L’Oréal CEO explains why the 114-year-old beauty company spends a billion euro a year on tech—more than it invests in R&D

Co-host Alan Murray joins for the pre-interview chat. 

Listen to the episode or read the full transcript below.

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Transcript:

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Alan Murray: Leadership Next is powered by the folks at Deloitte, who, like me, are exploring the changing rules of business leadership and how CEOs are navigating this change.

Welcome to Leadership Next, the podcast about the changing rules of business leadership. I’m Alan Murray.

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Michal Lev-Ram: And I’m Michal Lev-Ram. Alan, I actually gave our listeners a little preview of this interview in our CEOI wrap-up episode that aired earlier this month. And in that episode, we featured an interview with Johnson & Johnson CEO Joaquin Duato, who claimed that their consumer goods business is soon going to be able to compete with L’Oréal, which I found pretty surprising. Now, I had just interviewed L’Oréal CEO Nicolas Hieronimus a few days before hearing Joaquin speak, so I didn’t have a chance to ask him about this claim. But it’s a really big claim to make. L’Oréal brought in $42 billion in revenue in 2022. And that’s a 10% increase from the year before.

Murray: Yeah, and they are doing that, Michal, across the globe. They have 37 consumer brands across four verticals, almost 90,000 employees in 11 countries. It’s a monster company. And you interviewed Nicolas while he was at the company’s headquarters in Paris, right?

Lev-Ram: Yeah, that’s right. He was there at their HQ. Although, like you said, they are really all over the world with so many different brands. And L’Oréal had actually just wrapped their 2023 Paris Fashion Week runway show. This is a part of their luxe brand-building.

Murray: Nicolas took over the company in 2021. He was only the sixth CEO of L’Oréal. He himself has been with the company for 30. And another thing he has in common with Joaquin of J&J is leading a stable legacy company where people tend to stay, they really commit. I’m really sorry I didn’t get to join you for this one, Michal. I’ve met him before. I would have loved to have been part of the interview. What else did you talk about?

Lev-Ram: Well, it really was fascinating. And I actually was most interested in some of what he said about technology. You wouldn’t expect a beauty company to be, you know, so innovative and in the weeds on the tech side, but this is one of his passions and a huge area of focus for the company in general. They even have a Chief Metaverse position, by the way—that’s just one aspect of their tech agenda. And they today consider themselves a beauty tech company. Nicolas is actually giving the keynote at the 2024 Consumer Electronics Show about beauty tech, the first time that a cosmetics company CEO is doing this keynote. So we dug into that quite a bit.

Murray: Awesome. Sounds like a fun conversation, Michal. Can’t wait to hear it. So let’s dive in.

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Lev-Ram: Okay, Nicolas, welcome to the show. Lovely to have you with us here. I want to start out by asking kind of a broad question. L’Oréal has been around for a while. You’ve got us beat—Fortune’s been around for just 93 years. And I want to talk about just what it means to be a brand that has evolved so many times over so many decades. And now, you leading it—what is the secret, in your view, today, of that evolution, of staying relevant?

Nicolas Hieronimus: Well, first of all, hello, Michal. It’s a great pleasure to be with you, here from Paris, France, to talk about beauty and about L’Oréal. So you’re right to say that L’Oréal is a 114-year-old company. So we’re going to be celebrating our 115th anniversary next year. Beauty is an essential human need. And it’s an ever-growing industry. I mean, it’s an unattainable ideal that everybody’s striving towards, and we are here to create the means to to achieve these objectives and dreams, and, of course, the proof of that is that the market has been growing since, you know, I’ve been at L’Oréal for 36 years now. And the only year when the market was negative was during COVID. Not because people didn’t need beauty, but because stores were closed, and only those who were buying online could do it. So it’s a very dynamic market, and it’s the market we have dedicated our entire company to. We only do beauty, but we do all of beauty at all price points with like, more than 36 global brands, so that allows us to offer beauty to all, or should I say, beauty to each, because people’s aspirations that relate to beauty are very different.

You were telling me about your daughters. I’m sure their beauty expectations are different from yours and from your sister’s or mother’s, and we have to be able to satisfy everybody. And we do that through very effective products. In the end, you know, L’Oréal was founded 114 years ago by a chemist, and science, R&D, has always been at the heart of our model. We spend over 3% of our turnover in research, over 1 billion euro last year. We are one of the only companies in beauty that has fundamental research, meaning we work to discover ingredients, not just to make formulas, and therefore we are constantly offering the best of beauty to consumers. So that’s what we’ve been doing for 114 years to be ahead of the curve, to satisfy consumers.

