Agon In Command

A lifelong sailor, Jean-Paul Agon, Chief Executive Officer of L'Oréal, has no fear of uncharted waters, even in the roughest of seas.

Business conditions are far from serene, in the view of financial analysts. Lurking beneath the surface is growing competition, particularly in the U.S., where mass is heating up, epsecially with private label brands, hair care share wars and the persistent challenge to L'Oréal's dominance by archrival Procter & Gamble.

But Agon exudes the confidence of a new chief who finished his first year with a resounding exclamation - an 11.9 percent increase in profits to 1.83 billion euros, or $2.3 billion, on a sales gain of 8.7 percent to 15.79 billion euros, or $19.84 billion. During a recefnt far-ranging interview in his 10th-floor office at L'Oréal headquarters in the Paris suburb of Clichy, he seems at ease - posied and affable, quick to laugh and show flashes of wit. He has a ready smile and always seems charming. But as as his friend Publicis Groupe president Maurice Levy cautions, Agon's affable personality and Latin warmth cloaks an iron determination. "He will not abandon his position unil he has the solution," Levy warns. For a man of obvious drive, Agon can seem laid back. He likes to spend his summer holiday sailing through the Greek Islands, bantering with his crew in the their native tongue. That same down-to-earth openness allows him to feel completely at ease in a humble taverna in Astoria, Queens. Above all, a piercing intelligence enables him to frame complex issues adroitly, with his favorite punch line: "It's simple."

Optimism comes naturally to Agon, who started his career at age 25, struggling to make something of L'Oréal's tiny, flyspeck of a business in Athens. He steadily rose up through the ranks for 29 years, wrestling with the challenges of one division after another, to finally take the helm last April.

It's a job that he has been groomed for by Sir Lindsay Owen-Jones, his charismatic predecessor who, during his 22 years as ceo, transformed L'Oréal from a Ffrench export power to the industry leader of globalized brands and who remains the company's chairman. Nnow the 50-year-old Agon is steering Jones' through the chop of the 21st century, predicated on his vision of the company's vibrancy and how it lives in the world. "Tthe first part is to make an even greater business success," he says. "second part is to make the L'Oréal experience a great satisfaction for the employees, more than ever a great place where people really can have great personal and professional lives." third part is to make "a great citizen of the world," Agon says. "The leading beauty company also has to take care of the beauty of the world. We cannot just be focused on our own success or our own satisfaction. We also have to share with who's around us and to contribute to make the world a little bit better, a little bit more beautiful."

Following in the footsteps of Jones may seem daunting, but Agon stepped right in, at least in the view of the maestro himself. "Jean-Paul really did have a very successful first year," says Owen-Jones, adding that "He justified the confidence
I had placed in him. Rright away he found the right combination between modesty and ambition,
and between continuity and renewal. People followed him immediately and instinctively. company didn't miss a beat. He gave a new sense of dynamism to an already successful model, with a lot of energy and youth."

Indeed, Agon has set out to map a new world of opportunity fueled by the emerging markets of China, Iindia, Russia, Brazil and Mexico. He has also blazed new avenues of growth in the masstige segment with the acquisition of Body and in the rapidly emerging "bio-organic" category of products. Iin the process, seems to be morphing from a company that was founded 98 years ago by Eugène Schueller, a chemist who invented the first synthetic hair dye, into an organization that employs nearly 3,000 scientists in 30 different disciplines practicing a more holistic definition of science designed to also harness the power of natural ingredients.

In promising Wall Street organic sales growth of 6 to 8 percent a year, Agon plans on hitching L'Oréal's marketing engine and financial muscle to the emerging markets outside of bastions in Western Europe and North America, what the company has referred to as the rest of the world. "We computed that every year, roughly 70 million new [consumers] in the world gain access to a level of income that allows them to buy our brands and products," Agon says, noting that globalization is one of the most powerful cylinders in the L'Oréal growth engine.

These "other" markets are already larger in sales volume than North America. "Tthey are now almost 30 percent of our business, and contribute to 60 percent of our growth." He predicts that one day - "very soon" - the emerging markets will generate 50 percent of L'Oréal's volume.

"What we're seeing right now is a completely new condition of the worldwide economy," he says, while discussing China, Iindia, Brazil, Mexico and Russia. "Because of the transfer of wealth around the world, these markets opened up 10 or 15 years ago, but it's really now that they're booming in terms of economic growth. Tthis economic boom creates new social classes and new categories of consumers who now have access to our products. is a historic opportunity.

