Leader (U.S.)

Beauty Battle: Giant L'Oreal Faces Off Against Rival P&G

By SARAH ELLISON and JOHN CARREYROU
Staff Reporters of THE WALL STREET JOURNAL

What do women really want?

For two very different answers, step into the battle over the $90 billion beauty-products industry. For years one company, France's L'Oreal SA, has dominated the business by wooing women with Parisian chic, the promise of looking like its sexy spokeswomen, and the self-assured slogan, "Because I'm worth it."

What L'Oreal offers, says Chief Executive Lindsay Owen-Jones, is a "unique cultural heritage, which is Paris, which is beauty, which is fashion, which is an eye for things that are beautiful and that inspire consumers to spend more with the feeling of being special."

Now L'Oreal is feeling pressure from a rival with an entirely different approach to selling beauty. It's Procter & Gamble Co., wheeling out the no-nonsense comparative advertising that it's long used to sell soap and diapers, reciting statistics to show how its products are superior to "Brand X."

A current P&G promotion for Pantene conditioner offers a "10-day challenge," promising hair that is 60% healthier, 85% shinier, 80% less prone to breakage and 70% less frizzy. In another case, after using 60 different methods to measure the size of pores, length of wrinkles and the color and size of age spots, P&G researchers used results from one of the tests to proclaim in national ads that Olay Total Effects Night Firming Cream worked better than leading department-store brands. The ad featured a jar of Olay atop a stack of other products. The fine print listed the losers -- among them, two products from L'Oreal's Lancome.

P&G began the beauty wars in earnest in 2001, with its $5 billion takeover of Clairol -- the biggest acquisition in the company's 165-year history. P&G thus leapfrogged L'Oreal's leading position in mass-market beauty, becoming the largest seller of cosmetics in supermarkets and club stores. P&G has the upper hand in skin cleansers, moisturizers and shampoos. L'Oreal, however, remains the world leader in beauty, and leads the U.S. market in color cosmetics and hair-color products.

Now the two are colliding more than ever. P&G is trying to penetrate the high-end market, where L'Oreal rules, while L'Oreal is trying to sell more shampoo and conquer Wal-Mart, P&G's biggest customer. And both P&G and L'Oreal have flirted with Beiersdorf AG, the German maker of Nivea skin cream, with P&G contemplating a $10 billion bid.

A.G. Lafley, P&G's chief executive, insists that his company can win by giving women an honest answer about how products stack up against competing brands. "Frankly, too much of beauty care has been promises unkept," he says.

Sitting in front of a row of L'Oreal products in his Paris office, Mr. Owen-Jones, a charismatic Briton who has run L'Oreal for the past 14 years, sniffs that L'Oreal ads don't "have the comparison of a T-shirt that's shrunk on one side and the one that hasn't on the other." In cosmetics, "you have to both inform, convince but also seduce consumers ... and not just ram facts down their throats."

Mr. Owen-Jones adds, "You've got to decide whether something is beautiful, and by the way, even with the most sophisticated marketing methods, nobody is actually going to tell you whether this bottle is beautiful or not -- you've got to shoot from the hip."

But today L'Oreal finds itself playing catch-up in some areas. After P&G launched Olay Total Effects antiaging cream two years ago, L'Oreal quickly followed with a similar-sounding product called Visible Results, packaged in a bottle virtually identical to Total Effects'. "Imitation is the sincerest form of flattery," says Susan Arnold, P&G's president of personal beauty care, who started at P&G in 1980 as a brand assistant working on Dawn dish detergent. (L'Oreal says Visible Results is aimed at a different, younger demographic than P&G's product.) Total Effects, which has become the best-selling antiaging cream in mass retailers in the U.S., retails for $19.99, one of P&G's most expensive products.

Keeping Up Appearances

P&G's interest in beauty is more than cosmetic. In the '90s the company's sales growth began to falter. Now many of its markets are mature, and profit margins for its core products, such as diapers and toilet paper, are under constant price pressure from generics and branded competitors. P&G has tried for years to relieve that pressure, and revive sales, by diversifying its product line.

