L'OREAL B.V. NEDERLAND

Case Analysis: L'Oreal Nederland B.V.Garnier and L’Oreal Product Lines

Strategic Situation Analysis

In 1992, the L'Oreal Group was one of the largest cosmetics manufacturers in the world. Headquartered in Paris, it had subsidiaries in over 100 countries. L'Oreal believed that innovation was its critical success factor. It thus invested heavily in R&D to be able to compete in the global industry. L'Oreal tried to introduce its products worldwide to offset with the high R&D costs. However, international subsidiaries, as in the case Director of the Netherlands subsidiary, could make decisions by themselves whether to introduce those new products in their country. Any new products introduced, had to be financed by that country’s operations. With the limited resources in Netherlands operation, the products will have to be marketed with the same sales force. L'Oreal presently offers the following products in the Netherlands: Plenitude and Recital under the L'Oreal brand name and Ambre Solaire under the Garnier Institute brand name. L'Oreal Nederland director has been considering whether to introduce the Synergie skin care line and Belle Couleur hair colorants line into the Netherlands. Synergie and Belle Couleur are marketed under the Garnier Institute name in France. The critical issue is that Dutch consumers had little awareness of Garnier brand and thus no brand image. In order to succeed in the Dutch market, the products needed to offer the unique, differential competitive advantages. Without which, they will likely fail and will also be the cause of creating the negative image for the Garnier family name. Thus, it will destroy the future prospects of the Garnier lines introduction to Netherland’s market.

Problem Definition

Under the Garnier family brand name, L’Oreal has successfully launched both the Synergie skin care and Belle Couleur permanent hair coloring lines in France. While the Garnier brand name is familiar to the French, Dutch consumers have little or no awareness or knowledge of the Garnier brand and had not formed a brand image. The Garnier sunscreen was a new product and few Dutch women knew of the brand. It was, therefore, very important that any new Garnier products launched in the Netherlands have a strong concept and high market potential. To accomplish this the products needed to offer unique, desired, and identifiable differential advantages to Dutch consumers.

L’Oreal’s main problem in this case is deciding whether they should try to launch a product line in a market with little brand awareness. Although this is their main problem, other difficulties are likely to arise, such as overcoming brand loyalty and defining a positioning statement that appeals to the female Dutch consumer.

Introducing a new product line successfully into the Dutch market is vital for Garnier because it can determine the success of the brand as it expands into new markets. One of the goals of introducing a new product line, to a market with little brand awareness, is to create a positive association and/or experience with the Garnier family name. To create a positive brand image

L’Oreal Nederland B.V. |


and high brand awareness new products must have a strong concept, high market potential and great positioning with consumers.

Cosmetic consumers tend to be brand loyal in fear that they will have experience negative results when attempting to use a new or different brand. This is another obstacle Garnier must overcome in addition to launching a product line to a market with little brand awareness. Dutch consumers will continue to purchase products that they know, use and trust, because they have had positive outcomes after product usage. It is known that attachment to a certain product only becomes stronger with age, so it’s imperative that a new product line reach the young consumer who will only grow increasingly loyal as they grow older. Cosmetic consumers research products to become familiar with the items that they want to buy, therefore, both product packaging and advertising of the new product lines needs to be informative, to ensure the cosmetic consumer understand that the Garnier brand will fulfill their wants and needs.

THE EXTERNAL ENVIRONMENTScanning of the external environment is executed at two levels.

General/Macro Environment Industrial Environment

General / Macro Environment

Factor Sub-Factors Data/Facts

Demographic

Population Size

Total population of Netherlands is 15 million (EU population 350 million).

In the late 1980s, 40 percent of the Dutch population was under 25 years old.

The Dutch population was aging and the fastest-growing population segments were the 25-or-older groups in 1992.

Women population 5 million out of 15 million total population.

Age structure in Netherlands

The Dutch population was aging and the fastest-growing population segments were the 25-or-older groups in 1992.