"We still have the ambition to grow our business in North America and Europe," he continues, "but if you're able to grow your business in the rest of the world by between 12 percent and 15 percent a year, mathematically it helps you a lot. It accelerates
your growth worldwide."

Since he was named ceo, market sources have speculated about the possibility of making more acquisitions. "It's kind of a paradox," he says. "But an acquisition for us is first and foremost an opportunity for future organic growth. We're not looking for an acquisition that increases our size," he says, underscoring the point by citing Maybelline New York as an example. The color cosmetics brand was doing a little less than 200 million euros when Owen-Jones decided it could go global. Now a decade later, it's number one in the world with 1.4 billion euros or $1.9 billion in sales. Ffor 10 years, the Maybelline acquisition has fueled the organic growth of the company.

"We have to be opportunistic and pragmatic, and if there are opportunities to attack new segments or new markets or with a new positioning that we don't have in our portfolio, we should look at it," he continues. Agon adds, "Sometimes people think that we won't be able to use our money because there are no targets in the beauty industry. don't agree. There are and will be interesting opportunities," he says, declining to give examples.

Instead, he points to three major moves in 2006, the acquisition of Body Shop, Laboratoires Sanoflore and the license with Diesel. The Body Shop deal caused the most stir because at first blush, it appeared that was flirting with retailing. But Agon has been tireless in knocking down that notion. A retailer, like Macy's and Wal-Mart, sells the brands of others, he maintains.
The Body Shop simply is a brand with an integrated distribution system with its own retail outlets, no different from Kiehl's, Gucci, Chanel or Hermès. "Who ever said that Hermès is a retailer?" Agon asks. "They believe that in order to communicate
the magic of the brand, it's very important to sell the brand in their own stores." Alluding to the Body Shop's founder, Anita Roddick, he says, "Because she invented a brand that was different from the existing brands, either in mass or luxury, she realized that in order to communicate the values and maximize the experience of her brand, she needed to sell it in her own stores."

Agon says he would be open to adding a retail component to other brands, but "we have our plate quite full with the Body Shop." describes the chain, which has 2,250 stores in 50 countries, as "the absolute worldwide leader of masstige - between mass and prestige and a real channel in itself."

Still, he sees unlimited potential. "Body Shop is very small in America. They have no stores in South America and are still quite small in Asia," he says, reiterating that the company could be doubled to 5,000 doors.

Reached in London, Roddick describes her current role in L'Oréal-owned Body Shop: "I'm an agitator, a s--t stirrer and a rabble-rouser. My job is to do what I've always done here - to collect stories, myths and legends."

The crusader and beauty maven notes that her controversial decision to sell to one of the multinationals she'd derided in the past was influenced by the respect shown to her by L'Oréal's top rass. "Tthey didn't use BlackBerrys during discussions," she recalls. "They were well-mannered and seductive."

As for the U.S., which has been seen as something of an Achilles' heel for the Body Shop, Agon acknowledges that America is the country "where masstige was born" and therefore, the toughest competitive market. He adds, "From what know, The Body Shop had difficulties more in the execution of the strategy.

At the same time as we are able to fix our own issues and get it right, the U.S.. will be one of the most interesting markets."
Asked how L'Oréal can use its strong suit of applying research and development to add value without nudging up prices or alienating the constituency of what has been an anti-animal testing, anti-science brand, Agon tackles the issue head-on.

"I think the opposite, he says. "It's a great opportunity for us because of the weakness of our competitors in the masstige segment is the lack of innovation, quality and star products." His second point involves an admitted shift in direction for L'Oréal toward marketing natural products. "The mission is to bring quality and innovation to all consumers, whatever their choices or preferences," he says, "and there is a growing tendency catin the world for consumers wanting natural ingredients."

He continues, "Some people really want the best of technology because they want the best results. Other people just want something that is organic and natural. The mission should be to bring quality to all these consumers."

In expanding the scope of R&D, Agon seems to be leading into new territory. "Science can be what it chooses to be," he said. "It can bring high technology to people who want this or science can bring the best of nature to people who want organic products." He described a new upcoming line of products as "a great combination of Body Shop values and expertise."

