for plans and decisions at the starting point. As the CEO, what contributions do you expect to make to L’Oréal before your retirement?
A: L’Oréal enjoys a consistent development history. I’m one executive in this 100-year history, and my task is to push forward the ventures of my predecessor to continuously expand our global businesses, encourage and cultivate our work teams to adhere to our pursuit in this business of beauty. Our goals are to acquire more market share and continuously launch high quality products that meet the demands of consumers.