active m&a in the beauty space fuels future growth may 1 ......may 01, 2017 · on acquisitions...

1 DeborahWeinswig,ManagingDirector,FungGlobalRetail&[email protected]:917.655.6790HK:852.6119.1779CN:86.186.1420.3016Copyright©2017TheFungGroup.Allrightsreserved.

May1,2017

1) Manyglobalbeautycompanieshavechosentofocusonacquisitionsasakeystrategytodrivegrowth.Asaresult,wehaveseenasteadyriseinmergerandacquisition(M&A)activitysince2013.In2016,therewere91beautyindustrydealsannouncedglobally,up25%from75dealsin2013.

2) Beautycompanieshavebeenhuntingforgrowthviaacquisitionsinhigh-growthnichesofthemarketsuchasindependentcosmeticsbrandsandsustainablebrands.Manyofthetargetshaverecordedgrowthratesinthehighdoubledigitsinrecentyears.

3) IntensecompetitionformarketshareamongthetopbeautycompaniesisexpectedtocontinuetodriveM&Aactivity.

4) Weseethreeparticularhigh-growthareasaslikelytoattractmoreM&Aattention:organicskincarebrands,SouthKoreanbeautybrandsandsocialmedia-endorsedindependentcosmeticsbrands.Theseareashavegainedtractioninrecentyearsandhavepotentialtooutperformtheoverallbeautymarket.

Deep Dive: Active M&A in the

Beauty Space Fuels Future

Growth

Deborah Weinswig

Managing Director

Fung Global Retail & Technology

[email protected]

US: 917.655.6790

HK: 852.6119.1779

CN: 86.186.1420.3016


May1,2017

TableofContents

ExecutiveSummary.........................................................................................................................................3

MarketOverview:GlobalBeautyCompaniesSeektoBoostGrowthThroughM&A.........................................3

AcquisitionsAreaGrowthDriverforBeautyCompanies.................................................................................5

AcquisitionsHelpBeautyCompaniesOptimizeProductPortfolios...................................................................7

BeautyandPersonalCareCompaniesTapintoMillennialandGenZCustomerBaseThroughAcquisitions.....7

ContinuedM&AinHigh-GrowthAreasExpected.............................................................................................8OrganicSkincareandPersonalCareBrands.............................................................................................................8EmergingK-BeautyBrands.......................................................................................................................................9SocialMedia-EndorsedIndependentCosmeticsBrands........................................................................................10

Conclusion.....................................................................................................................................................12


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ExecutiveSummaryWehaveseenahealthylevelofM&Aactivityinthebeautyspacegloballysince2013.Maturebeautycompanieshavechosentouseacquisitionsasakeystrategyforgrowth,asithasprovenchallengingforthemtogrowtheirbusinessesorganicallybyopeningstoresandexpandingdistributionchannelsfortheirexistingbrands.Inadditiontohelpingbeautycompaniesexpandtheirbusinesses,acquisitionsalsohelpthemoptimizetheirproductportfoliosandtapintoayoungercustomerbaseofmillennialsandGenZers.

WeexpecttoseemuchcontinuedM&Aactivityintheindustry,givenstrongcompetitionformarketshareamongmaturebeautycompanies.ThreesegmentsofthebeautymarketarelikelytoseemoreM&Aattention:organicskincarebrands,SouthKoreanbeautybrandsandsocialmedia-endorsedindependentbrands.

MarketOverview:GlobalBeautyCompaniesSeektoBoostGrowthThroughM&AMaturebeautycompanieshavesoughtwaystocontinuetoexpandtheirmarketshare,astheyhavenotenjoyedthesamelevelofgrowthastheoverallbeautymarket.Topglobalbeautycompanieshavegrownby3%–4%inthepastfiveyears,whiletheoverallglobalbeautymarketaveraged5%growth.

Duetotheirmaturity,itischallengingforlargebeautycompaniestogrowtheirbusinessesorganicallybyopeningstoresthatfeaturetheircurrentbrands.Growthopportunitiesarealsolimitedintraditionaldistributionchannelssuchasdepartmentstores,wheretrafficandsaleshavefacedheadwinds.Inaddition,thereisincreasingcompetitionfromemergingindependentbeautybrandsatspecialtystoressuchasSephoraandUlta.

Figure1.GlobalBeautyandPersonalCareMarket:MarketSize(LeftAxis,USDBil.)andGrowthRate(RightAxis,%)

Source:EuromonitorInternational

Becauseintensecompetitionamongmajorbeautycompaniesmakesorganicgrowthmoredifficult,manyglobalcompanieshavechosentofocusonacquisitionsastheirprimarystrategyforgrowth.Acquisitionsrepresentanattractivestrategyforgainingmarketshare,particularlyinareasthat

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Maturebeautycompanieshavesoughttocontinuetoexpandtheirmarketshare,astheyhavenotenjoyedthesamerateofgrowthastheoverallbeautymarketinrecentyears.


