L’Oréal just announced it acquired a 10% stake in Galderma, characterized as a “pure play dermatology leader” in injectibles with Botox-competitor Dysport, and Restylane filler brands. Galderma generated $4 billion last year and the Wall Street Journal estimates that L’Oréal’s paid upwards of $1.85 billion for its share in the company.
Regarding the Galderma investment, L’Oréal CEO Nicolas Hieronimus said in a statement, “It allows us to explore partnering in the fast-growing aesthetics market, a key adjacency to our own pure beauty play.” Galderma describes it as a “scientific partnership” to advance the field of dermatology.
This is the second major investment L’Oréal made in the past year, after acquiring Australia-based Aësop skincare brand in a deal valued at $2.5 billion and reputed to be L’Oréal’s biggest in history.
But unlike Aësop, which reports under L’Oréal Luxe division, the Galderma partnership bolsters L’Oréal’s leadership in its Dermatological Beauty division, which has been the company’s leading growth sector since 2019.
Many of L’Oréal’s brands have a strong foothold in advanced skincare, most notably Luxe brands Kiehl’s, Helena Rubinstein, Takami, Biotherm, It Cosmetics and Lancôme.
Yet its portfolio of dermacosmetics brands that combine beauty tech and dermatological science to treat skin and hair issues grew 16% like-for-like in the first half of 2024, leaving the other three reporting segments in the dust as measure by growth, and most especially L’Oréal Luxe which advanced a mere 2%.
L’Oréal Advances
L’Oréal just reported it generated 7.3% like-for-like growth in the first half 2024 to reach $24.2 billion (€22.1 billion). This followed an 11% rise to $44.9 billion (€41.2 billion) last year.
Dermatological Beauty includes La Roche Posay, Vichy, Skinceuticals, Cerave and Skinbetter Science brands. Its 16% increase to $4.1 billion in the first half compares with 9% growth in Consumer Products, notably L’Oréal Paris, NYX, Garnier and Maybelline, which reached $9.1 billion, and 6% in Professional Products distributed primarily through hair salons to $2.7 billion, such as Redken, Kerastase and Pureology.
Given that L’Oréal Luxe is its second largest reporting segment at $8.3 billion, its slower growth is not surprising, yet a 2% uptick is disappointing because it boasts the company’s largest cohort of 25 brands, including Yves Saint Laurent, Prada, Valentino, Mui Mui, Mugler and Armani.
Dermatological Beauty earned more than its share of growth against Luxe and L’Oréal’s other reporting segments, making its outsized increase all the more significant. It has grown faster than any other L’Oréal segment since 2019, when it was called the Active Cosmetics division.
It was the company pacesetter even during the wonky 2020 and 2021 pandemic years. In 2020, Luxe declined by 8%, only to bounce back 21% in 2021. However, Active Cosmetics charged ahead in both years, up 16% in 2020 and 32% in 2021.
And its growth leadership has continued, up 22% in 2022 and 28% in 2023, when it got a name change to Dermatological Beauty. This compares with Luxe’s 10% year-over-year growth in 2022 and 4.5% in 2023. Luxe, in particular, has been hard hit by a shortfall in the travel retail market and weakness in China recently.
Cross-Category Penetration
Unlike Dermatological Beauty, which is grounded in the skincare and haircare categories, L’Oréal Luxe competes across the color cosmetics and fragrance categories as well. Spreading its net wider across more categories and brands should make Luxe more resilient to the ups and downs in beauty, yet it hasn’t provided that advantage recently.
Its less-visible but doctor-recommended dermatolgical beauty brands seem to have greater drawing power in the current market than those sporting a luxury brand label or celebrity influencer. L’Oréal boasts nearly 300,000 healthcare professional partners worldwide.
Note: the company doesn’t report revenues by brands nor division revenues by product category. And it only reports revenues by product category annually.
Skincare
Overall, skincare accounts for 40% of L’Oréal revenues in 2023, a segment which McKinsey in its “State of Fashion: Beauty” reported was a $190 billion market in 2022.
The skincare market is expected to grow at a 6% compound-annual-growth-rate (CAGR) through 2027. However, McKinsey forecasts luxury skincare (price points starting at $200) and prestige (price points $80 to $200) to grow faster, 11% and 7% respectively.