Lev-Ram: So, I want to dive a little deeper into some of what you said about growth. Something is clearly working. L’Oréal sales are at historic levels. Last year, the L’Oréal group generated sales of over 38 billion euros, or about $42 billion, for those of us who think in dollars, and that was a 10% year-to-year increase. So can you tell us what’s really driving this growth? What are the products in the lines? I know you’ve made all sorts of acquisitions over the years as well, but what are the trends that are really pushing this growth forward?

Hieronimus: Well, first of all, let me say that during COVID, which was a time of crisis, we really increased our gap of the market and our leadership in a major way, for several reasons. One is that, despite the store closures and all the difficulties, we paused for a quarter, and then we resumed our innovations and our launches, and we know beauty’s an offer market. You have constantly to stimulate consumers’ appetite and desire. So we never stopped launching products, even when we’re in the middle in some countries’ lockdowns. Then, of course, the fact that we had become such a digital-first company really was a game-changer. Not only did we have very strong e-commerce capabilities all across all over the world, but we had also ways to engage with our consumers. For example, to have them try our products without having going to stores. The fact you know, we acquired in 2018 this Canadian startup called ModiFace that allows you, through augmented reality, to try on your phone, lipstick shades, hair color shades, foundations, or to do skin diagnosis. And that’s, by the way, one of the of the of the aspects of beauty tech we’re going to be discussing later, but that allowed our consumers to continue to try our products and buy them if they want it. So we really increased very significantly our gap, a gap versus the market during the crisis, we could—we grew twice the speed of the market in 2021, and, I will say, declined half the market decline in 2020.

If you ask me what are the fastest-growing parts of our business, clearly for years, our luxury division was a strong growth driver. It has become our number-one division in terms of size, and it’s a division that had the pleasure to meet for almost a decade with brands like Yves Saint Laurent or Lancôme, Kiehls, which is a great American brand. And Aesop joined our portfolio, which we may talk about later.  So that’s been a strong growth driver.

But more recently, we’ve had a great comeback of our mass market division through the rebound of makeup. Clearly, we are—this division is the global leader in makeup. We are the leaders in beauty, and in makeup in general, but I have to say that brands like Maybelline, NYX, really benefited from the reopening of social life, and, you know people gathering together again. And again, we came up with great initiatives and products. But if I must highlight one part of our business which is really flying—like in frankly unbelievable ways, like in 29% growth last semester—is our dermatological beauty division with brands like CeraVe or LaRoche[-Posay], SkinCeuticals. This division is really going, flying, because because of what was already pre-existing, COVID—but health has become, you know, on the top of people’s preoccupation. And having products that are both safe, because they’re prescribed by doctors and developed with doctors, very efficient and at affordable prices. So in the case of CeraVe, this has been incredible business. I mean, CeraVe’s a brand that we acquired five years ago. It was $150 million, and now it’s $1.5 billion. And it’s a huge success all around the world. So this desire for safe, effective products has really propelled this dermatological beauty division in the leading seat of our growth engines.

Lev-Ram: You mentioned a few acquisitions there, including Aesop. What would you characterize as the L’Oréal kind of playbook for M&A across the globe, especially as you look at the last few years. How do you evaluate these acquisition targets and decide to pull the trigger?

Hieronimus: First of all, I think there’s an important fact that you be interested in, is that out of the 37 global brands that we have today, only three are actually—two were created by L’Oréal. All the otherss were acquisitions across our history. So L’Oréal of course, which has two, when I say three, or two, is because L’Oréal gave birth to L’Oréal Professional, which is the hairdressing brand, and L’Oréal Paris, which is the mass-market brand. And the third one is Kerastase, which I’m sure you use, considering your beautiful long hair. So these three brands were—

Lev-Ram: First interview where somebody has mentioned my hair. Thank you.

