BATAVIA, Ohio (AdAge.com) -- L'Oreal is preparing to lay off 500 employees in the U.S., or 4.7% of its work force here, by mid-2009 in a restructuring -- but the recession doesn't seem to be the sole reason.
The layoffs also come as the once-unstoppable beauty juggernaut, which even the mighty Procter & Gamble Co. had trouble matching in its home market, is facing a much tougher fight in the U.S. That fight is coming not only from P&G, but also from much smaller rivals such as Revlon and Alberto-Culver.
Hard times for hair, mass makeup
L'Oreal blamed much of a 5.7% decline in organic sales for L'Oreal in the third quarter in North America on slowing sales of prestige or higher-end products at salons, department and specialty stores. But the company is also having a harder time in two categories it had largely dominated for more than a decade: mass cosmetics and hair color.
L'Oreal has been losing share for most of the year in those categories, according to Information Resources Inc. data from Deutsche Bank, with P&G as the primary beneficiary, thanks in large measure to two blockbuster product launches. Those include the debuts late last year of CoverGirl LashBlast mascara and early this year of Clairol Nice 'n Easy Perfect 10 hair color. WPP Group's Grey Global Group, New York, handles both brands.
L'Oreal's shares also began slipping in the third quarter in shampoo and conditioner compared with a year ago, according to the IRI data, though there, P&G also has been having its troubles, and a much smaller rival, Alberto-Culver Co., has been the biggest winner of the past year or so.
And even in cosmetics, the giant global rival isn't L'Oreal's only worry in the U.S. Much smaller and heavily indebted Revlon, whose stock has been trading at or near record lows of late as investors spurn all things with a strong whiff of leverage, has nonetheless been gaining cosmetics share on L'Oreal lately, BMO Capital Markets analyst Connie Maneaty said in a research note Dec. 17.
In a research note today regarding L'Oreal competitor Beiersdorf, Sanford C. Bernstein analyst Andrew Wood blames a slowdown in L'Oreal's advertising and promotion spending as a percent of sales since 2005 for slowing organic sales growth and declining market shares globally of late.
L'Oreal's marketing spending as a share of sales has declined for five of the past seven semesters, most markedly of all in the first half of this year, Mr. Wood said. He believes L'Oreal began stepping up spending in the third quarter globally (as TNS data indicate it did in the U.S., with spending up 10.9% to $123.5 million in July and August vs. the year-ago period, excluding outdoor in both periods), but that hasn't been enough to slow the erosion.
Increased media spending in U.S.
"We have made the decision to maintain strong advertising and promotional support for our brands in the fourth quarter in order to prepare for 2009 in the best possible condition," L'Oreal CEO Jean-Paul Agon said in a statement in October, when the company released disappointing North American sales results for the third quarter.
And despite the third-quarter slowdown, L'Oreal actually appears to have hiked media spending in the U.S., which was up 10.5% to $123.9 million in July and August (excluding outdoor) from the year-ago period, according to TNS Media Intelligence.
Way of the economy
Beiersdorf, which has a relatively small presence in the U.S. with its Nivea brand, has gained ground on L'Oreal in Europe in recent years, in large part by aggressively hiking ad spending, Mr. Wood said. But now that Beirsdorf has announced plans to trim ad spending as a share of sales to "more normalized" levels as L'Oreal appears to be stepping up spending again, Mr. Wood said he believes the tide could turn against Beiersdorf in Europe.
L'Oreal declined to say in what functions or locations its U.S. layoffs will take place. But a spokeswoman said the restructuring has been caused by the economy, not tougher competition or the need to spend more on marketing.
"It's the economic situation of the country right now," she said. "We're doing what many other companies are doing. ... It's not unlike what L'Oreal does throughout the years anyway, looking at the business and seeing where we can maximize efficiencies, how we can share services, how to be smart in challenging economic circumstances."