Incumbent Responses

The L’Oréal Story

Out of the hundreds of DTC brands launched every year, many will fail, and very few will survive and even thrive. Regardless of their success, these new entrants pose significant challenges to incumbent brands. If you're a large brand like Gillette that has enjoyed a dominant position in your marketplace for many years, you will feel the pressure.

Now we're going to shift our focus from DTC brands to these large companies and consider what opportunities and challenges they face in this changing landscape. If you are an established brand, how do you respond to the fact that hundreds of startups can launch a brand in a short period of time and chip away at your market share?

This is the question facing L'Oreal. Founded in 1909, L'Oreal is a well-established player in the beauty industry. In 2022, it had 38 billion euros in sales and a net income of over 6 billion euros. It has many well-known global brands, including Lancome, Giorgio Armani, Maybelline, and Garnier. If you are L'Oreal witnessing hundreds of new beauty brands coming into your market, what should you do?

Imagine that you are on the marketing team at L’Oréal. You are witnessing new upstart beauty brands quickly becoming successful and poaching some of your customers. You need to determine what the right course of action is.

Asmita Dubey, Chief Digital and Marketing Officer at L’Oréal, shares her thoughts about this new wave of competition.

My current role at L'Oreal is chief digital and marketing officer, and, as the title suggests, this is about bringing digital and marketing even closer to reinvent the best beauty experiences in the world. So my job is to design, responsibly, the best consumer engagement with beauty, and all of it driven by a 360 digital edge. Because at L'Oreal, we are digital first in all our endeavors.

At L'Oreal, our purpose is to create the beauty that moves the world. For 110 years, we have been dedicated to one sole vocation: creating beauty. We have four divisions, and all our divisions share this dedication to beauty, with their own missions.

The first division, Consumer Products Division, is our mass beauty division, and the mission is to democratize the best of beauty. Our Luxury Division, which this year became the biggest division of the group, wants to bring the best of beauty products and services in a unique way to their consumers.

Active Cosmetics Division is trying to help people in their quest for a healthy and beautiful skin. Our fourth division, Professional Products Division, is trying to support hairdressers, the hair business, and the hair industry in the most sustainable way.

• As Asmita makes clear, L’Oréal is eager to stay on top of changing trends in the beauty industry. L’Oréal must determine a proper response to the increasing competition as DTC beauty companies enter the market.
• To respond to the DTC challenge, an incumbent company like L’Oréal could take one of three approaches:
  • One option is to acquire DTC brands that have gained traction in the industry. For example, Unilever acquired Dollar Shave Club for $1B in 2016. P&G acquired natural deodorant brand Native Cos, beauty company First Aid Beauty, and skin-care brand Snowberry New Zealand.
  • The second option is to build and launch its own DTC brands from the ground up. Many large companies are creating in-house accelerators and incubators to develop their own DTC brands. For example, Anheuser-Busch created ZX Ventures, Visa built Visa Ventures, and P&G formed P&G Ventures.
  • A third option is to build DTC capabilities within the company to complement the marketing of existing brands. This response would mean learning from the approach DTC brands have taken across the value chain that we discussed in the previous lessons.

Which of the three options would you recommend to L’Oréal?

• Acquire DTC brands
• Build its own DTC brands
• Build DTC-like capability

Each of these tactics could potentially be viable for L’Oréal. We will now move on to consider the pros and cons of each approach.

Acquiring DTC Brands

It has been common for incumbent brands to acquire DTC brands, as we saw with Unilever’s acquisition of Dollar Shave Club. Here are some additional examples:

• P&G acquired DTC brand Billie, which focuses on women’s shaving supplies.
• Walmart acquired the men’s apparel brand Bonobos.
• Financial service firms like JP Morgan acquired financial technology (fintech) companies.

There are many possible reasons for traditional companies to acquire DTC brands. One key reason could be to simply acquire the customers of the DTC brands. If you're L'Oreal, you might acquire a young DTC beauty brand like Perfect Diary because they have a large presence in China. That would give you access to a large number of customers that Perfect Diary already has. It may also give you access to the data they have because, as a traditional brand, you may have never had direct access to customers because you primarily sold through retailers. But Perfect Diary does have direct access to customers. By acquiring them, you can get data and learn about customer behavior much faster.

As a large company with greater resources, you can also help DTC brands scale faster, as many of them have difficulty doing this on their own. You can leverage your physical retail distribution to expand the distribution of DTC brands. Acquisition of a DTC brand may allow you to enter a new category that you may have been trying to enter without much success. For example, before acquiring Dollar Shave Club, Unilever did not have a strong presence in the men's razor market, unlike its arch-rival P&G that owned Gillette. The acquisition of Dollar Shave Club gave Unilever an entry into the market to compete with Procter & Gamble in an area where it has been weaker.

Sometimes acquiring a DTC company is a defensive strategy. Effectively, you're buying a competitor who is posing a threat to your business. However, acquiring a DTC brand to eliminate competition is probably not a good idea because similar DTC brands may continue to emerge.