Income and spending

In the European Union (EU), the Netherlands ranked fourth in per capita income.It ranked sixth in per capita spending on cosmetics and toiletries.Dutch per capita spending on personal care products was only 60 percent of the amount spent per capita in France or Germany.



Economic

Working Women

Disposable income

Increasing number of Dutch women was working outside the home. The labor force participation rate of women in the Netherlands was 29 percent and the number of women working outside the home was increasing faster in the Netherlands than it was in other EU countries.Women had more disposable income, and more of them were using it to buy cosmetics for use on a daily basis.

SocialDutch Women delaying childbirth

Dutch women were also delaying childbirth.Despite their rising incomes, Dutch women still shopped for value, especially in cosmetics and toiletries.

MarketMarket size and influences

Dutch market accounted for only 4 percent of total EU sales of cosmetics and toiletries.

Industry Environment

Factors Data/Facts

Threat of new Entrants

Any innovative products or new product variations in a line could be quickly copied. Retailers could develop and introduce their own private labels in four months; manufacturers could develop a competing product and advertising campaign in six months.

Threat of Substitute Product

No information about substitute products is given in the case.

Bargaining Power of Supplier

No such information in the case.The distribution channel does have some bargaining power.

Bargaining Power of Buyer

Dutch women have specific demands and expectations from cosmetics and shop for value. Their emphasis is on Natural ingredients in skin care products and on warm colors in hair colorants.

Rivalry among Competing Firms

There are numerous competitors. Oil of Olaz, Plenitude, Dr. vd Hoog and Rocher in the skin care market.

After careful examination of the data and facts collected from external environment, we develop Opportunity and the threats of the proposed project through EFE Matrix



External Factor Evaluation (EFE) Matrix

Key External Factor Weight RatingWeighted

Score

S.No Opportunity

1. 5 million Dutch women between the ages of 15 and 65

0.1 3 0.3

2. Rising labor force participation rate on women in the Netherlands

0.1 3 0.3

3. Dutch women having more disposable income and many of them using it to buy cosmetics for use on a daily basis

0.1 4 0.4

4. Skin care market was the second largest sector of the Dutch cosmetics and toiletries market

0.1 3 0.3

5. For the past five quarters unit volume had been growing at an annual rate of 12 percent and dollar sales at a rate of 16 percent.

0.15 3 0.45

Threat

1 Retailers can develop and introduce their own private labels in four months

0.15 3 0.45

2 Manufacturers can develop a competing product and advertising campaign in six months

0.1 3 0.3

3 Consumers loyal to their existing brands 0.1 2 0.164 Possible allergic reaction to a new product by the

company0.1 2 0.12

1.0 2.78

THE INTERNAL ENVIRONMENTThe internal environment is based on the Strengths and Weaknesses of the firm and the products that are under consideration to be launched.

Internal Factor Evaluation (IFE) Matrix

Key Internal Factor Weight RatingWeighted Score

S.No Strength

1. Strong brand name in the EU countries 0.10 3 0.302. Synergie skin care products were made with natural

ingredients0.11 3 0.33

3. Synergie skin care products had advertising slogan 0.10 3 0.30



“The alliance of science and nature to prolong the youth of your skin”

4. Complete line of products 0.07 3 0.21

5. Market research information suggests that participants reacted positively to Synergie concept brands containing the positioning statement and the terminology associated with the total product line scoring 4.94 on a seven-point scale.

0.06 3 0.18

6. 39% of the participants said they would certainly buy after they used it knowing the price.

0.04 3 0.12

Weakness7. Cannibalization of existing products (Plenitude and

Recital)0.18 4 0.72

8. Small Netherlands operations will have to spend a lot of money to promote Garnier brands and also to defend the existing brands

0.14 3 0.42

9. Results of test market not satisfactory specially for Belle Couleur – too dark color and didn’t cover gray and high price and less value of money for synergie

