There is growing concern that L’Oreal’s recent sales surge in China may not be sustainable in the long term. The French beauty giant is set to announce strong quarterly sales, driven by increased purchases in China. Analysts predict that L’Oreal’s overall sales will see an 11.5% organic growth compared to the previous year, with sales in North Asia, particularly in mainland China, expected to rise by 14.4%. However, there is apprehension among investors that Chinese consumers might turn to cheaper or local alternatives.

Barclays analyst Iain Simpson emphasized that investor unease about a slowdown in China is high, especially following disappointing reports from luxury brands LVMH and Estee Lauder, which have raised doubts about L’Oreal’s future prospects. L’Oreal holds the largest share of China’s $78.9 billion beauty and personal care market, selling a range of brands from Maybelline to local label Yuesai and high-end Lancome. Despite outperforming its competitors, L’Oreal’s shares have experienced a decline of around 9% in the last six months, in contrast to Estee Lauder’s steep drop of 45%.

Although there was hope for a strong recovery in China’s post-pandemic spending, the rebound has been uneven, leading to a slowdown in sales growth. LVMH’s recent sales report for the third quarter revealed a decrease in the growth rate of perfumes and cosmetics, down from 16% to 9% compared to the previous quarter. This has tempered expectations for high-end market spending. JPMorgan analysts have slightly adjusted their estimate for L’Oreal’s full-year sales growth to 12.1% on a like-for-like basis, highlighting the slowdown in North Asia. Additionally, Deutsche Bank downgraded L’Oreal to a “sell” rating last month due to expectations of slower growth in China and increased competition from local brands. Deutsche Bank analysts observed a decline in imports of cosmetics and skincare products in recent years and expressed the belief that China’s challenges may not be short-lived.

Chinese cosmetic brands that cater to local consumer preferences have been gaining market share, with Proya, Passional Lover, and Winona experiencing significant growth. The upcoming Singles’ Day sale on November 11 will feature a higher proportion of domestic products compared to last year, with more than 40% expected, according to GF Securities. Javier Gonzalez Lastra, portfolio manager of the Tema Luxury exchange-traded fund that includes L’Oreal among its top holdings, noted that Chinese consumers are increasingly willing to try local brands. However, Bernstein analysts believe that L’Oreal, with its diverse product range, is well-positioned to compete in all segments of the market.

Links:
1. Source 1: Article discussing concerns about L’Oreal’s sales growth in China and potential price sensitivity among consumers.
2. Source 2: FT article providing insights into the challenges faced by global beauty companies in China and the rise of local brands.