Notably, Durk Jager, Mr. Lafley's predecessor as CEO, tried to move P&G heavily into the pharmaceuticals business -- but his bid to purchase American Home Products Co. and Warner-Lambert Co., for more than $100 billion, fell through in January 2000. That March, P&G announced a steep earnings drop, sending its stock into a free-fall and capping a three-month stretch that saw the company lose nearly half its market value. Mr. Jager resigned that June.

When Mr. Lafley took over as CEO, he immediately set his sights on enhancing the beauty business. The company wasn't a complete stranger to the game: P&G made its first big foray into the field in 1985, when it picked up the Pantene and Olay brands with its acquisition of Richardson-Vicks. Until that point, the company's beauty revenue totaled just $1 billion, and its biggest beauty brand was Ivory soap, a product best known for its ability to float in bathwater.

Mr. Lafley, the company's first CEO from the beauty division, dramatically increased the size of the beauty business, snapping up Clairol and pouring money into P&G's other beauty brands, while slashing costs and improving operating efficiency. He also joked about his short, spiky white hair, saying he was one of the only people left who didn't use dye.

In the first half of 2002, ad spending on Olay, Cover Girl, Clairol and Pantene accounted for about one-fifth of the $900 million P&G spent on advertising in the U.S., according to Competitive Media Reporting. Moreover, P&G, like L'Oreal, pours hundreds of millions of dollars a year into beauty research and development.

This attention has lifted P&G's beauty business and helped the company reverse its slide. Roughly $8 billion of the company's $40 billion in revenue now comes from beauty products, and under Mr. Lafley, P&G's stock has risen 51.74%. It ranked as the second-best-performing stock in the Dow Jones Industrial Average last year.

L'Oreal, meanwhile, has been in the beauty business since the early 1900s, when a chemist named Eugene Schueller started the company by peddling hair dyes to French beauty salons. A century later, L'Oreal has become the world's largest cosmetics company, with $14 billion in annual sales and a long record of double-digit profit growth. Investors have rewarded the performance by making L'Oreal France's second-most valuable company, with a market capitalization of $50.4 billion.

That impressive growth has made Liliane Bettencourt, Mr. Schueller's only child, Europe's richest person. In an unusual three-decade-old arrangement that was meant to protect the company from a takeover, the 80-year-old Mrs. Bettencourt controls L'Oreal in a partnership with giant Swiss food group Nestle SA. Mrs. Bettencourt, who has never taken an active role in managing L'Oreal, owns 51% of Gesparal, a holding company that owns 53.7% of L'Oreal. Nestle owns the other 49% of Gesparal, a stake it bought in 1974.

Crossing the Channel

L'Oreal owes much of its recent success to Mr. Owen-Jones, who joined the company in 1969 at age 23 as a product salesman. Steadily climbing the corporate rungs, he rose to the top job in 1988, becoming the first and only foreigner to head a big French company. Mr. Owen-Jones, now 56, cuts an unusual profile in the clubby Gallic business establishment: Born and reared outside of Liverpool, he bypassed the elite French schools that groom the country's CEOs. In his spare time, he likes to race cars.

Mr. Owen-Jones diversified L'Oreal's French portfolio by adding some American brands to reach a broader audience. The new additions, ranging from Ralph Lauren perfume to the Matrix hair-salon line, now represent 20% of L'Oreal's overall sales. And L'Oreal today derives a third of its revenue from North America, compared with just 14% from France.

The most successful addition by far has been Maybelline. Since acquiring the lipstick maker in 1996, L'Oreal has increased its sales nearly fivefold to $1.4 billion. Part of the makeover involved jazzing up Maybelline's offerings with some flashy new colors, such as lemon yellow and peppermint green in the Miami Chill line. To give the brand more cachet, L'Oreal also moved its offices from Memphis, Tenn., to Manhattan, and quickly changed the brand to "Maybelline New York."

Under Mr. Owen-Jones, L'Oreal's polished image has edged ever more toward glamour. One of his coups was to hire the model and actress Isabella Rossellini to endorse Lancome when he was head of L'Oreal's U.S. subsidiary in the early 1980s. That move helped turn the company's premium brand into a household name in the U.S. and popularized the use of celebrities in cosmetics advertising.

These days, L'Oreal employs what Mr. Owen-Jones has dubbed "the Dream Team" -- a stable of dozens of models and actresses to plug its wares in billboard ads and on TV. The team currently includes supermodel Claudia Schiffer, Destiny's Child singer Beyonce Knowles and actresses Andie MacDowell, Heather Locklear and Catherine Deneuve.