0.13 3 0.39

10. Lots of shelf space required for both the products 0.07 2 0.141.0 3.11

ROLE OF DISTRIBUTORS

Distributors’ acceptance of the two product lines was critical for L’Oreal’s successful launch of both Synergie and Belle Couleur. At one time, manufacturers had more control in the channel of distribution than did retailers. Retailers, however had been gaining power as a result of the increasing size of retailers, the development of chains with their central buying offices, and the proliferation of new brands with little differentiation from brands currently on the market. Retailers had also increasingly been offering their own private-label products, since they earned a higher percentage profit margin on their own brands.The retailers used to evaluate new products based on the following criteria, listed in order of importance (3 being the most important):

1 Evidence of consumer acceptance 2.52 Manufacturer advertising and promotion 2.23 Introductory monetary allowances 2.04 Rationale for product development 1.95 Merchandising recommendations 1.8



Positive here is that L’Oreal’s goal for developing new products was to introduce only products that had a differential advantage with evidence of consumer acceptance.

Break down of distribution channels for current L’Oreal products in Netherlands

1 Independent drug stores 35%2 Drug Chains 40%3 Food Stores (Supermarkets) 25%

L'Oreal has a positive image with Dutch retailers and they need to make sure that any new products they offer provide high quality and innovative, while showing consumer acceptance. We do not think that either of the potential lines offers what distributors expect from L'Oreal. Therefore if they decide to launch the new line-ups there may be some risk of losing current L'Oreal distribution as the Garnier lines will be shipped with L'Oreal in order to gain distribution quickly.

When discussing possible solutions, it is necessary to come to a recommendation that will create the most brand awareness and result in a positive association for the brand. The more familiar a consumer is with the brand, the more they will be willing and able to relate to a concept presented by that brand. Hopefully this will lead to reduced perceived consumer risk, trial of the product, and finally increasing brand and family loyalty

Launching Belle Couleur

Launching Belle Couleur aligns with L’Oreal’s mission statement of helping men and women around the world aspire to be beautiful and to express their individual personalities through cosmetics. In the Netherlands, there are 5 million women in the market of which 46% used hair coloring. Of this 46%, 73% used permanent hair coloring, this totals to a market size of about 1.7 million users. With a proposed selling price of 12.95 guilders (7.2 USD) and an average use of 4 times per year the total revenue market potential is 48 million USD in year one. Belle Couleur has a strong positioning statement, “natural colors, covers all gray” which resonates with Dutch consumers as over 60% of research participants stated that they used hair color to cover gray. No competitors currently have a clear positioning statement; therefore, Belle Couleur has a great opportunity to clearly position itself.

L’Oreal’s current hair coloring offering, Recital, is the leader in hair care market. Recital’s market share is declining as the Dutch women are trending towards warmer shades, and competitors appear to be offering warm, red tones. Based on market research, Dutch consumers responded positively to the concepts and the prices of the product line, but after usage participants stating that they probably/certainly will not buy Belle Couleur increased from 13% to 32%, as consumers said that the colorant did not cover gray and was too dark. Dutch consumers tended to use naturally light colours, but the French manufactured Belle Couleur is



formulated to give a classical dark blond look and it is L'Oreal's policy to not modify the product for a new market. Since L’Oreal only offers permanent hair coloring products that target consumer looking to cover gray, this presents a major issue for Belle Couleur and shows that their product results and positioning strategy are not matching up well. Another red flag with the market is that Dutch hair-coloring users are clearly trending towards using semi-permanent hair coloring products, as over the past 4 years permanent users have dropped from 88% to 73%.

As a subsidiary of L’Oreal, Garnier’s Belle Couleur would be manufactured in France, the headquarters of L’Oreal; therefore they have the option to either take the product to market unmodified or don’t take it to market at all. If Belle Couleur is going to work in the Netherlands, the organization will have to immediately work on a distribution plan, as the Dutch like to buy specific products at specific locations. Management also needs to keep in mind that L’Oreal already offers Recital under its own brand name and avoid cannibalization.

To move into the hair care market Belle Couleur needs to modify its product to cover gray hair, they have a strong positioning statement that resonates with consumers who want color to cover gray hair. Either they need to re-formulate the product to cover the Dutch consumer's gray hair or they need to change the positioning statement and emphasize the lower price offered by Belle Couleur. It is critical that the Garnier product line launch is successful so that they can build a positive brand image, create consumer value and ensure future success of its products in the Netherlands.

