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The U.K.: A Beauty Stalwart Heats Up

The U.K. market is buzzing with M&A deals, retail rollouts and online opportunity, while brands are launching at a rapid-fire pace. Who will the winners, and losers, be?

LONDON — British beauty looks to be on the cusp of a gilded age — of merger and acquisition, retail and customer experience — although the reason it’s happening now isn’t very pretty.

Nearly two years of lockdowns and social restrictions have saddled this country with debt, inflation, higher interest rates and taxes, not to mention an overwhelmed, and underfunded, National Health Service. COVID-19 was a killer, and continues to menace.

Even against that backdrop, the U.K. beauty market is experiencing something of a renaissance, brewing up new retail concepts, hot indie brands and a slew of M&A activity.

Revenues are set to hit $17.32 billion in 2022, with annual growth projected to be 4.1 percent each year until 2026. The U.K. is the second largest European beauty market after Germany, according to Euromonitor International, and is in the top 10 worldwide.

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That growth comes amidst a market in flux. Boots, the longtime leading beauty retailer in the country, which has lost its mojo in the category over the last couple of years, will likely be sold to private equity this year in what promises to be one of the biggest corporate transactions of the year.

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Sephora — long absent from Britain due partly to Boots’ dominance — is expected open its first physical store in the country later this year.

The beauty giant entered the market last year after buying online prestige beauty retailer Feelunique (soon to be rebranded as Sephora.com) in a deal valued at 132 million pounds, and is said to be eyeing locations in and out of London to expand its physical presence. A Sephora spokeswoman declined to comment.

In the meantime, Harrods’ H Beauty standalone stores have been rolling out across the country, with the latest opening last December in Edinburgh, Scotland. Two more H Beauty stores will open this year in Bristol and Newcastle, England, complete with play tables, skin care stations, treatment areas and the H Beauty Champagne bar, bringing the total to five.

 

The play tables at Harrods Beauty in Edinburgh.
The play tables at Harrods Beauty in Edinburgh. Courtesy of Harrods

Flannels, too, is in expansion mode, adding “interactive” beauty halls to its stores in the north of England. And Space NK, the original Indie pioneer, is set to open its biggest store to date, a 2,000-square-foot flagship at the new Battersea Power Station development in London.

The action isn’t just around brick-and-mortar, but online, too. In January, the London-based Farfetch acquired Violet Grey, for an undisclosed sum, promising to offer its Millennial and Generation Z audience luxury products in addition to “insights and expertise from multiple beauty experts and communities.”

The brand side is equally as dynamic. With his failed 50 billion pounds bid for GlaxoSmithKline’s consumer health care arm now history, Unilever’s chief executive officer Alan Jope said he would focus on buying prestige beauty and wellness companies.

Unilever’s plan is to triple the size of its prestige beauty business from 1 billion euros to more than 3 billion euros in the next few years and compete with similarly hungry corporations like Procter & Gamble, the Estée Lauder Cos. Inc. and Beiersdorf.

Cindy Palusamy, a beauty and wellness entrepreneur, brand builder and strategist, said while the London market may be small in terms of absolute numbers, “it has an outsize influence given it is home to a number of the leading lifestyle platforms — Selfridges, Harrods, Farfetch, Net-a-porter, Cult Beauty — all proudly British, supporting their home country creative community and entrepreneurs, providing global access, awareness and sales from Day One.”

The sector also benefits from a “vibrant angel investor class which has been mentoring and supporting new entrepreneurs. There is a talent pool that has created and defined the playbook for brand-led, d-to-c platforms and marketplaces.”

Beauty has further benefited from the boom in online sales during lockdown. Already a robust channel in the U.K. pre-COVID-19, online is growing at breakneck speed.

According to Euromonitor International, e-commerce sales of beauty and personal care increased by 23 percent over 2020-21, while “virtually enabled at-home experiences” will remain an imperative to drive further sales. According to Statista, some 40.5 percent of total beauty and personal care revenue here will be generated through online sales this year.

Post-COVID-19, U.K. beauty has reached an inflection point, and the potential is vast, said Michelle Feeney, the founder of Floral Street fragrances and an industry stalwart who helped to supersize MAC at the Estée Lauder Cos. and St. Tropez at PZ Cussons.

The Floral Street family of fragrances.
The Floral Street family of fragrances. Courtesy of ACCOOPER

Feeney believes so many trends are converging right now in Britain: Once huge brick-and-mortar beauty players such as Debenhams and Topshop have been broken up and sold. Others, such as John Lewis, are having trouble competing with buzzy, one-stop online retailers such as Cult Beauty, Feelunique, Lookfantastic or Next, which sells hundreds of brands online following its purchase of Marie Claire Beauty in 2019.

There has also been a steady stream of indie, premium British skin care, makeup, hair care, wellness and fragrance brands, which are hitting the market, many of which are going direct-to-consumer online.

Some are celebrity- or personality-driven — such as Rosie Huntington-Whiteley’s new brand Rose Inc; makeup artist Lisa Eldridge’s namesake offering, and Trinny Woodall’s Trinny London; others, such as Ciaté, Lottie London, the skin care specialist The Inkey List, and fragrance brands Floral Street and Vyrao, have been founded by beauty or retail veterans.

“There’s been an erosion of the retail landscape, pure players are coming in and doing a very good job, and then you’ve got the new consumer. Where do they go, and how do they find new brands?” said Feeney.

“We have great entrepreneurs, and a lot of (investors) who are seeing beauty as an opportunity. And if you are an investor looking for potential, you can take what somebody has created in the U.K., and escalate it around the world,” she added.