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targetmillennialconsumers.Asaresult,wehaveseenahealthylevelofM&Aactivitysince2013.Therewere91beautyindustrydealsannouncedin2016globally,up25%from75dealsin2013.

ThemostactiveregionsforbeautyindustryM&Aarealsothelargestbeautymarkets.NorthAmericawasthemostactiveregionin2016,with46announcedbeautyindustrydeals,up40%from33in2015.Europeremainedthesecond-most-activemarketin2016,whileM&AactivityintheAsia-Pacificregiongrewatthefastestratelastyear,reflectingbothrisingdemandforbeautyproductsandnotableindustryinnovationintheregion.

Figure2.GlobalBeautyandPersonalCareMarkets:NumberofM&ADealsAnnounced

Source:S&PCapitalIQ/FungGlobalRetail&Technology

Smallandmedium-sizedcompanieshavebeenthemostpopulartargetsforstrategicandfinancialacquirersseekinggrowthpotential.About75%ofrecentbeautyindustrydealsforwhichtransactionvaluesweredisclosedwerevaluedatlessthan$100million.Strategicacquirershavebeenthedominantplayersinthemarket,participatingin376of411announcedtransactionsfrom2012through2016.Thelargestbeautyindustryplayershavebeenthemostactiveacquirersinthespace.Financialbuyershaverepresentedasmallpercentageofactiveacquirersduetoincreasedcompetitionfordeals.

Figure3.GlobalBeautyandPersonalCareMarkets:NumberofDealsAnnounced,byRegion,2013vs.2016

Source:S&PCapitalIQ/FungGlobalRetail&Technology

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NorthAmericawasthemostactiveregionforbeautyindustryM&Ain2016,with46announceddeals,up40%from33in2015.


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AcquisitionsAreaGrowthDriverforBeautyCompaniesGlobalbeautycompaniesarehuntingforgrowthviaacquisitionsinhigh-growthnichesofthebeautymarketsuchasindependentcosmeticsbrandsandsustainablebrands.Manyofthetargetshaverecordedgrowthratesinthehighdoubledigitsinrecentyears.

Globalbeautycompanieshavealonghistoryofacquiringbrandsintheearly-growthstageandbenefitingfromtheirhighgrowthpotentialpost-acquisition.Forexample,L’OréalacquiredcolorcosmeticscompanyUrbanDecayin2012foranestimated$350million.Atthetimeoftheacquisition,UrbanDecaygeneratedonly$130millioninnetsales,butthebrandhelpedL’Oréaladdofferingstocompeteinaniche,accessible-luxurymarketthattargetsyoungconsumers.By2016,L’Oréal’smanagementnamedUrbanDecayasoneofthreekeypillarbrandsdrivingitstop-performingL’OréalLuxedivision,whichreported6.9%like-for-likeyearlygrowthin2016.

Morerecentbeautydealsdemonstrateglobalbeautycompanies’continuedconfidenceinusingacquisitionasagrowthstrategy.L’OréalacquiredITCosmeticsfor$1.2billionin2016,therebyaddingmorethan300productstotheL’OréalLuxemakeupportfolio.Atthetimeoftheacquisitionannouncement,ITCosmeticshadreported$182millioninannualrevenue,anincreaseof56%yearoveryear,anditshowedstrongpotentialtodrivegrowthforL’Oréal.EstéeLauderaddedmakeupbrandsBeccaandTooFacedtoitsbrandportfolioin2016.ABloombergarticleestimatesthatthetwobrandssawcombinedrevenueof$340millionand70%year-over-yeargrowthin2016.TooFacedpostedmorethan$270millioninannualrevenuein2016.

Source:TooFaced.com

Cotyisanotherprominentexampleofabeautycompanyutilizingacquisitionstogrowmarketshare.Thecompanyhasbeenthemost-activebuyerintheglobalbeautymarket,andhasbecometheworld’sthird-largestbeautycompanythrough12acquisitionsinthepast10years.From2007through2016,Cotyalmosttripleditsannualrevenue,growingsalesfrom$3.3billionto$9billion.

Thetablebelowhighlightsselectedrecentacquisitionsbylargebeautyandpersonalcarecompaniesseekinghigh-growthopportunities.

ManybeautyindustryM&Atargetshaverecordedgrowthratesinthehighdoubledigitsinrecentyears.


