L’Oreal Sets Eyes on Chinese Consumers, Buys Luxury Brand Aesop

L’Oreal’s acquisition of the Australian luxury brand Aesop from Natura & Co., announced Monday (April 3), for an enterprise value of $2.53 billion, sets L’Oreal to expand its presence in the high-end skincare market and facilitate international expansion, especially in China.

Through the acquisition, L’Oreal is entering the upscale skincare market in Australia and New Zealand, leveraging Aesop’s strong presence and loyal customer base. Additionally, the acquisition is expected to bolster L’Oreal’s position in the high-end cosmetics industry and facilitate its international expansion, most notably in China — the world’s largest cosmetics market and a consumer base less impacted by economic fluctuations.

Why L’Oreal Sets Eyes on China

L’Oreal’s acquisition is strategic, as it has a reputation for acquiring promising brands and using its global distribution network to extend their reach. L’Oreal CEO Nicolas Hieronimus believes that Aesop has significant potential for growth, particularly in China, where the brand recently made its debut with two stores in the last quarter of 2022, as well as in travel retail.

“Given L’Oreal’s strong track record of creating value from recent acquisitions, we expect this transaction to be helpful … despite its limited size relative to L’Oreal,” he said.

Aesop, regarded as one of Natura’s most successful brands, has established a presence in nearly 400 locations across the Americas, Europe, Australia, New Zealand and Asia, including two new stores in Shanghai. According to reports, the brand generated $537 million in sales in 2022, a 21% increase from the previous year after accounting for currency fluctuations. Aesop achieved double-digit growth in all regions and exceeded expectations in its entry into the Chinese market, which is renowned for its rapid growth in the beauty industry.

With that in mind, Barclays analyst Ian Simpson anticipates that Aesop’s acquisition will contribute to L’Oreal’s organic sales growth by about 1.2% this year.

Largest Acquisition to Date

L’Oreal’s acquisition of Aesop, per data from Dealogic, marks the company’s most substantial brand purchase to date. L’Oreal already owns a range of labels, such as Maybelline and Lancome, and has been strategically shifting towards the upmarket, where economic fluctuations have less impact on consumers. Jie Zhang, an analyst at AlphaValue, states that the acquisition will enhance L’Oreal’s dominance in the natural cosmetics sector, where significant corporations are now directing their deal-making activities.

By acquiring Aesop, L’Oreal can leverage the brand’s established distribution channels and customer base in China, along with its reputation for providing high-quality, sustainable skincare products that are natural. Aesop’s product line, comprising hair care products, facial cleansers, and moisturizers, will complement L’Oreal’s existing range of products and allow the company to offer Chinese consumers a wider array of products.

Furthermore, the acquisition will enable L’Oreal to expand aggressively in the Chinese market and capture a significant share of the country’s booming cosmetics industry. With sales expected to reach $62.8 billion in 2023, China is the world’s largest cosmetics market.

Conversely, the sale of Aesop to L’Oreal will alleviate some of the financial pressures on Natura, the Brazilian company that owns Avon and The Body Shop, caused by its high debt and declining profit margins.

The sale of Melbourne-based Aesop is part of Natura’s wider organizational restructuring following the departure of former CEO and Executive Chairman Roberto Marques, who was replaced by Fabio Barbosa last June. The acquisition is set to be completed in the third quarter of 2023, pending regulatory approval, and will be paid for in cash.

Consumer Segment Isn’t Ready to Spend

PYMNTS reported last month that China’s consumer spending hasn’t seen the surge many expected after the lifting of COVID-19 restrictions.

In fact, the CEOs of eCommerce giants JD.com and Alibaba expressed that China’s consumer spending has yet to rebound from the pandemic-induced downturn, according to a CNBC report.

According to the report, the Chinese government announced on March 5 that its target for economic growth this year is 5%, a goal that CNBC labeled as conservative. Officials also stated that they anticipate consumption will play a crucial role in driving growth, but it remains constrained.

See also: Retailers Say Chinese Consumer Spending Has Not Yet Recovered From COVID

Like L’Oreal, after the removal of pandemic-related travel restrictions in China, many businesses across different industries have been expecting a resurgence in consumer spending both domestically and internationally.

For example, Starbucks and McDonald’s have made efforts to expand their operations in China, hoping to capitalize on the anticipated rise in consumer demand following the lifting of pandemic-related travel restrictions. “I remain more confident than ever that we are still only in the early chapters of our growth story in China,” Starbucks Interim CEO Howard Schultz said in early February.

Similarly, in the luxury goods sector, Bernard Arnault, chairman and CEO of LVMH, stated in late January that luxury brands will have new opportunities with the reopening of China. “We have every reason to be confident — indeed optimistic — on the Chinese market,” Arnault said at the time. “In Macau, where the Chinese can now travel to, the change is quite spectacular. The stores are full, and it’s really come back at a very strong pace.”

In the pre-pandemic year of 2018, Chinese consumers purchased about one-third of the world’s luxury goods.

As brand and retailers wait for consumer spending in China to resume to pre-pandemic levels, only time will tell and the duos efforts to capture the loyalty of consumers at large.

Through the acquisition, Aesop joins a portfolio of brands including Kiehl’s, Maybelline, Lancôme, Thayers Natural Remedies, and many other brands.

In 1987, Dennis Paphitis, a hairdresser based in Melbourne, founded Aesop. The brand gained a loyal following for its skin, hair, and body products that did not contain animal-derived ingredients, such as honey or beeswax. Aesop’s trademark dark bottles with white and black labels became popular at high-end restaurants and among interior design enthusiasts. Aesop’s sales increased dramatically in 2009 when it regained control of its global distribution from independent distributors and started vetting restaurants and cafes that sold its products. In 2017, Natura & Co acquired Aesop from Paphitis.