Because They're Worth It

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Acquisitions will permit L'Oreal to continue diversifying its revenue base and product range. In December L'Oreal bought Mininurse, a Chinese mass skin-care brand with a 5% market share. It bought a majority stake last year of Shu Uemura, a Japanese concern in which it owned a 35% stake. In the past decade, Western Europe's share of L'Oreal's overall sales has fallen about 12%, while the share of regions like Asia has risen more than 20%. L'Oreal also has its eye on India and Mexico. "It's a superb sales model," says Andy Smith, an analyst at Citigroup Smith Barney, of L'Oreal. "They've managed to identify all the hot spots of growth in the industry and dominate those areas."

As ever with L'Oreal, innovation is as likely to dominate the company's thinking as where to find the next group of willing consumers. In 2002 L'Oreal spent $594 million on research — about 3% of turnover and double that of its nearest rivals. In the stark laboratory not far from the Paris headquarters, for example, scientists are coming at the dermis from both sides — developing skin products that are applied externally as well as those that are ingested. High above the earth, a European space-agency satellite is transmitting data to L'Oreal about where global-pollution levels are strongest — so L'Oreal can adapt its moisturizers. There's even a team of people trying to figure out how to biologically trigger total color recall in human hair, potentially making hair dye a thing of the distant past.

Scientists are also working on the line extensions for Inneov, L'Oreal's line of edible beauty supplements, developed with Swiss food giant Nestle and launched last year. The promise is simple: take one of the little dark pink pills every day, and the firmness of your skin will improve. By the end of the year, consumers may be able to buy Inneov pills to thicken hair and tackle cellulite. On the horizon: a pill to enhance sun protection. "We started with a product that demonstrably shows you have firmer skin," Owen-Jones says. "This is not snake oil."

L'Oreal is convinced that boomers will fight aging to the death and so demand more and more scientific solutions to that annoying biological problem. Company research shows that L'Oreal's consumer used to be between ages 20 and 50. Now she's between 15 and 70. A decade from now, L'Oreal predicts the range will extend from 12 to 90 years old. With the beauty-supplement market worth about $800 million, it could be a while before Inneov pays its way. "Maybe not for 10 years," says Merrill Lynch's Raju. "But they want first-mover advantage."

Yet for all this apparent foresight, L'Oreal's recent stock performance has at times been less than lustrous. Its P/E ratio has more than halved over the past three years, suggesting the market feels that its growth prospects have slowed. Analysts cite the company's big ad and promotions budget and the fact that its manufacturing is less efficient than that of its competitors. Says Citigroup's Smith: "L'Oreal has the cost structure of a prestige cosmetics house, yet only 25% of its products are in the prestige category. The rest is mass market." Such criticisms draw a scathing response from Owen-Jones. "Analysts work like politicians," he sniffs. "They spend their time justifying that they've always had a point of view." He refuses to restructure. There are "so many other places you can invest if what you want is bloodletting," he says.