Ingredients-led skin care has been driving a lot of the recent growth and investors can’t seem to get enough.

Matthew Wiseman, a partner at investment bank Alantra, has seen great interest in skin care M&A deals, and said global corporates and private equity alike are eager to take a slice of the pie.

He said the premium skin care brands have done a stellar job of fueling growth by taking pains to educate and inform consumers, and showcase the products in an attractive way online.

The skin care brands’ “shop and learn” strategies took flight during COVID-19 when consumers found themselves stranded at home with lots of leisure time and disposable income they couldn’t spend on clothing, color cosmetics or entertainment.

Consumers’ concerns about health, what they were putting into their bodies, and the environment ballooned, and they often turned to brands to make sense of it all.

The entrepreneur and investor Carmen Busquets, who as chairperson of Cult Beauty oversaw the sale of the company to THG in a deal valued at 275 million pounds, said she witnessed this behavior firsthand.

During the pandemic, she kept a close eye on consumer behavior and said “a shift occurred in younger customers’ shopping habits. Previously, they’d shopped predominantly for makeup, but then started turning to skin care products,” and wanted to educate themselves, too.

“Sales grew organically, and the demand for higher-quality products continued to rise even though competitors were selling the same products at significantly discounted prices,” Busquets said.

Those consumers are looking for more than an education. They want mission and purpose, too, and the smart indie brands have been delivering just that.

“Consumers are empowered today and have high expectations of brands,” said Anna Sweeting, founding partner of the specialist private equity fund Vaultier7.

Sweeting said brands with purpose, ones that are socially aware and able to connect with customers with integrity, are particularly attractive to investors because they have those values already embedded in their DNA.

Alice Wells, managing director of the Australia-based Lempriere Wells, which specializes in M&A, financing and private equity, would agree. She said investors are so attracted to these niche brands “because they actually stand for something, often have better formulations and meet immediate needs or wants of the customer.”

She believes that bigger, older brands aren’t as appealing as they’re “less agile and can’t respond to market trends as quickly. They have systems and processes around new product development and operations that inhibit fast innovation.”

Diversity and open-mindedness has also been a big driver of business here, too.

The U.K. has a population of 68.5 million, with more than 80 percent living in urban centers. While every city has a different makeup depending on immigration, student population and expatriate communities, the country has become a living tapestry of languages, ethnicities — and beauty concerns — all of which are feeding sales.

Busquets said there’s a reason why Harry Styles’ new beauty brand, Pleasing, can coexist with beauty giants such as Pat McGrath and Charlotte Tilbury.

“Beauty, like fashion, has always been much more experimental and creative in the U.K. You just need to look at David Bowie, Boy George, Queen, Elton John — and Twiggy. All of them had iconic makeup styles that still inspire global trends today. They have contributed to an inclusive industry that appeals to both women and men.”

Palusamy added that a “diverse, influential consumer market” in the U.K. allows for a test-and-learn culture and “a great feedback loop.”

Fearless creativity has been another engine behind beauty’s growth. Even in the darkest days of wartime rationing British women were using beetroot juice as lip tint; boot polish for mascara, and chalk instead of face powder.

“The Brits are always pushing boundaries, and the customer loves what is new and exciting. If French women are chic, the British are definitely brave with makeup, and love to be challenged. There is no fear of being wrong,” said Selma Terzic, CEO of the cosmetics brand, and contouring specialist, Iconic London.

The underlying trends in British beauty, and the ones that emerged during COVID-19, are set to continue, at least in the short term: Ingredients-led skin care still has a long run ahead, while other categories are preparing for their moment in the sun.

“Hair is next,” said Wiseman of Alantra, adding that there is a big trend toward the “skin-ification of hair.”

He believes that brands such as Hairburst, which sells growth vitamins, shampoos and treatments, and Curlsmith, which specializes in curls and waves, are adopting similar strategies to skin care by focusing on ingredient-led formulas, tackling specific needs, educating consumers, staying active and engaged on social and building communities.

Wiseman also believes that, as people start socializing and attending events once again, color cosmetics will begin to recover, as will larger-scale brick-and-mortar operators such as Boots.

The online channel will only get stronger, according to Rachel Horsefield, CEO of THG Beauty.

Testament to the growing power of its online beauty business, and a planned corporate reorganization, THG plans to seek a separate listing for the division, which owns online retailers Lookfantastic, Cult Beauty and Dermstore, as well as brands including Perricone MD, ESPA and Glossybox.

“We’ve really seen penetration into beauty as a category in the last couple of years accelerate, and we expect to see this trend continue,” she said.

“The infrastructure of the U.K. means it is incredibly easy and convenient for people to order online and, in many cases, have their order delivered the same day, meaning they also get that instant gratification. Unlimited shelf space online also means that customers are more likely to be able to find what they’re looking for.

“Digital evolutions in social and video mean that customers are finding it easier than ever to learn and discover new products. We see great opportunity in helping support beauty brands make the transition from bricks and mortar into online,” she added.

Private equity will continue to chase investment in the high-growth businesses and retail (Bain and CVC are the front-runners for Boots, according to British press reports), although small British brands should think before they take investment, or sell, according to Feeney.

“I’m happy if people are looking at Britain, and that there is a lot of noise. And I hope that genuine entrepreneurial, great brands get to grow and go global. But I think private equity are looking at the margins. They love beauty margins, but do they want to invest in building these brands?” she said.

Feeney added that, right now, “there’s almost 1980s ‘Wolf of Wall Street’ salivation around beauty brands and the numbers and the margins. Private equity are thinking it’s a really quick win, a way to make a lot of money, so I think brands have to be really careful.”