L’Oreal says there are signs shoppers are trading down

L’Oreal SA said there are signs that shoppers are trading down to cheaper skincare products in fresh evidence that soaring inflation is eroding household budgets.

The change in consumer behaviour is most pronounced in the UK “where the inflation is the highest,” with trading down affecting the skincare category there but not haircare nor fragrance, said Chief Executive Officer Nicolas Hieronimus in a Bloomberg TV interview.

The beauty market is still “very dynamic” at the global level, even though there’s been a “slight rebalancing between volume and value,” he added.

The French cosmetic giant’s shares fall as much as 5.5% in Paris trading 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 of roles, the luxe unit was weaker than the mass-market consumer products unit, which sells Maybelline New York mascara and Garnier shampoos, whose strong sales helped L’Oreal report a 9.1% uplift in third-quarter comparable sales.

Only last year, L’Oreal Luxe surpassed the company’s mass-market division to become the group’s largest and has driven growth in recent quarters. However, amid weaker consumer demand, the unit was also particularly hurt in the quarter by repeated lockdowns in China including Hainan, a duty free island where Chinese shoppers have been going. Hieronimus said the outlook for China was currently “unpredictable.”

Analysts at RBC said L’Oreal’s third quarter performance was a “beat, but debatable quality.” L’Oreal’s luxe unit was “well below expectations” and could spark fears of the same type of down trading that Procter & Gamble recently spoke about, said Martin Deboo at Jefferies.

Hieronimus said he’s confident L’Oreal can continue to grow sales and improve its margin notably because “the company has pricing power.”

Comparable sales at L’Oreal’s active cosmetics division soared by more than a quarter, largely beating estimates as brands recommended by dermatologists, such as CeraVe and La Roche-Posay, continued to gain the popularity among consumers. Shares in L’Oreal are down by around a quarter so far this year.

The French beauty group results follow disappointing performance at Kering SA which owns the Gucci brand whose growth has failed to keep pace with rivals LVMH Moet Hennessy Louis Vuitton SE and Hermes International.

—Bloomberg