That marriage concept was also applied to the acquisition of Laboratoire Sanoflore. It is miniscule, with a sales volume of only 15 million euros, or $20.3 million at current exchange, Agon concedes, but it's one of the French leaders of the budding bio-organic market and has been earmarked by L'Oréal to be the leader of a new category. "In our portfolio, each brand is a champion of its positioning." He notes that Sanoflore's bio certification imposes "some very clear restraints; can bring even within these constraints more efficacy, more quality."

Speaking of how definitions have broadened in the L'Oréal labs, Agon says, "not only about the chemistry, that's the past. The science of beauty today is about chemistry but it also is about biology, it's about natural ingredients, it's about dermatology. If you meet our scientists, you will find all types of disciplines. Tthe science of beauty is very, very comprehensive today."

He then drew a parallel with one of the champions of the past decade, Posay, which did only 16 million or 17 million euros, or $21.7 million or $23.1 million, when L'Oréal bought it in 1989. As a brand recommended by dermatologists, "We identified this trend as something really emerging and really maybe important for the future." Today the brand is 20 times larger. "We passed the 300 million euro level [$407.2 million] last year and we think La Rroche Posay has a huge potential worldwide because everywhere in the world there is segment of people who want and prefer a dermatologist brand."

He continues, "exactly the same story for bio-organic. Ttoday it's small but it's growing and it's also universal. Because of this type of attitude, you can find it everywhere in the world - you find it in Europe, in the U.S., in Japan. We believe that the potential of Sanoflore will be similar to that of Lla Rroche-Posay and it will be another brick in the L'Oréal building."

L'Oréal's edict for global propositions of high organic potential does have its exceptions. Although Agon points out that when is hunting for a new avenue of growth, the possible acquisition target "has to be clearly identified as something that's going to be strong and also something that's going to be completely worldwide. We're not interested in a local thing."

But L'Oréal also makes purchases for other reasons, such as its recent upping of its stake from 30 to 100 percent of the Beauty Alliance, a Tampa, Fla., based salon distribution company to "understand better the way [the distributors] work with their hairdressers and how we could improve the relationship between our brand and the hairdressers."

The market is complicated because of the practice of booth renting. "If you have a salon with 10 stylists," he said, "you have 10 [businesses] to deal with, because each is buying his own products."

On May 9th, L'Oré;al gave them another salon hair care line to choose from when it acquired PureOlogy, aimed at women with color-treated hair. Agon's lofty vision will have to be propelled to fruition by the piston power of the L'Oréal financial machine. Agon maintains that the business model, as created by Jones, consists of six cylinders: scientific innovation, product creation, the power of "a portfolio of amazing brands," the ability to create added value, the power of globalization and acquisitions, or the "cherry on the cake that allows us always to find new territories, new segments and new categories on which we can build our future expansion." counts L'Oré;al Paris as "the number one beauty brand in the world" and Lancôme as the world's top prestige brand.

Some critics question whether that machine needs retooling for the Internet age. Specifically, how can a company cope with the apparent price polarization, as consumers seem to opt for either inexpensive mass brands or ultra-pricy specialty store models. Many of L'Oréal's brands sit squarely in the unpopular middle.


That question drew a quick and animated response. "It's absolutely just wrong," he replies. "The segment of cheap brands is not expanding anywhere in the world. private labels are not expanding that much and when they are, they're taking share from the very cheap brands."

"On the top of the pyramid, it's true that we've been seeing recently the expansion of very expensive brands, but it's not a question of polarization. just a question of permanent trading up. People more and more want better quality, better technology, better products.

"Polarization of the business is just an illusion," he continues. "If you take the skin care market, you'll see in the U.S., for example, that there is absolutely no polarization at all. There's just an amazing trading up with new products launched by L'Oréal, by Olay, and Vichy in the drugstores; with Lancôme, and also with the expensive brands. They have a very small market share but they are contributing to the expansion of the market."

He was equally dismissive of the criticism that L'Oréal is mired in traditional forms of advertising in an age when the prime consumer has gone digital. "Advertising is just a way to communicate about our products," he retorts, adding, "My kids never watch TV. They spend several hours a day on the Iinternet. The new generation have new habits in terms of media and we have to adjust our strategies to that. And that's what we're doing."