While these are all compelling reasons to acquire DTC brands, there are many reasons to pause and wonder if this is indeed the best strategy. First, it's easy to acquire DTC brands, but harder to make them profitable. DTC brands are funded by venture capitalists who are looking for growth more than profits. But once large established companies like Unilever acquire them, they have to manage them with a traditional balance sheet and need to show profitability. David Taylor, former CEO of Procter & Gamble, said, "There are many, many launches that grow fast. A business model that makes money is a higher challenge."

Second, even if a large company like L'Oreal acquires a DTC brand, it is still unclear how it should avoid the potential disruption of its existing billion-dollar brands. Third, it's unclear when you should acquire a DTC brand. Should you buy it when it's small and less expensive to buy, even though its future is uncertain? Or should you buy it when it has become a successful brand but may require $1 billion to buy?

In essence, every large company should ask these questions before acquiring a DTC brand:

1. What are we acquiring it for?
2. Can we scale it profitably?
3. How does this acquisition help us with our existing brands?
4. Is it worth the price to buy it?

There are many risks involved with acquiring a DTC brand, which means it may not always be a wise decision for a larger company. From a marketing perspective, the company may struggle to appeal to the customers of its newly acquired DTC brand and may find it hard to make the DTC brand profitable. For example, Walmart acquired Bonobos for $310 million in 2017, but it ended up selling it for $75 million in 2023.

Building Your Own DTC Brand

Many incumbent companies are creating in-house accelerators and incubators to create their own DTC brands. Some examples include Anheuser-Busch, Visa, Kellogg, and P&G.

Let’s examine the challenges that a large company might face if it plans to launch DTC brands in-house.

Rather than acquiring an existing DTC brand, many legacy brands take the approach of building their own DTC brands. Many large companies have incubators and accelerators to support these kinds of ventures. But they face many challenges with this approach.

The first is the threat of cannibalization. Gillette could have created a Dollar Shave Club inside the company, but it would cannibalize its current business. If Gillette's customers start buying Dollar Shave Club, which is cheaper, Gillette's profitability would go down.

The second challenge for legacy companies is that they are used to building billion-dollar brands. A new $50 or $100 million DTC brand is not going to move the needle for a large company like L'Oreal and, as a result, may not get enough resources.

The third challenge is profitability. Large companies are used to assessing projects based on their potential ROI. Most DTC brands and the VCs who fund them prioritize growth over profitability. In contrast, large companies need to justify their investments to their shareholders. Entrepreneurs and VCs are willing to take risks, but large companies are typically risk-averse. Uncertain returns on these new ventures and limited upside potential of a $50 or $100 million brand eventually lead executives to fund their large established brands instead of pouring money into these new ventures.

The challenges of launching a DTC brand in-house are many, but these challenges do not mean it is impossible for this approach to be successful.

However, acquiring a DTC brand or launching a new one are not the only two options that companies like L’Oréal have to respond to this new wave of competition, as you will learn next.

Building DTC Capabilities

Instead of acquiring or developing DTC brands, an incumbent could instead learn from the way DTC brands have innovated across the value chain. It can then combine these new approaches (e.g., direct distribution, agile testing and learning, or new ways to get customer insights) with their existing strengths, such as a large customer base, high brand awareness, deep pockets, and extensive distribution systems.

L’Oréal has decided to take this approach and build DTC capabilities for its existing brands. Asmita discusses L’Oréal’s approach.

And when we are talking about marketing in the digital age, it is about building loved brands, more influencer marketing, more websites, creating engines of growth for us, and then starting to measure all of that with ROI. That's on the consumer engagement side.

And then there is the whole acceleration on e-commerce looking at the channel mix, which is shifting, and preparing ourselves for the channel mix. But by 2014, '15, we already had goals for e-commerce as to what it would look like in 2020.

And at the same time, we started thinking of the third leg, which was about personalization at scale and what personalization means. So all in all, it's been a 10-year journey about trying to do this new marketing and trying to master marketing in the digital age. And it keeps on evolving.

Asmita mentioned several strategies that L’Oréal is pursuing as part of its effort to increase DTC-like capabilities:

• Accelerate e-commerce
• Create more digital consumer engagement
• Focus on personalization

Each of these strategies has its strengths. One of the core strategies of L’Oréal is to accelerate its e-commerce for its existing brands. Here is Asmita describing this strategy.

We have more than 35 brands in the group. And we have more than 200 D2C sites. So it's a lot of D2C sites all around the world. And it is across divisions that we have D2C business, but it depends on the business model of that brand.

So to give you some example, a Lancome, Kiehl's, Yves Saint Laurent, Armani, these are the brands in the luxury division which have a very, very thriving D2C business. And that business is based on the best brand experience, consumer relationships, convenience, generosity that we offer in terms of exclusivity, gifting, gratification. So those are the reasons why the luxury brands have the D2C.

