Now that they’ve bought them, they have to absorb them.
After spending billions on snapping up smaller, growing brands over the last few years, beauty’s megaplayers now face the challenge of incorporating them into their operations – without crushing them in the process.
“We’re coming to a point where some of the big companies are saying, ‘I now need these smaller brands for growth, but I still haven’t figured out how to grow them,’” said Wendy Liebmann, chief executive officer of WSL Strategic Retail. “The complexity in onboarding these companies is really building them and not losing the strength of these independent entrepreneurs.”
At least in the near term, the strategy underscoring The Estée Lauder Co.’s recent acquisitions seems to be: Leave them alone.
Lauder is “learning a lot from Too Faced and Becca about social media,” said president and ceo Fabrizio Freda at the WWD Beauty Summit. “Our goal is not to turn them into us; our goal is to help them be the best they can be and to learn from that.”
“We don’t prioritize new brands versus the existing portfolio,” Freda said in an interview. “Every brand is its own priority. We are focusing to grow every single brand. We don’t allocate resources by brand, but by growth opportunities — by channel, by category, by region.”
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Asked if it’s possible for a company to make too many acquisitions, Freda said, “That’s not for us.”
“We have a very clear acquisition strategy where we start from gaps we have in our portfolio … opportunities identified around the world, and then reverse engineer … in which areas we need to add brands, and then we go and look for these brands. It’s not just what is available on the market … it’s a strategy — a reverse-engineered approach to growth and gap-filling, and in that sense, there is not too much.”
For Becca and Too Faced specifically, staying mostly autonomous, while leveraging the fast global-expansion possibilities of belonging to a larger organization, is the game plan.
“They’re an R&D machine,” said Becca ceo Robert DeBaker, who noted Lauder is also pumping up the brand’s global rollout. “We can do things through them that would have been twice as much work and twice as much expense if we’d done them on our own.”
Before the Lauder acquisition, Becca’s revenues were mostly generated in North America — but soon, the company will reach a point where one-third of sales come from geographies outside of the region, DeBaker said. That increased global focus is also reflected in the brand’s 1.8 million Instagram followers, 60 percent of whom are based outside North America, he noted.
“In terms of brand strategy and brand direction, they’re acquiring you because you have something that’s working well, so the approach they have [taken] has been hands-off with us,” DeBaker said. “We’ve been able to access their thought leadership from people like Fabrizio [Freda] and John Demsey [executive group president] … about ways we can enhance what we do.
“For the most part, they’re saying, ‘What you’re doing is fresh … how do we help you do more and stay out of your way,’” DeBaker said.
Since its acquisition, Becca has continued introducing products — it launched a Glow Palette in connection with Chrissy Teigen, Crystal Lip Topper, First Light Primer and Soft Light Blurring Powder in multiple shades — all after a turnaround that included cutting stockkeeping units until the company had less than 150. But 2017 Becca has plenty of shelf space to fill, DeBaker said, and that, in connection with the accelerated pace of business under Lauder, has the brand churning out new skus.
Too Faced has also benefited from the data and global infrastructure that comes with joining Lauder, according to president Eric Hohl, though the brand hasn’t officially entered new territories yet.
“The biggest and most impactful [thing] right now is the global international reach Estée Lauder has,” Hohl said. “[The company has] offices, infrastructure and people in all major markets around the globe, so it has given us an opportunity to look at each of those opportunities and assess, figure out the size of the prize, and figure out strategically if it fits.”
Right now the company is planning its international expansion. Outside of the U.S., the brand’s distribution is “Sephora-centric,” Hohl said, but Too Faced may tap into other distributors as part of a global growth plan. “It might be in the next 12 or 18 months, or to enter into travel retail — Estée Lauder does that well,” Hohl said. “As we think about Germany or the U.K. or other markets — maybe where Sephora isn’t — we’re using [Lauder’s] infrastructure and local market knowledge to do our homework and put a strategy in place.”
Brands are never exactly the same after an acquisition, noted Beth DiNardo, global brand president of Smashbox and Glamglow — but what’s important is maintaining brand DNA and culture. She suggests companies “immediately have a game plan with the influential people in that brand [about] what is meaningful about what made the brand successful, so you’re really clean on anchors and roots,” she said. “You want to throw off your anchors and keep your roots.
“We’re not going to be exactly who we used to be,” DiNardo added. “But what made us successful, and what are we going to do to retain that? [We] write it down, circulate it, socialize it, reward it and make sure we don’t lose it.”
Those core principles remain in play at Smashbox — they are still the starting point for all new concepts, according to DiNardo.
She gave an example with Glamglow — a brand that started with Instagram-friendly face masks. “That’s their deal — they started with masks, and masks will always be their category, but they’re about giving you that California, Hollywood glow.” That glow can come from products other than masks, DiNardo noted.
