Merger and acquisition activity in the beauty and personal-care industry in the last few years has seen key industry players building their businesses by adding brands — large and small — to their portfolios.
And based on the metrics, this activity is not slowing anytime soon.
Much of the activity in the market has been a reaction to slow organic growth in core markets. For example, in the U.S., beauty and personal care has only seen 3 percent growth over the last five years, with little expectation of higher rates in the next five. In addition, the industry is highly concentrated and at the same time highly fragmented. The top three companies account for at least 45 percent share of the overall market, while the remainder of the pie consists of a very long tail of many small brands.
According to A.T. Kearney’s Merger Endgame methodology, which is based on analysis of hundreds of M&A across multiple industries, a given industry is ripe for consolidation when the top three players account for 45 percent or more of the market.
At this tipping point, survival depends on acquiring or being acquired. This is exactly where the beauty industry stands today — and the big players are reacting. Analysis of more than 200 M&A transactions that took place in the beauty and personal-care industry globally between 2010 and 2016 is shared in our recent study, Shop or Drop: The Inevitable Path for Growth in Beauty. This research sheds light on the who, why, what and how of value creation in the industry.
Creating Value Through Serial Acquisition
The study shows that frequent beauty buyers — those that have completed, on average, two transactions or more a year — increase faster in value and are rewarded by the market in a form of higher share price compared to infrequent buyers. More specifically, the enterprise value, or EV, growth rate of frequent beauty buyers is 26 percent higher than companies that didn’t transact as often during the same time period.
A comparison of EV/EBITDA multiples across the 214 acquisitions studied also showed that serial acquirers — large and small — maintained 1.4 times EV/EBITDA compare to non-serial ones. Wall Street really does reward acquisitive companies over inactive ones with significantly higher market valuations.
Our research looked at the four main catalysts that have driven most of these recent deals — namely, greater access to:
- Distribution Channels
- New Markets
This was the most widespread strategic M&A driver and characterized about 60 percent of the transactions we studied. Leading beauty and personal-care companies seeking to expand their share of wallet in new consumer segments found the most attractive acquisition targets in smaller, nimble and innovative companies that were ahead at reading the early signs, attitudes and preferences of evolving or emerging demographics such as Asian, African-American and Hispanic consumers.
Examples here include L’Oréal’s acquisition of hair-care and skin-care brand Carol’s Daughter in 2014 to target women of color, harnessing the demand for ethnic products, and TPG’s and Revlon’s acquisitions of E.l.f. Cosmetics and Mirage Cosmetics, respectively, to target the value consumer.
This was also a cornerstone of beauty and personal-care M&A deals, accounting for 20 percent of our transaction sample. Nothing can shortcut the path to leading-edge innovation more efficiently than acquiring it. With increased interest in science and biotech-based formulations or devices, this space has been fertile ground for deal seekers. Examples include SkinMedica’s acquisition of science-based mineral makeup company Colorescience, and Valeant’s acquisition of Solta Medical, a manufacturer of energy-based medical device systems for aesthetic applications.
Gaining access to new channels was the motivating factor behind 12 percent of our transaction sample. Macy’s acquisition of Blue Mercury is a perfect example of this — it’s an acquisition that targets alternative channels to its own traditional department store environment. Not surprisingly, access to e-commerce distribution fueled a significant portion of BPC strategic M&A, with physical retailers buying digital retailers to complement capabilities and reach consumers through multiple touch-points. An example of this trend is Target’s acquisition of online beauty e-retailer DermStore.
Access to New Markets
Expansion into new geographies as a key M&A driver represented 8 percent of the M&A transactions in our sample. Acquiring or merging with local companies creates rapid access to local distribution channels, bypassing the time and capital needed to build distribution from the ground up and avoiding import barriers.
It’s notable that the majority of successful M&A deals based on this principle occurred between an acquirer and a target that were both in mature markets — usually acquisitions of North American, European and Japanese companies. Notable examples here are the expansion of Hain Celestial into Canada with the acquisition of Belvedere, and the Japanese beauty brand Kosé making a move on the U.S. prestige cosmetics company Tarte.
In sum, while M&A has been beneficial to beauty and personal-care companies in general, we found through analyzing the data that active acquirers making frequent purchases outperform the industry average and gain more value than companies that take a more conservative approach to M&A. This suggests that going forward, market leadership in beauty and personal care will be highly dependent on one’s M&A ability to identify gems, integrate and then grow them.
Looked at this way, 2017 could be quite an active deal-making year.
Hana Ben-Shabat is a partner in the consumer and retail practice of A.T. Kearney, a global strategy and management consulting firm. She can be reached at firstname.lastname@example.org.