The global beauty industry may be headed for a new era of growth.
That was among the signals emerging from a seismic realignment of the industry over the last year, as a number of major players engaged in a buying spree of young brands or of each other, while others, notably Procter & Gamble and Avon, jettisoned businesses that no longer worked or fit.
“In the last 12 months, nearly every major beauty company has announced an acquisition, which represents an unprecedented level of activity,” said Kelly McPhilliamy, managing director and co-head of consumer investment banking at Wells Fargo.
Once the smoke cleared, beauty stalwarts were more in tune with a whirlwind of rapidly emerging consumer tastes. The industry also is learning, via acquisition, how to get a grip on the new realities of the digital age. By acquiring indie brands, the buyers are gaining entry into the new world of direct selling, with its prized Millennial audience.
Not completely impressed, Wendy Liebmann, chief executive officer of WSL Strategic Retail, described this fervent activity as mostly a defensive action by entrenched players. “I am hoping that these moves have just sort of cleaned house enough that the companies can get back and say, ‘How do I innovate in a really transformative way?’ This feels like stage one to me.”
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Lucie Greene, director the Innovation Group of J. Walter Thompson, agreed the stage has been set for growth, but she maintains that the major players have to push themselves on the brand creation front. “The bigger legacy companies need to adjust to a rapidly changing environment and respond to the changes in consumer patterns and desires. They are doing it at the moment by acquisition, trying to acquire small brands that are growing fast. I’d love to see them create more of their own, rather than rely on the acquisition model,” she said, pointing to Target incubator as a success at creating private label products. The other side of the coin involves delivery systems and retail, which is also all in flux. One success is Amazon, “which is moving into a multitude of different categories, not only selling them but creating products.”
Some big players have slimmed down. P&G Beauty divested 43 brands and Coty bought 41 of them, a move that’s expected to boost Coty up the industry’s rankings of the biggest companies, by revenue, from 14th place this year to number five.
P&G Beauty had previously been number two but then fell to number three this year and will stay there — despite selling off a majority of its beauty portfolio, according to Procter & Gamble’s estimates of market rankings. With the addition of shave preps, P&G will hold its ground with beauty sales of $11.5 billion.
Avon Products Inc. also shed its long-troubled North American division to regroup under its international banner, which represents 86 percent of sales.
P&G’s previous number-two ranking was usurped by Unilever as it made four impactful acquisitions in the prestige skin-care market — Ren, Kate Somerville, Dermalogica and Murad.
Unilever’s estimated 2015 beauty sales stood at $20.47 billion, according to the WWD Beauty Inc Top 100 rankings.
Revlon Inc., the mass market icon, nearly doubled its size by acquiring the department store rooted Elizabeth Arden.
A rumbling also came out of the East, as the Tokyo-based Shiseido reorganized and reenergized itself under new leadership by group ceo Masahiko Uotani. The company joined others in dipping into the acquisition pool. In June, it acquired Laura Mercier to widen its footprint in prestige makeup. Also included in the deal was ReVive skin care. Shiseido followed those moves by signing a licensing agreement with Dolce & Gabbana.
Perhaps the most attention was drawn by the acquisition duel between Estée Lauder Cos. Inc. and L’Oréal, which retained their respective leadership positions while snapping up Indie brands.
Lauder grabbed the latest word, when in mid-November it acquired Too Faced makeup brand for $1.45 billion, the largest purchase in the beauty giant’s 70-year history. It simultaneously closed on the earlier deal for Becca Cosmetics at a price estimated by industry sources at $230 million. The combination of the two deals instantly elevated Lauder’s profile in the Millennial-rich world of specialty chains, like Sephora and Ulta Beauty, as well as key social media channels. Previously, Lauder had made five other acquisitions, three of them artisanal fragrance houses.
Lauder’s Too Faced acquisition seemed to answer acquisitions made by L’Oréal in the summer to buy It Cosmetics for $1.2 billion and Atelier Cologne. Earlier, the industry leader had acquired two cutting edge makeup houses, Urban Decay and NYX.
In making these deals, companies made their moves for their own particular reasons and motives — some companies scaled up and others streamlined, some moved ahead, others slipped — but they all happened in the same time frame.
Fabrizio Freda, president and ceo of Lauder, ticked off a series of “evolutions” as an explanation for the acquisition wave, including the rise of e-commerce putting pressure on brick-and-mortar retailing. But two of his insights seem the most potent. “The consumer is upgrading to prestige [priced products], which are growing faster than the mass category,” and “women around the world use many, many beauty brands and products at the same time — 10 brands in their bathroom on average. To win, you need a portfolio of brands,” he said, adding that megabranding doesn’t have the currency it did in the past. In addition, brand-building is much easier, due to lower barriers to entry, because of lower interest rates, access to e-commerce and availability to influencers.
There are different strategies at work in each deal, but they all tend to work back to the consumer. “It is the consumer that is driving the transformation,” declared Fabian Garcia, an ex-Colgate-Palmolive veteran who became the new ceo of Revlon Inc. in March.
“Everybody else is trying to find ways to move at the pace the consumer is moving. When you come to think about it, it starts with that insatiable quest that consumers have for what is new and innovative and this is Millennial-driven,” Garcia added. “The companies are trying to respond, to find the consumer, to give her what she wants, to find a customized solution, to talk to her in a language that is more authentic, to be faster with their innovations — to catch her. She is a moving target.”
Patrice Louvet, group president of global beauty at P&G, pointed out that size does matter. “For some of the players, it’s the desire to gain scale because they have come to the realization that they are not competitive, given their existing size.”
Vasiliki Petrou, senior vice president of the prestige division of Unilever, concluded,“The change was started by the expansion of digital and the democratization of beauty beyond any kind of imagination that we would have thought before. This is positive because it is bringing a lot of creativity, speed and entrepreneurship as well to the bigger companies and it challenges in a constructive way the way we innovate, and the way we go to market. For the companies that can get this boost of inspiration but also [inject] business modeling in their plan, it can be a huge accelerator for the future. For the companies that either are not embracing it or they are not open to it, it will definitely challenge them for the future.”