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NEW YORK, United States — Only a Kardashian-Jenner family bombshell could eclipse the news of a new billion-dollar-plus Estée Lauder beauty brand acquisition.
On Monday, Coty announced it had taken a majority stake in Kylie Cosmetics, paying $600 million for 51 percent of the business. A deal between the two had been rumoured for months. But earlier that same day, news broke that Estée Lauder had acquired Korean company Have & Be Co., the parent of skincare brand Dr Jart and grooming brand Do the Right Thing, for $1.1 billion. It’s the first Asia-based brand the company has acquired and one of a handful of beauty deals that has garnered 10 figures this year.
This busy week is the culmination of a lucrative year for beauty acquisitions by corporate strategics, particularly in skin care. To wit: L’Occitane kicked the year off in January with its surprise purchase of skin-care brand Elemis for $900 million. Edgewell bought Harry’s for $1.37 billion in June. Colgate-Palmolive acquired luxury French skincare brand Filorga for $1.69 billion in July. But some buzzier brands went for less: Unilever purchased Tatcha for almost $500 million in June and Shiseido acquired Drunk Elephant for $845 million in October. SC Johnson is bullish on sun care brands, acquiring Sun Bum in June and a majority stake in Coola in October.
But this week’s frenzy of deal-making activity may in retrospect have turned out to be a last gasp for beauty M&A. Big cosmetics companies are no doubt still looking to add lines that will attract younger customers. But the buzziest skin-care labels have already been scooped up. There are still some tempting targets on the market, including Glossier and Charlotte Tilbury, though both carry high valuations that may keep all but the biggest buyers on the sidelines. The dozens of influencer brands that sprang up in Kylie Jenner’s wake look less appealing with makeup in the midst of a sales slump.
“It’s hard to imagine what’s really left that would excite corporate buyers in a big way,” said Rich Gersten, a partner at private equity firm Tengram Capital Partners, which has stakes in Lime Crime and Cos Bar, among other beauty names.
But there is definitely still hope for growing beauty brands wanting to find a corporate parent, as well as some lessons to be gleaned from the past year of deals.
Beauty companies are testing the waters first
Estée Lauder has favoured a strategy of buying a minority stake in a company and seeing how it performs before sealing the deal with an outright acquisition. The 70-year-old cosmetics giant can afford to be patient; it has owned a 20 percent stake in Indian brand Forest Essentials since 2008, and a 28 percent stake in Deciem since 2017. That company’s leading brand, The Ordinary, reportedly did $300 million in sales in 2018.
“The minority investment structure… has been favourable for both parties over the past four years,” Shana Randhava, vice president of new business development at The Estée Lauder Companies, said in an email of the Dr Jart deal (the company bought a minority stake in 2015). She noted that the structure gives brands an alternative to private equity.
It’s hard to imagine what’s really left that would excite corporate buyers in a big way.
Dr Jart was one of the first Korean beauty brands to hit the mainstream in the US, introducing the country to BB creams back in 2011. But the brand has managed to avoid being pigeonholed in the K-beauty category, unlike some of its newer competitors from South Korea. A longstanding retail partnership with Sephora has fuelled its growth, as has its focus on results-oriented skin care, a desirable category in the last few years. Its Cicapair franchise, with products featuring calming ingredients, has spawned knockoffs throughout the industry.
Dr Jart is projected to do over $500 million in sales this year, with Have & Be valued at about $1.7 billion. Estée Lauder lauded the brand’s devoted millennial following in both Asia and the US, as well as an innovative pipeline.
Plenty of other global beauty and personal care companies, including L’Oreal and P&G, have established venture arms to invest in very early-stage brands, though the stakes tend to be smaller than Estée Lauder’s. Unilever’s has been active, investing this year in Australian clean skin-care brand Dr Roebuck’s, clean makeup brand Saie and supplement brand Nutrafol, among others.
Gersten thinks that some corporate minority investors might have a hard time remaining hands-off.