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Figure4.GlobalBeautyandPersonalCareMarket:SelectedM&ATransactions,2013–April2017

Buyer CompanyAcquired Segment TransactionValue(USDMil.)

2017 Coty Younique GlamorousCosmetics $600

2017 L’Oréal CeraVe,AcneFree,Ambi Clinical $1,300

2016 Coty GHD ProfessionalHaircare $510

2016 CounterBrands NUDEBrands Pure/Natural N/A

2016 EstéeLauder TooFaced Playful/Cruelty-Free $1,450

2016 EstéeLauder Becca Diversity $230–$240*

2016 JakksPacific C’estMoi Kids’Beauty N/A

2016 Johnson&Johnson VogueInternational Sustainable/Natural $3,300

2016 L’Oréal ITCosmetics PremiumColorCosmetics $1,200

2016 OrigamiOwl WillaGirl Kids’Beauty N/A

2016 Unilever LivingProof Scientific $200*

2016 Unilever DollarShaveClub Subscription $1,000

2015 Coty 43BrandsfromP&G Premium $12,000

2015 Coty Bourjois Mass $239

2015 Unilever Dermalogica Professional N/A

2015 Unilever KateSomervilleSkincare Natural/Prestige N/A

2015 Unilever REN Purity N/A

2015 Unilever Murad Clinical N/A

2014 EstéeLauder Glamglow Celebrity/Edgy $100–$125*

2014 L’Oréal NYX Mass $500

2013 Cosmax L’OréalUSACosmeticsPlant Mass N/A

2013 Target DermStoreBeautyGroup E-CommercePlatform N/A

2013 ValeantPharmaceuticals SoltaMedical BeautyDevices $250

*Third-partyestimateSource:Bloomberg/companyreports


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AcquisitionsHelpBeautyCompaniesOptimizeProductPortfoliosBeautycompaniesmakeacquisitionstooptimizetheirportfoliosorenternewbusinessareaswheretheyseegrowthopportunities.TheadditionsofAtelierCologneandITCosmeticshavehelpedL’Oréalstrengthenitspositioninthepremiumbeautymarket,whereitsportfolioincludesoutperformingbrandssuchasUrbanDecayandYvesSaintLaurent.InApril2016,Johnson&JohnsonaddedUSbrandNeoStratatoitsoutperformingdermocosmeticsportfolio,whichalreadyincludedestablishedbrandsAveenoandNeutrogena.

Cotyhasusedacquisitionstodiversifyitsbusiness,expandingfromitscorefragrancebusinesstoabalanced,three-pillarportfoliothatincludesfragrances,skincareandcolorcosmetics.Following12acquisitionsin10years,Cotynowhasthelargestfragrancesbusinessintheworld,aswellasthesecond-largestprofessionalhairproductsbusinessandthethird-largestcolorcosmeticsbusiness.ThecompanyalsobuiltasolidskincarebrandportfoliothroughitsacquisitionsofDelLaboratories,Philosophy,TJoyHoldingsandLenaWhiteinrecentyears.

BeautyandPersonalCareCompaniesTapintoMillennialandGenZCustomerBaseThroughAcquisitionsBeautycompanies’recentM&Aactivityindicatesthatthecompaniesarelookingtotapintoayoungercustomerbase.Forexample,in2016,EstéeLauderacquiredcosmeticsbrandTooFaced,85%ofwhosecustomersareundertheageof40.Thebrandhasbuiltupasolidcommunityofyoung,digitally-savvycustomerswhooftenseekrecommendationsfromtheirpeersandfromsocialmediainfluencers.Atthetimeofacquisition,TooFacedhadmorethan7millionInstagramfollowersandrelationshipswithmorethan900influencers.

Unilever’sacquisitionofSeventhGeneration,aneco-friendlyhouseholdandpersonalcarecompany,demonstratedUnilever’sefforttotargetmillennialandGenZconsumers,whotendtobehighlyconsciousoftheenvironmentalandsocialimpactoftheirconsumption.UnileverhasalsoexperimentedwiththesubscriptionmodelthroughitsacquisitionofDollarShaveClub,amen’srazorsubscriptione-commercebusinessthathasastrongmillennialcustomerbase.

Source:DollarShaveClub.com

RecentM&Aactivityindicatesthatbeautycompaniesarelookingtotapintoayoungerconsumerbase.In2016,EstéeLauderacquiredcosmeticsbrandTooFaced,85%ofwhosecustomersareundertheageof40.


