Deal focus: L’Oréal shows staying power

As the world’s largest cosmetics company with around 40 brands, EUR 32.3bn (USD 32.3bn) in annual revenue, and more than a century of history, L’Oréal is the quintessential long-term investor.

This was demonstrated in May when the company – deciding to base its first investment arm dedicated to a single market in China – opened an office in Shanghai despite the city being under lockdown. And it was demonstrated again last week when the investment arm threw its support behind a local brand even as some GPs flee the consumer sector in the wake of recent volatility in public markets.

The investment, a Series A extension for fragrance brand Documents, coincided with L’Oréal redesignating its China headquarters in Shanghai as a regional headquarters for North Asia with responsibility for Japan and South Korea as well as China.

"This breakthrough move further confirms the important position of the Chinese market in L'Oréal's global layout, L'Oreal's unparalleled commitment to China, and its sincerity in cooperating with industry ecosystem partners," Fabrice Megarbane, president of L’Oréal North Asia and CEO of the company’s China operation, told AVCJ.

"At the same time, the establishment of Shanghai Meicifang Investment is another milestone for L'Oréal, which reflects the group's confidence in the increasingly optimised business environment in China, as well as confidence in the development prospects of the entire Chinese market and Chinese beauty brands."

L'Oréal entered China in 1997 and currently has 31 brands active in the market. The purpose of Meicifang is to invest in the beauty of the future, specifically: new Chinese brands, new digital consumer experiences, advanced supply chain technology, and innovative projects in the fields of future science. 

China’s rapid recovery from the first wave of COVID-19 proved a boon for the broad consumer sector, including cosmetics. Private equity investors responded accordingly, with deployment rising from USD 293m in the first half of 2020 to USD 497m in the second half and then reached USD 4.4bn in the first six months of 2021, according to AVCJ Research.

The fervour didn’t last long. Investment fell sharply to USD 1bn in the second half of the year before moderating to USD 1.6bn in the first half of 2022.

“Starting in the first half of 2020, I had never seen so much capital flooding into one sector so quickly,” said Yijun Shen, a managing director of Cathay Capital, “Consumer is a huge sector but it got saturated in the space of just 18 months. Fierce competition and oversupply significantly pushed up customer acquisition fees and other costs.”

Cathay Capital co-led the Documents round with L’Oréal, operating through the Cathay Consumer Co-creation Fund. The vehicle was launched last December last year in conjunction with L’Oréal and two other France-headquartered luxury groups, Kering and Pernod Ricard. It is one of numerous strategies through which Cathay Capital, a China-Europe cross-border investor, engages industrial LPs.

Shen first met Documents in March just before Shanghai went into lockdown. Much of the due diligence was conducted online, resulting in the investment closing in August. On-site visits resumed not long after. L’Oréal identified the company independently and then work closely with Cathay Capital on execution. The latter was responsible for pricing the deal.

Documents is dubbed China’s most expensive perfume brand, with a 30-millilitre bottle selling for around CNY 950 (USD 122). The brand positioning is very deliberate – Zhaoran Meng, the company’s founder equates luxury goods with art in terms of consumer willingness to pay a premium.

“In addition to the functional value, people pay up for the artistic value. A luxury product gives greater space for creativity and allows our team to fully display our capabilities,” Meng told Chinese media earlier this year.

Shen endorses this view, noting that pricing power is also brand power, and consumer brands do not want to get caught in the trap of being seen as no more than a cheap alternative.

The Documents style is referred to as “chanku,” which means “zen and cool”. Its fragrances draw on high-end local raw materials such as mugwort, magnolia, and walnut, and claim a longer-lasting effect. Fifteen have been launched to date across three core categories.

The company also seeks to distinguish itself through avant-garde store design, relying heavily on oriental aesthetics to underline a connection to Chinese history and culture. These outlets are the primary distribution channel. There are currently two in Shanghai and one in Beijing, with three more set to open in Chengdu and Shenzhen this year. Expansion into Hong Kong and Europe is also on the agenda.

Spending per customer at the first store in Shanghai is around CNY 1,600, exceeding Meng’s projection of CNY 1,200. The patrons are also remarkably young, with four in five born after 1995 and one-third born after 2000.

"The unique emotional, social, and cultural values of perfume make it a jewel in the premium consumer categories,” added Mingpo Cai, founder and chairman of Cathay Capital. “Documents is a deep Chinese concept yet it has universal resonance, and they have been very brave in the pricing.”

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• Topics
• Greater China
• Early-stage
• Consumer
• China
• Cathay Capital Private Equity