Marketing Mix (4 P's)

Product: The problem is the majority of Dutch market love to have the brighter hair color. It sounds impossible for Belle Couleur will succeed in Netherlands if the product is not modified. Even some people will love to buy Belle Couleur, those people are the Recital's buyers who love L'Oreal product and want to have it at a lower price. Thus, it is also the cannibalization problem. If the L'Oreal is willing to expand the market of the low priced hair color product, they should reposition the Belle Couleur by differentiating its quality or advantages from Recital. For example, let Belle Couleur offer the brighter shades of hair color to compete with other competitors and also satisfy the majority of Dutch market.

Price: The mid-price range. There is no one offering this price range. It is quite competitive.

Place: Proposed break down of distribution channels for Belle Couleur in Netherlands

*As the drug chains and supermarkets are increasing in importance for all manufacturers, their share in the distribution channel has been increased.


1 Independent drug stores 32%2 Drug Chains 43%*3 Food Stores (Supermarkets) 26%*


Promotion: Right now the Recital faced the losing market shares. That's mean its need to spend more on promotion campaign. Thus, to introduce the new lines of hair color in this downturn of the industry. L'Oreal will have to carefully consider implementing the promotion of the introduction of Belle Couleur. Of course, the product is not strongly favorable in the Dutch market. And the France manufactures will not reformulate or customize the product for Dutch market.

Budgeting and Forecasting



Budgeted Forecasts for: Average Price

12.95 Guilders12.95/1.8=7.194=7.20 USD

Given: 5000000Number of women between ages 15 and 65 5 millionPercentage of hair color users (both permanent andsemi-permanent) 46% 2,300,000 Permanent hair color users in 1992 73%Total users (Target Market) 1,679,000 No.Average uses per year 4Total purchases 6,716,000 UnitsActual Price 7.20 USDPotential Sales of Year 1 48,355,200 USD

Unit 1992 1993 1994 1995 1996 1997

Hair coloring market No. of users 2,300,000 2,645,000 3,041,750 3,498,013 4,022,714 4,626,122 Permanent % of mkt 73% 69% 65% 61% 57% 53%Permanent Hair color users No. of users 1,679,000 1,825,050 1,977,138 2,133,788 2,292,947 2,451,844 Average purchases per year 4 4 4 4 4 4 Total Sales Volume Units 6,716,000 7,300,200 7,908,550 8,535,151 9,171,789 9,807,378 Actual Price 7.20 7.2 7.2 7.2 7.2 7.2

Gross Revenue 48 53 57 61 66 71All Costs for Belle Couleur -45 -49 -53 -58 -62 -66Net Profit 3 3 4 4 4 4

Assumptions:1) Assumed the market for hair coloring was growing @ 15% per year, as have been the case over the past four years.2) Assumed Permanent was losing 4% per year to semi-permanent, as have been the case over the past four years {(88%-73%)/4}.2) L'Oreal's profit/sales is 6.13% (based on L'Oreal net profits $0.417 billion / $6.8 billion)4) Weighted average: Calculated that 25% of users use it every 6 weeks, 47% use it about every 2.5 months and theremainder use it once per year

Purchase every

Annual Purchases

WeightageWeighted Average

1.5 8.0 0.3 2.0 2.5 4.8 0.5 2.3

12.0 1.0 0.3 0.3 4.5

Conservatively taken as 4 purchases per year.

Belle Couleur-'covering gray with natural colors'

AMOUNTS IN USD MILLIONS

Launching Synergie

The launch of Synergie is supported by the fact that the Dutch market is growing more than 12% annually. When looking at demographic trends (the aging population, increasing disposable



income for women, value focused consumers) along with a growing market, the launch of Synergie appears to have a lot of potential. Financially the projected total revenue potential for the skin care market in year one is 33 million US Dollars. In addition, the Dutch consumer has shown increased interest in products with natural ingredients, which is part of Synergie’s positioning statement “The alliance of science and nature to prolong the youth of your skin.” If Synergie can break into the market, consumers are very loyal and they link their self concept with the brand image.

