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Brazil’s Beauty M&A to Accelerate Amid ‘Difficult’ Year

Natura's agreement to buy Avon is seen as putting pressure on smaller rivals' ability to compete in the country's growing beauty market.

The consolidation of Brazil’s beauty sector is expected to accelerate as Natura’s freshly inked Avon acquisition undermines rivals’ ability to keep up with what is set to become the world’s fourth-largest beauty company.

“It’s very likely that we will see more M&A,” said Banco do Brasil’s analyst Georgia Jorge, adding that Natura’s main rival, O’Boticario, is seen making strategic buys in coming months, especially in the fast-growing e-commerce channel, where sales are climbing 15 percent annually in Brazil.

“Boticario is already doing this [acquisitions]. Last year, it purchased Vult [to expand in the parapharmacy channel ] and they are looking for new channels to approach the consumer, not just in direct sales but also in e-commerce and physical stores,” Jorge said.

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O’Boticario – which runs its eponymous brand as well as Eudora, Quem Disse Berenice, The Beauty Box and Multi B – could also become a takeover target. Highly acquisitory online retailer Magazine Luiza could possibly be interested as it seeks ways to boost its brick-and-mortar presence, Jorge said. Fresh from a 4.7 billion reals, or $1.1 billion, equity offering, the firm snapped up beauty e-tailer Epoca Cosmeticos in 2013 and has been on the hunt for other targets since then, analysts said.

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In other possible tie-ups, online market place B2W – born from the merger of Lojas Americanas and – could follow in Luiza’s footsteps and bag a small, emerging label to boost its catalogue in one of the world’s top three beauty markets. Via Varejo, which is looking to grow its online offering, could opt for a similar strategy, observers said.

Meanwhile, newly enlarged Natura is forecast to deliver revenues of 40 billion reals, or $9.4 billion in 2020, a gain in the high single digits compared to 2019, and poised to become a much more powerful banner across Latin America, said one Sao Paulo-based analyst.

With Avon in tow, Natura should become a much larger player in markets where Avon had lead, notably Colombia, Peru, Mexico and Argentina, where Natura could become the number one or two player.

O’Boticario and other door-to-door South American firms, such as Peru’s Belcorp and Yanbal, have time to face off their new, more formidable rival, however. This is because the two firms will be very busy integrating their businesses, the main synergies from which — such as $200 million to $300 million in cost savings — won’t materialize until after 2022, observers said.

Analysts said the merging of the two firms is likely to hit a few bumps, notably combining and re-training direct sales associates to market both Natura and Avon products, as well as fixing Avon’s widely known distribution problems.

“It would be great if they can achieve strong cross-sales,” said Jorge. “The idea is to add 2.5 million consultants to Avon’s existing network. Once they are able to sell Natura products, it will be great for them [as Avon’s sales have underperformed]” to have that extra income.

The other challenge will be to merge both entities’ product catalogs, which are somewhat complementary but target different consumer segments and categories, Jorge added. For instance, Avon is more focused on selling makeup to the C class segment, while Natura targets the A and B market with body creams and lotions, also through its Bodyshop and Aesop banners.

Felipe Borero, an analyst with Brasil Plural, said overhauling Avon’s distribution activities will be a big sticking point as it has long faced difficulties dealing with suppliers, making the whole process “slow and expensive.”

What’s more, Natura will also streamline Avon’s marketing, which has suffered setbacks, particularly in social media, where it can use some strengthening, he added.

Meanwhile, Brazil’s beauty market recovery, albeit slow, should help the firms complete their marriage, Borero said.

He predicts sales will increase 7 percent on a nominal basis this year, up from 5 percent growth in 2019, as Brazil’s economic growth doubles, fueled by President Jair Bolsonaro’s structural reforms. “Economic growth continues to climb and interest rates are very low,” said Borero. “We are very optimistic about the retail sector,” including beauty, he added.

Borero’s forecasts came in the middle of industry lobby Abihpec and consultancy Euromonitor, which had differing views about the sector’s outlook, with the former saying nominal growth will reach 5 percent and the latter 9 percent.

Whatever the case, Abihpec predicted growth will be sluggish as stubbornly high unemployment (hovering at just below 12 percent) dampens consumption of discretionary items such as skincare and fragrances, despite an economic rebound.

The industry group expects real growth to come in at 1.5 percent this year versus 0.69 percent in 2019. On a nominal basis, sales will gain 5.1 percent, matching a similar performance in 2019

“It will be a difficult year because we don’t have much growth in salaried workers,” Abihpec’s president Joao Carlos Basilio said in a statement, echoing views that brands must step up product innovation to boost sales.

Basilio noted flagship industry categories, such as makeup and hair straightening or curling products, continue to suffer, with sales declining 10 percent between January and October last year

The real’s weakness is also lifting raw material import costs, squeezing brands’ margins, as low inflation prevents them from marking up their products, Abihpec members said.
Jorge backed Abihpec’s forecast, noting that consumer confidence, at least in beauty retail (clothing merchants paint a brighter picture), is not improving as quickly as hoped amid the high unemployment numbers.

“When we looked at the results of Lojas Renner [the industry’s fashion retail chain benchmark], we see people are buying more apparel but are also cautious about using their credit card, about getting more indebted,” Jorge said.

She added clothing and beauty sales increased in the fourth quarter of 2019 but that they were somewhat artificial because the government released 500 reals of workers’ pension money (due to the recent pension overhaul), an amount that went up to 1,000 reals for certain laborers, said Jorge.

“The question is whether sales would have risen so much without this as unemployment is still increasing and income is not rising significantly,” Jorge mused. “We don’t think retail will be growing as fast as we think,” she concluded, though she noted e-commerce gains will continue to eclipse brick-and-mortar ones, gaining 15 percent to 18 percent in 2020.