(FORTUNE Magazine) – Oleg Chabanov can't disguise his frustration. On a warm afternoon in Moscow, the local manager for L'Oreal is stuck in a dingy store a few blocks from the Kremlin, trying to drum the basics of brand management into a couple of grumpy shop assistants. In particular, he wants them to move a package of L'Oreal's Biotherm, a luxury skin-care cream, away from a display of Maybelline lipstick, a middle-brow brand. "If you separate these brands, you'll sell more of both," Chabanov explains. Grudgingly, one of the women moves the Biotherm cream. "So do you understand why I have asked you to do this?" Chabanov inquires. "Nyet," she snaps.

As Chabanov trudges off to another shop, he can console himself with two thoughts. First, he works for the world's most successful cosmetics company. L'Oreal's net earnings for 2001 were $1.2 billion, a 19.6% increase over the previous year, and the group's 17th straight year of double-digit profit growth. And second, reeducating sullen Soviet-style shopkeepers matters: It is attention to the details of brand management that has helped turn L'Oreal from a successful French company into a world-class global beauty empire.

L'Oreal's particular skill is to buy local cosmetics brands, give them a facelift, and export them around the world. Indeed, it's the story of L'Oreal's own corporate makeover. A decade ago about 75% of the company's $5.5 billion in annual sales was in Europe, the majority in France, and the L'Oreal name was indelibly linked with Parisian sophistication. Last year Europe accounted for only 49% of the group's $13.7 billion in revenues, with 32% coming from North America (double the share in the early 1990s).

Consider some of the brands that L'Oreal has bought and then repackaged. Maybelline, a dowdy U.S. makeup house acquired by L'Oreal in 1996, has swapped its image as Middle America's favorite nail polish for a sexier, international profile. The result: Japanese teenagers went wild about Maybelline's Wonder Curl mascara in 1999 and are now flocking to buy Volum' Express, its latest eyelash product. Then there's Soft Sheen and Carson, two U.S. hair-care firms catering to African-Americans. L'Oreal acquired them in 1998 and 2000, respectively, and merged them into Soft Sheen/Carson. The brand now derives 30% of its $200 million annual revenues abroad, much of that from South Africa. In short, while actress Catherine Deneuve is the official face of the company's main French brands, L'Oreal is French only when it wants to be. The rest of the time it's happy being African, Asian, or anything else that sells.

At L'Oreal's sleek headquarters in the Paris suburb of Clichy, the mastermind of this global strategy glances at a display of the company's products on a shelf behind his desk. Good brand management is about hitting the right audience with the right product, says Lindsay Owen-Jones, CEO of L'Oreal since 1984 and chairman since 1988. "It is a very carefully crafted portfolio," he explains. At one end of the shelf is a bottle of Ralph Lauren's Safari perfume; farther along there's a tube of Elseve conditioner; and at the far end, a jar of Vichy, a skin cream sold chiefly through pharmacies. "Each brand is positioned on a very precise [market] segment, which overlaps as little as possible with the others," says Owen-Jones.

So far this doesn't sound much more original as a magic formula than putting water in moisturizing cream. After all, L'Oreal's main rivals--companies such as Estee Lauder in luxury cosmetics and Procter & Gamble and Unilever in mass-market hair and skin care--also sweat the details of brand management. L'Oreal, though, has an added ingredient in the dapper form of Owen-Jones, a 56-year-old British expatriate with a Welsh name, an Italian wife, flawless French, and a hard-charging American management style honed in the early 1980s when he ran L'Oreal's U.S. division. In Owen-Jones's cosmopolitan world, brands don't stay at home servicing the same old clientele. They get spruced up, put in a new set of traveling clothes, and sent abroad to meet new customers.

"O-J," as he is referred to at L'Oreal, is a wizard at thinking outside the box--or, in this case, the boxes of such venerable L'Oreal labels as Helena Rubinstein and Garnier, as well as those of newer additions like Shu Uemura, the Japanese cosmetics house in which L'Oreal holds a 35% stake. Consider his intended conquest of the African hair-care market. When Owen-Jones bought Soft Sheen, the brand had no international presence. Carson had found a market in South Africa, but the Savannah firm was up to its neck in debt and in no shape to expand. Owen-Jones saw an opportunity: "We realized that people of African origin, wherever they were in the world, were a huge future potential business."

Soft Sheen/Carson is still a long way from conquering Africa, a hair-care market that L'Oreal estimates is worth about $1 billion a year. But in South Africa, the continent's biggest economy, Soft Sheen/Carson now has 41% of a $90 million market, up from 30% at the time Carson was acquired. And it is beginning to push northward, organizing training sessions for hairdressers in former French colonies like Senegal. The goal, says Alain Evrard, L'Oreal's managing director for Africa: half of the total market within the next five to ten years. He is also setting his sights on the large black communities in such European cities as London and Paris.