Hieronimus: You’re welcome. But so, all the others were acquisitions. And I think the pattern is more or less always the same. First of all, we seek complementarity. So either in terms of channel, product category, geography, price points. We see growth, of course. We try to acquire brands that are growing, but that are still small enough, or at least with great international potential, because then what we do is, we globalize them. So typically, if I take CeraVe, if I take Kiehls, and Nyx, if I take next, to take a few American brands—these are brands that we acquired when they already have proven success in their home markets. Very complimentary of our portfolio in terms of positioning. And then we grow, we roll them out. And we, of course, continue to push them in their local market, but we make them global successes. And every acquisition, because it’s complimentary, gives us new ideas, new ways of doing things. I remember when we acquired Urban Decay, or NYX, which were indie American makeup brands, they were launching products much faster to respond to trends than we were doing. And so when we changed our ways of working to replicate what they were doing, when we acquired Kiehls, we discovered, I would say a certain approach to retail and to service, to consumers, which we now apply in many brands. And now we just made the acquisition of Aesop, which is a brand that’s already a bit bigger than what we traditionally acquire, but that still has a huge potential. That not only goes for stores, four or five stores in China, which are, by the way packed with consumers. And again, Aesop is a very premium luxurious retail experience with products that are also leveraging aromatherapy and essential oils. And I guess it will also get us stronger on many of these aspects.

Lev-Ram: I want to dive into the tech piece, because I think the way you’ve positioned the company and how much you’ve leaned into this is really fascinating. And I want to start by just first asking you about this announcement that you’re going to be delivering a keynote at the Consumer Electronics Show. I’ve been going to CES for quite a few years, I don’t think they’ve ever had a beauty CEO comment or speak. So tell me first a little bit about what it means to be a beauty tech company. What does that title even mean to you?

Hieronimus: First of all, I have to, I must tell you that I’m both very honored to do the opening keynote of the CES. I have to say I’m a bit under stress and pressure, because it’s a big show. So I like doing keynotes, but this one is particularly important. So, and as you said, it’s the first time ever a beauty company CEO is doing that speech. So, we are working very hard on making it worthwhile for the audience. But I think it’s a real testament to our commitment to technology.

You know, of course we’ve been, as I said—we’re a science-led company, we’re science-driven. And science today, of course, it’s chemistry, it’s biology, but it’s also technology. We, you know, early 2010, we really embrace the digital transformation, which was both a booster for, in the industry, with the development of selfies and try-ons, but it also was also an enabler for our teams, and in our own capacity to engage consumers and to offer them the best products. But technology’s evolving now so fast that we have really embarked into a next level of transformation, which is really, for me, twofold. One is towards the consumer. And another one is internal. And both, in the end, thrive on the leverage of data computing power to offer the best tailor-made solutions. First of all, for the consumers. We were talking earlier about ModiFace and virtual try-ons. But today, in the plethora of beauty products, if we want to be able to offer beauty to all, but a beauty that’s tailor-made for each individual, we have to have a deep understanding of one’s skin needs, psychology, skin issues, and using tech and data to make sure that the product or the routine I will recommend to you, Michal, will be very different from the one I would recommend to my wife, or I will use for myself. So we are developing diagnostics tools. We’re leveraging huge data partnerships with companies like Verily, for example, or startups, like BreezoMeter, to bridge the dots between, you know, your environments, your lifestyle, your skin, and your beauty objectives. And that’s really a way to increase the satisfaction of consumers. So that’s one aspect of beauty tech. And we’ve been showcasing many of these either diagnostic or application tools at CES for years now. And then there’s the other part, of course, is the internal part of beauty tech, which is using data to, for example, empower our researchers to formulate faster. And that’s where AI is really helping a lot. So we have our own… its the combination of the human power of the human brain and of the computing power of the machine with AI, and we see that both in research, or in operations, supply chain efficiency, we are already making strong progress in that direction. So it’s really a huge financial commitment for the company actually. We’re spending in tech more than we do, even, in pure R&D, is over a billion euro, slightly more.

Lev-Ram: Wow, that’s a really staggering statistic.

Hieronimus: Yeah, it’s a big number. And it’s of course, they are very synergistic. So in the end, the tech is the new leg of science for L’Oréal. The only challenge is to keep up with the pace of transformation of this technology industry. And that’s why being at CES, where it all happens and all the new technologies are shown, is a great privilege and a great source of inspiration for us.

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Murray: Jason Girzadas is the CEO of Deloitte US and is the sponsor of this podcast and joins me today. Welcome, Jason.