He points out that more than one-third of L'Oréal's brands don't depend on traditional advertising and, in many cases, are going digital. As for electronic retailing, did 75 million euros, or $102 million, worldwide last year, mostly with brands that target a younger demographic, like Kiehl's. Much has been made on Wall Sstreet about upstart indie brands, like Bare Escentuals, the mineral makeup concept that quickly shot to over $300 million in sales. Asked how he can build in enough flexibility in the huge L'Oréal machine to compete with nimble entrepreneurs, Agon says, "We said, 'Wow', this lady had a great idea, we should have had this idea. But okay, we had 100 others. So you can't always have ALL the ideas and you can't prevent other people from being clever. It doesn't change the business model because there was one Bare Escentuals in the past five years."

His prescription for corporate flexibility is decentralization. "We're not a big machine. We're a flotilla of boats. When you visit our divisions, you don't see a big structure with one man in charge of everything. You see almost completely autonomous
brands and divisions and each brand is made of a team that is completely fanatical."

During a February meeting with security analysts, Agon outlined the difficulties in the American market, stemming mostly from the consolidation of department stores. He followed up in the interview, saying, "when Federated [Department Stores Iinc.] and May [Department Co.] merged, this clearly creates some turbulence in the selective business. On the professional side, we reorganized our distributor's network and this also had some consequences. I hope that now the situation is clear again."

He continues, "I don't believe in the extinction of the department store. [They] have to reinvent themselves, but they have a great role to play. Macy's has a national coverage and can do national promotions and advertising." Agon says he considers freestanding stores opened by brands like Lancôme as purely a complement to department stores, not an alternative. Particularly in city centers, he says, "It's good to have a place where the brand is completely optimized -  optimal space, optimal merchandising, optimal staff, because this is also a place where you learn a lot about your relationship with the consumers."

A bright spot in the U.S. is the mass skin care market. "Skin care has been the most obvious category where trading up has happened," Agon said. "When you see what is the skin care market today, compared to what it was five years ago or even 10 years ago, it's an amazing transformation."

As for another aspect of the American market, his nemesis Procter & Gamble, he acknowledged feeling that the fuss made about the rivalry between the two giants is overblown. Breaking into a slightly sly smile, Agon says, "We have the pleasure to compete with them in many categories. We compete in hair color and we're doing fine. We're competing in makeup and doing fine. We are competing in hair care and we did fine, I think. We have the pleasure to compete in skin care. But you know our main purpose in our life is not to compete with P&G."

When pressed again with the question of whether he pays special attention to the folks from Cincinnati, Agon laughs heartily, "It's not my hobby."

"There are several players in the market and P&G is a serious player. We're a serious player. But there are still many other manufacturers and players in the market and that's fine."

One question that hovered over Agon's ascendancy was how well he could work with Owen-Jones, 61, who remains chairman. In the words of both men, it's just fine. "We are doing exactly what we said we would do," Agon says. "He's doing exactly what he said he would do. in charge of all the relationship with the shareholders, with the board. We discuss together key strategic decisions regarding acquisitions, regarding key human resource issues. We meet once a week and we have absolutely no conflict."

Agon praises Owen-Jones' decision to step down and hand over power as "absolutely a miracle. And he has never changed his mind. That's a fantastic example of strength and determination," says Agon, who attributes their bond to the quality of a relationship that goes back 20 years. When asked how their management styles differ, Owen-Jones says, "A ceo of a cosmetics company shares his time between the conceptual part, the development of worldwide brands, and the terrain, visiting the brands. spends a little more on the second and a little less than on the first. He seems a lot cooler and laid-back. As Jean-Paul says, 'He is not as nice as people think and I am not as tough as people think.'"

Both Wall Sstreet analysts and executives talk about the seamlessness of the transition, particularly in New York where Agon's last post was as ceo and president of L'Oré;al USA. More than one executive there says, "It's like he never left."

There is also talk in the industry about Agon's easy accessibility, compared to the latter years of his predecessor's storied tenure. Iin discussing differences in their styles, Levy of Publicis, a friend of both men, points out that Owen-Jones rose to the top at the unusually young age of 38, when he was named ceo in 1984. He was made chairman at 42. Iin contrast, Agon was plucked from the operational ranks and named ceo at 49, meaning that his identification with those he now oversees is still fresh and he is closer in age to them, resulting in a sharper sense of kinship. "OJ is such a brilliant man that people were in awe," said one executive, using the familiar nickname for Owen-Jones. "Some people were intimidated; Jean-Paul is much more approachable."