Soft Sheen/Carson's goals fit with Owen-Jones's mantra that "we must be careful not to give the impression that we are imposing one type of Western beauty on the world." L'Oreal sometimes even plays with subverting conventional preconceptions of beauty. The cover of its latest annual report features a Japanese model with red hair and purple lipstick. And this summer, riders on Moscow subways have been startled by advertisements for Garnier hair dye using straw-blonde African and Asian models.

Owen-Jones clearly relishes doing the unexpected. Take his decision in 2000 to buy Kiehl's, a small New York City cosmetics firm with a cult following. Kiehl's is a world away from L'Oreal's slick style, appealing through charm and word-of-mouth recommendations to a loyal clientele of New Yorkers who value the advice of its lab-coated assistants. Its cluttered East Village shop is stuffed with mountaineering souvenirs and photos of vintage planes that reflect the leisure interests of the Morse family, who owned the company before the L'Oreal takeover. Owen-Jones is bemused by the place. "There's a motorcycle in the corner that doesn't quite relate to the product offering," he says, and "they clearly attach no importance to packaging quality." But being different from L'Oreal, he explains, is the point. "We bought it precisely because we thought it was interesting to see a brand do things successfully that were contrary to what we would have done."

In this spirit, Owen-Jones has followed Kiehl's rule book in discreetly launching the brand outside New York. Last year a second store was opened in San Francisco, and this year Kiehl's cosmetics are on sale in selected European stores. There have been no magazine ads, no special promotions, no attempt to change the products. Owen-Jones holds up a tube of Kiehl's Close-Shavers Squadron shaving cream and ticks off the ways it would fail L'Oreal's quality-control tests. "It leaves a mess in the basin," and the label on the tube "occasionally doesn't stay on." But, he says, stroking his chin, "it just happens to leave your skin smoother than anything else I've ever used."

There is, of course, a fair amount of froth here. There always is when it comes to marketing cosmetics, a business that has been described as selling hope in a jar. Owen-Jones's achievements, though, are solid. And they contrast with the mess some of L'Oreal's rivals have left in the basin. Estee Lauder posted a loss of $25 million, including restructuring charges, for the quarter that ended June 30. In early September its stock was trading 21% lower than at the same time in 2001. As for Revlon, it suffered nine straight quarters of losses before CEO Jeffrey Nugent resigned in February. Its stock price is about half what it was a year ago.

Not all of L'Oreal's competitors are in such bad shape. Nivea is successful enough that L'Oreal may buy it--the skin cream made by Germany's Beiersdorf chemicals group outsells Plenitude, L'Oreal's rival offering. The Avon ladies are formidable opponents in Russia. And Procter & Gamble's Max Factor line is the most popular foreign makeup brand in Japan. But no other cosmetics player matches L'Oreal's combination of strong brands, global reach, and narrow product focus.

"L'Oreal's strategy is as close to perfection as you can get," says Antoine Belge, a cosmetics industry analyst at ABN Amro Bank in Paris. True, Sept. 11 damaged sales in the U.S. of upmarket L'Oreal brands like Lancome and Helena Rubinstein. Last year the luxury division's North American revenues increased only 3.3%, compared with 14% growth in 2000. And while the stock is down 6% from a year ago, L'Oreal's first-half profits were up 29.6% over last year, and the company continues to be highly regarded by professional investors. Its price/earnings ratio of 34 is more than twice as high as Wall Street's historical average and above that of rivals like Wella or consumer goods heavyweights like Coke and Gillette.

It's easy to forget, then, that when Owen-Jones was named chairman in 1988, his appointment was considered risky. He was (and remains) the only foreigner to head a major French company. And he faced the enormous challenge, as the cosmetics business was rapidly globalizing, of leading L'Oreal out of its Gallic box.

L'Oreal was founded in 1907 by Eugene Schueller, a chemist who tramped the streets of Paris to sell his patented hair dyes to local hairdressers. (The company's name is adapted from Schueller's first brand, L'Aureole, which means "halo.") Schueller's successor, Francois Dalle, took the company public in 1963. He later became preoccupied with the need to internationalize L'Oreal's ownership structure to prevent interference from left-wing politicians, for whom state control of the nation's top companies seemed as natural as breathing. In 1973, Dalle persuaded Liliane Bettencourt, Schueller's daughter and L'Oreal's main shareholder, to accept a poison pill that diluted her majority stake. Under a complex deal, Swiss food-products giant Nestle took a 49% stake in a holding company--with Bettencourt owning the remaining 51%--that in turn acquired just over half of L'Oreal's stock. That structure remains in place today, and Bettencourt has become the richest person in Europe. Her roughly $20 billion fortune is based almost entirely on the rise of the company's shares since Owen-Jones took charge.

Owen-Jones grew up in Wallasey, a drab town near Liverpool, studied modern languages at Oxford University, and attended the Insead business school near Paris. "I had a girlfriend in Paris at the time," he says, "and that may have influenced my decision." He says he joined L'Oreal after graduating in 1969 at least in part for the prospect of checking out the models. The anecdote sounds well worn, but one element rings true: Owen-Jones likes to have fun. An avid motor-racing fan who used to compete at Le Mans, he flies his own helicopter and spends summer weekends sailing his yacht off Saint-Tropez.