May1,2017

Figure5.RecentBeautyandPersonalCareBrandAcquisitionTargetswithaLargeMillennialandGenZCustomerBase

*Third-partyestimateSource:Bloomberg/companyreports/FungGlobalRetail&Technology

ContinuedM&AinHigh-GrowthAreasExpectedStrongcompetitionformarketshareamongthetopbeautycompaniesisexpectedtocontinuetodriveM&Aactivity.Weseethreeparticularhigh-growthpocketswithinthebeautyandpersonalcaremarketaslikelytoattractmoreM&Aattention:organicskincarebrands,SouthKoreanbeautybrandsandsocialmedia-endorsedindependentcosmeticsbrands.Thesesegmentshavegainedtractioninrecentyearsandhavepotentialtooutperformthemarket.Forexample,theglobalorganicbeautyandpersonalcaremarketisexpectedtogrowataCAGRof10.2%from2016through2022,accordingtoAlliedMarketResearch.SouthKoreanbeautybrands,alsoknownasK-beautybrands,havebecomeaglobalphenomenon,andhavefoundsignificantcustomerbasesacrosstheWesternworld.

Onthesupplyside,thereisalsoahealthynumberofemergingbeautybrandsthatcouldbecomeM&Atargets.Below,wecoversomepotentialtargetsinthesehigh-growthareas.

OrganicSkincareandPersonalCareBrandsGlobalbeautycompaniesarelikelytoacquireorganicandnaturalskincarebrandsinordertocapitalizeontherecenthealthandwellnesslifestyletrend.Thetrendisdrivingupdemandfornaturallyformulatedskincare,asconsumersaretakingaholisticapproachtohealthylivingthatincludeschoosingnaturalbeautyproducts.Emergingorganicandnaturalbrandsthatarelikelyacquisitiontargetsinclude:

TheHonestCompany:Co-foundedin2011byactressJessicaAlba,thenontoxichouseholdproductscompanyreached$300millioninrevenuein2016andownsbothdirect-to-consumerandthird-partydistributionchannels.ThecompanyhasallegedlybeenintalkswithpotentialbuyersthatincludeUnilever.

Acquirer Company Value(USDMil.)

2016 Coty GHD $510

2016 EstéeLauder TooFaced 1,450

2016 EstéeLauder Becca 230–$240*

2016 JakksPacific C’estMoi N/A

2016 L’Oréal ITCosmetics 1,200

2016 OrigamiOwl WillaGirl N/A

2016 Unilever LivingProof 200*

2016 Unilever SeventhGeneration 700*

2016 Unilever DollarShaveClub 1,000

2015 Unilever KateSomervilleSkincare N/A

2014 L’Oréal NYX 500

2013 Target DermStoreBeautyGroup N/A

Asmaturebeautycompaniescompeteformarketshare,weexpecttoseecontinuedM&Aactivityintheglobalbeautyandpersonalcaresector.


May1,2017

Source:Honest.com

Goop:AluxuryorganicskincarelinecreatedbyGwynethPaltrowin2016inresponsetodemandforbetterorganicskincareproducts,Goopoffersproductsthatrangeinpricefromabout$80to$140.TheGooplifestylewebsitecuratedbyPaltrowhasdevelopedawidereadership,andtheGoopskincarelineisontracktoexpanditsproductofferingsanddistributionchannels,whichmaycreatesynergieswithestablishedbeautycompanies.

Source:Goop.com

EmergingK-BeautyBrandsTheK-beautywaveisexpandingwellbeyondSouthKorea’sshores.ExportsofSouthKoreancosmeticshavebeenincreasingbyanaverageof36.9%everyyearsince2011,andreached$2.45billionin2015,accordingtotheKoreaCustomsService.Lastyear,SouthKoreaovertooktheUSandJapantobecomethesecond-largestcosmeticsexportertoChinaafterFrance,withatotalexportvalueof$1.1billion,accordingtotheMinistryofFoodandDrugSafetyofKorea.SephoraUSnowoffersacollectionofK-beautyproductsthatfeaturespopularSouthKoreanskincareroutines.TheK-beautyphenomenonisdrivenbycutting-edgeproductinnovationandhasastrongdigitalmediapresence.

TherearelimitedacquisitionopportunitiesintheK-beautyspaceforinterestedbuyersbecausemostestablishedbrandsbelongtoSouthKoreanbeautyconglomeratessuchasAmorePacificandLGHousehold&HealthCare.However,thereareanumberofemergingK-beautystartupsthatcouldbecomeacquisitiontargets,includingNeogenandCOSRX.

Neogen:Foundedin2009,NeogenhasbeendubbedarisingstarbyOliveYoung,oneofthelargestbeautyretailersinSouthKorea.Thecompanyusesadvancednaturalscienceandbiotechnologytodevelopitsproducts.