“Typically I would say a large corporation would struggle more with a minority investment because they’d want to have a more active role influencing the outcome,” he said.
Influencer brands are still risky
Jenner might have gotten a huge payout, but the market still isn’t sold on a Coty-Jenner merger. Coty shares initially jumped on the announcement, but have since fallen back to trade close to their pre-deal price.
On a conference call with investors after the Coty announcement, some analysts voiced concern about the company’s assertion that Jenner is “not a fad.”
I don't know why you felt the need to pay such a high multiple of sales for a brand that may well be a fad.
“I don't know why you felt the need to pay such a high multiple of sales for a brand that may well be a fad,” Deutsche Bank’s Faiza Alwy said on the call. “It feels like the makeup brand at least is not on trend with what we're seeing with the makeup category at the moment, and maybe the skin care just feels a little bit unproven right now.”
Coty desperately needs a brand that resonates with younger consumers, especially after its Covergirl rebrand did not pay off. Jenner’s global reach, social media following and growth into adjacent categories (skin) were compelling to Coty, but there are no guarantees.
“It is quite a large bet that Kylie is going to be able to continue that exceptional growth profile,” said Matthew Wiseman, a partner and M&A advisor at Alantra in the UK.
A compelling brand story is still necessary
Non-influencer brand founders with well less than Kylie’s 150 million Instagram followers need not despair.
“She has a strong social following, but tell me what the real brand DNA is,” said Gersten, noting that other brands with interesting stories or unique brand positioning might have better longevity.
Dr Jart is one of these. While it doesn’t have engaged, individual founders like Tatcha and Drunk Elephant do, it’s built a compelling narrative about ingredient efficacy combined with unique delivery systems. It’s not a trend play for Estée Lauder.
She has a strong social following, but tell me what the real brand DNA is.
Brands that prompt replenishment and evangelising among fans will win. Dr Jart is a brand that’s inspired loyalty among its users, said Sarah Jindal, a senior global analyst at Mintel.
“The followers of these brands are committed,” she said. “It makes sense that these are the ones the big guys are starting to latch onto and pick up.”
What 2020 may hold
The major cosmetics corporations appear to be set when it comes to their colour cosmetics portfolios. Some deals to fill out skin-care portfolios may be in the cards, though brands will have needed to scale to about $100 million in sales to appeal to a strategic, Wiseman said.
“They’re being more selective around the brands they’re prepared to buy,” he said.
Haircare may be the next frontier. Hair brands are expanding their distribution, a departure from the professional salon channel that once drove business. While still early, the approach is already working for some: Henkel, which owns hair brands Schwarzkopf and Alterna, just acquired DevaCurl, a brand that has passed through the hands of a few private equity investors. PE firm Advent International just acquired Olaplex, a hair treatment brand.
Wiseman thinks there are more high profile hair acquisitions on the horizon, thanks to parallels with a booming skincare sector.
Ultimately, more brands will find buyers.
“People are looking for growth and they’ll continue to use M&A as a platform for growth,” said Gersten. “They have no choice.”
THIS WEEK IN BEAUTY
Tara Simon is out at Ulta Beauty. For the past seven years, Simon built out Ulta’s prestige offerings, bringing in brands like IT Cosmetics and Kylie Cosmetics.
“Natural beauty” has no official definition, but maybe it will soon. New York Congressman Sean Patrick Maloney introduced a bill to set standards for which cosmetics products can be labelled “natural.”
Marie Kondo launches an e-commerce shop full of wellness products that spark joy. She’ll be selling things like bath products and crystals, which presumably consumers won’t want to "Kondo".
Building a network of safe salons. Pantene is teaming up with UK-based group the Dresscode Project to educate stylists and help transgender people find salons where they feel safe and comfortable.
James Charles hosting the Project Runway of beauty influencers on YouTube. The show debuts in spring 2020 and will offer contestants a chance to win $50,000.