FACE TO FACE INTERVIEW

Paolo Gasparrini knows how to smile; in fact he can hold one, at a moment’s notice, for upwards of two minutes. For others this would just be a useful trick, but for Gasparrini, smiles are an important tool with which to gauge the contentment of the 3,000-plus employees at L’Oréal China, and to make sure they are doing their jobs. “If they are not smiling I want to know why aren’t they smiling, why aren’t they happy. Let’s talk to them, and make them happy.” It’s Gasparrini’s favorite solution when dealing with potential language barriers, despite the fact he switches smoothly between his native Italian and Portuguese, Spanish, French, English and Chinese.

As the CEO and managing director of L’Oréal China, Gasparrini has transformed a fledgling business into one of the biggest success stories in China’s cosmetics industry in just 12 years. L’Oréal China recently announced that it now has the second largest share of the cosmetics market in China, 10.6%, right on the heels of market leader Procter & Gamble, and with RMB 6.95 billion in Chinese sales — a 27.7% increase on the previous year — Gasparrini looks well-positioned to celebrate the company’s global centenary this June with a big grin and a deserved sense of pride.

He sat down with CIB to explain the secrets of L’Oréal China’s success and why he is not worried about the recent economic downturn.

How far back does L’Oréal go in China, and where is it now as a company?

L’Oréal came into China in 1996. We’ve been operating here for 12 years, and for the last 11 we’ve had double-digit growth in sales. L’Oréal China has 3,000 employees, but that doesn’t include the 10,000 job opportunities we create for beauty advisors and cosmetics girls who are not directly on our payroll. We have 16 brands in China, and opened an R&D center in Pudong in 2005 that employs 200 people.

When did you personally join the company?

I started in 1987 as the general manager of L’Oréal’s fragrance department, Manetti & Roberts, in Italy. Before that I worked as the marketing director for Johnson & Johnson, but my very first job out of graduate school was with a pharmaceutical company in Italy. I was the person who visited doctors and explained the efficiency of these products. I would say, “Good morning” and then have a scientific conversation about the drugs.

But I wanted something more fast-moving, so I moved into marketing. In 1990, after three years at Manetti & Roberts, L’Oréal moved me to Brazil as the CEO. I was thirty-five years old and thought it was a great challenge - I stayed there for 6 years. Then they asked me to set up a team of 40-50 people in China.

Was it hard moving from Brazil to China?

Everything was different. Brazil was similar to Italy, culturally, but China is completely different: the culture, the people, the history, everything. I understood when I arrived here that I didn’t understand; I didn’t know anything, so I followed the Chinese people and learned from them. They helped me with everything and it worked for me. They had a lot to teach me at the beginning, from finding me an apartment, to teaching me how to buy food, and then how to set up the business and speak to the media. I have four or five people in the company who are still very close to me who have taught me everything.

Did you have any problems with adapting to Chinese staff in the beginning?

When you trust people, they return the trust with loyalty. If you don’t, then it doesn’t work.

What was it like arriving in a new country with so much logistical responsibility?

When I arrived here in September 1996 we didn’t know the distribution, we didn’t know the market. Nobody knew what L’Oréal was; they didn’t recognize the brand and back then people didn’t travel like they do now.

It was a challenging time. Nothing was easy – but the return on our effort was very encouraging. We understood that L’Oréal needed to create a Chinese name. Now, many Chinese see our name in French and straight away pronounce it “Ou Lai Ya.”

We started with Maybelline, which we had just acquired, and developed that brand first. Then when we saw it was working, we would launch another brand, and then another brand. I think this country rewards effort.

L’Oréal China reached profitability in 2003. Did you have a profitability plan from the beginning?

No, absolutely not. When one brand started to develop, we launched another, and then another. We were not in a hurry. Profitability was not our motive. If we had wanted to hit profitability, then we could have done it earlier. What we wanted to do was increase our presence in the market.

Your group posted disappointing results recently: a 1% drop in recurring sales of cosmetics globally, and a six-month profit drop of more than 50% over the year. What do you think the growth will be for China in 2009?

At the end of 2008 we had already seen 28% growth in China, despite the fact that the economy has suffered. We’re still growing.Of course, because of the crisis, business conditions have become tougher. But we have a fantastic team here and we’re very integrated with the country. We are pushing and cooperating with the government, doing charity work, and participating in the Shanghai Expo. We try to understand the laws and regulations here, and when the government tells us they’d like us to do something, we do it.

What is your advertising budget like?

Advertising is important. We have to launch our products, build the brands and the awareness of them. China is a very competitive market.

What is your current market share in the Chinese Mainland?

We have 10.5% of the market share. In 1997, we had sales of 182 million RMB – last year we had RMB 6.95 billion in sales.