MostestablishedK-beautybrandsbelongtoconglomerates,leavinginterestedbuyerswithlimitedoptions.However,thereareanumberofemergingK-beautystartupsthatcouldbecomeacquisitiontargets.


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Neogen’ssix-corebiotechnologyissaidtohelpmaximizethebenefitsofnaturalingredients.Thecompanyhasalsoregisteredseveralpatentsforitstechnology,coveringareassuchasnaturalwhiteningandantiagingmaterials,andanti-inflammatoryanddetoxificationmedicinalherbs.

Source:NeogenDerma.com.hk

COSRX:Foundedin2014withamissiontomakeingredient-orientedandhigh-performancecosmetics,COSRXtakesaminimalisticapproachtoskincarebyincludingnounnecessaryingredientsinitsproducts.Thishelpstolowerthechanceofanallergicreactionforconsumerswithsensitiveskin.Thecompanycurrentlysellsitsproductsonlyonline,inordertominimizecosts,butitplanstoopenbrick-and-mortarstoresbytheendoftheyear,duetocustomerdemand.

Source:Cosrx.co.kr

SocialMedia-EndorsedIndependentCosmeticsBrandsBeautycompanieshavebeenincreasingtheirmarketingbudgetstoexpandtheirsocialmediapresence,asyoungbeautyshoppersareheavilyinfluencedbysocialmediacontent.Onaverage,aninfluencermarketingcampaigncostsbetween$25,000and$50,000,accordingtoasurveybyinfluencerplatformLinqia.AccordingtoastudybyForbes,thetop30social


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mediainfluencershaveacombined250millionfollowersandchargeanaverageof$300,000persocialmediapost.

Formaturebeautycompaniesseekingtocaptureyoungerbeautyshoppers,acquiringbrandsthathaveastrongsocialmediapresenceisimportant.Recentbeautyacquisitiontargetshaveoutperformedtheirpeersintermsofmentionsonsocialmediaandoverallonlinepresence.Someattractivepotentialacquisitiontargets,basedonsocialmediamentionsandonlinesearchvisibility,includeAnastasiaBeverlyHills(ABH)andMakeupGeek.

AnastasiaBeverlyHills(ABH):ABHhasdevelopedanumberofsignaturebrowproductsthatmadeheadlinesonsocialmediaplatforms.Thebrandhasawhopping13.4millionfollowersonInstagram.ABHhasthehighestearnedmediavalue(amarketingcampaignmetricthatmeasuresengagement,conversionandsales)onInstagram;itisalmostdoublethatofthematurecosmeticsbrandMAC,accordingtodatafrom50,000influencerscollectedbyTribeDynamics.Inaddition,ABHhasaccumulatedagroupofloyalcelebritycustomerswhohaveendorsedthebrandonsocialmedia,includingNaomiCampbell,KimKardashian,JenniferLopez,HeidiKlum,VictoriaBeckhamandPenelopeCruz.

Source:AnastasiaBeverlyHills.com

MakeupGeek:StartedbybeautyvloggerMarlenaStellin2012,MakeupGeekgrewfrom$500,000inannualrevenueto$22millioninfiveyears,largelyduetoitssocialmediapresence.ThebrandisknownforitsassociatedYouTubemakeuptutorialvideosanddirect-to-consumerdistribution,whichallowscustomerstosaveasmuchas30%–40%.MakeupGeek’sYouTubechannelhasmorethan1.4millionsubscribers.Thebrand’sstrongsocialmediapresenceandcurrentsmallsizemakeitasignificantacquisitionopportunity.


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Source:MakeupGeek.com

ConclusionAcquisitionshaveproventobeakeygrowthstrategyformaturebeautycompanies,amidchallengesforthemtogrowtheirbusinessesorganically.AcquisitionshavehelpedbeautycompaniestostayrelevanttoayoungercustomerbaseofmillennialsandGenZers.WeexpecttoseemuchcontinuedM&Aactivityintheindustry,giventhecurrentcompetitivelandscapeintheindustry.


May1,2017

DeborahWeinswig,CPAManagingDirectorFungGlobalRetail&TechnologyNewYork:917.655.6790HongKong:852.6119.1779China:[email protected]

JingWangResearchAssociate

HongKong:8thFloor,LiFungTower888CheungShaWanRoad,KowloonHongKongTel:85223004406London:242–246MaryleboneRoadLondon,NW16JQUnitedKingdomTel:44(0)2076168988NewYork:1359Broadway,9thFloorNewYork,NY10018Tel:6468397017

FungGlobalRetailTech.com

active m&a in the beauty space fuels future growth may 1 ......may 01, 2017 · on acquisitions...

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