“No two integrations look alike,” she noted. “The reason for that is twofold — every brand is quite different in what it’s bringing, but every acquisition, the company learns something. They learned a lot in the Smashbox integration; we did a whole playbook of learnings coming out of it. When we bought Glamglow, those were incorporated.”
NYX – a 2014 L’Oréal acquisition – is still operating on its own terms, according to ceo Scott Friedman.
“[L’Oréal has] a process that marries the individual countries and continents or zones’ go-to market authority … with an ownership of the brand itself, and the way those two things work together enables them to really accelerate a brand’s growth globally,” Friedman said.
The way he describes it, shortly after the deal L’Oréal executives from different regions showed up for a two-day program at NYX, where the brand provided guidance and helped determine the best leaders for each geographic region. “Ultimately, what we gave them was a rulebook for how to properly launch NYX,” Friedman said. And the NYX team works with those territory heads closely, he said.
“From the very beginning — it goes to Jean Paul Agon [L’Oréal chairman and ceo] himself,” Friedman said. “He announced to everyone within L’Oréal that ‘L’Oréal’s acquired a lot of different companies, and we learn from them and we share our best practices and we L’Oréal-ize some of them … [but] in this case it’s critical we NYX-ize L’Oréal.’”
That meant amping up focus on the end customer, speed to market and a collaborative, entrepreneurial approach, Friedman said. “All of those things together I think they appreciate in terms of the way we work,” he said. “They’ve adopted all of them. They’re doing a lot and they’re doing it well.”
The other thing that has helped NYX keep its NYX-ness is separation, Friedman said. The brand has its own distribution center and still does its product development work out of Los Angeles, and doesn’t have to clear new launches through L’Oréal, he said.
“We’re faster historically than most of the L’Oréal,” Friedman said. “We’re independent and we have more skus than most of the other brands.”
When Shiseido looks to buy a company, it is decided by a geographic team that essentially pitches the acquisition to other regions, spearheads the process, makes the business plan and handles the integration. It’s a process designed on purpose for smooth post-deal sailing, according to Shiseido Americas ceo Marc Rey. “That makes a huge difference because the people who lead the due diligence are also the people who lead the integration,” Rey said. “It helps us enormously in the integration process because you don’t have to start again — you don’t have people who say, ‘The due diligence was done like that but I disagree.’ It’s surely a continuum — it’s very smooth.”
Even though Shiseido has become more acquisitive lately with the purchases of Laura Mercier, ReVive, the Dolce & Gabbana fragrance license, MatchCo and JWalk, that’s not the company’s main growth engine, according to Rey.
“We’re not obsessed with doing M&A,” he said. “That’s not the way we grow, it’s not the thing which is
at the absolute top of the agenda.” It is, however, still a part of the company’s 2020 plan laid out by global ceo Masahiko Uotani. According to Rey, Shiseido is interested in deals that come at the right time, the right price and are an overall strategic fit – meaning they don’t overlap overwhelmingly with existing brands in the group’s portfolio.
“Dolce [& Gabbana] – it’s a very beautiful brand, and we didn’t have this footprint and were lacking critical mass in fragrances … it was managed by Europe,” Rey said. “And Laura Mercier, we thought we needed an additional brand in terms of makeup, [and] it’s very complementary to the brands we have.”
Lauder has a similar avoid-overlap strategy, according to DiNardo, global brand president of Smashbox and Glamglow. “We look for brands that are different than what we have,” DiNardo said. “Five years ago or 10 years ago we were all in different distribution, and now we’re finding ourselves in the same distribution. It’s really important to differentiate your brand proposition so you can feel the difference even though you all have a lipstick in the same store.”
At Unilever, which has added Murad, Kate Somerville, Dermalogica, Ren and Living Proof to its prestige holdings, the strategy is to keep them away from the larger business (which includes a handful of food brands) — essentially, to not integrate — according to Vasiliki Petrou, executive vice president of Unilever Prestige.
“We’ve stayed small in that sense; we haven’t on purpose integrated with the big company,” Petrou said. “We [run] our business outside the big company — prestige is its own category and global P&L in that sense. The founders are very important to us … this is the DNA of the brand, the heart of the brand … so they are very much involved.”
Coty has been on an acquisition spree so big it caused a corporate overhaul. The company reorganized into three segments — consumer, luxury and professional — upon acquiring the P&G beauty portfolio. According to ceo Camillo Pane, segmenting the company empowers each division “to be making most of the decisions on their own.”
