Chairman of L'Oreal Group Jean-Paul Agon reflects on changes in the Chinese consumer market

Yes, indeed, I had the chance and the privilege to be sent to China in 1997 by my predecessor, Lindsay Owen-Jones, to set up a subsidiary, because L'Oréal was not present at all in China or in the different Asian countries at the time. And I had this incredible privilege of arriving—I had been the CEO of Germany, and I arrived in Shanghai in early '97. For me, it was immediately a wonder. I was truly fascinated by this country, its culture, its history, the people, and also very quickly I understood the immense opportunity. And I must say, with all modesty, that from the first months of my start in China, I immediately imagined—even though China was not yet what it has become—I immediately imagined that China would certainly become one of the leading world powers economically and also, of course, for L'Oréal.

First of all, I think there is a very good mutual understanding between the French and the Chinese. I've worked in practically every country in the world and also in all Asian countries; I believe there is a truly spontaneous mutual understanding between France and China, and between the French and the Chinese. And right away, I can say that the Chinese collaborators immediately understood the L'Oréal spirit, the culture of L'Oréal, the human culture. And even at that time—pardon me—the fact that it's a French brand is something that makes it work immediately. Yet, maybe you don't know, but half of L'Oréal's brands are not French; there are brands from all European countries, Giorgio Armani, American brands, etc. But in the Chinese mind, L'Oréal is still France. At any rate, the first beauty brand—I want to point this out because sometimes cultural differences are highlighted: do you know that the first European beauty brand is L'Oréal, the first American beauty brand is L'Oréal, the first Chinese beauty brand is L'Oréal? So in a way, there is a convergence of beauty values that is absolutely there.

No, we have 3 for now, it's confidential.

First, as I was telling you, the sheer size—the size was obviously an extreme ambition. But also very quickly, because we saw that Chinese women—and men too, actually, because men consume a lot of beauty products in China, more than in France; Chinese men are more concerned about the quality of their skin and hair than French men. We develop specific products for that market. Practically all our mass-market products, except luxury products which are exported from France, are designed in China under international brands but conceived in China, formulated in China by Chinese teams for Chinese consumers. So where was I—what was your question? It was why, how did you understand it was so important. So there is the market size first, of course, because I was struck by something from the beginning. It's a funny anecdote: when I arrived in China, the person responsible for the local market said, 'Nice of you to come see us, how long will you stay? Usually, when a boss comes, they stay three days.' I told him, 'I think I'll stay three months.' And he said, 'Three months, but what are we going to do for three months?' So we toured all of China, visited maybe 30-40 cities, went into stores, met people, and I understood something very important right away: Chinese women were instinctively experts in beauty. And that wasn't obvious, because the previous 30, 40, 50 years of Chinese history had not been easy; they didn't have access to all the products in the world. But instantly, instinctively, Chinese women knew how to recognize the quality of a lipstick, a cream, a hair product, etc. And that has been confirmed today: our most expert consumers in the world are probably the Chinese consumers.

Absolutely. That is what we have: 400 researchers in our Chinese laboratories, practically all Chinese except one or two expatriates. We develop our products in China, in Shanghai, in Pudong, for the Chinese market but also for Asian countries. There is a point I'd like to raise because I think it's good advice for companies that want to go to China. I believe China is actually a fairly easy country—a country of great opportunities. And I'll echo what the ambassador said: I have two pieces of advice. The first is to trust. There is a fundamental difference in success between those who go with the desire to trust and build relationships and those who go with a lot of suspicion. When you go with trust, you succeed. But the second piece of advice is: be aware that it is a very competitive market. It's not a closed or hermetic market; on the contrary, it is very open, and the Chinese authorities generally help companies develop, but you must not underestimate its competitiveness. Today, of all the world's markets, it is probably the most competitive.

Oh, that is absolutely true. I would even say it's been the case for 10 years already. China has been ahead. Remember that 15 years ago the first major players were Americans in Silicon Valley, but very quickly the big Chinese players caught up and are now on par. China is probably the most digitalized country in the world, without a doubt. We were talking about it a few days ago: more than one in two purchases in China is made online; it's the only country where it's over 50% — 55% of our business is e-commerce. As I was telling you, young Chinese women, if you ask them where they buy their makeup, they say online, and if you tell them they can also buy it in a store, they say 'Oh really, what's a store?' So you have to understand that the Chinese market has completely changed. But there's an interesting point: it's thanks to China that L'Oréal has become the most digitally savvy company in the world. In a way, it's a torture test: to succeed in China you have to be very advanced in digital, and of course that lead you gain in China serves you to conquer all other markets. And the transformation of consumption and wealth in China, with an emerging middle class, also benefits brands like L'Oréal a lot. Yes, absolutely, you're right. And we're still only at the beginning of the story. That's why we are not at all in a logic of decoupling or slowing down or anything; we think we've only just begun. Today we estimate we have about 100 to 150 million Chinese female consumers regularly, whereas we mentioned the middle class is probably around 400 million, so there are still people to reach. We haven't even done half the journey yet.

First, we need to put the slowdown in perspective. By definition, the larger you grow, the bigger the additional increment in volume becomes. So even with a lower growth rate, the increment in wealth, consumption, or revenue continues to increase in absolute value. There's also a macro context that affects all industries. And then there have been phases in Chinese history—I've known it pretty well for 27 years, I've been to China about 80 times, so my knowledge is regular. There have been cycles: an initial cycle, then an acceleration, a very strong acceleration over the last 10 years, probably also due to digital. Now there's a slight slowdown, but we are very confident that consumption will continue to grow.

But you know, L'Oréal Paris in China is made in China. That's the quality. Ah, but it's not called L'Oréal; in China it's called Paliolaya. You can ask any Chinese person—it's probably one of the best-known brands, but they don't say L'Oréal, they say Paliolaya. And I'm sure that perhaps half of Chinese consumers even think Paliolaya is almost a Chinese brand. So it's the appropriation of French quality for Chinese consumers through a brand that has practically become Chinese.