And then we have an active cosmetic brand, which also has D2C. For example, SkinCeuticals. It's a brand that brings professional treatment and consultations to our consumers. And D2C plays a very important role there because it is connecting those professionals and the consumers to each other.

Then we have the professional product division. And a brand like Kerastase has D2C because it does B to B to C business. It is driving traffic to salons in an offline plus online world.

And finally, even our consumer products division, which is the mass beauty division. In the mass beauty division, there is a brand like NYX Professional Makeup where it makes sense to do a D2C model because their D2C plays the role of bringing communities together—influencers, prescribers, beauty advisors. And then the brand has a lot of offline stores. So, it is again O plus O together and the experience that comes together.

I mean for us, our consumer is O plus O. So therefore, for us, the channel mix is an offline plus online channel mix. 29% of our business is online today. Very robust e-commerce business and it's very, very sizable. It is across zones, across countries, it is growing. And we are preparing for scenarios where up to 50% of the business could be online.

By moving more of the beauty product experience online, customers might feel they are missing out on in-person experiences such as trying on products or having face-to-face contact with staff.

Another component of L’Oréal’s strategy is to create personalization at scale. Unlike DTC companies, L’Oréal has many large retail partners, so it needs to develop services that also benefit them. Here is Asmita again.

I will give you an example of how we partner with our retailers in today's world, and one of the partners is we bring services. We are evolving from product to services. We acquired ModiFace, which is an augmented reality-based company. And with that company, we have started to roll out a lot of services, digital services, like makeup virtual try-ons, like hair color try-ons, like skin diagnosis.

And you would be surprised to know more than 50 of our retailers use those services in their own product detail pages. ModiFace is a Canadian entity, and it has been acquired by L'Oreal Group in 2018. We have more than 60 very, very beauty tech talents out there. Their job is to code, build algorithms. And now they are focused on doing that for beauty. They are one of the leaders in augmented reality. And with their augmented reality technology, together we have built all these digital services.

So when we say digital service—and all these digital services are with the retailers also, but on our D2C, on offline, so they're omni-channel services—let me give you one or two examples.

An example is a makeup virtual try-on. So you take your smartphone. And a consumer can—on the smartphone—try the color of a lipstick or the color of an eyeshadow or the color of a full look because you can say, I want this look, and then augment it on themselves through a smartphone.

The other service example I could take is skin diagnosis. So, we have a skin diagnosis tool and algorithm, which is based on 15,000 images from RNI. And it addresses 16 different skin concerns. So the consumer has to go through that. Again, it can be done on the smartphone. There are other physical tools which we later enable with the same on the D2C itself. People try and use the skin diagnosis. And from there, they get personalized routines and recommendations.

So I will give you an example of Lancome. If you go to the Lancome D2C, you will have a skin diagnosis tool called e-Youth Finder. You go through it, and then you get a personalized routine or recommendation. This is possible with the collaboration of ModiFace, RNI, digital, and marketing. And in some specific cases, we have partnerships with 50 retailers.

For a legacy brand to make the DTC approach work, it needs to build a process that leverages its strengths, and then scale this process across several brands and countries. Asmita offers more detail on how L’Oréal uses a scalable approach.

We have more than 200 D2C sites. The way we operate these sites is based on strong scalable engines of growth. So we have a D2C factory. When we say it's a D2C factory, it means we have a common core model in the whole world. Then we have a brand layer for Estee Lauder, Lancome, Kiehl's, Armani, La Roche-Posay. And finally, at the country level, there may be some customizations.

When we operate with this kind of operating model, there are many, many benefits, which are at scale. The first one is when we launch a new feature. It can be reached to many, many brands and many, many countries in a short period of three months or so. When we launch a new service like skin diagnosis, it can be rolled out to the whole world because of that common core model that we are talking about.

When we talk about a luxury brand, there is a homogeneity in the value proposition of the D2C because of the scalable engine, which is so valuable to the luxe brand. To turn it around, if we don't build these scalable models, it's a challenge for a large brand to operate a large D2C business.

Let’s summarize the approaches that large, established companies can take to compete with new, agile DTC players. We’ll start by recalling the previous approaches that we discussed, and then summarize the capabilities approach that we just examined.

We have discussed two approaches that legacy brands could take—either by acquiring DTC brands or building their own digital brands internally. Each of these comes with limitations. A better approach for traditional companies is to learn from DTC brands and build these new capabilities in-house.

These new capabilities might include how to collect customer insights in new ways, how to design the product better, how to reach consumers, how to build community, or how to market effectively in the digital environment. All traditional companies need to build these new digital capabilities.

In addition, traditional companies already have huge advantages. They have big R&D budgets. They have well-known brands. They have a large customer base. They have a big distribution footprint. What they need now is the ability to combine their existing strengths with the new digital capabilities. They don't need to forget their past or what they have, but they do need to complement these advantages with the new skills needed in the digital environment.

Whether you are working for a large established company, or whether you are part of a startup, it's about understanding and gaining the digital marketing skills to navigate this new environment.