Jason Girzadas: Thank you, Alan. It’s great to be here.

Murray: I have a sense, Jason, from conversations on Leadership Next and elsewhere, that business leaders today better understand the benefits of having a diverse set of voices at the management table. But what are some of the lessons you’ve learned through Deloitte’s own DEI journey?

Girzadas: Yeah, lots of lessons learned. I think we’ve certainly made progress. We feel like that’s a function of a couple of things: Deloitte is very proud to have published twice a transparency report that sets forth long-term expectations for the diversity of our workforce, and how we hold ourselves accountable, that is meant to be—and I think has served to be—a role model stance for us to take, and one that we encourage all businesses to replicate. The second is to get specific, in addition to transparency, the specific objectives around gender diversity around Black and Hispanic, Latinx, as well as other cohorts that we have really established, not only a recruitment and retention, but also advancement goals for. And finally adding to the mix, how we intend to hold ourselves accountable for supplier diversity, as well as longer-term ambitions for us in this space. So our experience is somewhat emblematic of what a lot of large organizations go through. But for us, the commitment and transparency, as well as the specificity around cohorts, has made a difference. And we’ve seen positive results in the last two years that we’re hoping to build upon. Do we declare success? Absolutely not. But it’s made all the difference for us.

Murray: Jason, thanks for your perspective, and thanks for sponsoring Leadership Next. 

Girzadas: Thank you.

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Lev-Ram: It’s interesting, though, you know, you’re talking about technology as sort of a vehicle for more inclusivity within your sector. And I wonder if it’s also a vehicle for you know, consumer empowerment and in some other ways. My daughters actually were in France this summer. And they came back with this app, which I’m sure exists everywhere. And now they’re scanning all of my cosmetics products. And right away, this app shows them, you know, a scale of how environmentally friendly, how healthy, you know, the product is. And so I’m wondering, that level of empowerment, consumer empowerment, does that put even more of an onus on companies like L’Oréal? I know, you’ve already done a lot of work on making sure that, you know, the contents of the products are cleaner and more sustainable. But how does that impact how you do your product development, when consumers have so much power in their hands? 

Hieronimus: Well, actually, we are eager to empower consumers even more. We’ve been transforming ourselves, and our products, and our formulas, and our packaging for decades now. And we are very much aligned on the SBTI target to stay within the 1.5-degree temperature change. But it won’t happen without the consumer themselves changing their habits. So we’ve done several things. The one thing we’ll be talking about, which is very dear to my heart, is that we have developed a methodology, which we call eco score, to precisely measure the environmental footprint of products, ranked from ABCD to E, E being the worst. And it’s been done with external scientists with NGOs. And it involves everything including the scope three, the usage phase, and the rinsing of the of the product. And that’s what I like also about being a CEO today is that it’s not just about winning, it’s about also having an impact, and involving other stakeholders in the transformation. So, we call them—first of all, another company, which we know is also at the forefront of sustainability, which is Unilever. And we decided together to create a consortium and invite all the other beauty players in industry, all the other retailers, to join that movement and to align on what this eco score would be so that we can all have the same score on our products. And for consumers to be able to choose, I have to say, it’s already on our products. And so if you go to the sites, internet sites of Garnier, for example, you will see the environmental impact of a Fructis product, it takes a bit of time to align everybody, because of course each company has different perspectives on on when to score should be and should encompass but we’re getting there. But we don’t stop there. We also transform our products. For example, I’m a great believer that the best way to reduce packaging intensity is to use refills. So if you take our fragrances, as you may know, we are the worldwide leader in fragrances, all our new fragrances, and today 70% of our catalog is refillable. So you can buy your beautiful bottle of Prada Paradox, or whichever you want to buy. And then you can buy a refill, which has much less packaging, much less glass, and you can refill your bottle. And of course, it’s not only more sustainable, but it’s more economical, because it provides a real saving for the consumer because in reality, even though consumers claimed that they want to shop sustainably, if they don’t see another benefit, they will hardly sacrifice the either the beauty of the packaging or the price. So we make these refills both more affordable and more ecological. And that’s our way to contribute to consumer behavioral change. Indeed, the consumer has a role to play.