Still, with the change in power there's a sense of a loosening. "There's more open-mindedness in terms of finding different ways to bring beauty to the consumer, especially in developing markets," says one colleague. "He has this supernatural power to conceptualize things. In a meeting you will present him with a problematical situation and he will listen and then give his conceptualized version back to you with a solution, all at once."

Agon lies to say there are no taboos, which turns out to be more than a slogan. "You can discuss anything with him," says another executive. "If you don't bring up a subject, he may do it himself."

"What I like about him is that his sense of energy is great," says Robert Salmon, a retired L'Oré;al executive who worked with Agon twice, when he was rebuilding Biotherm and when he oversaw Asia. "And he has great vision," Salmon says, adding that Agon "knows how to motivate people." He urgest the new ceo to surround himself with bright young minds in tune with the digital age. He also suggests that Agon should consider forming alliances around the world, such as with Natura in Brazil.

One Wall Street analyst, talking on the condition of anonymity, says of Agon, "His colleagues respect but don't fear him. It allows Agon to be challenged internally much more than Owen-Jonens was in the last few years of his tenure." Another analyst says Owen-Jones was "clearly someone who cared about his legacy, especially in terms of financial matrix" during his last few years as ceo, whereas "Jean-Paul Agon is incredbily engaged in the day-to-day business."

When Agon was running the American subsidiary in New York, he acquired a reputation for rolling up his shirt sleeves and delving into the details of a launch plan offered by subordinates. To some, this was micromanaging. But to him, it's simply taking an interest.

"I like to understand and I like to contribute and I like to work with the people rather than that the end, taking a decision based on reports," he says. "I like to share and discuss and understand the issue." He says it's unfair and inaccurate to say that he has a controlling personality. "I'm not a control freak at all because I don't control anything at the end," he says. "What I do, it's a very different management style. I want to agree wtih the teams at the origin of the project. So when we work on a project, for example, I really want to be part of it, because I like it. But also because I think that I can contribute to the right definition of the project. So we discuss that quite at length at the beginning of the project and once it's done, I don't control anything. They do it the way they want because, very honestly, I think they are very good at doing it - much better than [me] - and it's not my job."

Agon also has a passion for foreign travel. Even when he is discussing difficult markets, like Japan, his optimism bubbles up. "This is a great country for beauty," he says. "Japanese women really love beauty and they are really experts. Mathematically, we have 2 or 3 percent market share and it's the second market in the world. So there is 97 percent of the market to conquer," he says. "As these consumers are very demanding," he continues, "it's a very important market for us because it's a way to test the level of quality of our products, of our packaging, of our concepts of our brands, of everything. It's a way to harden, strengthen, sharpen up a position for Asia and for the world."

He's also looking for new ideas. "During a visit to Brazil last year, I was absolutely amazed by the creativity of Brazilian hairdressers in terms of hair care." Explaining that the market has a multi-ethnic population with all types of hair, "It's a real challenge for the Brazilian consumers and for Brazilian hairdressers. I find in Brazil the most creative hairdressers of the world in terms of invention of new hair care techniques."

As a result, L'Oréal set up a lab in Rio de Janeiro to invent new hair concepts for worldwide distribution. "Ssome of the innovations that we made for Ké;rastase and worldwide last year, in fact, came from Brazil," he says.

Like China, Agon expects Iindia to become one of the great markets of the world. As in L'Oréal went into with all its brands blazing, instead of introducing them one at a time. "India first is a great country, it's a beautiful country and it's a very large country. People are very educated and they have a huge potential," he says. "They are clever people. They all speak Eenglish, which is a huge advantage in this modern world.

"What held it back until now was the fact that there was no modern distribution. Until very recently,
there were no department stores, no malls, no hypermarkets and very few supermarkets and very few pharmacies or modern pharmacies." But that is now changing, Agon notes. "In the very near future, there will be many new forms of distribution." Whether entering markets or acquiring brands, Agon exhibits a voracious curiosity and a questing intellect. "I compare a brand portfolio to a puzzle," he says. "Each piece of the puzzle has a very special role and mission. To maximize the potential of the company we just have to fill in the puzzle. So there may be still some pieces missing."