Within the skin care market competition seems to be very stiff at the middle price range especially from L’Oreal’s own offering, Plentitude. The Synergie product line is going to have to find a way to differentiate itself to create consumer value. Synergie will also have to find a way to familiarize the Dutch consumer with the technical product descriptions and terms that make Synergie unique.

Lastly, one of the most significant problems with the introduction of the Synergie line comes back to the product. According to market research, after knowing the price those who used the product for a week were less likely to purchase the product than those who just used it once. This seems to show that the product is not as good as others in its price range. At the same time private labels entry is a viable threat as they can copy competition fairly quickly.

Marketing Mix (4 P's)

Product: The differential advantage is natural ingredients

Price: It is offered in the mid-price range. Synergie will be able to compete with the outside competitors. However, it has to compete within L'Oreal brands (Plenitude).

Place: Proposed break down of distribution channels for Synergie in Netherlands

*As the drug chains and supermarkets are increasing in importance for all manufacturers, their share in the distribution channel has been increased.

Promotion: As mentioned earlier, the main problem is cannibalization. L'Oreal needs to concentrate on the positioning of each product. The Synergie line would have to be highly promoted and advertising would stress on it having “natural ingredients”. This would help in distinguishing it in the target market who are mainly interested in natural ingredients (Synergie) and who are mainly interested in anti-aging cream (Plenitude).

Budgeting and Forecasting


1 Independent drug stores 35%2 Drug Chains 43%*3 Food Stores (Supermarkets) 22%*


Budgeted Forecasts for: Average Price

(11.95+21.95)/2=16.95 Guilders

16.95/1.8=9.42=9.45 USDGiven: 5000000

5 million

Given: Percent of women using day cream 46%Total users (Target Market) 2,300,000 Average Purchases per year 1.5 (1+2)/2=1.5 Given: Once or twice a yearTotal purchases 3,450,000 UnitsAverage Price 9.45 USDPotential Sales of Year 1 32,602,500 USD

AMOUNTS IN USD MILLIONS1992 1993 1994 1995 1996 1997

Gross Revenue 33 38 44 51 59 68All Costs for Synergie -31 -35 -41 -48 -55 -64Net Profit 2 2 3 3 4 4

Assumptions:1) Assumed that the dollar sales will grow at the rate of 16% per year as have been the case for past five quarters.2) L'Oreal's profit/sales is 6.13% (based on L'Oreal net profits $0.417 billion / $6.8 billion)

Synergie- line of facial skin care products

Number of women between ages 15 and 65 (Total Users)

ISSUES

If the Netherlands operations decide to introduce the Garnier lines of products, there are some issues that need to be considered/ addressed, these are;

1. Limited resources: there is a limited sales force. It is stated that Netherlands division will use the same sales force for both L'Oreal existing product and Garnier new product lines. This might lead to ineffective work. L'Oreal would need to come up with solutions such as the compensation, incentives, etc. to improve motivation.

2. L'Oreal existing products: Due to less time and money to maintain the lines, this might lead to sales drop or ineffective management of the currently lines. Also, L'Oreal would need to develop a strategy for the Plenitude and Recital to defend their position against the competition.

3. Recital's losing market share: this line now requires attention from the managements.

Recommendation

Based on the current positioning statements and market research for each line-up, the data simply does not support strong consumer acceptance. Something would have to be done to improve the



