Beauty giants’ growth blemish needs an AI makeover
The author is a Reuters Breakingviews columnist. The opinions expressed are her own.
By Yawen Chen
LONDON, Oct 23 (Reuters Breakingviews) -Artificial intelligence could soothe L’Oréal’s OREP.PA growth pains. Despite the French cosmetic and skincare giant’s annual marketing budget that hit 13 billion euros last year, sales only grew a disappointing 3.4% in the third quarter. With an industry slowdown likely to persist, cutting costs with new generative-AI technology looks like an easier way for CEO Nicolas Hieronimus to boost the bottom line.
L'Oréal’s latest results show even the world’s largest cosmetics company is not immune to the broader gloom caused by falling Chinese sales. The 189 billion euro group is expected to grow its top line by just 4% to 5% in both 2025 and 2026, a level not seen since 2017 and less than half the rate in 2022 and 2023, per JPMorgan analysts.
What isn’t shrinking is L’Oréal’s marketing budget. By 2023 it had risen by nearly 30% from two years prior and is expected to grow by over 7% a year through 2028, as per analyst estimates compiled by LSEG. Its advertising and promotion expenses usually amount to about a third of annual sales. Typically about half of such marketing spend goes on content creation, such as making commercials, according to industry sources.
Hieronimus is already dabbling with AI. L’Oréal unveiled its own generative AI-powered beauty content lab in May, which has created more than 1,000 images. But there’s scope to be bolder. Tools from AI developers like Runway can now animate static pictures with one click, or convert blurry images into high resolution ones instantly, making it easy to create advertisements from behind a desk. Whereas conventional commercials can take months to film, and edit, a YouTuber recently created a bogus but plausible Volvo Car VOLCARb.ST advert from scratch in less than a day using an AI video generator.
McKinsey reckons that AI tools could allow companies to boost marketing productivity by 15%. Use that as a guide for potential cost cuts, and L’Oréal’s operating profit could rise to 14 billion euros by 2028, according to Breakingviews calculations using Visible Alpha forecasts. Put that on the 17 times enterprise value to 2028 EBIT multiple that the French group trades at, and its equity would be worth some 227 billion euros, or 16% more than its current market capitalisation.
Hieronimus could face pushback if such plans involve mass job cuts. Changing myriad ad agency contracts could also take time. But with AI startups mushrooming, and some already working with peers like Hugo Boss BOSSn.DE, L’Oréal needs a sharper AI strategy.
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CONTEXT NEWS
French cosmetics giant L'Oréal’s sales in the quarter ended in September rose 3.4% from the same period a year earlier to 10.28 billion euros on a like-for-like basis at constant exchange rates, it said in a release on Oct. 22.
Analysts at Citi had expected a 5.6% rise, while those at Jefferies had forecast 6%.
L'Oréal CEO Nicolas Hieronimus said in the release “the situation in the Chinese ecosystem has become even more challenging”, and the company is preparing its own “beauty stimulus plan” for 2025.
L'Oréal shares fell 3.4% to 354.8 euros as of 0738 GMT on Oct. 23.
A third of L’Oréal sales goes to marketing https://reut.rs/3BRBJIe
Editing by Neil Unmack and Streisand Neto
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