Owen-Jones started at the bottom at L'Oreal, making sales calls to Normandy beauty parlors. He did well and was marked for rapid promotion. From 1978 to 1981 he ran L'Oreal's Italian business, and from 1981 to 1984 headed the U.S. subsidiary, L'Oreal's most important overseas operation. During his stint in the U.S., he defied the received wisdom of his colleagues in Paris, who argued that European brands like Lancome could never compete with established American names such as Estee Lauder and Revlon. And he breached U.S. cosmetics industry etiquette by declaring war on Estee Lauder. His battlefield: counter space in American department stores. In 1983 he got Macy's to provide Lancome with the same amount of turf as Estee Lauder and that year boosted Lancome's U.S. sales by 25%.

So when Owen-Jones succeeded Dalle as chairman in 1988, L'Oreal got a foreigner with a rebellious streak who was also a company insider. That latter credential is worth stressing, because there's a lot about L'Oreal that Owen-Jones hasn't changed. For one thing, L'Oreal's main mass-market brand, L'Oreal Paris, responsible for about 38% of the group's sales, has been internationalized without losing its French cachet. Owen-Jones has also maintained L'Oreal's image as the "scientific" beauty company. L'Oreal spends about 3% of its revenues on research, compared with an industry average of less than 2%.

What Owen-Jones did change was the idea that L'Oreal should stick to its old branding formula. He wanted to venture into uncharted territory. For him, new brands represented "adventures" where the company could experiment with different images and tap new customers. And no brand adventure was bigger or riskier than the $758 million purchase of Maybelline in 1996.

Since its creation in 1915, Maybelline had found its core market in Middle America, where it earned a safe, steady income churning out undaring lipsticks and nail polish. Only 7% of its $350 million in annual sales was outside the U.S. Owen-Jones's goal was to make the Memphis cosmetics firm a global mass-market brand. By the end of 1996 he had shifted Maybelline's management operation to New York City, leaving behind a raft of old-timers who didn't want to move. Memphis "just didn't quite fit the sort of profile [for finding] some of the key people we needed," Owen-Jones says. The new Maybelline team set about revamping the brand's staid color lines and soon launched Miami Chill--nail polish in icy lemon and peppermint hues that never would have made it out of the labs at the old Maybelline.

Meanwhile, Maybelline began an international rollout, with "New York" added to the brand name overseas because, as Owen-Jones says, "there are lots of people in the world who think that American street smart is just as much fun as French chic." Maybelline's results prove the point. Last year 56% of the brand's $1 billion in sales came from outside the U.S. Maybelline was the leading medium-priced makeup brand in Western Europe, with a 20% market share. "Maybelline is a modern contemporary brand for all women and all races," says Ketan Patel, the brand's worldwide general manager.

A stick of Maybelline's Water Shine Diamonds is a good measure of how global L'Oreal has become. The product grew out of a L'Oreal failure two years ago--the Japanese trial run of Moisture Whip, another wet-look lipstick from Maybelline. "Moisture Whip wasn't quite right for Japanese women, because it was a little too dry," says Yoshitsugu Kaketa, L'Oreal's consumer products manager in Japan. "So we put in more moisturizing formula." Owen-Jones then insisted that the Japanese version of Moisture Whip be given a new name, Water Shine. The makeover worked, becoming "so successful in Japan," says Kaketa, "that we started to sell Water Shine in Asia and then around the world." Today in Moscow you can't get away from models with sparkly Water Shine Diamonds lips flashing smiles from billboards on every street corner.

Such news should make Owen-Jones happy, but he worries about the sheer unpredictability of the beauty business. "I don't think there's ever any totally hard evidence to prove whether you're right or wrong before you make a decision," he says. "There's lots of it afterward if you've screwed up."

So where might Owen-Jones screw up? Despite the success of Wonder Curl and Water Shine, L'Oreal has struggled in Japan, the world's third-largest cosmetics market. To fix the problem, L'Oreal formed an alliance with Shu Uemura, a Japanese cosmetics company rapidly expanding into China and other Asian countries. The smart money is on L'Oreal executing a friendly takeover. "We want to be able to understand how the Japanese approach cosmetics," says Owen-Jones. "The only way to do it is to buy a Japanese brand."

Owen-Jones also has to live with the uncertainty surrounding the company's future. Bettencourt, 79, has said she doesn't want the arrangement with Nestle to change in her lifetime, and Nestle has promised to respect her wishes. But after her death, it's not clear whether Nestle will be as compliant with her only child, Francoise. Nestle has about $13 billion tied up in L'Oreal, and with 26% of its shares, it could launch a takeover bid.

But the biggest unanswered question is what will happen in 2006, when Owen-Jones is due to retire. The consensus inside L'Oreal is that Owen-Jones will follow Dalle's example and appoint a new CEO while staying on in a supervisory role as chairman. Owen-Jones will say only that he's committed to finding a "great successor" and that when he reaches 60, he plans "to breathe." So spare a thought for the next chief executive of L'Oreal, who will have Owen-Jones breathing down his neck.

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