Dermatological Beauty is heavily invested in the luxury and prestige segments, as are L’Oréal Luxe brands, and both make the most of advanced science in skincare. However, Dermatological Beauty leans on the clinical side, while Luxe relies on the brand to do the heavy lifting.
“Health is the future of beauty,” division president Myriam Cohen-Welgryn explains. “At L’Oréal Dermatological Beauty, we pioneer health and beauty to offer life-changing and sustainable dermatological solutions to all.”
And Cohen-Welgryn reported that some 60% of branded videos viewed are posted by doctors online, giving its brands the authority of independent medical experts.
Haircare
Haircare made up 15% of L’Oréal revenues in 2023, plus 8% in hair color. McKinsey reports that haircare was a $90 billion market globally in 2022, and it will experience a five-year 6% CAGR.
Dermatological Beauty plays in this space, but Luxe has little to offer here. McKinsey observed that “premiumization” and “skinification” represent white space in the beauty market, as more consumers are adopting a multi-step haircare regime similar to what they follow in skincare.
Dermatological Beauty reports that hair and scalp issues are the second most frequent reason people visit a dermatologist and the dermacosmetics haircare category offers significant opportunity.
Make-Up And Fragrances
Dermatological Beauty has virtually no stake in the make-up or fragrance categories, which accounted for 20% and 13% of L’Oréal revenues in 2023 respectively, though Luxe is well represented here.
McKinsey reports make-up was an $80 billion business and fragrance reached $70 billion in 2022. Color cosmetics are expected to deliver a 6% CAGR through 2027 evenly distributed across price points, while fragrance will experience the highest growth in prestige ($100-$250) and luxury ($250 and above) range, up 8% and 13% CAGR respectively, where L’Oréal Luxe has a stronghold.
Luxe has an enviable range of luxury brands in its portfolio, so why its growth has slowed so considerably – 10% in 2022, 4.5% in 2023 and 2% in 1H2024 – might reflect the broader waning in the luxury market given the uncertain economic environment.
Nonetheless, even cash-strapped consumers seem to be trading up to dermatologically-advanced solutions for skin and hair health, while forgoing extravagancies in luxury beauty, even trading down to mass-brands.
L’Oréal Consumer Products division where its mass beauty brands report advanced nearly 13% from 2022 to 2023 followed by 9% in the first half of 2024, besting Luxe over the last two-and-a-half year period and taking over from Luxe as L’Oréal’s number one division in 2023 at $16.6 billion (€15.2 billion) to Luxe’s $16.3 billion (€14.9 billion).
Challenging ‘Lipstick Effect’ Theory
The “Lipstick Effect” is a theory that in times of economic hardship women will splurge on little luxuries, like cosmetics, that give the most bang for the buck in public and skimp on higher-priced beauty products used in the privacy of home, such as skincare and shampoo. The theory was first proposed by economist Juliet Shor in her 1998 book The Overspent American: Why We Want What We Don’t Need.
“They are looking for affordable luxury, the thrill of buying in an expensive department store, indulging in a fantasy of beauty and sexiness, buying ‘hope in a bottle.’ Cosmetics are an escape from an otherwise drab everyday existence,” she wrote.
L’Oréal’s latest results confirm part of the thesis that when priced out of the hard goods luxury market, less-affluent consumers will substitute by splurging on more affordable beauty products. However, L’Oréal’s results challenge another premise of Shor’s thesis about spending to gain prestige from luxury brand cosmetics – the public face – against the private use of skincare or haircare products.
As the dynamic growth of L’Oréal’s Dermatological Beauty division shows, the beauty market is evolving to put more emphasis on skin and hair health and wellness, a trend that McKinsey describes as a holistic approach to beauty.
“A new definition of beauty is reshaping the market as consumers shift their objectives from aesthetic perfection to holistic wellbeing,” and McKinsey advises, “Traditional beauty players need a crystal-clear understanding of how expansion into wellness-inspired products can align with their expertise as well as their consumers’ needs and interests.”
L’Oréal with its established Dermatological Beauty brands and its new partnership with Galderma is way out front in realizing and profiting from the turn consumers are taking toward healthy beauty from the inside out.
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