P&G acknowledges that it can't compete with L'Oreal in trendiness. For the most part, the women who speak for P&G's beauty products are unknowns.

Mr. Lafley brought Domenico De Sole, chief executive of Italian fashion house Gucci, onto his board and recently sent a group of P&G product designers to visit him. Lecturing the P&G executives on the essence of beauty and luxury, Mr. De Sole held up his Gucci watch to illustrate the point that products that weigh more give the impression of higher quality. He also described how Gucci uses special tissue paper in its stores. Impressed, P&G responded to the advice by printing "Olay" on the inside of its moisturizer packages, a move calculated to give the product a more upscale look.

At L'Oreal, P&G's ambitions draw snickers. "They're mainly laundry-detergent makers," says Bruno Bernard, a biology Ph.D. who heads L'Oreal's research into hair follicles at a Paris lab. "Their vision of hair is of something you can wash like you would a piece of clothing."

P&G researchers don't dispute that idea. In fact, P&G's strategy to revive Clairol's hair-color business started in the company's laundry room. P&G turned to researchers at the company's fabric-care division, home of Tide laundry detergent, for new insights on how tapwater affects fibers. The P&G scientists found that there are a lot of similarities between a strand of hair and a string of fabric. The result: a new technology to block trace amounts of copper in tapwater, which diminishes the ability of hair-color molecules to penetrate hair follicles. "You've got to lift the natural melanin out of the hair and at the same time deposit new color," explains Wilbur Strickland, a P&G researcher who worked for three years to help develop the new technology. "With fabric-care products there is the same dynamic of taking things out [such as dirt] and putting something back in" -- such as fragrance or fabric softeners.

The new ingredient will be added to Clairol's Nice 'n Easy hair color and is part of P&G's effort to stop a decades-long slide in Clairol's market position. Today, L'Oreal's two main brands, L'Oreal Paris and Garnier, control 47.9% of the U.S. hair-color market, according to Information Resources Inc. Clairol has 35%.

Now, both P&G and L'Oreal are looking to make big moves in each other's core markets. Mr. Lafley covets Beiersdorf, maker of Nivea cream, the biggest skin-care brand in the world -- an acquisition that would provide P&G with a strong foothold in Europe. Mr. Lafley declines to comment on discussions with Beiersdorf, saying only, "If you're not in the habit of being a hostile acquirer, the seller always controls the timing." L'Oreal took a look at Beiersdorf over the summer but has since backed away, according to people familiar with the matter.

Meanwhile, L'Oreal's largest product launch of its 95-year history will land squarely in P&G's domain. L'Oreal's new shampoo and conditioner marketed under its Garnier brand, Fructis, is coming to the U.S. in February. Currently, L'Oreal ranks fourth among shampoo vendors in the U.S. and is No. 5 in conditioners -- segments where P&G holds the top two slots with Pantene and Clairol Herbal Essences. P&G played a direct role in Fructis's creation. L'Oreal came up with the new shampoo in France after P&G blindsided it with a breakthrough product in the early 1990s: a silicon-based two-in-one shampoo and conditioner. Now selling in Spain, Germany, Mexico and Canada, the U.S. is Fructis's final hurdle.

Strolling through a Duane Reade drugstore on Manhattan's Fifth Avenue, Karen Fondu, one of L'Oreal's senior U.S. executives, peruses the aisles of lipsticks, eye shadows and hair colorants, pointing out the prime placement of L'Oreal's products. Pausing in the shampoo aisle, she lifts a perfectly manicured finger and points to the top shelf where she wants Fructis to be positioned. "We want to be right there," she says, indicating a spot between bottles of Pantene and Herbal Essences shampoos and conditioners.

L'Oreal executives are enjoying playing the underdog in the U.S. "We're a relative newcomer to this side of the Atlantic," says Joseph Campinell, president of L'Oreal's U.S. consumer-products division. Putting on a mock Southern twang, he says: "There are still a lot of people at Winn-Dixie who want to know what that 'Lowral' brand is."

Write to Sarah Ellison at sarah.ellison@wsj.com and John Carreyrou at john.carreyrou@wsj.com