Lev-Ram: So I got another question for you on this kind of intersection of changing consumer behavior and technology. I saw this interesting story about a woman I think of on TikTok, who was mixing all these different nail polish colors in water. How do you make sure that the way you’re listening to and interacting with consumers is evolving as those consumers’ platforms are evolving? And what teams do you have in place to make sure that they are really on top of it and catching all of the latest trends so that that can inform your product development?

Hieronimus: Well, I think there are two sides to your question. First of all is, how do we stay on top of the new, I would say, new engagement channels with consumers, and how do we speak to consumers or listen to consumers? Frankly, here we are true to the mantra I was talking about earlier, which is “seizing what is starting.” You know whenever a new channel of communication appears and becomes the channel of a generation, which is the case of TikTok today, we jump on it, and we set up normally, we set the team’s best practices. And usually, we’re pretty good at it, and if you take into account a brand like CeraVe, which is today, according to Advertising Age, is the one of the two leading brands as it relates to TikTok strength and engagement strategy. So we have teams, of course in the USA, but in China in Europe, and we really have our pulse on both on the new media and on the new consumers expectations and communication styles. So that’s, that’s very much in our DNA. And there are many, many ideas that spring from, from what’s happening on the social networks—you will remember the contouring fashion, back a few years ago, it was just using existing products in a in a very creative way to have a very specific result. And that we follow and it inspires our marketing teams, and inspires our lab. So the great thing is that now is with social networks, and even the you know, ratings and reviews that we all look at, when we choose a restaurant or hotel or a beauty product, we have, you know, instant, real-time consumer loop. And by the way, that’s part of the tag that we have equipped our R&I with, our R&D with, is that whenever we launch a product, we know instantly, whether it’s great, good, should be improved, what are the potential flaws. And that allows our labs to immediately rework if necessary, and come up with an even better formula. So it’s fantastic, you know, when I started, you had to go into the street and ask consumers what they thought about your product. Now their feedback comes directly to you. So it’s fantastic.

Lev-Ram: I want to ask you about culture also. And there’s such a rich history in L’Oréal of the culture, the in-office culture, the power of the brand, and the history of the brand, as you’ve, you know, made more of these forays into tech, into moving so fast to develop product. And I know there’s always been a deep science background in history there. But you know, agile development, these are these are newer concepts. And as the acquisition targets have been so global, and the culture has expanded, how do you kind of keep the DNA alive? How do you keep in focus what L’Oréal has been and what’s worked for years and spread that through the company?

Hieronimus: Well, thank you for this question. Because, you know, I think in the end, the real recipe of L’Oréal’s success—we talked about science, about brands, about products, but the real recipe is our people and our culture. And it’s an incredible asset and have to say, you know, having been 36 years in this company, I’m still amazed every day at the level of passion, commitment, creativity, interconnection of our teams, and our capacity from Shanghai to New York, Rio or Paris, to behave the same, to think the same and to be fully aligned. So how do we keep this alive? And it’s an even better and more important question at a time of post-COVID remote working trends. And I think that’s something that’s very, very dear to my heart.

So how do we keep it here alive? First of all, we have people that stay for quite a long time at L’Oréal. You know, I was looking, if you take the top 300 managers of L’Oréal, the average tenure in loyalty is 18 years. So there is a very strong, you know, very strong stability. We regularly and constantly bring people from outside, either from acquisitions or people that we recruit even at high level, but there is a very strong common culture that’s been passed on, either orally, or physically, when when we have big gatherings across the years. We communicate a lot, and I do communicate a lot. Last year, I recorded, I think I counted 35 videos, to share what’s happening at the group level, the vision, the strategy, and that’s bringing people together. We, very early on, post-COVID, we said at L’Oréal—and I knew at the time it was not so popular—when you were hearing what, you know, the pitch from the Silicon Valley companies that it was the end of office work. We said, well, at L’Oréal, you have to be in the office three days a week, we’re going to make it worth it. We’re going to transform our offices. And I don’t know if you’ve been to the L’Oréal West Coast offices in El Segundo, but you should go and see it, because it’s truly an incredible place. And frankly, you want to be there. You want to spend some time there. So we want to keep people together. We believe in serendipity. And we travel, we meet people, so it’s a very loyal company in the end, and people share the same passion.

Lev-Ram: Thank you so much for joining us. It’s been great hearing about everything that’s going on at L’Oréal, appreciate it.

Hieronimus: Thank you, Michal, and have a good day in California.

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