consumer perception of the brands, such as a stronger positioning statement, a focused marketing plan, or a better product in general. Also, since the subsidiary is responsible for the introduction of the product, there is a possibility that the L'Oreal sales force becomes overwhelmed by having to sell in both products at once, while maintaining the current L'Oreal offerings. L'Oreal would also have to lobby for a lot of shelf space in both drugstores and supermarkets. They cannot rely on the retailers just handing them the shelf space, especially since they do not have an established brand name in the NetherlandsThe decision that the Netherlands L’Oreal subsidiary faces is very difficult, especially in a smaller market with multiple competitors and an aging population that tends to be very brand loyal. We recommend that L’Oreal launch neither Synergie nor Belle Couleur until they can come up with a concept and product that differentiates itself from competitors and provides clear evidence of consumer acceptance. Obviously this is not going to be an easy decision for management to accept, but based on what we know about the Dutch market and the importance of introducing the Garnier name with a successful product line launch, we believe that the target market and product positioning needs to be more clearly understood. Furthermore, cosmetic life cycles are very short; therefore, if we offer a new product in the Dutch market we need it to be breakthrough innovation. Finally, in an established market such as the Netherlands, a new product line would have to be financed by the current operations within that country and L’Oreal already markets both skin care and hair coloring product lines in the Netherlands. So not only would Garnier be competing against L’Oreal in a smaller market, but the Dutch L’Oreal sales force would have to sell both product lines.Dutch consumers have very little awareness of Garnier and they have not formed a brand image; this makes it very difficult to break into a market where consumers tend to be brand loyal. Although Dutch women have more disposable income, the fastest growing segment is women 25+ who shop for value and only purchase skin care products 1 to 2 times per year, making it very difficult to establish a new brand in the skin care market. The Dutch research department conducted research on the Synergie products and the results were fairly similar to competing brands including L’Oreal’s current offering, Plentitude. An especially fast growing category consists of anti-aging creams and yet the research results declined after participants used the Synergie anti-aging cream. Dutch women are increasingly interested in products with natural ingredients, but they aren’t familiar with technical product descriptions, which is part of the current position statement that Synergie provides (“The alliance of science and nature to prolong the youth of your skin”).

The trend over the past 4 years has been towards the semi-permanent colorant, yet nearly 73% of Dutch women us permanent hair coloring. There is a lot of potential in this market, but there are strong competitors. As mentioned, L’Oreal has an offering in this category and smaller brands have entered the market over the past few years as well. Currently none of the competitors have a clear positioning statement describing customer benefits; therefore Belle Couleur appears to have a competitive advantage with its current positioning as “natural colors, covers all gray.”But there are two major problems with the Belle Couleur line. First, the market research conducted revealed that after use participants who ‘probably would not’ or ‘certainly would not’



buy the product increased from 13% to 32%, with many women saying that their hair was too dark and the color “didn’t cover the gray.” Secondly, Dutch consumers tended to use naturally light colors, but the French manufactured Belle Couleur is formulated to give a classical darkblond look and it is L’Oreal’s policy to not modify the product for a new market.

In terms of distribution, L’Oreal has a positive image with Dutch retailers and they need to make sure that any new products they offer provide high quality and innovative, while showing consumer acceptance. We do not think that either of the potential lines offers what distributors expect from L’Oreal. Therefore if they decide to launch the new line-ups there may be some risk of losing current L’Oreal distribution as the Garnier lines will be shipped with L’Oreal in order to gain distribution quickly.

L’Oreal headquarters wants to introduce more Garnier products in other areas including the Netherlands over the next few years. There is potential to move into both skin care and hair coloring markets as the annual volume growth rate is 12% and 15% respectively, but more work needs to be done to understand the target market and to come up with a concept and value that resonates with the Dutch consumer. In order to move into the skin care market, Garnier needs to position the Synergie line as a “natural moisturizer” that is sold at a reasonable price, and then they have to retest this concept and using a lower price to determine if there is a potential target market for a new brand line up. They also need to be prepared to spend a lot of money upfront on advertising in order to gain market share. To move into the hair care market Belle Couleur needs to modify its product to cover gray hair, they have a strong positioning statement that resonates with consumers who want color to cover gray hair. Either they need to re-formulate the product to cover the Dutch consumer’s gray hair or they need to change the positioning statement and emphasize the lower price offered by Belle Couleur. It is critical that the Garnier product line launch is successful so that they can build a positive brand image, create consumer value and ensure future success of its products in the Netherlands.


L'OREAL B.V. NEDERLAND

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