L’OREAL
Aurélien FATTORE - Pieter HOFSTRA
Kenza OUAZZANI - Carsten SIEBERT
1- Value Chain and Organization
2- General data
3- Cost estimation and allocation
4- Activity-Based Costing
5- Cost-Volume-Profit Model
6- Investment analysis
1- Value chain and organization
R&D
Design
Determined
by segment
Creating
new
formulas
Supply
Production
Marketing Distribution
Core
Process
Receiving
Raw materials
and packaging
B2B & B2C
30,1% of Sales
Customer
service
Each plant
produces for its
geographical
area
2- General data: from the Income Statement…
Consolidated Income Statement
In Million €
Net Sales
Cost of sales
Gross Profit
Distribution Costs
Admin. Expenses
R&D
Operating profit
Other Inc/Expens.
2006
2005
15,790.1
-4,569.1
11,221.0
-4,783.0
-3,309.4
-532.5
2,540.9
-60.8
14,532.5
-4,347.3
10,185.2
-4,367.2
-3,009.3
-496.2
2,266.0
9.3
Product Cost
Period Cost
…to some examples of costs
Direct Costs :
Direct Labor: machine and quality control workers
Direct Material: raw materials, packages
Manufacturing Overhead Costs:
Indirect Labor: plastic purchase manager (packaging)
Indirect Material: power supply for whole plant
Cost Hierarchy:
Unit Level: cream
Batch Level: packaging for delivery
Product Level: composition of the cream
Customer Level: key account managers
Facility Level: building, accounting activities
3- Cost estimation and allocation
•
Appropriated Product-Costing Systems:
Process costing: relevant for making the mixture; we consider equivalent units of mixture to
evaluate the costs.
Job costing: appropriated for packaging
•
Appropriated cost allocation:
ABC: within jobs and processes, in order to get inside view of costs
4- Activity Based Costing
Steps to take for Activity Based Costing
1) Identifying the major activities that take place in an organization;
2) Assigning costs to cost pools/ cost centers for each activity;
3) Determining the cost driver for each major activity.
4) Assigning the cost of activities to products according to the product’s
demand for activities
We used this approach for L’Oréal for a plant with two main products.
All costs in the next slide are estimated.
4- Activity Based Costing (2)
Activity
Activity costs
Activity cost driver
Quantity of activity cost driver
Acitivity cost driver rate
Production activities
Machining: activity centre X
700000000
Number of machine hours
500000000
1,4
Machining: activity centre Y
800000000
Number of machine hours
600000000
1,333333333
Mixing fluids X
4000000
Number of machine hours
2000000
2
Mixing fluids Y
5500000
Number of mixing hours
2500000
2,2
100000000
Number of purchase orders
1000000
100
Receiving raw material
60000000
Number of materal receipts
500000
120
Disburse materials
20000000
Number of production runs
300000
66,66666667
Analysing Fluids
20000000
Number of research hours
250000
80
Experimenting Fluids
15000000
Number of experimenting hours
300000
50
Number of test hours
150000
40
Number of advertisements
50000
500
Number of commercial minutes
10000
13000
Number of promotional hours
10000
1000
400000
500
2000000
35
300000
200
Materials procurement activities
Purchasing raw material
R&D activities
Testing Fluids (before production)
6000000
Marketing activities
Advertisement
25000000
Commercials
130000000
Promotion (shows, etc.)
10000000
General factory support activities
Production scheduling
200000000
Number of production runs
Set-up machines
70000000
Number of set-up hours
Quality inspection
60000000
Number of first item inspections
5- Cost-Volume-Profit model
Total revenues = 15355,1 Mil €
Operating profit = 2482,6 Mil €
16000
15000
Total costs and revenues in Mil Ū
14000
Total costs = 12872,5 Mil €
13000
12000
11000
10000
9000
8000
7000
6000
5000
Administration Costs
4000
3000
Marketing & Promotion Costs
Estimated Fixed Costs
2000
1000
0
Units of production and sales
R & D Costs
Due to very high fixed costs in the R&D, advertising and administration division the volume must be high in order
to make a profit.
Increasing the volume was one major reason for the increase of the operating profit by 9,6% in 2006!
6- Investment analysis & Capital budgeting
decision
•
In 2006, L’Oréal announced it would buy « The Body Shop » company for two
main strategic reasons:
- strengthening the distribution network
- obtaining a more ‘ethical’ image.
Some days before L’Oréal made this announcement, The Body Shop published its
annual results:
Data available for the Capital Budgeting Decision
1£=
1,43€
The Body Shop Company
Sales
- Cost of Sales
= Gross profit
Results 2006 (before acquisition by L'Oréal) in M£
R& D
Marketing and promotion
Administration
official detail unavailable
official detail unavailable
official detail unavailable
Operating Profit
+ Depreciation
+ Other adjustments
= Cash Flow from operations
TOTAL CASH AND CASH EQUIVALENTS
in M€
485,8
694,69
167,3
239,24
318,5
455,46
41,5
15
1,5
58
53,8
59,35
21,45
2,15
82,94
76,93
ANY QUESTION ?
6- Investment analysis & Capital budgeting
Investment analysis according to the Net Present Value Technique (M€)
Assumptions
Annual Cash Flow 'CF'
Discount Rate 'r'
Annual Growth (expected) 'g'
Results
Present Value in perpetuity (if the company is owned forever)
Maximum amount of money L'Oreal should be willing to pay
Investment actually realized to buy the shares
Net Present Value > 0
76,93
10%
3%
1099
1099
940
159
Pr esentValueInPerpetuity  PV
CF CF(1 g) CF(1 g) 2



 ...
1 r
(1 r) 2
(1 r) 3
CF

rg
(GordonFormula)

The investment is profitable. Moreover, L’Oréal wants to strengthen ‘The Body
Shop’ results. What does L’Oréal expect, in addition to strategic plans ?
Most competitors of ‘The Body Shop Company’ have margins twice more
important. L’Oréal expects to improve the margin of ‘The Body Shop’, thanks to
synergies in production (gains in the value chain), marketing and overheads.
First results, one semester after L'Oréal bought 'The Body Shop Company'
Sales
435
Gross profit
154,7
Cash Flow (converted into a annual value)
100
Reminding : NPV calculated with the Body Shop usual cash-flows
159,0571429
NPV calculated with Cash Flow 2006
488,57143