Pane has publicly acknowledged that the integration efforts have affected sales. In the quarter after the company closed the P&G deal, numbers were down, and the ceo told Wall Street analysts that “distraction associated with the merger integration efforts” was one of the factors at play. Coty’s financial results improved in subsequent quarters.
While many big corporations seems to have stayed in their lanes when it comes to their newly acquired brands, it doesn’t mean the thought of interference doesn’t creep into the minds of the brand leaders.
“You’re preconditioned when a big company takes over to look over your shoulder thinking, ‘When are they going to come,’” DeBaker said. “That’s just not what happens.
“When you first go to a large corporation, having worked there before, you sort of expect there’s this big machine and it’s going to start telling you to do different things … I expected them to come in with guns blazing and get their hands into many more things than they did,” he said. “At a certain point when you ‘integrate into systems’ it’s more hands-on, but that’s not strategy, that’s just stuff.”
DiNardo agreed large corporations have a different attitude these days toward the companies they buy. “The days of making an acquisition and crushing them are over,” she said. “It’s a two-way street … brands used to buy things and own them, now they buy them and learn.”
For Too Faced, maintaining a distance from the larger corporation was something the brand discussed with Lauder before the deal, Hohl said. “We had conversations with Estée Lauder up front — that was just part of how we structure the deal in the sense that the most important thing for us, Too Faced, is to maintain our identity and brand DNA and the momentum, the culture, everything that makes us Too Faced,” Hohl said. “We want to take the good parts of being part of a global company … and only take the good parts. That’s basically what we’ve done. It’s also what Estée Lauder has done — they recognize the importance as well, and they’ve set us up internally to be completely separate.”
Roughly six months in, that means Too Faced isn’t part of the Lauder systems and doesn’t participate in every single meeting, though as part of a publicly traded company they do have reporting requirements, Hohl noted. “We just stand on our own, and for the first six months, it’s been working as planned,” he said.
But it isn’t only the industry’s beauty whales that are having to learn how to swallow minnows without ruining them. Integration skills will also be coming into play on the private equity side of the equation, where the latest trend seems to include funds with little experience in beauty partnering with beauty executives in order to get their foot in the door. In several instances, the executive creates a PE-backed platform to make acquisitions.
One example is Glansaol, the “strategic startup” created by former Revlon ceo Alan Ennis, which has acquired Laura Geller, Clark’s Botanicals and Julep, with plans to make further deals before ultimately floating the company on the public markets. Ultimately, Ennis is aiming to own five to seven indie brands in complementary categories. “The brand team focuses on what we call the front of the house — and Glansaol the platform takes care of the back of the house. There are dynamics at play that make the early days hard,” Ennis said, admitting that concept is easier said than done. “I liken it to raising kids … you endure the moment, and you enjoy the memory. Building a platform is hard.”
Nicky Kinnaird and Lori Perella Krebs have teamed up in a similar fashion. They partnered with Winona Capital to form Ancora, which invested in Indie Lee as its first deal — the idea is to make further beauty, wellness and lifestyle acquisitions. Summit Partners is also backing Myles McCormick’s platform, called Elevate BrandPartners, which has invested in Morphe. Ares Management, which has agreed to acquire Devacurl from Tengram Capital Partners, is also looking to build a beauty platform, industry sources said.
While the onslaught of major beauty acquisitions seems to have tapered in recent months, the bankers that do the actual brokering of deals say they are boasting plenty of mandates, which could result in 2017 being somewhat backloaded in terms of deal flow.
“As I look around the industry now, [I see] the complexity and challenges that are facing the companies that have made these kinds of acquisitions,” Liebmann said. “There’s going to be a pushback on the wild and crazy acquisitions for a little bit.”
Experts contend that taking on too many acquisitions can cause corporate-level distraction that could potentially affect financial performance. Before he left his post as head of P&G’s beauty operations to join Ralph Lauren Corp. as ceo, Patrice Louvet called out over-acquiring beauty brands a decade earlier as something the caused problems at P&G. “We overextended ourselves,” Louvet said in mid-2016. “We were out of touch with reality of where to create value. We lost sight of the core.” Then they sold everything but the core, keeping only 12 beauty and personal care brands and divesting the rest.
But as long as Wall Street-demanded growth remains at the top of the priority list, the acquisitions will keep coming. At Lauder, for example, half of its year-over-year sales growth — equal to roughly $100 million — came from Too Faced and Becca in its latest quarter.
“It’s not an acquisition market where you’re selling a depressed [company] and you’re trying to integrate,” Rey said. “It’s a consolidation market because the big guys are healthy and on the other side, the startup and the entrepreneur brands are coming all the time with no huge barrier to entry.”
So what’s next? Health and wellness beauty deals, according to Liebmann. “That’s the piece that really comes next in terms of where consumers are most interested in looking for new [things].”