Was there a formula for balancing profits and growth?

We always watched the reaction of the consumers and no brand we’ve launched has been rejected. China was growing faster than other places and we wanted to take the momentum.

What I wanted to do from the start was make sure that we had products in the four divisions: Consumer Products, Luxury Products, Professional Products — products which are only available in salons — and Active Cosmetics Products. Of these four divisions, Consumer Products is the biggest proportion of our sales.

L’Oréal’s strategy is to make sure we offer all our consumers an option, starting from the mass market, to semi-selective market and luxury markets. And, of course, our pricing matches the market segments. L’Oréal is the only cosmetic company to offer products in all the above market segments. Where we didn’t [originally] have products to offer in those four segments, we’ve acquired them.

Do you think your growth will continue at the same rate?

If I could give you an exact forecast, I would be a billionaire. The only thing I can give you is my feelings. First of all, China is still developing. The cosmetics market is protected from the downturn because no woman wants to say they won’t buy lipstick because of money. No woman will say that she won’t buy skin cream because of money. This is about priority – about your skin, your looks, and your beauty.

Do you worry about defections to cheaper brands?

The strategy of L’Oréal is that we have a pyramid, with the most expensive products at the top, and a lot of value items at the bottom. People can go up and down the pyramid as they like.For the luxury consumer, we have Lancome or Helena Rubinstein. For the second-tier consumer, we have L’Oréal Paris and for the value consumer we have Garnier and Mininurse. We protect our brand and our quality. Other companies have different strategies; they stretch the brand from luxury to value. That’s not our way.

How do you price your products?

We have to differentiate between imported products and locally manufactured products. We have three factories in China and many of our products are made locally in Suzhou, Yi Chang (Hubei Province) and Pudong, Shanghai. If we’re selling imported products, our price has to reflect the customs duty. For example, about 4-5 years ago, during SARS, we decreased the cost of Maybelline products by 35% overnight. We told our consumers that this was a permanent reduction because our [sales] volume had increased to such an extent that we could do that. That was our gift to the consumers. And of course, sales exploded. But we didn’t see this explosion of sales for 3-4 months after the reduction in price – then it went through the roof. It was a repositioning of price. Right now our local product sales are increasing faster than our imported product sales. This trend will continue and accelerate, as will our price decreases.

Have you discovered anything unique about the Chinese consumer?

They buy quality and they have high expectations. But quality is number one. One reason behind our success is that we invest over 3% of our sales in product development and research.

Do you think the emergence of local Chinese brands will affect foreign-branded cosmetics groups?

This is a new development. My opinion is that competition is good for us. It grows the market, the distribution and consumer consciousness. But if you have a bad competitor, with quality problems or scandals, then the whole market is affected in a bad way.

What is L’Oréal’s sales and distribution model in China?

First, there are department stores. You set up a counter. L’Oréal supports 10,000 beauty advisors. In other parts of the world, retailers — such as Carrefour — took up the space that department store traditionally had for cosmetics. That’s not true for China, so here you have both.

Chinese people have developed the habit of going to the department store, so you have two very strong distribution models. People buy cosmetics at Carrefour and Wal-Mart, and when they want to upgrade they go to the department store. And then there’s the development of [specialized] cosmetics store, like Sephora, which has also helped the market.

You’ve been expanding the L’Oréal brand through acquisitions. Do you plan on continuing this strategy?

We acquired Mininurse to accelerate our expertise and distribution at the widest part of the consumer pyramid. We acquired Yue-Sai Cosmetics because it was the only aspirational Chinese brand created in China with Chinese ingredients, and we wanted to grow the luxury market. We don’t need new acquisitions, but it doesn’t mean we are not actively looking.

How about issues with counterfeits?

It exists, of course, but the size of the phenomenon has been reduced. We use the help of the government and are policing it better, so I don’t lose sleep over it.

Has the cosmetics market changed in the 12 years you’ve been here?

We have more men’s products. Now almost 20% of our consumers are men. When I started here, the demographic of our user was 18-35, now they have grown old with us, so they are now 45-48 year-olds who want anti-aging products. We’re aging with our consumers, as well as attracting younger ones.

So how do you communicate with your staff and ensure that everything is running smoothly?

We speak together in English, French and Chinese. But I don’t focus on the conversation, what I understand is when people are happy or unhappy – I have a sixth sense for it. The Chinese, they don’t give importance to words, they show you how happy they are by their attitude; their behavioral hints. So I have got into the habit of noticing this and catching this. It’s a more personal way of interacting.

What was the key fact behind L’Oréal’s strong growth in China?

It’s people. We have a really good team who are proud to be working here. Of course, most of our work force is women; we want to be close to the people we are selling to. You cannot do anything without [the right] people.