Mergers and acquisitions may be scarce these days, but Coty Inc. — the prolific fragrance house — has a hankering for buying.

This story first appeared in the March 21, 2008 issue of WWD. Subscribe Today.

The New York-based firm, which has a strong European sensibility, is looking for targets to fortify its color cosmetics and skin care businesses, and lessen its dependence on the troubled fragrance industry. The strategy also will catapult Coty to its goal of hitting the $5 billion mark by 2010.

In December, Coty took a decisive step closer to becoming a more well-rounded beauty player by acquiring DLI Holding Corp., which is known in the beauty industry as Del Laboratories, for an estimated $800 million.

“We have a strategy to really build out our three pillars: fragrance, color cosmetics and skin care,” said Coty chief executive officer Bernd Beetz. “We succeeded over the last five years to have double-digit growth on our existing base business, and that is what we continue to project for the future. Plus we always think about adding acquisitions.”

The Del Labs purchase — which added Sally Hansen, the budget color line NYC New York Color, La Cross implements and Orajel oral care — has shifted the ratios of Coty’s key pillars of fragrance, cosmetics and skin care. Prior to Del Labs, fragrance accounted for 70 percent of company sales, color cosmetics for 15 percent and toiletries and skin care for the remaining 15 percent combined. Those percentages have now shifted to 61 percent for fragrance, 25 percent for color and 14 percent for toiletries and skin care.

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Coty plans to grow its cosmetics business — which prior to Del Labs was anchored by the Rimmel brand — with the launch next month of Sally Hansen Natural Beauty, a cosmetics line created in collaboration with the resident makeup artist Carmindy of TLC’s “What Not to Wear.” Natural Beauty marks Sally Hansen’s second stab at color — the brand launched the now defunct Healing Beauty line in 2003. High prices were likely to blame for Healing Beauty’s shortcomings, said industry sources, but retailers seem optimistic about the introduction of Natural Beauty.

Sherry Saffert, divisional merchandise manager of beauty care for CVS Pharmacy, said of Natural Beauty, “The new line has a quality ingredient story with premium packaging and pricing. It is a full color assortment line inspired by Carmindy…with the customer in mind.” She added CVS has allotted two-feet of space in its “best doors” for Natural Beauty, alongside similarly positioned brands, including Physicians Formula, Almay and Neutrogena.

Beetz also sees ample opportunity for the NYC brand, which often goes head to head for retail space with fellow value brand Wet ‘n’ Wild, owned by Markwins International. Plans call for a global expansion of the NYC brand, which sources estimate generates sales $66 million at retail. The brand’s current international presence is about 5 percent, said Beetz. International markets across all products account for about 60 percent of Coty’s sales.

Coty acquired Rimmel in 1996, when the edgy, London-based brand had sales of less than $100 million. Rimmel’s global retail sales have since grown to about $700 million. The brand is slated to expand to China in May via a licensing agreement with Tokyo-based Kosé Corp.

Referring to its acquired UCI and Rimmel businesses, Beetz said, “I think we have proven with our brands so far that we are able to build them, and with the expertise that we are also acquiring with the teams at Del we should be able to make significant progress there, too.”

Coty plans to fully integrate the Del Labs business over the next 12 to 18 months, but Beetz noted Harvey Alstodt, president of Del Cosmetics, and his team continue to run the Del Cosmetics business.

“When you put Del together with Coty, they become a substantial supplier to the beauty world,” said Alstodt.

Several retailers said that new product programs for Sally Hansen and NYC New York Color that were announced prior to the acquisition remain in place for this year. Del Labs’ upper management, namely Charles Hinkaty, former president and ceo, and Joseph Sinicropi, chief financial officer, left the company in January. Sources close to the situation said additional decisions to determine who stays and who goes will be made in June or July.

