L’Oreal SA has said there are signs that some British shoppers are trading down to cheaper skincare products in fresh evidence that soaring inflation is eroding household budgets.
The current change in behaviour is focused on the UK, “where the inflation is the highest,” chief executive officer Nicolas Hieronimus said in a Bloomberg TV interview Friday. It’s affecting the skincare category there but not haircare or fragrance, he said.
Also read: Why Hollywood's top facialist believes hands are the best tools
The French cosmetic giant’s shares fell as much as 6.3% in Paris trading, the biggest intraday drop in more than two years, over concerns of weakening growth at the company’s previously fast-growing luxury arm, which includes brands such as Lancome Paris and Ralph Lauren.
In a reversal, the luxe unit was weaker in the third quarter than the mass-market consumer products division, which sells Maybelline New York mascara and Garnier shampoos. That unit’s stronger sales helped L’Oreal report a 9.1% uplift in comparable sales during the period.
The beauty market is still “very dynamic” at the global level, even though there’s been a “slight rebalancing between volume and value,” said Hieronimus.
The update from L’Oreal, whose stock is down about a quarter so far this year, shows “hairline fractures appearing,” with volumes sequentially softening, pockets of weaker demand and changing consumer behavior, Morgan Stanley analyst Pinar Ergun wrote in a note.
Only last year, L’Oreal Luxe surpassed the company’s mass-market division to become the group’s largest, and it has driven growth in recent quarters. However, amid weaker consumer demand, the unit was particularly hurt in the quarter by repeated lockdowns in China including Hainan, an island known for its duty-free shopping. Hieronimus said the outlook for China was currently “unpredictable.”
US and Canadian shoppers are also spacing out their visits to hair salons, Hieronimus said in an analyst call Thursday. “So we are planning that professional hair colour will probably slow down in the quarter to come,” he said. That division saw its comparable revenue growth slow from 11% in the second quarter to 4% in the three months to the end of September.
Analysts at RBC said L’Oreal’s third-quarter performance was a “beat, but debatable quality.” L’Oreal’s luxury unit was “well below expectations” and could spark fears of the same type of down-trading that Procter & Gamble Co. recently flagged, said Martin Deboo at Jefferies.
Hieronimus said he’s confident L’Oreal can continue to increase sales and improve its margin, notably because “the company has pricing power” and is growing “at twice the size of the market.”
L’Oreal’s active cosmetics division soared by more than a quarter, handily beating estimates, as brands recommended by dermatologists, such as CeraVe and La Roche-Posay, continued to gain popularity.
Also read: Why makeup trends of 50s, 60s, 70s, 80s and 90s are trending