Too Faced

Beauty companies need to spend to survive according to the latest report by consulting firm A.T. Kearney.

According to the report, Shop or Drop: The Inevitable Path for Growth in Beauty, companies need to do deals for access to customers, innovation, new channels and new markets. The analysis looked at 214 beauty and personal care transactions between 2010 and 2015 and determined that companies that make more than two acquisitions per year grow 26 percent faster than less acquisitive businesses, namely infrequent buyers with less than $1 billion in revenue, which grew at 14 percent, or those with more than $1 billion in sales, which grew at 10.8 percent.

The deal frenzy of late is driven by the need to grow in stagnant markets, according to the report’s coauthor, Hana Ben-Shabat, a partner in the retail practice at Kearney.

She says the overall beauty and personal-care market in the U.S. grew by only 3 percent over the past five years, and not much more is expected in the next five years and named the concentrated nature of the industry (few big players, each with large market shares) as another driver.

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“Organic growth really is slowing down in the beauty industry, M&A is really becoming [very important] for businesses in this industry,” Ben-Shabat said. “You must be able to identify targets, evaluate them properly, understand which ones are going to fit you and then execute the deal.”

A.T. Kearney names access to consumers as the most pronounced driver of M&A, saying that companies are looking to expand their wallet share among new consumer groups. “Most companies are looking in a strategic way what this target is going to fulfill,” Ben-Shabat said.

L’Oréal’s 2014 acquisition of Carol’s Daughter falls into the gaining-new-consumer-demographics category, according to the report, because it allowed the company to target women of color. The report also names Elizabeth Arden’s deals for the Justin Bieber and Nicki Minaj fragrance licenses, PZ Cussons deal for hair-care brand Fudge, and Revlon’s purchase of Sinful Colors as deals that could bring specific demographics into a larger corporation’s customer base.

Innovation is the next big cause of beauty M&A, according to the report, behind deals like L’Oréal’s purchase of color-matching business Sayuki and Lauder’s deal for GlamGlow. “One way to shortcut [innovation] is to find somebody who is already doing it and acquire them,” Ben-Shabat said.

Acquisitions also work as a means to expand into new markets. For example, Kosé made its way into U.S. prestige makeup with the 2014 acquisition or Tarte, and Macy’s, with Bluemercury, added access to a new distribution channel – specialty retail.

Ben-Shabat expects deal flow to remain active, she said. “New indies are most likely to remain top acquisition targets,” the report states. “Acquisitions such as [Too] Faced (by Estée Lauder) and IT Cosmetics (by L’Oréal) will be the norm, not the exception. The watch list is growing and the competition for these brands will intensify.”