The Estée Lauder Cos. Inc. is betting about $1.68 billion that growth in prestige makeup is here to stay.
The company’s two latest deals, Too Faced, which it is buying for $1.45 billion in its biggest acquisition ever, and Becca Cosmetics, which it closed on for an industry source-estimated $230 million, underscore the company’s certainty that younger consumers’ enthusiasm for makeup will not dull as they age.
“MAC’s softening for the quarter is not behind our acquisition strategy,” Lauder president and chief executive officer Fabrizio Freda said on a call with analysts Tuesday to discuss the Too Faced acquisition. Freda had previously discussed MAC’s troubles in North America, where declines pushed overall makeup sales down to $1.17 billion compared with $1.62 billion for the prior-year period, on Lauder’s earnings call in early November.
“Makeup growth is a long-term trend globally because it’s driven by multiple engines,” Freda said later in the day at the Morgan Stanley Global Consumer & Retail Conference. “So, one engine is the Millennial and Gen Z generation that is consuming more makeup. So the more Millennials will become the age of their mothers and the Gen Z the age of the Millennials, overall the trend will continue to be positive. Because when you are in this lucky situation in which the younger generation consumes more than the older, I think you cannot assume that when they will get older they will consume less. Because what we see, and we have facts on that, is that the habits are very hard to change. So it doesn’t depend by age, it depends by the habits that you create in your life. So today, makeup went from ‘I always use the same look for myself’ to ‘I use makeup to interpret my mood, my moment, my week, my point of view, my age moment’ whatever; different women have different point of views… so I believe that the generational growth of makeup will be a trend for the long term.”
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Growing makeup use from Asian consumers, low barrier to entry for brands, diversification of the market and increased levels of excitement are the other reasons he cited for sustained growth in color cosmetics. Freda noted that 85 percent of Too Faced’s customers are under 40-years old. “These consumers have been driving the rapid growth of makeup,” he added.
Lauder is paying for the business with short-term debt, that will later be replaced with long-term debt, chief financial officer Tracey Travis said.
“Too Faced is the latest step in our focused and clear acquisition strategy,” Freda said. “In recent years we built a portfolio of artisanal fragrances at the fastest-growth, profitable end of the fragrance category…now, we’ve enriched our portfolio in makeup with two brands focused on younger consumers and specialty multi.” For Too Faced, Lauder will also focus on travel retail, he said.
Too Faced is set to leave its latest owner, private equity firm General Atlantic, less than a year and a half after the firm bought the company with plans to expand it internationally. Sources indicated Lauder had tried to buy the brand then, but it ended up selling to General Atlantic for around $500 million. Lauder also took an early look at Becca before the brand was contracted for a sale to Main Post Partners, which owned Too Faced before it sold it to General Atlantic, and Castanea Partners for around $200 million, sources said. When exclusivity on that deal ended, Lauder came back to pay more for Becca, sources have said. A Wall Street analyst asked Freda about Lauder’s previous attempt to buy Too Faced, and he responded: “It is not always what you want to buy you can buy the moment you want,” he said. “We did look at this business before and we were not successful at the time, and we’ve been successful now.”
In addition to the $270 million in sales that Too Faced is expected to have this year, it’s likely the company will also bring its social media influencer expertise to Lauder, according to Tribe Dynamics cofounder Conor Begley, who said Too Faced has relationships with more than 1,000 influencers.
The brand earned $223,600 in earned media value from a collaboration with social media influencer Kandeejohnson related to the brand’s Better Than Sex Waterproof Mascaras, according to Tribe, while Too Faced’s Sweet Peach eye shadow palette and Born This Way concealer generated $6.2 million and $3.1 million in earned media value, respectively.
“Too Faced could have a very similar effect to Estée Lauder that Nyx had with L’Oréal,” Begley said. “When Nyx was brought into L’Oréal a big reason for that was their digital expertise and their work with influencers…[Too Faced] is really a brand that is deeply integrated with the influencer community, so I think a lot of the expertise they have is going to be something Estée Lauder will leverage across their other brands.”