Since arriving at Coty in 2001, fresh from Parfums Christian Dior, Beetz has revved up the company’s appetite for risk taking. Shortly after his arrival, Coty began mining Hollywood in a bid to revive the celebrity fragrance concept. Using Jennifer Lopez’s Glow by JLo scent as the first trial balloon, he upended the fragrance business by deliberately shortening the life cycle of new launches to nine months from a stretch of 12 to 18 months to feed consumers’ desire for newness. Coty’s expanding celebrity roster has since fueled this shortened, rapid-fire launch cycle. In doing so, it has rewritten the category’s business model, which was once predicated on longevity. Now in its sixth year, the Jennifer Lopez franchise generates about $100 million in annual sales. Coty’s star wrangling prowess has resulted in other fragrance deals with Celine Dion, the Beckhams, Kate Moss, Gwen Stefani and, most recently, Revlon’s longtime spokesmodel Halle Berry. When asked if consumers’ interest in celebrity scents may be waning, Beetz said, “The importance of celebrity in the beauty industry is increasing. Just look at all the endorsement deals. From a sociological point of view, I don’t see people’s interest in celebrities decreasing.”

Reflecting on the shorter life cycles in the fragrance business, he said, “I think it’s going to be more discriminatory. The stakes are going to be higher and the investments are going to be higher. So, there’s going to be a bigger threshold for those who are successful.” That said, Beetz declared that Coty plans to increase its marketing might behind its fragrance brands. And perhaps for good reason, Coty’s reliance on fragrance has prompted some financial experts to question the firm’s profitability. But Beetz is adamant the firm has a double-digit operating margin, which he said is well ahead of several public beauty firms. As a point of comparison, the Estée Lauder Cos. Inc. had an operating margin of 10.7 percent in fiscal 2007, and L’Oréal’s operating margin was 16.7 percent last year. Each acquisition, particularly outside the fragrance category, helps to improve Coty’s profit margins, noted financial experts.

Beetz has also upped the ante — and risk quotient — with a spate of acquisitions and divestitures. During the past five years, Coty acquired the Marc Jacobs and Kenneth Cole fragrance licenses from LVMH Moët Hennessy Louis Vuitton for an estimated $50 million; Unilever Cosmetics International’s designer fragrance brands — including Calvin Klein, Vera Wang, Chloé and Cerruti — for an estimated $800 million, and most recently the Del Labs brands. At the same time, it has shed less-attractive businesses, such as specialty bath, selling The Healing Garden and Calgon brands to Ascendia Brands Inc. The company has done this strategic maneuvering, said Beetz, while maintaining a double-digit growth rate. He noted that the Del Labs acquisition has pushed the firm’s revenues of $3.5 billion past the $4 billion mark, and closer to its previously announced goal of hitting $5 billion by 2010.

Long before Beetz took over the helm, it was speculated the beauty firm’s owner, the Ludwigshafen, Germany-based Joh. A. Benckiser GmbH, a private holding company, had ambitions to take Coty public. Rounding out the company portfolio may mark a step toward that goal, said industry observers. But given the sharp downturn in the economy, it’s unlikely Coty would pursue an initial public offering this year.

A number of industry watchers have said Coty has more heavy lifting to do to build robust color cosmetics and skin care businesses. As it stands, Coty still leans heavily on the fragrance category, which seems to have weakened under the load of new launches.

In the past five years, over 1,000 new prestige fragrances have hit counters — an average of over 200 a year, noted Karen Grant, senior beauty industry analyst, The NPD Group. She added that, compared with 10 years ago, a typical prestige fragrance today on average will generate about one-third the volume of fragrances in the past.

The flood of short-lived fragrances has taken its toll. Sales of prestige fragrances dipped 1 percent to $2.94 billion in 2007, according to The NPD Group.

Coty may be able to shield itself from troubles in the fragrance category by beefing up its skin care business, which at present is relatively small. In the past, the firm had expressed interest in dermatological skin care. When asked if Coty has an interest in Murad Inc., the skin care brand of El Segundo, Calif.-based dermatologist Howard Murad that was recently eyed by the Estée Lauder Cos., Beetz said, “We have a three-pillar strategy and we want to strengthen two pillars [color cosmetics and skin care]. We’re always open [to acquisitions] and as we look around the market, if we see a target that interests us we will work on it, but we cannot talk about our prospective [acquisitions] in the marketplace.”